Texas Instruments Incorporated — Q1 2011 Form 10-Q
Business context and period: Semiconductor designer and manufacturer serving electronics companies worldwide, with Analog, Embedded Processing, Wireless and Other segments. This unaudited report covers the three months ended March 31, 2011; comparisons are primarily with Q1 2010.
Financial results
Dollar amounts are in millions, except per-share data. Revenue grew 6% year over year, but operating profit and margins declined as operating expenses rose and Japan-related costs were recorded.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $3,392 | $3,205 | +6% |
| Gross profit / margin | $1,728 / 50.9% | $1,689 / 52.7% | +2% / down 1.8 percentage points |
| Operating profit / margin | $908 / 26.8% | $950 / 29.7% | -4% / down 2.9 percentage points |
| Net income | $666 | $658 | +1% |
| Diluted EPS | $0.55 | $0.52 | +6% |
| Operating cash flow | $516 | $710 | -$194 |
| Capital expenditures | $194 | $219 | -$25 |
R&D was $422 million (up 14% year over year) and SG&A was $396 million (up 10%). Q1 included $30 million of estimated Japan-related costs, primarily in cost of revenue, and $2 million of acquisition costs. The prior-year quarter included $10 million of restructuring expense. The effective tax rate estimate for 2011 was about 28%.
Segment performance
| Segment | Revenue | Year-over-year change | Operating profit |
|---|---|---|---|
| Analog | $1,536 | +12% | $418 |
| Embedded Processing | $533 | +21% | $102 |
| Wireless | $658 | -8% | $141 |
| Other | $665 | -2% | $247 |
Analog and Embedded Processing growth reflected stronger shipments. Wireless weakness was driven by lower baseband sales to one customer; baseband revenue was $334 million, down 21% year over year. Other operating profit included the Japan and acquisition costs; the prior-year comparison also reflects differing segment conditions.
Liquidity, cash and balance sheet
At March 31, cash and cash equivalents were $1.343 billion and short-term investments were $1.514 billion, totaling $2.857 billion, $215 million below year-end 2010. Total assets were $13.310 billion; total liabilities were $2.736 billion and stockholders’ equity was $10.574 billion. The balance sheet shown does not provide a clear interest-bearing debt balance. A $1 billion revolving credit facility was unused at quarter-end.
Operating cash flow fell to $516 million, primarily due to working-capital changes, including compensation payments and higher inventory. Inventory increased $158 million to $1.678 billion; days of inventory rose to 91 from 83. About one-third of the increase was Wireless baseband inventory associated with weaker-than-expected customer demand. Accounts receivable rose $50 million to $1.568 billion; days sales outstanding increased to 42 from 39.
Investing activities provided $63 million, including net proceeds from short-term investment activity. Financing activities used $555 million: TI repurchased $771 million of stock (21.9 million shares) and paid $153 million of dividends. Stock-option exercises and other common-stock transactions provided $350 million.
Material developments, outlook and risks
- Japan earthquake: The March 11 earthquake damaged the Miho facility and less severely affected Aizu; Hiji was undamaged. Aizu had resumed full production, while Miho restarted initial production in mid-April and was expected to reach full loadings in Q3, subject to stable power and no further complications. Estimated Q1 lost revenue was about $20 million. Final losses and insurance proceeds could not be estimated, and losses could exceed policy limits.
- Management outlook: TI expected Q2 growth, but said results would be pressured by Japan-related lower output, local demand and possible supply-chain disruption, as well as additional earthquake costs. Management expected a good second half provided consumer and enterprise demand remained strong. Orders were $3.58 billion, down 2% year over year and up 14% sequentially.
- 2011 estimates: Management expected an effective tax rate of about 28%, R&D expense of $1.7 billion, capital expenditures of $0.9 billion and depreciation of $0.9 billion. These are estimates, not guarantees.
- National Semiconductor transaction: Announced April 4, 2011, after quarter-end. The proposed $25-per-share cash acquisition was expected to cost about $6.5 billion, subject to regulatory and shareholder approvals. TI expected to use existing cash and new debt; committed bridge and revolving facilities totaled $3.5 billion. If regulatory approvals cannot be obtained, TI may owe a $350 million reverse termination fee.
- Other risks: Semiconductor demand and capacity utilization are cyclical; manufacturing has significant fixed costs. Wireless baseband sales are concentrated in one customer and TI expected substantially all baseband revenue to cease by the end of 2012. Auction-rate securities of $257 million remained illiquid, although management did not expect this to impair business funding. TI reported no material product-claim accruals or payments and did not expect disclosed legal proceedings to materially affect its financial condition, results or liquidity.
Key facts for investors to verify
- Miho production recovery, customer and supplier disruptions, final earthquake losses, and timing and amount of insurance recoveries.
- Whether Q2 and second-half demand meet management’s expectations, particularly given semiconductor cyclicality and customer concentration in baseband.
- National Semiconductor approval and closing conditions, financing terms, integration implications, and potential reverse termination fee exposure.
- Inventory levels and the conversion of working capital into operating cash flow.
- Liquidity and financing after the proposed acquisition, including any new debt; the filing does not state a clear quarter-end debt balance.