01—Abstract
Summary
Summary of the 10-K filed February 24, 2009. Cited figures are marked; the original filing is the authoritative source.
Texas Instruments' 2008 10-K shows a sharp downturn in the back half of the year.
Revenue fell 10% to $12.50 billiona from $13.83 billion, and gross margin slipped to 50.0% from 53.3%. Operating profit dropped 30% to $2.44 billion (19.5% margin vs. 25.3%), and diluted EPS fell to $1.45 from $1.83. Management attributed the decline to a dramatic drop in global semiconductor demand in the second half of 2008, which accelerated in the fourth quarter, when orders were 42% below the third quarter.
Q4 operating profit was only $51 millionb after $254 million of restructuring charges, and management guided to continued pressure on 2009 results. TI's balance sheet remains strong: total cash and short-term investments were $2.54 billion, there is no debt, and $3.55 billion remains authorized for buybacks. Operating cash flow was $3.33 billion, and the company returned capital through $2.12 billion of repurchases and $537 million of dividends.
Management responded with a 12% workforce reduction (about 3,400 people) and wireless restructuring, targeting roughly $700 millionc in annualized savings. Working-capital discipline also improved: receivables fell sharply, and inventory was cut by $200 million from Q3 levels, though days of inventory rose to 89.
Key risks for investors include concentration in the wireless segment, where revenue fell 19% and Nokia accounted for about 20% of total revenue, as well as the fixed-cost structure of TI's owned fabs, roughly $482 milliond of illiquid auction-rate securities (par $535 million), and the cyclicality of the semiconductor market. Management's view that the downturn is a broad economic slowdown rather than a simple inventory correction is the central judgment for the outlook.
02—Key points
Key Highlights
- Revenue declined 10% to $12.50B (2007: $13.83B); Q4 2008 revenue of $2.49B was the weakest quarter of the year as all segments posted double-digit declines.
- Operating profit fell 30% to $2.44B; operating margin compressed to 19.5% from 25.3%, with $254M of restructuring charges weighing on results.
- Diluted EPS of $1.45 vs. $1.83 in 2007; restructuring reduced EPS by $0.12, while buybacks added about $0.12 through a lower share count.
- Wireless revenue fell 19% to $3.38B and operating margin dropped to 10.3%; TI is shifting from baseband chips to applications processors and has ended the effort to sell its merchant baseband business.
- Balance sheet remains strong: $2.54B in cash and short-term investments, no debt, and $13.8B of shares repurchased in the trailing years, with $3.55B of authorization remaining.
- Operating cash flow of $3.33B, plus a 12% workforce reduction (about 1,800 layoffs and 1,600 voluntary departures) with roughly $700M in annualized savings expected after Q3 2009.
- Management guided that 2009 results will be pressured by lower demand, and the effective tax rate is expected to be about 24% in 2009 (vs. 28% in 2008).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Texas Instruments kept $0.15.
- Revenue$12.50B100.0%
- Cost of revenue−$6.26B50.0%
- Gross profit$6.25B50.0%
- Operating costs−$3.81B30.5%
- Operating income$2.44B19.5%
- Interest, other & tax−$517.0M4.1%
- Net income$1.92B15.4%
Where FY2008 revenue went
$12.50B- Cost of revenue: $6.26B, 50% of revenue
- R&D: $1.94B, 16% of revenue
- Net income: $1.92B, 15% of revenue
- SG&A: $1.61B, 13% of revenue
- Other operating costs: $254.0M, 2.0% of revenue
- Interest, other & tax: $517.0M, 4.1% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 24, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $12.50B$13.84B | −9.6% |
| Cost of Revenue | $6.26B$6.47B | −3.2% |
| Gross Profit | $6.25B$7.37B | −15.3% |
| R&D Expenses | $1.94B$2.14B | −9.3% |
| SG&A Expenses | $1.61B$1.68B | −3.9% |
| Operating Income | $2.44B$3.50B | −30.3% |
| Net Income | $1.92B$2.66B | −27.7% |
| EPS (Basic) | $1.46$1.87 | −21.9% |
| EPS (Diluted) | $1.44$1.83 | −21.3% |
| Shares Outstanding (Basic) | 1.31B1.42B | −7.7% |
| Shares Outstanding (Diluted) | 1.32B1.44B | −8.5% |
05—Questions
Frequently Asked Questions
Why did Texas Instruments' earnings decline so sharply in 2008?
Revenue fell 10% as global semiconductor demand dropped dramatically in the second half of 2008, with the decline accelerating in Q4. Lower factory utilization from inventory reduction, a $254M restructuring charge, and the loss of a 2007 one-time gain combined to push operating profit down 30%. Management described the environment as a broad economic slowdown rather than a routine inventory correction.
How concentrated is TI's customer base and revenue?
Nokia was the largest customer, accounting for 18% of 2008 direct revenue (about 20% including indirect sales through contract manufacturers). Most of that revenue is in the Wireless segment, which declined 19% in 2008. Distributors accounted for about 30% of revenue, and more than 85% of revenue came from outside the U.S.
Is Texas Instruments financially strong enough to weather a prolonged downturn?
Yes, by most measures. TI had $2.54B in cash and short-term investments, no debt, and undrawn revolving credit facilities totaling $1.175B. Operating cash flow was $3.33B, and management stated it has the resources to fund working capital, capex, and dividends for at least the next 12 months. Risks include $482M of auction-rate securities (par $535M) that are illiquid and classified as long-term investments.
What is TI doing to adjust its cost structure?
TI announced a 12% workforce reduction in January 2009 (about 1,800 layoffs plus 1,600 voluntary departures) at a total charge of about $300M. In October 2008 it also restructured its Wireless segment, cutting more than $200M in annual expenses and eliminating about 650 jobs. Combined, the actions are expected to yield more than $700M in annualized savings by Q3 2009. Management is also reducing capital expenditures and foundry purchases.
What are the main long-term growth drivers for TI, according to management?
Management identifies Analog and Embedded Processing as its primary growth engines, where it holds roughly 12% and 10% market shares in fragmented markets. Analog is about 40% of revenue and Embedded Processing about 15%. In Wireless, TI is focusing investment on OMAP applications processors and connectivity products rather than baseband chips, which face shrinking margins. Beginning in 2009, power management will be reported as a separate Analog category.
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