Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TER > SEC Filings for TER > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for TERADYNE, INC

Form 10-K for TERADYNE, INC


28-Feb-2014

Annual Report


Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations

Statements in this Annual Report on Form 10-K which are not historical facts, so called "forward looking statements," are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in Teradyne's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.

Overview

We are a leading global supplier of automatic test equipment. We design, develop, manufacture and sell automatic test systems and solutions used to test semiconductors, wireless products, hard disk drives and circuit boards in the consumer electronics, wireless, automotive, industrial, computing, communications and aerospace and defense industries. Our automatic test equipment products and services include:

semiconductor test ("Semiconductor Test") systems;



wireless test ("Wireless Test") systems; and

military/aerospace ("Mil/Aero") test instrumentation and systems, storage test ("Storage Test") systems, circuit-board test and inspection ("Commercial Board Test") systems (collectively these products represent "System Test").

We have a broad customer base which includes integrated device manufacturers ("IDMs"), outsourced semiconductor assembly and test providers ("OSATs"), wafer foundries, fabless companies that design, but contract with others for the manufacture of integrated circuits ("ICs"), developers of wireless devices and consumer electronics, manufacturers of circuit boards, automotive suppliers, wireless product manufacturers, storage device manufacturers, aerospace and military contractors.

In 2013, we acquired ZTEC Instruments Inc. ("ZTEC"), a supplier of modular wireless test instruments. The acquisition of ZTEC expands our Wireless Test segment into the design verification test of wireless components and chipsets.

In 2011, we acquired LitePoint Corporation ("LitePoint") to expand our product portfolio of test equipment in the wireless test sector. LitePoint designs, develops, and supports advanced wireless test solutions for the development and manufacturing of wireless devices, including smart phones, tablets, notebooks, laptops, personal computer peripherals, and other Wi-Fi, Bluetooth and cellular enabled devices. LitePoint and ZTEC represent our Wireless Test segment.

We believe our acquisitions of LitePoint and ZTEC have enhanced our opportunities for growth. We will continue to invest in our business to expand further our addressable markets while tightly managing our costs.

The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had, and will continue to have, a significant effect on our business since our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor and electronics industries. Historically, these demand fluctuations have resulted in significant variations in our results of operations. The sharp swings in the semiconductor and electronics industries in recent years have generally affected the semiconductor and electronics test equipment and services industries more significantly than the overall capital equipment sector.

In 2013, revenue from our Storage Test business unit was significantly lower than 2012 due to lower hard disk drive demand from lower shipments of personal computers, a trend which is expected to continue. In response to this lower demand, during the third quarter of 2013, we implemented a headcount reduction in the Storage Test business unit. It is possible that we may need to take further cost control and reduction measures including reducing the number of employees and reducing manufacturing capacity. A prolonged slowdown in hard disk drive demand may result in increased risk of excess and obsolete inventories, asset write-offs and restructuring charges.

On March 21, 2011, we completed the sale of our Diagnostic Solutions business unit, which was included in the System Test segment, to SPX Corporation for $40.2 million in cash. We sold this business as its growth potential as a stand-alone business was significantly less than if it was part of a larger automotive supplier. The financial information for Diagnostic Solutions has been reclassified to discontinued operations.

Critical Accounting Policies and Estimates

We have identified the policies discussed below as critical to understanding our business and our results of operations and financial condition. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.


Revenue Recognition

We recognize revenues when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass upon destination, acceptance or cash payment, we defer revenue recognition until such events occur.

Our equipment has non-software and embedded software components that function together to deliver the equipment's essential functionality. Revenue is recognized upon shipment or at delivery destination point, provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require us to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received. We also defer the portion of the sales price that is not due until acceptance, which represents deferred profit.

For multiple element arrangements, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, a hierarchy is used to determine the selling price for allocating revenue to deliverables as follows:
(i) vendor-specific objective evidence of selling price ("VSOE"),
(ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("BESP"). For a delivered item to be considered a separate unit, the delivered item must have value to the customer on a standalone basis and the delivery or performance of the undelivered item must be considered probable and substantially in our control.

Our post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or tools and can be performed by the customers or other vendors. Installation is typically provided within five days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customers' ability to use the product. We defer revenue for the selling price of installation and training. Extended warranties constitute warranty obligations beyond one year and we defer revenue in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605-20, "Separately Priced Extended Warranty and Product Maintenance Contracts" and ASC 605-25, "Revenue Recognition Multiple-Element Arrangements." Service revenue is recognized over the contractual period or as services are performed.

Our products are generally subject to warranty and the related costs of the warranty are provided for in cost of revenues when product revenue is recognized. We classify shipping and handling costs in cost of revenue.

We do not provide our customers with contractual rights of return for any of our products.

Retirement and Postretirement Plans

Effective January 1, 2012, we changed the method of recognizing actuarial gains and losses for our defined benefit pension plans and postretirement benefit plan and calculating the expected return on plan assets for our defined benefit pension plans. Historically, we recognized net actuarial gains and losses in accumulated other comprehensive income within shareholders' equity on our consolidated balance sheets on an annual basis and amortized them into operating results over the average remaining years of service of the plan participants, to the extent such gains and losses were outside of a range ("corridor"). We elected to immediately recognize net actuarial gains and losses and the change in the fair value of the plan assets in our operating results in the year in which they occur or upon any interim remeasurement of the plans. In addition, we used to calculate the expected return on plan assets using a calculated market-related value of plan assets. Effective January 1, 2012, we elected to calculate the expected return on plan assets using the fair value of the plan assets.

We believe that this new method is preferable as it eliminates the delay in recognizing gains and losses in our operating results and it will improve the transparency by faster recognition of the effects of economic and


interest rate trends on plan obligations and investments. These actuarial gains and losses are generally measured annually as of December 31 and, accordingly, will be recorded during the fourth quarter of each year or upon any interim remeasurement of the plans. In accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections, all prior periods presented in this Annual Report on Form 10-K have been adjusted to apply the new accounting method retrospectively.

Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, we use consistent methodologies to evaluate all inventories for net realizable value. We record a provision for both excess and obsolete inventory when such write-downs or write-offs are identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix, and possible alternative uses.

Equity Incentive and Stock Purchase Plans

Stock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718 "Compensation-Stock Compensation". As required by ASC 718, we have made an estimate of expected forfeitures and are recognizing compensation costs only for those stock-based compensation awards expected to vest.

Income Taxes

On a quarterly basis, we evaluate the realizability of our deferred tax assets by jurisdiction and assess the need for a valuation allowance. We consider the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the realizability of our deferred tax assets. As a result of this review, undertaken at December 31, 2002, we concluded under applicable accounting criteria that it was more likely than not that our deferred tax assets would not be realized and established a valuation allowance in several jurisdictions, most notably the United States. At December 31, 2011, we reassessed this judgment and concluded that it is more likely than not that a substantial majority of our deferred tax assets will be realized through consideration of both the positive and negative evidence. The evidence consisted primarily of our three year U.S. historical cumulative profitability, projected future taxable income, forecasted utilization of the deferred tax assets and the fourth quarter of 2011 acquisition of LitePoint offset by the volatility of the industries we operate in, primarily the semiconductor industry. As such, we reduced the valuation allowance by $190.2 million, which was recorded as a tax benefit in the year ended December 31, 2011. At December 31, 2013 and 2012, we maintained a valuation allowance for certain deferred tax assets of $40.4 million and $55.4 million, respectively, primarily related to state net operating losses and state tax credit carryforwards, due to uncertainty regarding their realization. Adjustments could be required in the future if we estimate that the amount of deferred tax assets to be realized is more or less than the net amount we have recorded.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted which retrospectively reinstated the research and development tax credit for 2012 and extended it through December 31, 2013. As a result, in the first quarter of 2013, we recorded a discrete benefit related to 2012 U.S. federal research and development tax credit of approximately $6.7 million.

Investments

We account for our investments in debt and equity securities in accordance with the provisions of ASC 320-10, "Investments-Debt and Equity Securities." On a quarterly basis, we review our investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:

The length of time and the extent to which the market value has been less than cost;



The financial condition and near-term prospects of the issuer; and

The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

Goodwill, Intangible and Long-Lived Assets

We assess the impairment of intangible and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important in the determination of an impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner that we use the acquired asset and significant negative industry or economic trends. There were no events or circumstances indicating that the carrying value may not be recoverable in 2013, 2012 or 2011. When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the associated risks. We assess goodwill for impairment at least annually in the fourth quarter, as of December 31, on a reporting unit basis, or more frequently, when events and circumstances occur indicating that the recorded goodwill may be impaired. If the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess. No goodwill impairment was identified in 2013, 2012 or 2011.


                 SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED

                            STATEMENTS OF OPERATIONS



                                                              Year Ended December 31,
                                                     2013               2012              2011
Percentage of net revenues:
Net revenues:
Products                                                 80.9 %            83.5 %            81.2 %
Services                                                 19.1              16.5              18.8

Total net revenues                                      100.0             100.0             100.0
Cost of revenues:
Cost of products                                         34.9              38.8              40.5
Cost of services                                          8.4               7.7               9.7

Total cost of revenues                                   43.4              46.5              50.2
Gross profit                                             56.6              53.5              49.8
Operating expenses:
Engineering and development                              18.5              15.4              14.1
Selling and administrative                               19.6              16.7              16.2
Acquired intangible assets amortization                   5.1               4.4               2.8
Restructuring and other                                   0.1              (0.5 )             0.5

Total operating expenses                                 43.3              36.1              33.6
Income from operations                                   13.4              17.3              16.2
Interest income                                           0.3               0.2               0.5
Interest expense and other                               (0.5 )             1.5               1.7

Income from continuing operations before
income taxes                                             14.1              16.1              15.0
Provision (benefit) for income taxes                      2.6               3.0              (9.1 )

Income from continuing operations                        11.6              13.1              24.1
Income from discontinued operations before
income taxes                                               -                 -                0.1
Benefit for income taxes                                   -                 -                0.0

Income from discontinued operations                        -                 -                0.1
Gain on disposal of discontinued operations
(net of tax)                                               -                 -                1.7

Net income                                               11.6 %            13.1 %            25.9 %

Results of Operations

Book to Bill Ratio

Book to bill ratio is calculated as net bookings divided by net sales. Book to
bill ratio by reportable segment was as follows:



                                        Three months ended December 31,
                                     2013            2012            2011
              Semiconductor Test         1.0             1.0             1.2
              Wireless Test              0.7             1.1             0.7
              System Test                1.0             1.6             1.9
              Total Company              1.0             1.1             1.3


Revenues

Net revenues for our three reportable segments were as follows:



                                                                   2012-2013        2011-2012
                                                                    Dollar           Dollar
                          2013          2012          2011          Change           Change
                                                    (in millions)
   Semiconductor Test   $ 1,023.0     $ 1,127.7     $ 1,106.2     $    (104.7 )    $      21.5
   Wireless Test            251.9         286.4          28.4           (34.5 )          258.0
   System Test              153.0         242.7         294.5           (89.7 )          (51.8 )

                        $ 1,427.9     $ 1,656.8     $ 1,429.1     $    (228.9 )    $     227.7

The decrease in Semiconductor Test revenues of $104.7 million or approximately 9% from 2012 to 2013 was primarily due to a decrease in system-on-a-chip ("SOC") test product sales because of a lower application processor market, which is a key sector of the mobility applications market, in 2013 compared to 2012, partially offset by higher memory system sales.

The increase in Semiconductor Test revenues of $21.5 million or approximately 2% from 2011 to 2012 was primarily due to an increase in SOC test product sales for mobility applications, partially offset by a decrease in memory system sales.

The decrease in Wireless Test revenues of $34.5 million or approximately 12% from 2012 to 2013 was primarily due to lower connectivity volume, partially offset by higher cellular volume.

The acquisition of ZTEC, which was completed in October of 2013, added $0.4 million of revenues in 2013. The acquisition of LitePoint, which was completed in October of 2011, added $286.4 million and $28.4 million of revenues in 2012 and 2011, respectively. LitePoint and ZTEC represent our Wireless Test segment.

The decrease in System Test revenues of $89.7 million or approximately 37% from 2012 to 2013 was primarily due to lower product volume in Storage Test systems. The decrease in Storage Test system sales was due to lower hard disk drive demand primarily from lower shipments of personal computers, a trend which is expected to continue.

The decrease in System Test revenues of $51.8 million or approximately 18% from 2011 to 2012 was primarily due to lower product volume in both Storage Test systems and Commercial Board Test systems, partially offset by an increase in Mil/Aero system and instrument sales.

Our three reportable segments accounted for the following percentages of consolidated net revenues for each of the last three years:

                                         2013       2012       2011
                    Semiconductor Test      71 %       68 %       77 %
                    Wireless Test           18         17          2
                    System Test             11         15         21

                                           100 %      100 %      100 %


Net revenues by country as a percentage of total revenues were as follows (1):

                                         2013       2012       2011
                     China                  23 %       21 %       13 %
                     Taiwan                 19         18         12
                     United States          16         14         16
                     Korea                   8         13         10
                     Singapore               8          6          6
                     Europe                  6          5          7
                     Malaysia                6          4         10
                     Japan                   6          6         10
                     Philippines             4          7          9
                     Thailand                2          5          6
                     Rest of the World       2          1          1

                                           100 %      100 %      100 %

(1) Revenues attributable to a country are based on location of customer site.

The breakout of product and service revenues for the past three years was as follows:

                                                                  2012-2013        2011-2012
                                                                   Dollar           Dollar
                         2013          2012          2011          Change           Change
                                                   (in millions)
    Product Revenues   $ 1,154.9     $ 1,383.6     $ 1,160.2     $    (228.7 )    $     223.4
    Service Revenues       273.0         273.2         268.9            (0.2 )            4.3

                       $ 1,427.9     $ 1,656.8     $ 1,429.1     $    (228.9 )    $     227.7

Our product revenues decreased $228.7 million or 17% in 2013 from 2012 primarily due to a decrease in SOC test product sales because of a lower application processor market and due to lower volume in Storage Test systems.

Service revenues, which are derived from the servicing of our installed base of products and includes equipment maintenance contracts, repairs, extended warranties, parts sales, and applications support, decreased $0.2 million or 0.1%.

Our product revenues increased $223.4 million or 19% in 2012 from 2011 primarily due to $254.6 million of product revenues from the addition of LitePoint, an increase in SOC Semiconductor Test products for mobility applications and an increase in Mil/Aero systems and instruments. The increase was partially offset by a decrease in sales in our memory test and Storage Test systems. Service revenues increased $4.3 million or 2%.

In 2013 and 2012, revenues from one customer accounted for 12% and 10%, respectively, of our consolidated net revenues. In 2011, no single customer accounted for 10% or more of our consolidated net revenues. In each of the years 2013, 2012 and 2011, our three largest customers in aggregate accounted for 26%, 29% and 19% of our consolidated net revenues, respectively.

Gross Profit



                                                                                   2012-2013         2011-2012
                                                                                   Dollar /          Dollar /
                                                                                     Point             Point
                                         2013          2012          2011           Change            Change
                                                                 (dollars in millions)
Gross Profit                            $ 808.8       $ 886.0       $ 711.8       $     (77.2 )     $     174.2
Percent of Total Net Revenues              56.6 %        53.5 %        49.8 %             3.1               3.7


Gross profit as a percent of revenue increased from 2012 to 2013 by 3.1 percentage points. This increase was a result of an increase of 1.7 points related to a favorable product mix in SOC Semiconductor Test and lower Storage Test system sales compared to 2012, an increase of 1.1 points due to pension income in 2013 compared to pension expense in 2012, an increase of 1.1 points due to lower excess and obsolete inventory provisions and increased sales of previously reserved inventory, and an increase of 0.4 points as a result of no purchase accounting inventory step-up in 2013, partially offset by a decrease of 1.4 points due to lower sales volume across all segments.

Gross profit as a percentage of revenues increased from 2011 to 2012 by 3.7 percentage points. This increase was a result of an increase of 4.6 points primarily due to the addition of LitePoint, partially offset by a decrease of 1.2 points due to higher inventory provisions.

The breakout of product and service gross profit was as follows:

. . .

  Add TER to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TER - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.