Texas Instruments Incorporated — Q3 2009 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2009. TI designs, manufactures and sells semiconductors globally through Analog, Embedded Processing, Wireless and Other segments. Results are unaudited; the nine-month results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Change YoY |
|---|---|---|---|
| Revenue | $2.880 billion | $3.387 billion | -15% |
| Gross profit / margin | $1.481 billion / 51.4% | $1.643 billion / 48.5% | Profit -10%; margin +2.9 points |
| Operating profit / margin | $763 million / 26.5% | $746 million / 22.0% | Profit +2% |
| Net income | $538 million | $563 million | -4% |
| Diluted EPS | $0.42 | $0.43 | -2% |
| Orders | $3.11 billion | — | -4% YoY; +11% sequentially |
Versus Q2 2009, revenue rose 17% and net income more than doubled, to $538 million from $260 million. Gross margin improved from 45.7% to 51.4%; operating margin increased from 14.0% to 26.5%.
For the first nine months, revenue was $7.422 billion (-26% YoY), operating profit $1.116 billion (-53%), net income $815 million (-55%), and diluted EPS $0.63 versus $1.35. Gross margin fell to 45.9% from 51.4%; lower revenue and factory utilization drove the decline, with about $400 million of gross-profit reduction attributed to lower utilization.
Cash, liquidity and capital allocation
- At September 30, cash and cash equivalents were $1.294 billion and short-term investments $1.533 billion, totaling $2.827 billion, up $287 million from year-end 2008.
- Nine-month operating cash flow was $1.642 billion, down $574 million year over year. Capital expenditures were $317 million; investing cash flow was a $445 million outflow.
- Current assets were $6.138 billion and current liabilities $1.662 billion. Total liabilities were $2.465 billion; the balance sheet presents no borrowings line. TI’s $1 billion multi-year and $175 million non-U.S. revolving facilities were unused.
- Inventory was $1.116 billion, down $259 million from year-end; accounts receivable increased $522 million to $1.435 billion. Days sales outstanding were 45 versus 33 at year-end, while days of inventory declined to 72 from 89.
- TI paid $418 million in dividends and repurchased $602 million of stock in the first nine months. It had $2.95 billion remaining under its announced repurchase authorization at quarter-end.
Material changes, outlook and management commentary
- Management said results exceeded expectations, with strong sequential demand for a second consecutive quarter as customers wound down inventory corrections and increased factory production. Analog led the recovery, rising 20% sequentially.
- Q3 revenue declined year over year across all segments. Wireless fell 26% (baseband revenue down 33%); Analog and Embedded Processing each declined 8%. Sequentially, revenue increased in all segments.
- Cost reductions helped profitability: nine-month R&D declined 26% and SG&A declined 22% year over year. Restructuring actions eliminated about 3,900 jobs and are expected to lower annualized costs by more than $700 million.
- Restructuring charges totaled $200 million for the first nine months, with $10 million in Q3. Total charges for the announced actions are expected to be about $450 million through Q4 2009; Q4 charges were forecast at approximately $0.01 per share.
- Management’s 2009 estimates: annual effective tax rate about 28%, R&D expense $1.5 billion, capital expenditures about $800 million and depreciation about $900 million. After equipping the new 300-mm analog facility, capital spending is expected to return to approximately 5%–8% of revenue. Management stated liquidity should cover business needs for at least 12 months.
- TI is shifting Wireless investment away from standard baseband products toward applications processors and connectivity; standard baseband development has stopped, and substantially all custom baseband revenue is expected to cease by the end of 2012.
- Subsequent events: TI bought Qimonda manufacturing equipment for $172.5 million in October 2009 and declared a quarterly dividend of $0.12, a 9% increase from the prior rate.
Risks, contingencies and unusual items
- Semiconductor demand is cyclical; fixed manufacturing costs and utilization can pressure margins. Other cited risks include competition, product development and manufacturing execution, customer concentration and inventory adjustments, supply availability, foreign exchange, taxes, IP matters and changing technology.
- TI held $457 million of illiquid auction-rate securities, valued using Level 3 assumptions. Auctions remained inactive; principal access may be limited, though the securities were largely AAA/Aaa-rated and student-loan-backed. TI reported no material expected effect on its ability to fund operations.
- TI’s former Sensors & Controls business indemnity has a maximum potential exposure of $300 million, subject to specified terms and a $30 million total deductible for certain matters. The filing says other legal proceedings are not expected to materially affect financial condition, results or liquidity.
- Q3 tax expense included $14 million of discrete charges, compared with $34 million of discrete tax benefits in Q3 2008. Nine-month 2008 tax benefits included $113 million related primarily to indefinitely reinvesting foreign earnings, affecting year-over-year comparisons.
Important facts for investors to verify
- Whether the sequential demand recovery and order growth persist, particularly as customer inventory corrections unwind.
- Whether Analog growth and margin improvement continue, and how the Wireless/baseband transition affects revenue and profitability.
- Actual restructuring charges, completion timing, job reductions and realized annual cost savings versus management’s estimates.
- Cash conversion and working-capital trends, especially receivables and the rise in days sales outstanding.
- Execution, cost and returns from the 300-mm analog facility and the planned 2009 capital spending.
- Liquidity and eventual principal recovery for the $457 million auction-rate securities, as well as any material developments in the stated indemnity or legal matters.