01—Abstract
Summary
Summary of the 10-K filed February 24, 2012. Cited figures are marked; the original filing is the authoritative source.
Texas Instruments' 2011 10-K reports revenue of $13.74 billiona, down 2% from $13.97 billion in 2010, with net income falling 31% to $2.24 billion and diluted EPS of $1.88 versus $2.62.
The decline was driven by the wind-down of baseband products in Wireless (baseband revenue fell 36% to $1.10 billionb, with substantially all expected to cease by end-2012), weaker factory utilization in the second half as the semiconductor market softened, and roughly $426 million of acquisition-related charges tied to the $6.5 billion National Semiconductor acquisition completed September 23, 2011. Operating margin compressed to 21.8% from 32.3%, and gross margin fell to 49.3% from 53.6%. Strategically, management is repositioning TI around Analog (up 7% to $6.37 billion, now about 15% of a roughly $43 billion market) and Embedded Processing (up 2%), which management identifies as the primary growth engines.
The National deal added the Silicon Valley Analog product line and additional fab capacity, but also added roughly $2.9 billionc of acquisition-related intangibles, $3.5 billion of goodwill, and $4.5 billion of total debt, lifting total assets to $20.5 billion from $13.4 billion. Management also announced closures of two older fabs in Hiji, Japan and Houston, Texas, with about $215 million in total charges and roughly $100 million in expected annual savings.
Capital returns remained significant: TI repurchased $1.97 billiond of stock and paid $644 million in dividends, and the quarterly dividend was raised 31% to $0.17 per share in September 2011. Investors should weigh the near-term earnings pressure from acquisition amortization (guided to about $170 million of charges in Q1 2012), the planned loss of baseband revenue, customer concentration (Nokia at 13% of revenue), and cyclical end-market exposure against the company's manufacturing scale, Analog franchise, and improved portfolio focus.
02—Key points
Key Highlights
- Revenue of $13.74B fell 2% YoY, but net income dropped 31% to $2.24B and diluted EPS fell to $1.88 from $2.62, driven by lower gross margin and $426M of acquisition-related charges.
- Operating margin declined to 21.8% from 32.3%, and gross margin fell to 49.3% from 53.6%, reflecting lower factory utilization and the National acquisition's fair-value inventory and PP&E step-ups.
- The $6.5B National Semiconductor acquisition (closed Sept. 23, 2011) boosted Analog and added SVA, but lifted goodwill to $4.45B, acquisition intangibles to $2.9B, and long-term debt to $4.2B.
- Analog revenue grew 7% to $6.37B and remains the largest segment (~15% share of a ~$43B market); Embedded Processing grew 2% to $2.11B, and management calls both the primary growth engines.
- Wireless revenue fell 15% to $2.52B as baseband revenue dropped 36% to $1.10B; management expects baseband revenue to decline to $50–100M per quarter in 2012 and cease by year-end 2012.
- Restructuring: two older fabs in Hiji, Japan and Houston, Texas will close over 18 months, with about $215M in total charges and roughly $100M in annual savings.
- Shareholder returns: $1.97B of buybacks in 2011 (59M shares), $644M in dividends, and a 31% increase in the quarterly dividend to $0.17; $5.67B of repurchase authorization remains.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Texas Instruments kept $0.16.
- Revenue$13.73B100.0%
- Cost of revenue−$6.96B50.7%
- Gross profit$6.77B49.3%
- Operating costs−$3.78B27.5%
- Operating income$2.99B21.8%
- Interest, other & tax−$791.0M5.8%
- Net income$2.20B16.0%
Where FY2011 revenue went
$13.73B- Cost of revenue: $6.96B, 51% of revenue
- Net income: $2.20B, 16% of revenue
- R&D: $1.72B, 12% of revenue
- SG&A: $1.64B, 12% of revenue
- Other operating costs: $427.0M, 3.1% of revenue
- Interest, other & tax: $791.0M, 5.8% of revenue
Kept 16% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 24, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $13.73B$13.97B | −1.7% |
| Cost of Revenue | $6.96B$6.47B | +7.6% |
| Gross Profit | $6.77B$7.49B | −9.6% |
| R&D Expenses | $1.72B$1.57B | +9.2% |
| SG&A Expenses | $1.64B$1.52B | +7.8% |
| Operating Income | $2.99B$4.51B | −33.7% |
| Net Income | $2.20B$3.23B | −31.8% |
| EPS (Basic) | $1.91$2.66 | −28.2% |
| EPS (Diluted) | $1.88$2.62 | −28.2% |
| Shares Outstanding (Basic) | 1.15B1.20B | −4.0% |
| Shares Outstanding (Diluted) | 1.17B1.21B | −3.5% |
05—Questions
Frequently Asked Questions
Why did TI's earnings decline sharply in 2011 despite stable revenue?
Revenue was roughly flat (down 2%), but gross margin fell from 53.6% to 49.3% due to lower factory utilization, inventory charges, and acquisition-related costs recorded in cost of revenue. Operating expenses rose with the addition of National, and acquisition charges of $315M were recorded below gross profit, pushing operating profit down 34%.
How significant is the National Semiconductor acquisition to TI's future?
The $6.5B deal added thousands of catalog analog products, design tools, and manufacturing capacity, and management says it is central to growing Analog. However, it added about $2.9B of intangibles amortizing toward roughly $80M per quarter over 8–10 years, significantly increased debt, and carries integration risk that the 10-K explicitly flags.
What is the risk from the baseband business wind-down?
Baseband revenue was $1.1B in 2011, almost all sold to a single customer, and management expects it to cease by end-2012. Given Nokia accounted for 13% of total revenue (about two-thirds of it baseband-related), this creates a meaningful revenue gap that must be offset by Analog, Embedded Processing, and OMAP growth.
How is TI managing its capital structure and shareholder returns?
TI funded the acquisition with $3.5B of long-term debt and $1B of commercial paper, while still repurchasing $1.97B of stock and paying $644M in dividends in 2011. Cash and short-term investments totaled about $2.94B at year-end, and the company has two revolving credit facilities expiring in 2012 that management intends to replace.
What structural features of TI's business model should investors understand?
TI owns much of its manufacturing, so a large share of costs is fixed, which magnifies margin swings with utilization—positive in upturns, negative in downturns. About 40% of revenue flows through distributors, about 90% of revenue comes from outside the U.S., and the semiconductor market is characterized by cyclical supply and demand swings.
06—Continue