Teradyne Inc. (NASDAQ:TER)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) initially increased substantially before declining markedly. Simultaneously, the cost of capital exhibited a consistent, albeit gradual, increase, while invested capital showed an initial rise followed by a decrease in the most recent year. These movements collectively impacted the company’s economic profit.

NOPAT Trend

NOPAT experienced substantial growth from 2019 to 2021, increasing from US$499.351 million to US$1,034.943 million. However, a significant decline was observed in 2022, falling to US$659.470 million, and continued downward in 2023 to US$313.918 million. This suggests a weakening in operational profitability in the latter part of the period.

Cost of Capital Trend

The cost of capital increased steadily throughout the period, rising from 22.51% in 2019 to 24.38% in 2023. This consistent increase indicates a growing expense associated with financing the company’s invested capital.

Invested Capital Trend

Invested capital increased from US$1,845.838 million in 2019 to US$2,587.403 million in 2022. A decrease was then observed in 2023, with invested capital falling to US$2,415.179 million. This suggests a period of capital expansion followed by a potential reduction in investment or asset sales.

Economic Profit Trend

Economic profit mirrored the NOPAT trend. It rose significantly from US$83.845 million in 2019 to US$426.179 million in 2021, peaking in that year. A substantial decline followed, with economic profit decreasing to US$33.258 million in 2022 and ultimately resulting in an economic loss of US$-274.962 million in 2023. This indicates that, despite positive NOPAT for most of the period, the returns generated were insufficient to cover the cost of capital in the final year.

The shift from positive economic profit to a substantial economic loss in 2023 is a key observation. This outcome is likely attributable to the combined effect of declining NOPAT and a rising cost of capital. Further investigation into the drivers of the NOPAT decline and the factors influencing the cost of capital would be warranted.

Net Income

Net income demonstrated a strong upward trend from 2019 through 2021, rising from approximately 467 million US dollars in 2019 to over 1 billion US dollars in 2021. However, this pattern reversed in the subsequent two years, with net income declining to about 715 million in 2022 and further decreasing to approximately 449 million in 2023.

Net Operating Profit After Taxes (NOPAT)

NOPAT followed a similar trajectory, increasing notably from around 499 million US dollars in 2019 to approximately 1.03 billion US dollars in 2021. After this peak, NOPAT experienced a significant decrease to roughly 659 million in 2022 and almost halved to 314 million in 2023.

Overall Trend Analysis

Both net income and NOPAT showed strong growth over the first three years before entering a period of marked contraction in the last two years. The declines in 2022 and 2023 suggest a reduced profitability from operations and overall earnings, potentially indicating operational challenges or external factors adversely affecting financial performance during this period.

Provision for Income Taxes

The provision for income taxes exhibited an overall increasing trend from 2019 through 2021, rising from 58,304 thousand US dollars in 2019 to a peak of 146,366 thousand US dollars in 2021. This increase suggests higher taxable income or possibly less favorable tax conditions during this period. However, from 2021 onward, there was a decline in the provision, falling to 124,884 thousand US dollars in 2022 and further to 76,820 thousand US dollars in 2023, indicating a reduction in income tax expense or changes in tax strategy or rates.

Cash Operating Taxes

Cash operating taxes also followed a rising trajectory from 2019 to 2021, with amounts increasing from 66,842 thousand US dollars in 2019 to 166,173 thousand US dollars in 2021. This upward movement corresponded with the trend seen in the provision for income taxes, reflecting potentially higher tax payments aligned with reported taxable earnings. After 2021, cash operating taxes remained relatively stable in 2022, slightly decreasing to 165,914 thousand US dollars, before a more pronounced reduction to 108,845 thousand US dollars in 2023.

Comparative Insights

Both the provision for income taxes and cash operating taxes indicate growth during 2019–2021, peaking in 2021, followed by notable declines in the subsequent years. The gap between provision and cash taxes narrows slightly by 2023, implying a convergence between estimated tax liabilities and actual cash outflows. The trends suggest possible fluctuations in taxable income levels, tax planning measures, or regulatory environments affecting the company’s tax expenses and payments during the observed timeframe.

Total Reported Debt & Leases

The total reported debt and leases demonstrate a significant downward trend throughout the analyzed period. Beginning at $460,012 thousand as of December 31, 2019, the amount slightly increased to $472,757 thousand in 2020, then sharply decreased to $184,581 thousand in 2021. This declining trajectory continued in subsequent years, reaching $132,885 thousand in 2022 and further reducing to $82,614 thousand by the end of 2023. This pattern indicates a strategic reduction in leverage over time, suggesting efforts to lower financial risk or improve debt management.

Shareholders’ Equity

Shareholders’ equity shows an overall increasing trend with slight fluctuations. Starting at $1,480,158 thousand in 2019, it substantially grew to $2,207,018 thousand in 2020, followed by a continued rise to $2,562,444 thousand in 2021. However, in 2022, equity slightly decreased to $2,451,294 thousand before recovering to $2,525,897 thousand in 2023. This overall growth points towards retained earnings accumulation or capital infusions, enhancing the company's net worth and financial stability.

Invested Capital

Invested capital displays a gradual increase in the earlier years, moving from $1,845,838 thousand in 2019 to $2,183,213 thousand in 2020, and then to $2,564,053 thousand in 2021. After peaking in 2022 at $2,587,403 thousand, it slightly contracted to $2,415,179 thousand in 2023. The steady increase through most of the periods indicates ongoing investments in operational assets and business growth, while the recent decline may reflect asset disposals, depreciation effects, or a strategic contraction.

The economic spread ratio exhibited significant fluctuations between 2019 and 2023. Initially, the ratio demonstrated substantial growth, peaking in 2021, before experiencing a marked decline culminating in a negative value in 2023. This trend is closely linked to the performance of economic profit and the changes in invested capital over the same period.

Economic Spread Ratio Trend

In 2019, the economic spread ratio stood at 4.54%. This increased considerably to 16.01% in 2020 and further to 16.62% in 2021, indicating a growing ability to generate returns exceeding the cost of capital. However, a substantial decrease was observed in 2022, with the ratio falling to 1.29%. This downward trend accelerated in 2023, resulting in a negative economic spread ratio of -11.38%, signifying that returns were insufficient to cover the cost of capital.

The economic spread ratio’s movement mirrors the changes in economic profit. The substantial increases in economic profit in 2020 and 2021 directly contributed to the higher economic spread ratios observed during those years. Conversely, the significant decline in economic profit in 2022 and the negative economic profit in 2023 led to the corresponding decrease and eventual negative value of the economic spread ratio.

Invested Capital Relationship

Invested capital consistently increased from 2019 to 2022, rising from US$1,845,838 thousand to US$2,587,403 thousand. While invested capital decreased slightly in 2023 to US$2,415,179 thousand, the decline in economic profit was more pronounced, driving the economic spread ratio into negative territory. The increasing invested capital base, without a corresponding increase in economic profit, contributed to the diminishing returns and ultimately the negative spread in the most recent year.

The shift from positive and increasing economic spread ratios to a negative ratio suggests a deterioration in the company’s ability to efficiently allocate capital and generate returns. Further investigation into the factors driving the decline in economic profit, despite the substantial invested capital, would be warranted.

The economic profit margin exhibited significant fluctuation between 2019 and 2023. Initially, the margin demonstrated substantial growth, peaking in 2021, before experiencing a marked decline culminating in a negative value in 2023.

Economic Profit Margin Trend

In 2019, the economic profit margin stood at 3.59%. This increased considerably to 11.05% in 2020, and continued to rise to 11.48% in 2021. A substantial decrease was then observed in 2022, with the margin falling to 1.06%. The most significant change occurred in 2023, where the margin became negative, reaching -10.49%.

The economic profit itself mirrored this trend. Positive economic profit values were recorded from 2019 through 2022, with the largest value occurring in 2021. However, 2023 saw a transition to a negative economic profit, coinciding with the negative economic profit margin.

Relationship between Revenue and Profit Margin

Adjusted revenues increased from 2019 to 2021, aligning with the growth in the economic profit margin. While revenues decreased in both 2022 and 2023, the decline in the economic profit margin was disproportionately larger, particularly in 2023. This suggests that factors beyond revenue volume, such as increased costs or a higher cost of capital, significantly impacted profitability in the latter years.

The shift from positive to negative economic profit margin in 2023 indicates that the company’s returns were insufficient to cover its cost of capital during that period. The substantial decline warrants further investigation into the underlying drivers of this performance.