Teradyne Reports Fourth Quarter and Fiscal Year 2019 Results

About Teradyne
Teradyne (NASDAQ:TER) brings high-quality innovations such as smart devices, life-saving medical equipment and data storage systems to market, faster. Its advanced test solutions for semiconductors, electronic systems, wireless devices and more ensure that products perform as they were designed. Its Industrial Automation offerings include collaborative and mobile robots that help manufacturers of all sizes improve productivity and lower costs. In 2019, Teradyne had revenue of $2.3 billion and today employs 5,400 people worldwide. For more information, visit  teradyne.com. Teradyne® is a registered trademark of Teradyne, Inc. in the U.S. and other countries.

Safe Harbor Statement
This release contains forward-looking statements regarding Teradyne’s future business prospects, results of operations, market conditions, earnings per share, the payment of a quarterly dividend, the repurchase of Teradyne common stock pursuant to a share repurchase program, and the impact of the U.S. export and tariff laws. Such statements are based on the current assumptions and expectations of Teradyne’s management and are neither promises nor guarantees of future performance, events, earnings per share, use of cash, payment of dividends, repurchases of common stock, payment of the senior convertible notes, or the impact of the U.S. export and tariff laws. There can be no assurance that management’s estimates of Teradyne’s future results or other forward-looking statements will be achieved. Additionally, the current dividend and share repurchase programs may be modified, suspended or discontinued at any time.

On May 16, 2019, Huawei and 68 of its affiliates, including HiSilicon, were added to the U.S. Department of Commerce Entity List under U.S. Export Administration Regulations (the “EAR”). This action by the U.S. Department of Commerce imposed new export licensing requirements on exports, re-exports, and in-country transfers of all U.S. - regulated products, software and technology to the designated Huawei entities.  While most of our products are not subject to the EAR and therefore not affected by the Entity List restrictions, some of our products are currently manufactured in the U.S. and thus subject to the Entity List restrictions.  Compliance with the current Entity List restrictions has not significantly impacted our sales. There have been recent news reports that the U.S. Department of Commerce plans to modify the U.S. EAR to expand the scope of the regulations to include more products that would become subject to the Entity List restrictions relating to Huawei and the designated Huawei entities including HiSilicon. These modified regulations, if implemented as currently reported, would impact our ability to continue to sell certain products directly to Huawei and HiSilicon, both of which are significant Teradyne customers. However, based on our understanding, these proposed modified regulations would not impact our sales to third party contract manufacturers used by Huawei and HiSilicon to manufacture and test semiconductor and other electronic devices.  Because the business environment for Huawei is both fluid and uncertain, there are also risks that Huawei and HiSilicon may have less demand for our products and/or may purchase products from our competitors who are not impacted by the U.S. regulations. Until these or any new regulations become public and effective, we will not know the extent of the impact on our business with Huawei and HiSilicon.  However, it is possible that these modified regulations and any other additional regulations that may be implemented by the U.S. Department of Commerce or other government agency would have a material impact on our business and financial results.

Important factors that could cause actual results, earnings per share, use of cash, dividend payments, repurchases of common stock, or payment of the senior convertible notes to differ materially from those presently expected include: conditions affecting the markets in which Teradyne operates; decreased or delayed product demand from one or more significant customers; development, delivery and acceptance of new products; the ability to grow the Industrial Automation business; increased research and development spending; deterioration of Teradyne’s financial condition; the consummation and success of any mergers or acquisitions; unexpected cash needs; insufficient cash flow to make required payments and pay the principal amount on the senior convertible notes; the business judgment of the board of directors that a declaration of a dividend or the repurchase of common stock is not in the company’s best interests; additional U.S. tax regulations or IRS guidance; the impact of any tariffs or export controls imposed in the U.S. or China; compliance with trade protection measures or export restrictions; the impact of U.S. Department of Commerce or other government agency regulations relating to Huawei and HiSilicon; and other events, factors and risks disclosed in filings with the SEC, including, but not limited to, the “Risk Factors” section of Teradyne’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and the Quarterly Report on Form 10-Q for the period ended September 29, 2019. The forward-looking statements provided by Teradyne in this press release represent management’s views as of the date of this release. Teradyne anticipates that subsequent events and developments may cause management’s views to change. However, while Teradyne may elect to update these forward-looking statements at some point in the future, Teradyne specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing Teradyne’s views as of any date subsequent to the date of this release.

          
TERADYNE, INC. REPORT FOR FOURTH FISCAL QUARTER OF 2019
              
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
              
      Quarter Ended  Twelve Months Ended
      December 31,
2019
  September 29,
2019
  December 31,
2018
  December 31,
2019
  December 31,
2018
                           
Net revenues   $ 654,650     $ 582,038     $ 519,558     $ 2,294,965     $ 2,100,802  
                           
  Cost of revenues (exclusive of acquired intangible assets amortization shown separately below) (1)     271,412       237,000       210,022       955,136       880,408  
                           
Gross profit     383,238       345,038       309,536       1,339,829       1,220,394  
                           
Operating expenses:                    
  Selling and administrative (2)     117,092       109,166       100,552       437,083       390,669  
  Engineering and development     86,794       77,804       74,706       322,824       301,505  
  Acquired intangible assets amortization     9,784       9,647       10,559       40,147       39,191  
  Restructuring and other (3)     (2,088 )     (6,500 )     11,446       (13,880 )     15,232  
      Total operating expenses     211,582       190,117       197,263       786,176       746,597  
                           
Income from operations     171,656       154,921       112,273       553,653       473,797  
                           
  Interest and other expense (4)     7,770       3,188       1,144       12,881       5,996  
                           
Income before income taxes     163,886       151,733       111,129       540,772       467,801  
  Income tax provision (benefit) (5)     27,103       15,873       (32,662 )     61,597       16,022  
Net income   $ 136,783     $ 135,860     $ 143,791     $ 479,175     $ 451,779  
                           
Net income per common share:                    
Basic   $ 0.82     $ 0.80     $ 0.80     $ 2.81     $ 2.41  
Diluted   $ 0.75     $ 0.75     $ 0.79     $ 2.67     $ 2.35  
                           
Weighted average common shares - basic     167,286       169,641       178,958       170,425       187,672  
                                   
Weighted average common shares - diluted (6)     181,780       180,494       181,520       179,459       192,605  
                           
                           
Cash dividend declared per common share   $ 0.09     $ 0.09     $ 0.09     $ 0.36     $ 0.36  
                           
                           
                           
(1 ) Cost of revenues includes:   Quarter Ended   Twelve Months Ended
          December 31,
2019
  September 29,
2019
  December 31,
2018
  December 31,
2019
  December 31,
2018
      Provision for excess and obsolete inventory   $ 6,396     $ 3,049     $ 1,720     $ 15,244     $ 11,242  
      Sale of previously written down inventory     (1,222 )     (821 )     (1,501 )     (3,184 )     (6,679 )
      Inventory step-up     64       -       -       447       372  
          $ 5,238     $ 2,228     $ 219     $ 12,507     $ 4,935  
                           
(2 ) For the three months ended September 29, 2019 and the twelve months ended December 31, 2019, selling and administrative expenses include an equity charge of $2.1 million for the modification of Teradyne's retired CFO's outstanding equity awards to allow continued vesting and maintain the original term in connection with his July 17, 2019 retirement.
                           
(3 ) Restructuring and other consists of:   Quarter Ended   Twelve Months Ended
          December 31,
2019
  September 29,
2019
  December 31,
2018
  December 31,
2019
  December 31,
2018
      Contingent consideration fair value adjustment   $ (2,796 )   $ (7,759 )   $ 10,223     $ (19,257 )   $ 987  
      Employee severance     460       808       768       2,871       8,714  
      Acquisition related expenses and compensation     248       451       455       2,506       4,584  
      Other     -       -       -       -       947  
          $ (2,088 )   $ (6,500 )   $ 11,446     $ (13,880 )   $ 15,232  
                           
                           
(4 ) Interest and other includes:   Quarter Ended   Twelve Months Ended
          December 31,
2019
  September 29,
2019
  December 31,
2018
  December 31,
2019
  December 31,
2018
      Non-cash convertible debt interest   $ 3,496     $ 3,453     $ 3,327     $ 13,728     $ 13,064  
      Pension actuarial loss (gain)     7,727       -       (3,512 )     8,176       (3,316 )
          $ 11,223     $ 3,453     $ (185 )   $ 21,904     $ 9,748  
                           
(5 ) For the twelve months ended December 31, 2019, income tax provision (benefit) includes a $26 million tax benefit from the release of uncertain tax position reserves due to the IRS completion of its audit of Teradyne's 2015 Federal tax return. For the quarter and twelve months ended December 31, 2018 income tax provision (benefit) includes a $52 million tax benefit related to the finalization of our toll tax charge.
                           
(6 ) Under GAAP, when calculating diluted earnings per share, convertible debt must be assumed to have converted if the effect on EPS would be dilutive. Diluted shares assume the conversion of the convertible debt as the effect would be dilutive. Accordingly, for the quarters ended December 31, 2019, September 29, 2019 and December 31, 2018, 7.3 million, 5.8 million and 0.9 million shares, respectively, have been included in diluted shares. For the twelve months ended December 31, 2019 and December 31, 2018, 4.9 million and 2.7 million shares, respectively, have been included in diluted shares. For the three months ended December 31, 2019 and September 29, 2019, diluted shares also included 5.4 million and 3.6 million shares, respectively, from the convertible note hedge transaction. For the twelve months ended December 31, 2019 and December 31, 2018, diluted shares included 2.7 million and 0.5 million shares, respectively, from the convertible note hedge transaction.
                           
                           
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
       
                           
          December 31,
2019
  December 31,
2018
           
                           
Assets                    
  Cash and cash equivalents   $ 773,924     $ 926,752              
  Marketable securities     137,303       190,096              
  Accounts receivable, net     362,368       291,267              
  Inventories, net     196,691       153,541              
  Prepayments and other current assets     188,598       170,826              
      Total current assets     1,658,884       1,732,482              
                           
  Property, plant and equipment, net     320,216       279,821              
  Operating lease right-of-use assets, net     57,539       -              
  Marketable securities     104,490       87,731              
  Deferred tax assets     71,894       70,848              
  Other assets     22,985       11,509              
  Retirement plans assets     18,457       16,883              
  Acquired intangible assets, net     125,480       125,482              
  Goodwill     416,431       381,850              
                           
      Total assets   $ 2,796,376     $ 2,706,606              
                           
Liabilities                    
  Accounts payable   $ 126,617     $ 100,688              
  Accrued employees' compensation and withholdings     163,883       148,566              
  Deferred revenue and customer advances     104,876       77,711              
  Other accrued liabilities     70,871       78,272              
  Operating lease liabilities     19,476       -              
  Contingent consideration     9,106       34,865              
  Income taxes payable     44,200       36,185              
                           
      Total current liabilities     539,029       476,287              
                           
  Retirement plans liabilities     134,471       117,456              
  Long-term deferred revenue and customer advances     45,974       32,750              
  Deferred tax liabilities     14,070       20,662              
  Long-term other accrued liabilities     17,188       37,547              
  Long-term contingent consideration     30,599       35,678              
  Long-term operating lease liabilities     45,849       -              
  Long-term income taxes payable     82,642       83,891              
  Debt     394,687       379,981              
                           
      Total liabilities     1,304,509       1,184,252              
                           
Shareholders' equity     1,491,867       1,522,354              
                           
      Total liabilities and shareholders' equity   $ 2,796,376     $ 2,706,606              
                           
                           
                           
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
   
                           
          Quarter Ended   Twelve Months Ended    
          December 31,
2019
  December 31,
2018
  December 31,
2019
  December 31,
2018
   
Cash flows from operating activities:                    
  Net income   $ 136,783     $ 143,791     $ 479,175     $ 451,779      
  Adjustments to reconcile net income to net cash provided by operating activities:                    
    Depreciation     19,326       17,485       70,834       67,415      
    Amortization     12,972       12,900       49,821       45,809      
    Deferred taxes     (3,186 )     3,898       (6,163 )     28,340      
    Stock-based compensation     9,075       8,250       37,897       33,577      
    Provision for excess and obsolete inventory     6,396       1,720       15,244       11,242      
    Contingent consideration fair value adjustment     (2,796 )     10,223       (19,257 )     987      
    Retirement plans actuarial losses (gains)     7,727       (3,512 )     8,176       (3,316 )    
    (Gains) Losses on marketable securities     (1,875 )     3,914       (6,033 )     3,494      
    Other     153       144       766       1,083      
                           
    Changes in operating assets and liabilities, net of businesses acquired:                  
      Accounts receivable     (3,651 )     59,869       (70,440 )     (17,938 )    
      Inventories     (13,265 )     4,619       (27,408 )     (29,498 )    
      Prepayments and other assets     (5,319 )     (29,683 )     (21,437 )     (58,402 )    
      Accounts payable and other liabilities     28,472       (2,431 )     49,279       13,693      
      Deferred revenue and customer advances     11,534       3,556       39,313       13,379      
      Retirement plans contributions     (1,311 )     (1,090 )     (5,086 )     (4,334 )    
      Income taxes     15,293       (47,277 )     (15,931 )     (80,429 )    
Net cash provided by operating activities     216,328       186,376       578,750       476,881      
                           
Cash flows from investing activities:                    
  Purchases of property, plant and equipment     (38,594 )     (26,110 )     (134,642 )     (114,379 )    
  Proceeds from government subsidy for property, plant and equipment     -       -       -       7,920      
  Purchases of marketable securities     (57,162 )     (109,223 )     (662,701 )     (918,744 )    
  Proceeds from sales of marketable securities     45,312       2,958       105,586       846,122      
  Proceeds from maturities of marketable securities     218,455       336,339       611,927       1,270,439      
  Proceeds from life insurance     -       -       2,912       1,126      
  Purchase of investments and acquisition of businesses, net of cash acquired     (57,772 )     -       (79,742 )     (169,474 )    
Net cash provided by (used for) investing activities     110,239       203,964       (156,660 )     923,010      
                           
Cash flows from financing activities:                    
  Issuance of common stock under stock purchase and stock option plans     33       14       29,312       20,973      
  Repurchase of common stock     (131,218 )     (261,215 )     (500,000 )     (823,478 )    
  Dividend payments     (15,036 )     (16,002 )     (61,305 )     (67,322 )    
  Payments related to net settlement of employee stock compensation awards     (192 )     (182 )     (14,741 )     (20,023 )    
  Payments of contingent consideration     -       -       (27,615 )     (13,571 )    
Net cash used for financing activities     (146,413 )     (277,385 )     (574,349 )     (903,421 )    
                           
Effects of exchange rate changes on cash and cash equivalents     (169 )     (222 )     (569 )     439      
Increase (decrease) in cash and cash equivalents     179,985       112,733       (152,828 )     496,909      
Cash and cash equivalents at beginning of period     593,939       814,019       926,752       429,843      
Cash and cash equivalents at end of period   $ 773,924     $ 926,752     $ 773,924     $ 926,752      
                           

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