01—Abstract
Summary
Summary of the 10-K filed February 28, 2006. Cited figures are marked; the original filing is the authoritative source.
Texas Instruments closed 2005 with record results: net revenue rose 6% to $13.39 billiona, operating margin reached a record 20.8%, and diluted EPS was $1.39, up 32% year over year on net income growth of 25% to $2.32 billion.
Semiconductor, which is 87% of revenue, drove the gains. Its operating margin expanded to 23.9% on manufacturing cost reductions and wireless growth, while DSP and analog remain the core franchises. The filing also reflects strong cash generation ($3.77 billionb operating cash flow) and aggressive capital return, with $4.15 billion of buybacks in 2005 and a new $5 billion authorization in January 2006.
The most significant forward-looking event is the agreement to sell substantially all of Sensors & Controls to an affiliate of Bain Capital for $3 billionc, expected to close in the first half of 2006 and to be reported as discontinued operations. Management says this will sharpen focus on DSP and analog, and the RFID business stays in Semiconductor. TI also acquired Chipcon for about $200 million, closed in January 2006.
Investors should note that the 2005 comparison is affected by stock-option expense now recognized under SFAS 123(R) from July 2005, and that the company is moving to straight-line depreciation in 2006, which management expects to reduce depreciation by about $350 milliond. Key risks include semiconductor cyclicality, heavy customer concentration in the cell-phone market (Nokia was just under 10% of revenue directly, and more including indirect sales), and fixed-cost manufacturing exposure.
Legal and contingent items include a $112 million patent jury award against Globespan that is subject to a pending antitrust counterclaim, and an Italian government review of roughly $250 million in grants, with about $175 million already finalized. Management does not expect either to have a material adverse effect.
02—Key points
Key Highlights
- Record 2005 revenue of $13.39 billion (+6%), with operating profit of $2.79 billion and a record 20.8% operating margin, up from 17.5% in 2004.
- Diluted EPS of $1.39 (up 32%), aided by a roughly 100 million reduction in average diluted shares from buybacks; net income rose 25% to $2.32 billion.
- Semiconductor (87% of revenue) is the core: revenue of $11.72 billion with a 23.9% segment operating margin, driven by wireless (3G OMAP processors and baseband modems) and high-performance analog.
- TI holds leading market positions, described as the world's largest analog and DSP supplier and third-largest semiconductor company by 2005 revenue, though the filing gives no market share figures.
- Agreed to sell substantially all of Sensors & Controls to a Bain Capital affiliate for $3 billion, expected to close in 1H 2006; this will be reported as discontinued operations.
- Aggressive capital returns: $4.15 billion of share repurchases in 2005, dividend raised to $0.03 per quarter, and a new $5 billion buyback authorization in January 2006 on top of prior programs.
- Customer concentration and legal exposure: Nokia was just under 10% of direct revenue (more with indirect sales), and a $112 million patent award against Globespan is contingent on a pending antitrust case.
03—Questions
Frequently Asked Questions
How much of TI's 2005 earnings growth came from operations versus share buybacks?
Net income grew 25% to $2.32 billion, while diluted EPS grew 32% to $1.39. The gap reflects about 100 million fewer average diluted shares, driven largely by the stock repurchase program. Operating profit rose about 26% to $2.79 billion, so the business itself improved substantially, mainly through gross margin gains in Semiconductor.
What is the financial impact of selling Sensors & Controls?
The segment generated $1.17 billion of 2005 revenue and about $266 million of operating profit. The sale price is $3 billion in cash, against net assets of roughly $342 million (total assets of $476 million less liabilities of $134 million), which implies a large gain, though the filing does not quantify one. Results will move to discontinued operations from Q1 2006, and the segment's $1.17 billion of revenue will leave continuing operations, reducing the reported revenue base. RFID stays with Semiconductor.
Does the 2005 margin improvement reflect the new stock-option accounting?
Partly. Under SFAS 123(R), adopted July 1, 2005, total stock-based compensation was $178 million (1.3% of revenue), which lowered 2005 results. Despite that expense, operating margin still rose to 20.8%, so the underlying improvement is real. Because prior periods were not restated, year-over-year comparisons are not fully like-for-like.
What are the main risks to TI's outlook?
The main risks are semiconductor cyclicality, the high fixed-cost base from owned fabs (which hurts margins when utilization falls), and concentration in cell-phone, PC, and communications markets. Customer concentration is also significant, with Nokia the largest customer. Other risks include foreign currency and international operations (over 80% of revenue from outside the U.S.), and competition from larger rivals such as Analog Devices and STMicroelectronics.
Are there material legal or contingent liabilities investors should watch?
Two matters stand out. First, a February 2006 jury awarded TI $112 million against GlobespanVirata for patent infringement, which could be trebled, but the award depends on the outcome of Globespan's antitrust claims, scheduled for trial in October 2006, and could be reduced or reversed. No gain is recorded. Second, Italian government auditors are reviewing about $250 million of grants tied to former memory operations, and a repayment demand is possible. Management does not expect a material adverse effect from either.
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