Texas Instruments Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. TI designs and manufactures semiconductors for customers worldwide. Results include National Semiconductor from its September 23 acquisition date.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Change |
|---|---|---|---|
| Revenue | $3.466 billion | $3.740 billion | Down 7% |
| Gross profit / margin | $1.744 billion / 50.3% | $2.039 billion / 54.5% | Margin down 4.2 points |
| Operating profit / margin | $814 million / 23.5% | $1.227 billion / 32.8% | Margin down 9.3 points |
| Net income | $601 million | $859 million | Down 30% |
| Diluted EPS | $0.51 | $0.71 | Down 28% |
Q3 orders were $3.07 billion, down 10% year over year and 15% sequentially. Revenue was approximately flat sequentially. Management said the quarter was below the seasonal average, despite revenue exceeding expectations.
For the first nine months, revenue was $10.315 billion versus $10.441 billion; operating profit was $2.627 billion versus $3.284 billion; net income was $1.938 billion versus $2.286 billion; and diluted EPS was $1.62 versus $1.85. Gross margin was 50.6%, compared with 53.9%.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $2.285 billion, compared with $2.590 billion. Capital expenditures were $663 million; operating cash flow less capital expenditures was approximately $1.622 billion.
- Cash and cash equivalents were $1.581 billion and short-term investments were $1.037 billion at September 30. TI reported total cash and short-term investments of $2.62 billion, down $450 million from year-end 2010.
- Debt totaled approximately $5.8 billion on the balance sheet, including $1.586 billion of short-term and current debt and $4.215 billion of long-term debt. This includes $1.2 billion of commercial paper and debt assumed with National.
- TI issued $3.5 billion of long-term debt to help fund the acquisition. A swap effectively fixed the rate on $1.0 billion of floating-rate debt at 0.922%. Two revolving credit facilities provide $1.92 billion of additional borrowing capacity; the filing says they support the commercial paper program.
- Nine-month investing cash outflow was $5.175 billion, largely reflecting $5.390 billion in acquisition cash outflow, net of acquired cash. Financing activities provided $3.152 billion, including debt proceeds; TI repurchased $1.673 billion of shares and paid $451 million in dividends.
Segments and material changes
- Analog: Q3 revenue of $1.557 billion, down 2% year over year; operating profit of $414 million, down 20%. National contributed $18 million of post-acquisition revenue.
- Embedded Processing: Revenue of $539 million, down 7%; operating profit of $113 million, down 29%.
- Wireless: Revenue of $580 million, down 24%; operating profit of $78 million, down 57%. Baseband revenue fell 40% year over year to $263 million.
- Other: Revenue of $790 million, down 3%; operating profit of $209 million, down 43%, including acquisition-related costs and the effects of Japan earthquake claims.
Management attributed lower year-over-year gross profit mainly to lower revenue, reduced factory utilization and inventory-obsolescence scrap charges. The estimated Q3 impact from lower utilization was about $90 million. For the nine-month period, Analog and Embedded Processing revenue grew 5% and 9%, respectively, while Wireless revenue fell 19%, primarily due to declining baseband shipments.
Acquisition, unusual items and outlook
- TI acquired all of National Semiconductor for total consideration of $6.557 billion. Preliminary purchase accounting recorded $3.527 billion of goodwill and $2.974 billion of acquired intangibles; valuations were not final. National’s results are included in Analog.
- Q3 acquisition costs were $147 million, including transaction costs, restructuring, accelerated stock compensation, retention bonuses and intangible amortization. Management said Q3 EPS included approximately $0.09 of acquisition-related charges. About 350 positions are expected to be eliminated by the end of 2012; additional restructuring charges of about $30 million were expected through Q3 2012. Approximately $75 million of remaining retention-bonus expense was expected by the end of Q1 2012.
- Acquisition accounting included a $96 million inventory fair-value write-up, with the remainder expected to affect cost of revenue in Q4 2011, and a $469 million property and equipment write-up expected to add about $10 million of quarterly depreciation. Annual acquired-intangible amortization for the next five years was estimated at about $325 million.
- Japan earthquake-related gross operating losses for the first nine months were $98 million, offset by about $20 million in property-damage insurance proceeds. TI also recognized $22 million of business-interruption proceeds as revenue. The timing and amount of additional insurance proceeds could not be estimated.
- Management expected economic uncertainty to continue weighing on demand in Q4. For 2011, TI expected an approximately 25% effective tax rate, $1.7 billion of R&D expense, $900 million of capital expenditures and $900 million of depreciation. Q4 EPS was expected to be reduced by about $0.15 from acquisition-related costs, including approximately $160 million in acquisition cost and $100 million in cost of revenue.
- The quarterly dividend was increased 31%, from $0.13 to $0.17 per share, effective for the dividend payable November 21, 2011. TI stated it expected adequate resources to meet business needs for at least the next 12 months.
Risks, contingencies and investor verification
Key risks include cyclical semiconductor demand, factory utilization and margin pressure, customer and product concentration, declining baseband revenue, and execution of National’s integration and expected benefits. TI also cited product, technology, supply, foreign exchange, tax, natural-disaster and debt-payment risks. The filing reports ongoing legal proceedings and states that management did not expect them to materially affect financial condition, results or liquidity. Estimated remaining exposure from specified indemnities related to the former Sensors & Controls business was approximately $200 million; management did not expect future payments to have a material effect.
- Verify National integration progress, final purchase-price allocation, acquired-asset amortization and the realization of expected commercial benefits.
- Track Q4 demand and orders, factory utilization, inventory levels and the trajectory of baseband revenue.
- Assess the effect of acquisition, restructuring and fair-value charges on reported margins and EPS, including costs expected after Q3.
- Monitor cash conversion, debt repayment and liquidity after the acquisition and increased dividend.
- Follow the outcome and timing of Japan-related insurance claims and material legal or indemnity matters.