Texas Instruments Incorporated — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. TI designs and manufactures semiconductors for global electronics markets. Results include National Semiconductor, acquired September 23, 2011, in the Analog segment as Silicon Valley Analog (SVA).
Financial results
| Metric | Q1 2012 | Q1 2011 | Year-over-year change |
|---|---|---|---|
| Revenue | $3.121 billion | $3.392 billion | Down 8% |
| Gross profit / margin | $1.531 billion / 49.0% | $1.728 billion / 50.9% | Margin down 1.9 percentage points |
| Operating profit / margin | $397 million / 12.7% | $908 million / 26.8% | Down 56% |
| Net income | $265 million | $666 million | Down 60% |
| Diluted EPS | $0.22 | $0.55 | Down $0.33 |
| Operating cash flow | $449 million | $516 million | Down $67 million |
Q1 diluted EPS included approximately $0.10 per share of National acquisition and previously announced restructuring charges. Revenue declined primarily because of lower Wireless baseband sales. Management reported core-business revenue (Analog, Embedded Processing and the remainder of Wireless) up about 2% year over year.
Segments and operating trends
- Analog: Revenue of $1.686 billion, up 10% year over year, largely reflecting SVA; operating profit was $335 million versus $418 million. Revenue was approximately flat sequentially.
- Embedded Processing: Revenue of $473 million, down 11% year over year but up 7% sequentially; operating profit was $36 million versus $102 million.
- Wireless: Revenue of $373 million, down 43% year over year and 48% sequentially; operating loss was $25 million versus operating profit of $141 million. Baseband revenue was $87 million, down 74% year over year.
- Other: Revenue of $589 million, down 11% year over year; operating profit was $51 million versus $247 million. This segment includes acquisition-related charges and certain corporate items.
Cash, debt and liquidity
- Cash and cash equivalents were $1.193 billion and short-term investments were $1.572 billion at March 31, for total cash and short-term investments of $2.765 billion, down $170 million from year-end 2011.
- Debt comprised $700 million of commercial paper, $378 million current portion of long-term debt and $4.207 billion long-term debt. A new $2 billion revolving credit facility runs through March 2017; commercial paper’s quarter-end weighted-average rate was 0.30%.
- Operating cash flow was $449 million; capital expenditures were $103 million. TI repaid $300 million of commercial paper, repurchased $300 million of shares and paid $195 million in dividends. Dividends declared were $0.17 per share.
- Inventory was $1.853 billion, up $65 million from year-end; days of inventory increased to 105 from 86 as TI built inventory for anticipated demand.
Management said available resources were sufficient for working capital, investment, dividends and other business needs for at least the next 12 months.
Material changes, outlook and unusual items
- Orders were $3.24 billion, down 9% year over year but up 13% sequentially. Management said the semiconductor cycle had bottomed in Q1, orders were broadening across regions and markets, and backlog was growing.
- Management expected 2012 to be a good year for growth. It provided no specific revenue or EPS forecast in the filing. It expected 2012 R&D expense of about $2.0 billion, capital expenditures of $0.7 billion, depreciation of $1.0 billion and an annual effective tax rate of about 28%.
- National acquisition-related costs totaled $174 million in Q1, including $153 million in acquisition charges and $21 million in cost of revenue. TI expected about $100 million of such costs in Q2, declining thereafter toward ongoing intangible amortization of about $80 million per quarter for 8–10 years.
- Q1 included about $65 million of Japan earthquake business-interruption insurance proceeds recorded as revenue. Cumulative earthquake-related gross operating losses through March 31, 2012 were $101 million; TI said future insurance proceeds could not be estimated.
- TI recorded $10 million of restructuring charges in Q1 for planned Houston and Hiji facility closures. Estimated total closure costs were about $215 million, with $122 million recognized through Q1; the closures were expected by mid-2013.
- TI expected substantially all baseband revenue, which was $1.1 billion in 2011, to cease by the end of 2012. Q1 baseband revenue was less than 3% of total company revenue.
Risks and contingencies
Key risks include semiconductor cyclicality and demand uncertainty, fixed manufacturing costs and utilization, competitive pricing and rapid technology change, customer concentration and forecast errors, reliance on external foundries, international and currency exposure, and successful integration of National. The filing also identifies tax, environmental, product-liability, intellectual-property, natural-event, financial-market, debt-service and cybersecurity risks. TI said legal proceedings were not expected to materially affect its financial condition, results or liquidity. Potential remaining exposure under specified indemnities related to the former Sensors & Controls business was estimated not to exceed $200 million; management did not expect future payments to be material.
Investor facts to verify
- Whether order growth and backlog gains translated into sustained revenue growth and improved manufacturing utilization.
- Whether Wireless baseband declines and the planned exit occurred on schedule, and whether other Wireless products diversified revenue as expected.
- Actual acquisition, integration and facility-closure costs compared with management’s estimates, including the expected ongoing intangible amortization.
- The sustainability of Q1 results excluding the $65 million earthquake-related insurance revenue and the timing or amount of any further insurance recoveries.
- Inventory levels, cash generation, debt and shareholder returns relative to demand and the stated 2012 spending outlook.