Texas Instruments Incorporated — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Unaudited consolidated financial statements; dollar amounts are in millions except per-share figures. TI designs and manufactures semiconductors and reports four segments: Analog, Embedded Processing, Wireless and Other.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $3,205 | $2,086 | +54% |
| Gross profit / margin | $1,689 / 52.7% | $806 / 38.6% | Margin +14.1 percentage points |
| Operating profit / margin | $950 / 29.7% | $10 / 0.5% | Significant recovery |
| Net income | $658 | $17 | |
| Diluted EPS | $0.52 | $0.01 | |
| Operating cash flow | $710 | $251 | +$459 |
| Capital expenditures | $219 | $43 | +$176 |
Compared with Q4 2009, revenue rose 7% to $3.205 billion, operating profit increased from $875 million to $950 million, and net income was nearly unchanged at $658 million versus $655 million. Gross margin edged down from 52.9% to 52.7%; diluted EPS remained $0.52.
Q1 2010 tax provision was $299 million; the estimated annual effective tax rate was about 31%, versus the 35% statutory rate. TI said the estimate did not assume reinstatement of the federal research tax credit, which had expired at year-end 2009.
Segments and material changes
| Segment | Revenue | Operating profit (loss) | Year-over-year revenue change |
|---|---|---|---|
| Analog | $1,367 | $398 | +70% |
| Embedded Processing | $440 | $73 | +39% |
| Wireless | $717 | $158 | +27% |
| Other | $681 | $321 | +68% |
Broad-based shipment growth drove the year-over-year recovery. Higher factory utilization contributed an estimated $170 million benefit to gross profit versus Q1 2009, alongside higher revenue and lower restructuring charges. The prior-year comparison also reflected $105 million in restructuring expense, versus $10 million this quarter. TI reported orders of $3.64 billion, up 66% year over year and 12% sequentially.
Analog and Embedded Processing revenue together reached a record, according to management. Wireless revenue fell 5% sequentially, primarily on seasonal lower baseband shipments; baseband revenue was $424 million. TI had discontinued investment in baseband chips and expected substantially all baseband revenue to cease by the end of 2012. A low-power wireless product line was transferred from Analog to Wireless, and prior segment periods were restated.
Cash, liquidity and balance sheet
At March 31, TI held $1.217 billion in cash and cash equivalents and $1.574 billion in short-term investments, or $2.791 billion combined, down $134 million from year-end. Current assets were $6.323 billion and current liabilities $1.719 billion. Total assets were $12.370 billion; total liabilities were $2.565 billion. The balance sheet presents no borrowings; the $1 billion multi-year and $175 million non-U.S. revolving credit facilities were unused.
Operating cash flow was $710 million. Investing activities used $51 million, including $219 million of capital expenditures; financing activities used $624 million, including $504 million for repurchases of 20.6 million shares and $149 million of dividends paid. TI declared a quarterly dividend of $0.12 per share. Accounts receivable increased $249 million to $1.526 billion; days sales outstanding rose to 43 from 38. Inventory increased $74 million to $1.276 billion, while days of inventory remained 76.
Outlook, risks and unusual items
Management said demand remained strong entering Q2 and that it was increasing capacity to support customers. Production output was at a record; capacity was expected to increase each quarter in 2010, with shipments from the 300-millimeter Analog facility expected to begin in Q4. For full-year 2010, TI expected an effective tax rate of about 31%, R&D expense of $1.5 billion, capital expenditures of $0.9 billion and depreciation of $0.9 billion. Management believed available resources were sufficient for at least the next 12 months. No specific Q2 revenue or earnings forecast is provided in the filing text.
Key risks include cyclical semiconductor demand, competition, manufacturing utilization and fixed costs, execution of capacity expansion, customer concentration and inventory swings, technology and product-development demands, supply availability, foreign exchange, tax matters, and intellectual-property or product-liability claims. TI disclosed $457 million of auction-rate securities with limited liquidity; it reported that interest was being received, securities were rated AAA or Aaa by at least one major agency, and it did not expect the illiquidity to materially affect business funding. A discontinued-business indemnity has a $30 million deductible and maximum exposure of $300 million; TI said it did not expect potential payments to materially affect its financial condition, results or liquidity. The filing also reports ongoing legal and administrative proceedings but states their outcomes were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether demand, orders and factory capacity continued to support growth and margins after Q1, including the planned Q4 start of shipments from the 300-millimeter Analog facility.
- Progress and financial effects of the planned wind-down of baseband revenue by the end of 2012, and Wireless customer concentration.
- Whether working-capital growth, especially receivables and inventory, converted into sustained operating cash flow.
- Liquidity, valuation assumptions and recoverability of the $457 million auction-rate securities portfolio.
- Execution against 2010 R&D, capital expenditure, depreciation and tax-rate expectations, and the impact of the expired research tax credit.