01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
Texas Instruments closed 2010 with a strong rebound.
Revenue rose 34% to $13.97 billiona from $10.43 billion, and operating profit more than doubled to $4.51 billion, or 32.3% of revenue, up from 19.1%. Net income reached $3.23 billion, and diluted EPS was $2.62 versus $1.15 in 2009. Gross margin expanded to 53.6% from 47.9%, helped by higher factory utilization and a $144 million gain on the sale of a product line.
Management frames 2010 as a turning point in TI's shift toward Analog and Embedded Processing, which it designates as the company's primary growth engines. Analog revenue grew 42% to about $6 billionb, and Embedded Processing grew 41% to about $2.1 billion. Management estimates TI is the world's fourth-largest semiconductor company.
The balance sheet and cash flow remain strong. Operating cash flow was $3.82 billionc, and TI carries no debt. Capital expenditures rose to $1.2 billion as TI bought discounted fabs in Japan and China and added analog wafer capacity, which management says can support more than $5 billion of additional revenue once fully operational.
TI returned $2.45 billiond through buybacks and about $592 million through dividends. Roughly $7.64 billion of repurchase authorization remains. Investors should weigh several concentration and cyclicality risks.
Nokia accounted for 19% of revenue, and Wireless baseband revenue of $1.7 billion is expected to cease by the end of 2012. Management also notes that about 90% of revenue comes from outside the U.S., that the semiconductor market is cyclical, and that a large share of costs is fixed because TI owns much of its manufacturing capacity. Orders of $13.93 billion, up 23%, and backlog of $1.75 billion, roughly flat year over year, suggest continued demand, but backlog is not a reliable forecast of future revenue.
02—Key points
Key Highlights
- Revenue grew 34% to $13.97 billion in 2010, and net income rose to $3.23 billion from $1.47 billion.
- Operating margin expanded to 32.3% from 19.1%, driven by higher revenue, improved factory utilization, and a $144 million divestiture gain.
- Analog (about $6.0 billion, +42%) and Embedded Processing (about $2.1 billion, +41%) are the designated growth engines and drove most of the improvement.
- Operating cash flow was $3.82 billion, and TI had no debt at year-end, with $3.07 billion in cash and short-term investments.
- TI returned $2.45 billion through share repurchases and about $592 million in dividends, with $7.64 billion of authorization remaining.
- Customer concentration is significant: Nokia was 19% of revenue, and baseband revenue of $1.7 billion is expected to wind down by the end of 2012.
- About 90% of revenue comes from outside the U.S., and a large fixed-cost manufacturing base increases exposure to the semiconductor cycle.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Texas Instruments kept $0.23.
- Revenue$13.97B100.0%
- Cost of revenue−$6.47B46.4%
- Gross profit$7.49B53.6%
- Operating costs−$2.98B21.3%
- Operating income$4.51B32.3%
- Interest, other & tax−$1.29B9.2%
- Net income$3.23B23.1%
Where FY2010 revenue went
$13.97B- Cost of revenue: $6.47B, 46% of revenue
- Net income: $3.23B, 23% of revenue
- R&D: $1.57B, 11% of revenue
- SG&A: $1.52B, 11% of revenue
- Interest, other & tax: $1.29B, 9.2% of revenue
Kept 23% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $13.97B$10.43B | +33.9% |
| Cost of Revenue | $6.47B$5.43B | +19.3% |
| Gross Profit | $7.49B$5.00B | +49.9% |
| R&D Expenses | $1.57B$1.48B | +6.4% |
| SG&A Expenses | $1.52B$1.32B | +15.1% |
| Operating Income | $4.51B$1.99B | +126.7% |
| Net Income | $3.23B$1.47B | +119.6% |
| EPS (Basic) | $2.66$1.16 | +129.3% |
| EPS (Diluted) | $2.62$1.15 | +127.8% |
| Shares Outstanding (Basic) | 1.20B1.26B | −4.8% |
| Shares Outstanding (Diluted) | 1.21B1.27B | −4.4% |
05—Questions
Frequently Asked Questions
What drove the sharp improvement in 2010 profitability?
Revenue rose $3.54 billion, and gross profit grew 50% to $7.49 billion, lifting gross margin to 53.6% from 47.9%. Higher factory utilization added $291 million to gross profit, and operating expenses grew more slowly than revenue. Operating profit also included a $144 million one-time gain from selling a product line, so underlying margin improvement was somewhat smaller than the headline 32.3%.
How dependent is TI on a single customer, and what happens to baseband revenue?
Nokia accounted for 19% of 2010 revenue, down from 24% in 2009, and about two-thirds of that Nokia revenue came from baseband products. TI no longer invests in baseband development and expects substantially all of its $1.7 billion in baseband revenue to end by the end of 2012. Growth must come from connectivity products, OMAP processors, and the Analog and Embedded Processing segments to offset that decline.
Why is TI spending heavily on capital expenditures?
Capital expenditures rose to $1.2 billion from $753 million in 2009. TI bought wafer fabs in Japan and China at discounted prices and invested in analog wafer equipment. Management says the equipment and factories bought since late 2009 can support more than $5 billion of additional revenue once fully operational, and that depreciation impact will be minimal. Investors should watch whether that capacity is absorbed by demand.
Is the 2010 backlog a reliable indicator of future revenue?
Not on its own. Backlog was $1.75 billion at year-end 2010, close to the $1.79 billion of a year earlier, and it consists of firm orders with requested delivery dates. Customers can cancel or modify orders, and TI states that backlog may not indicate future revenue. Orders of $13.93 billion, up 23%, give a better view of demand momentum, though they too can change quickly in a cyclical market.
What are the main risks highlighted in the filing?
The filing emphasizes cyclicality in the semiconductor market, a largely fixed manufacturing cost base that can compress margins when demand falls, and intense competition from larger rivals and emerging Asian companies. It also cites customer concentration (Nokia and a few top customers), reliance on foundries and subcontractors for part of production, international and currency exposure, and intellectual property enforcement and licensing risks.
06—Continue