Texas Instruments Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2010; year-to-date figures cover the nine months ended that date. Financial statements are unaudited. Amounts are in U.S. dollars unless noted.
Business context
TI designs and manufactures semiconductors for electronics customers worldwide, with Analog, Embedded Processing, Wireless and Other segments. Management identifies Analog and Embedded Processing as primary growth engines and is focusing Wireless investment on smartphone applications processors and connectivity products while phasing out baseband investment.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $3.740 billion | $2.880 billion | $10.441 billion | $7.422 billion |
| Gross profit | $2.039 billion | $1.481 billion | $5.622 billion | $3.410 billion |
| Gross margin | 54.5% | 51.4% | 53.9% | 45.9% |
| Operating profit | $1.227 billion | $763 million | $3.284 billion | $1.116 billion |
| Operating margin | 32.8% | 26.5% | 31.5% | 15.0% |
| Net income | $859 million | $538 million | $2.286 billion | $815 million |
| Diluted EPS | $0.71 | $0.42 | $1.85 | $0.63 |
Q3 revenue rose 30% year over year and 7% sequentially. All segments grew year over year and sequentially. Management attributed higher gross profit mainly to revenue growth; for the first nine months, improved factory utilization also contributed, adding $296 million to gross profit. Q3 orders were $3.43 billion, up 10% year over year but down 8% sequentially.
Segments and material changes
| Q3 segment | Revenue | Year-over-year change | Operating profit |
|---|---|---|---|
| Analog | $1.581 billion | +35% | $520 million |
| Embedded Processing | $579 million | +47% | $160 million |
| Wireless | $767 million | +11% | $180 million |
| Other | $813 million | +29% | $367 million |
For the first nine months, revenue increased 41% and operating profit nearly tripled versus 2009. Segment growth was broad-based; Analog revenue rose 52% year to date, Embedded Processing 45%, Wireless 18% and Other 44%. Q3 industrial demand was particularly strong, while consumer demand cooled, including in computing and television markets. Management reported market-share gains across Analog, Embedded Processing and smartphone-related Wireless products.
Q3 baseband revenue was $438 million, down 3% year over year; year-to-date baseband revenue was $1.28 billion, approximately flat year over year. TI expects substantially all baseband revenue to cease by the end of 2012.
Cash flow, liquidity and capital allocation
- Nine-month operating cash flow was $2.590 billion, up from $1.642 billion in 2009. Investing activities used $509 million, including $898 million of capital expenditures; financing activities used $2.170 billion.
- Cash and cash equivalents were $1.093 billion and short-term investments were $1.417 billion at September 30, 2010, totaling $2.510 billion. Total cash and short-term investments were $415 million below year-end 2009.
- Current assets were $6.468 billion and current liabilities $1.838 billion. The filing presents no borrowings on the balance sheet; available revolving facilities were unused. Facilities included a $1 billion revolver through August 2011, reducing to $920 million through August 2012, and a $175 million non-U.S. facility expiring in November 2010.
- Nine-month dividends paid were $439 million. TI repurchased 74.3 million shares for $1.854 billion in the first nine months; Q3 repurchases totaled 24.0 million shares at an average $25.03 per share. The board authorized an additional $7.5 billion repurchase program in September.
- The board raised the quarterly dividend from $0.12 to $0.13 per share after quarter-end. The October 21 declaration was payable November 22, 2010.
Outlook, risks and unusual items
- Management expected Q4 revenue to be sequentially lower due to seasonality, continued softness in computing and consumer markets, and slower industrial growth.
- For 2010, management expected an effective tax rate of about 31%, R&D expense of $1.6 billion, capital expenditures of $1.2 billion and depreciation of $0.9 billion. The tax estimate excludes any reinstatement of the federal research tax credit, which had expired at the end of 2009.
- TI acquired two wafer fabrication facilities and equipment in Aizu, Japan, in August. The transaction involved $130 million net cash in total, including the business combination, production tools and a contractual settlement; $12 million of the settlement was charged to cost of revenue. The company also recorded $8 million of acquisition-related charges in cost of revenue and $1 million of acquisition costs in SG&A.
- After quarter-end, TI announced a China fab acquisition expected to use $140 million net cash, with up to a further $35 million payable based on performance criteria.
- Liquidity risk remains for auction-rate securities: $331 million remained classified as Level 3 investments at quarter-end, and principal access may be limited. TI said the securities were backed by student-loan guarantees and did not expect liquidity constraints to materially affect business requirements. Some securities were redeemed or called for redemption in October.
- Other disclosed risks include semiconductor demand cyclicality, fixed manufacturing costs and capacity utilization, competition and pricing, product development, customer concentration and inventory adjustments, supply availability, foreign exchange, tax changes, litigation, and warranty or product-liability claims. Management said legal proceedings and known product claims were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether Q4 demand weakened as anticipated, particularly in computing, consumer and industrial markets, and how that affected orders and margins.
- Whether strong margins and factory utilization were sustainable as capacity investment increased.
- Progress and costs associated with the Japan and China manufacturing facilities, including the China performance-based payment.
- Execution of the $7.5 billion repurchase authorization and the effect of buybacks on share count, liquidity and per-share results.
- Liquidity and valuation developments for auction-rate securities, and the timing of remaining redemptions.
- Whether the projected 2010 tax rate, R&D spending and capital expenditures tracked management’s estimates.