Why did Texas Instruments report a net loss in 2002 despite revenue growth and improved gross margins?

The loss came mainly from non-operating items. TI recorded a $638 million other-than-temporary write-down on its Micron Technology common stock, received in the 1998 sale of its memory business, and then established a $223 million valuation allowance against the related deferred tax benefit because the capital loss was unlikely to be usable. Together these items more than offset the $288 million of operating profit, producing a net loss of $344 million, or $(0.20) per share.

How strong is TI's balance sheet and cash generation?

The balance sheet is strong. At year-end 2002 TI held $949 million of cash and equivalents, $2.06 billion of short-term investments and $1.13 billion of long-term cash investments, for total cash of $4.14 billion. Debt was $1.24 billion, giving a debt-to-total-capital ratio of 0.10. Operating cash flow was $1.99 billion, and free cash flow reached $1.19 billion after capital expenditures fell to $802 million from $1.79 billion. TI also paid $147 million in dividends and repurchased $370 million of stock.

What is the outlook for 2003 and what should investors watch?

TI guided to Q1 2003 revenue roughly flat versus Q4 2002, with E&PS up about 10%, an operating margin near 6%, and EPS of about $0.06 plus or minus a few cents. For full-year 2003 it expects R&D of about $1.7 billion, capex of about $800 million, depreciation falling to about $1.4 billion, and an effective tax rate near 24%. Investors should watch the pace of semiconductor demand recovery in wireless and DSP, the Micron stock position (about $555 million at year-end) for further impairment risk, and whether incremental revenue converts to profit at the high rate management projects.

How concentrated is TI's business by product, geography and customer?

Semiconductors generated 83% of 2002 revenue, with Sensors & Controls at 11% and Educational & Productivity Solutions at 6%. More than 76% of revenue came from sales outside the U.S. The Nokia group accounted for 12% of consolidated revenue, the only customer above 10%. Sales to distributors were about 27% of semiconductor revenue. This concentration in cellular phones, PCs and communications infrastructure makes results sensitive to end-market swings.

Are there material legal or environmental liabilities that could hurt investors?

Management does not expect them to be material. Italian government auditors reviewed roughly $250 million of grants made to TI's former Italian memory operations and may seek partial repayment, but TI believes the grants were obtained and used in compliance with law. TI is also party to EPA and state environmental clean-up proceedings, which it says will not have a material adverse effect on its financial condition, results or liquidity. Both are disclosed as contingencies rather than accrued liabilities.

TXN 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 3, 2003. Cited figures are marked; the original filing is the authoritative source.

Texas Instruments' 2002 10-K shows a company in a cyclical downturn that nonetheless gained competitive ground.

Net revenue rose 2% to $8.38 billion^a, driven by a 30% jump in DSP revenue and a 45% rise in wireless, while gross margin improved sharply to 36.6% from 29.0% on higher factory utilization after the 2001 inventory correction. However, the bottom line was negative: TI posted a net loss of $344 million, or $(0.20) per diluted share, versus a $201 million loss in 2001. The loss was driven almost entirely by a $638 million other-than-temporary write-down on its Micron Technology stake, received when TI sold its memory business to Micron in 1998, and a related $223 million valuation allowance on the deferred tax asset created by that write-down.

Excluding these items, the business was near breakeven at the operating line, with operating profit of $288 million^b after $772 million of special charges and acquisition amortization. Balance sheet strength is a key investor takeaway. TI ended 2002 with $4.14 billion in total cash and investments, debt of only $1.24 billion (debt-to-capital ratio of 0.10), and operating cash flow of $1.99 billion.

Capital expenditures fell to $802 million^c from $1.79 billion, lifting free cash flow to $1.19 billion. Management guided to a Q1 2003 EPS of about $0.06, expected operating margin near 6%, and 2003 R&D of about $1.7 billion and capex of about $800 million, signaling expectations of a recovery in which incremental revenue would fall through at high incremental margins. Key risks remain concentrated.

Semiconductors made up 83%^d of revenue, with DSPs and analog chips the core. More than 76% of revenue came from outside the U.S., and Nokia alone accounted for 12%.

The company still holds 57 million Micron shares worth about $555 million at year-end, so further impairments or volatility in that position could affect earnings. Pending Italian government grant reviews (about $250 million in grants) and environmental matters are disclosed but management does not expect them to be material.

02—Key points

Key Highlights

Revenue grew 2% to $8.38 billion, led by DSP revenue up 30% and wireless revenue up 45%, while Analog grew 3%.
Gross margin expanded to 36.6% from 29.0% on higher factory utilization following 2001 inventory reductions.
Net loss of $344 million ($0.20 per diluted share) was driven by a $638 million Micron Technology investment write-down and a $223 million valuation allowance on the related tax asset.
Operating profit recovered to $288 million from a $582 million loss in 2001, after restructuring and acquisition-related charges.
Strong liquidity: $4.14 billion in cash and investments against $1.24 billion of debt; free cash flow rose to $1.19 billion as capex fell to $802 million.
Management guided to Q1 2003 EPS of about $0.06 and an operating margin near 6%, with 2003 R&D of about $1.7 billion and capex of about $800 million.
Concentration risks: 83% of revenue from semiconductors, over 76% from outside the U.S., Nokia at 12% of revenue, and about $555 million of remaining Micron stock exposure.

03—Questions

Frequently Asked Questions

Why did Texas Instruments report a net loss in 2002 despite revenue growth and improved gross margins?
The loss came mainly from non-operating items. TI recorded a $638 million other-than-temporary write-down on its Micron Technology common stock, received in the 1998 sale of its memory business, and then established a $223 million valuation allowance against the related deferred tax benefit because the capital loss was unlikely to be usable. Together these items more than offset the $288 million of operating profit, producing a net loss of $344 million, or $(0.20) per share.
How strong is TI's balance sheet and cash generation?
The balance sheet is strong. At year-end 2002 TI held $949 million of cash and equivalents, $2.06 billion of short-term investments and $1.13 billion of long-term cash investments, for total cash of $4.14 billion. Debt was $1.24 billion, giving a debt-to-total-capital ratio of 0.10. Operating cash flow was $1.99 billion, and free cash flow reached $1.19 billion after capital expenditures fell to $802 million from $1.79 billion. TI also paid $147 million in dividends and repurchased $370 million of stock.
What is the outlook for 2003 and what should investors watch?
TI guided to Q1 2003 revenue roughly flat versus Q4 2002, with E&PS up about 10%, an operating margin near 6%, and EPS of about $0.06 plus or minus a few cents. For full-year 2003 it expects R&D of about $1.7 billion, capex of about $800 million, depreciation falling to about $1.4 billion, and an effective tax rate near 24%. Investors should watch the pace of semiconductor demand recovery in wireless and DSP, the Micron stock position (about $555 million at year-end) for further impairment risk, and whether incremental revenue converts to profit at the high rate management projects.
How concentrated is TI's business by product, geography and customer?
Semiconductors generated 83% of 2002 revenue, with Sensors & Controls at 11% and Educational & Productivity Solutions at 6%. More than 76% of revenue came from sales outside the U.S. The Nokia group accounted for 12% of consolidated revenue, the only customer above 10%. Sales to distributors were about 27% of semiconductor revenue. This concentration in cellular phones, PCs and communications infrastructure makes results sensitive to end-market swings.
Are there material legal or environmental liabilities that could hurt investors?
Management does not expect them to be material. Italian government auditors reviewed roughly $250 million of grants made to TI's former Italian memory operations and may seek partial repayment, but TI believes the grants were obtained and used in compliance with law. TI is also party to EPA and state environmental clean-up proceedings, which it says will not have a material adverse effect on its financial condition, results or liquidity. Both are disclosed as contingencies rather than accrued liabilities.

04—Continue

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