Texas Instruments Inc. — Q3 2012 Form 10-Q
Business context and period. Semiconductor designer and manufacturer; this unaudited quarterly report covers the three and nine months ended September 30, 2012. TI reports Analog, Embedded Processing, Wireless and Other. National Semiconductor, acquired in September 2011, is included in Analog.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Revenue | $3.390B | $3.466B | $9.846B | $10.315B |
| Gross profit / margin | $1.740B / 51.3% | $1.744B / 50.3% | $4.922B / 50.0% | $5.224B / 50.6% |
| Operating profit / margin | $840M / 24.8% | $814M / 23.5% | $1.834B / 18.6% | $2.627B / 25.5% |
| Net income | $784M | $601M | $1.495B | $1.938B |
| Diluted EPS | $0.67 | $0.51 | $1.27 | $1.62 |
- Cash flow: Nine-month operating cash flow was $2.326B; capital expenditures were $399M, leaving $1.927B of operating cash flow less capex. Q3 free cash flow exceeded $1B, according to management.
- Liquidity: At September 30, cash and cash equivalents were $1.210B and short-term investments were $2.451B, totaling $3.661B. TI had no commercial paper outstanding and had a $2B revolving credit facility through March 2017.
- Debt: Current portion of long-term debt was $1.5B and long-term debt was $4.190B. TI issued $1.5B of fixed-rate notes in August; it repaid $1B of commercial paper and $375M of assumed National debt during the first nine months.
- Balance sheet: Total assets were $20.514B, total liabilities $9.111B, and stockholders’ equity $11.403B. Inventory was $1.848B; days of inventory were 101, versus 86 at year-end 2011.
Material changes and operating trends
- Q3 revenue declined 2% year over year, but increased 2% sequentially. The year-over-year decline mainly reflected Wireless and Other; Analog and Embedded Processing each grew about 2% sequentially.
- For the first nine months, revenue fell 5% and operating profit fell 30% year over year. Management attributed the profit decline to higher operating expenses, lower revenue and gross profit, and higher acquisition charges.
- Q3 segment revenue and operating profit: Analog $1.843B and $460M; Embedded Processing $520M and $63M; Wireless $325M and a $53M loss; Other $702M and $370M. Analog revenue included a full quarter of National’s Silicon Valley Analog business.
- Wireless revenue fell 44% year over year in Q3; baseband revenue was $54M, down 79%. TI stated that substantially all baseband revenue, which was $1.1B in 2011, was expected to cease by year-end 2012.
- Q3 orders were $3.24B, up 6% year over year but down 5% sequentially. Nine-month orders were $9.89B, down 4% year over year.
Outlook, commentary, risks and unusual items
- Outlook: Management said the economy and semiconductor market remained weak and likely would weaken further in Q4. TI expected about $1.9B of 2012 R&D, $0.5B of capital expenditures, $1.0B of depreciation and a 22% annual effective tax rate. It expected Q4 EPS to be reduced by about $0.06 by acquisition and restructuring charges. No Q4 revenue guidance is stated in the provided filing text.
- Reported earnings included significant items: Q3 included a $144M pre-tax gain from transferring Japan pension obligations and assets to the government, and a $90M discrete tax benefit plus a $67M benefit from lowering the estimated annual tax rate. TI described Q3 EPS as including 7 cents of acquisition and restructuring charges, 14 cents of tax benefits and 8 cents from the pension change.
- Japan earthquake: Q3 revenue included $60M of business-interruption insurance proceeds. TI said all related claims had been settled and all proceeds recognized and received by quarter-end. Nine-month gross profit included $361M of factory underutilization expense.
- Restructuring and acquisition: TI estimated $215M of total charges for planned Houston and Hiji facility closures, with $149M recognized through September 30, 2012. Nine-month acquisition charges were $363M, including $244M of acquired-intangible amortization.
- Shareholder returns: TI repurchased $1.2B of shares and paid $584M in dividends during the first nine months. It announced a 24% quarterly dividend increase, from $0.17 to $0.21 per share.
- Risks and contingencies: Key risks include cyclical semiconductor demand, manufacturing utilization and fixed costs, competition and product development, customer demand and inventory variation, foundry and supply availability, foreign exchange, taxes, debt service, and successful integration of National. TI disclosed various legal proceedings but did not expect a material adverse effect. Potential exposure under specified indemnities related to the former Sensors & Controls business was estimated not to exceed $200M; TI did not expect payments to materially affect its condition or results.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported earnings and margins depended on the pension gain, tax benefits, and Japan business-interruption insurance proceeds.
- Whether the expected Q4 semiconductor-market weakness and baseband revenue wind-down materially affected subsequent revenue and Wireless profitability.
- Progress, costs and timing of the Houston and Hiji closures, and whether total restructuring charges remain near the $215M estimate.
- National acquisition integration, ongoing amortization and other acquisition costs, and the durability of Analog and Embedded Processing growth.
- Debt maturities, cash deployment for repurchases and dividends, and the sustainability of returns under weaker operating conditions.