How much of the 2003 earnings improvement was operational versus one-time?

Operating profit rose $677 million, to $965 million, driven by higher revenue and better factory utilization. Non-operating items were also large: the Micron stock sales produced a $203 million pretax gain, and a $223 million tax valuation allowance was reversed. Management attributes about $993 million of the $1.54 billion net income swing to Micron-related actions, so investors should focus on operating profit when judging the run rate.

What is the outlook for 2004?

Management expects 2004 earnings to reflect revenue growth and higher operating margins, and expects to exceed the threshold for the employee profit-sharing program, starting with an accrual in Q1 2004 of about $60 million per quarter. Planned 2004 spending includes about $2.0 billion in R&D and about $1.1 billion in capital expenditures. Depreciation is expected to dip about $30 million in Q1 before rising through the year.

What are the main concentration and litigation risks?

Nokia accounted for 14% of 2003 revenue, making it the largest customer. Distributors account for about 25% of Semiconductor revenue. Qualcomm has filed a dispute over the Patent Portfolio Agreement, alleging that TI breached confidentiality terms, and TI is contesting Qualcomm's counterclaims. Italian government auditors are reviewing about $250 million in former memory grants; TI does not expect a material repayment, but the Ministry's decision is pending.

How strong is the balance sheet and capital allocation?

Cash, short-term investments, and long-term cash investments totaled $5.66 billion at year-end 2003, up $1.5 billion. Debt fell to $826 million total, including $431 million current, and the debt-to-capital ratio fell to 0.07 from 0.10. TI bought back $284 million of stock, paid $147 million in dividends ($0.085 per share annually), and made acquisitions including Radia Communications for about $133 million.

Is the semiconductor business still cyclical and fixed-cost heavy?

Yes. The 10-K notes that TI owns most of its manufacturing capacity, so a large share of operating costs is fixed and does not fall with lower demand, which can compress margins in downturns. Analog and DSP products are the core, together about three-quarters of Semiconductor revenue. TI's 2003 margin gains came from higher utilization, so the same leverage can work in reverse if demand weakens.

TXN 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 27, 2004. Cited figures are marked; the original filing is the authoritative source.

Texas Instruments' 2003 10-K shows a sharp earnings rebound driven by its Semiconductor business, which accounted for 85%^a of 2003 revenue.

Net revenue rose 17% to $9.83 billion^b from $8.38 billion, led by DSP products (up 36%) and wireless (up 32%). Gross margin expanded to 40.3% from 36.6%, as higher factory utilization spread fixed manufacturing costs over more output. Operating profit more than tripled to $965 million, and net income swung to $1.198 billion ($0.68 diluted EPS) from a $344 million loss in 2002.

Roughly $993 million^c of the year-over-year improvement came from Micron-related actions, including the sale of the remaining 57 million Micron shares, which added about $0.20 per share to EPS. The balance sheet remains strong. Total cash and investments were $5.66 billion, up $1.5 billion, and operating cash flow was $2.15 billion.

Long-term debt fell to $395 million^d from $833 million, and the debt-to-capital ratio dropped to 0.07. Management expects 2004 revenue growth and higher operating margins, with profit-sharing accruals of about $60 million per quarter, and plans R&D of about $2.0 billion and capex of about $1.1 billion. Investors should note that the 2003 earnings figure includes non-recurring Micron gains and a $223 million tax valuation allowance reversal, so underlying operating profit is the better guide to sustainable performance.

Key risks disclosed include the cyclical semiconductor market, high fixed manufacturing costs, customer concentration (Nokia at 14% of revenue), more than 80% of revenue from outside the U.S., and pending litigation with Qualcomm over the patent portfolio agreement. The Italian government's review of about $250 million in grants could also lead to repayments, though TI does not expect a material impact.

02—Key points

Key Highlights

Revenue grew 17% to $9.83 billion in 2003, with Semiconductor up 20% on DSP strength (DSP revenue up 36%) and wireless revenue up 32%.
Gross margin improved to 40.3% from 36.6%, reflecting higher utilization of fixed-cost fabs; operating profit rose 235% to $965 million (9.8% of revenue).
Net income of $1.198 billion ($0.68 diluted EPS) versus a $344 million loss in 2002; about $0.20 per share came from the sale of the remaining Micron stake.
Strong liquidity: $5.66 billion in cash and investments, $2.15 billion operating cash flow, and $500 million in undrawn credit lines.
Deleveraged balance sheet: long-term debt cut to $395 million from $833 million, with a $400 million note due in Q3 2004 to be repaid from cash.
Guidance for 2004 calls for revenue growth and higher operating margins, with profit-sharing accruals of about $60 million per quarter and R&D of about $2.0 billion.
Restructuring in 2003 totaled roughly $77 million in Semiconductor and Sensors & Controls, with about 1,750 jobs targeted for reduction over the program.

03—Questions

Frequently Asked Questions

How much of the 2003 earnings improvement was operational versus one-time?
Operating profit rose $677 million, to $965 million, driven by higher revenue and better factory utilization. Non-operating items were also large: the Micron stock sales produced a $203 million pretax gain, and a $223 million tax valuation allowance was reversed. Management attributes about $993 million of the $1.54 billion net income swing to Micron-related actions, so investors should focus on operating profit when judging the run rate.
What is the outlook for 2004?
Management expects 2004 earnings to reflect revenue growth and higher operating margins, and expects to exceed the threshold for the employee profit-sharing program, starting with an accrual in Q1 2004 of about $60 million per quarter. Planned 2004 spending includes about $2.0 billion in R&D and about $1.1 billion in capital expenditures. Depreciation is expected to dip about $30 million in Q1 before rising through the year.
What are the main concentration and litigation risks?
Nokia accounted for 14% of 2003 revenue, making it the largest customer. Distributors account for about 25% of Semiconductor revenue. Qualcomm has filed a dispute over the Patent Portfolio Agreement, alleging that TI breached confidentiality terms, and TI is contesting Qualcomm's counterclaims. Italian government auditors are reviewing about $250 million in former memory grants; TI does not expect a material repayment, but the Ministry's decision is pending.
How strong is the balance sheet and capital allocation?
Cash, short-term investments, and long-term cash investments totaled $5.66 billion at year-end 2003, up $1.5 billion. Debt fell to $826 million total, including $431 million current, and the debt-to-capital ratio fell to 0.07 from 0.10. TI bought back $284 million of stock, paid $147 million in dividends ($0.085 per share annually), and made acquisitions including Radia Communications for about $133 million.
Is the semiconductor business still cyclical and fixed-cost heavy?
Yes. The 10-K notes that TI owns most of its manufacturing capacity, so a large share of operating costs is fixed and does not fall with lower demand, which can compress margins in downturns. Analog and DSP products are the core, together about three-quarters of Semiconductor revenue. TI's 2003 margin gains came from higher utilization, so the same leverage can work in reverse if demand weakens.

04—Continue

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