01—Abstract
Summary
Summary of the 10-K filed February 26, 2008. Cited figures are marked; the original filing is the authoritative source.
Texas Instruments' 2007 10-K shows a company that grew profitability while revenue slipped.
Net revenue fell 3% to $13.83 billiona from $14.26 billion, but profit from operations rose 4% to $3.50 billion and the operating margin widened to 25.3% from 23.6%. Gross margin improved to 53.0%, helped by a richer mix of analog and DSP products and manufacturing cost reductions. Income from continuing operations was essentially flat at $2.64 billion, while diluted EPS from continuing operations rose 8% to $1.83, largely because share repurchases reduced the diluted share count by roughly 114 million.
Capital allocation was the central story. TI generated a record $4.41 billionb in operating cash flow and capital expenditures fell to $686 million from $1.27 billion as the company shifted toward outsourcing advanced digital production to foundries. The company returned capital aggressively, repurchasing $4.89 billion of stock and paying $425 million in dividends, with the quarterly dividend raised to $0.10 per share by late 2007.
Cash and short-term investments totaled $2.92 billionc at year-end, and the company has no long-term debt. Investors should weigh two risks.
First, roughly $1.04 billiond of auction-rate securities failed to settle at auction in mid-February 2008, which limits liquidity on a portion of the portfolio even though the securities are backed by government-guaranteed student loans. Second, the filing flags Ericsson's addition of a second 3G baseband supplier as a revenue headwind that began in Q4 2007, and Nokia accounted for 16% of 2007 revenue, a notable customer concentration.
02—Key points
Key Highlights
- Revenue declined 3% to $13.83B, but operating profit rose 4% to $3.50B and operating margin expanded to 25.3% from 23.6%.
- Gross margin reached 53.0%, up from 50.9%, driven by higher-margin analog and DSP mix and lower manufacturing costs.
- Record operating cash flow of $4.41B, up $1.95B year over year, with capex cut to $686M from $1.27B.
- Returned $5.3B to shareholders in 2007 through $4.89B of buybacks and $425M of dividends; $5.57B of repurchase authorization remains.
- Diluted EPS from continuing operations rose 8% to $1.83, with buybacks contributing about $0.13 of the increase.
- About $1.04B of auction-rate securities failed in mid-February 2008, constraining liquidity on a portion of cash investments.
- Nokia was 16% of 2007 revenue, and Ericsson's second-supplier decision began to weigh on results in Q4 2007.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2007, Texas Instruments kept $0.19.
- Revenue$13.84B100.0%
- Cost of revenue−$6.47B46.7%
- Gross profit$7.37B53.3%
- Operating costs−$3.87B28.0%
- Operating income$3.50B25.3%
- Interest, other & tax−$840.0M6.1%
- Net income$2.66B19.2%
Where FY2007 revenue went
$13.84B- Cost of revenue: $6.47B, 47% of revenue
- Net income: $2.66B, 19% of revenue
- R&D: $2.14B, 15% of revenue
- SG&A: $1.68B, 12% of revenue
- Interest, other & tax: $840.0M, 6.1% of revenue
Kept 19% as net incomeSG&A $1.68B · 12%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 26, 2008Financial Statements
| Revenue | $13.84B |
| Cost of Revenue | $6.47B |
| Gross Profit | $7.37B |
| R&D Expenses | $2.14B |
| SG&A Expenses | $1.68B |
| Operating Income | $3.50B |
| Net Income | $2.66B |
| EPS (Basic) | $1.87 |
| EPS (Diluted) | $1.83 |
| Shares Outstanding (Basic) | 1.42B |
| Shares Outstanding (Diluted) | 1.44B |
05—Questions
Frequently Asked Questions
Why did earnings per share rise even though revenue declined?
Revenue fell 3%, but operating profit grew 4% on better gross margins and lower operating expenses. The bigger driver of per-share growth was the share count: average diluted shares fell by 114 million, which added about $0.13 to EPS. Income from continuing operations was roughly flat at $2.64B, so most of the EPS gain came from buybacks rather than higher earnings.
How exposed is TI to its largest customer and to specific product lines?
Customer concentration is meaningful. Direct sales to Nokia were 16% of 2007 revenue, and including indirect sales the figure was 19%. Ericsson added a second 3G baseband supplier, which began to reduce TI's revenue in Q4 2007, though a new Ericsson engagement announced in July 2007 is expected to partly offset that loss over time. Revenue from RISC microprocessors and DLP products also fell, and the filing notes that cell phone DSP and analog revenue declined 3% on an end-equipment basis.
Is TI's cash position at risk because of the auction-rate securities?
Not in the company's view, but liquidity is reduced. TI held $1.04B of auction-rate securities at year-end 2007 and had sold down to under $575M by mid-February 2008. The February auctions then failed, so these holdings cannot be sold until auctions resume, a buyer is found, or the securities mature in 15 to 40 years. Management says the securities are backed by government-guaranteed student loans, collects interest on schedule, and believes the failures will not impair its ability to fund working capital, capex, or dividends. The filing warns of possible impairment if illiquidity persists.
What is management's strategy for manufacturing and capital spending?
TI is shifting capital toward analog and away from digital. It is outsourcing an increasing share of advanced digital wafer production to foundries, which accounted for about 50% of its advanced digital chips in 2007, and it now co-develops digital process technology with foundry partners instead of developing it alone. Capex fell to 5% of revenue from 9%, and the Richardson, Texas fab (RFAB) is complete and ready for equipment. Management expects analog to be the main growth driver, and it plans to keep building internal analog capacity while using outside partners for most digital production.
What is the outlook for the tax rate and the dividend?
Management expects the 2008 effective tax rate to be about 31%, up from 29% in 2007. The forecast assumes the federal R&D tax credit, which expired December 31, 2007, is not reinstated. On dividends, the quarterly rate was raised to $0.10 per share in Q3 2007 and was declared at that rate again in October 2007, after doubling in Q2 2007. Dividends paid rose to $425M in 2007 from $199M in 2006.
06—Continue