01—Abstract
Summary
Summary of the 10-K filed February 22, 2013. Cited figures are marked; the original filing is the authoritative source.
Texas Instruments' 2012 Form 10-K (filed February 22, 2013) describes a year of weak semiconductor demand that pressured top-line results: revenue fell 7% to $12.83 billiona, operating margin compressed to 15.4% from 21.8%, and diluted EPS dropped to $1.51 from $1.88.
The decline was driven largely by the planned exit from Wireless baseband products and a $351 millionb Wireless restructuring charge (including a $90 million goodwill impairment), along with a full year of acquisition-related amortization from National Semiconductor. Management emphasized that the core Analog and Embedded Processing businesses reached 70% of revenue and generated strong free cash flow of $2.92 billion (23% of revenue), most of which was returned to shareholders through buybacks and a 24% dividend increase. The filing signals a strategic reset.
TI is eliminating its Wireless segment, cutting roughly 1,700 jobs and targeting about $450 millionc in annualized savings, while redirecting OMAP and connectivity products toward embedded markets and expecting smartphone and tablet revenue to largely disappear by the end of 2013. Analog and Embedded Processing are positioned as the primary growth engines, with Analog holding roughly 18% of a $39 billion market and the company claiming the world's fourth-largest semiconductor revenue position. Two older fabs in Hiji, Japan and Houston are also being closed in 2013.
Key risks for investors include the cyclical nature of semiconductor demand, high fixed manufacturing costs that pressure margins when utilization falls, heavy exposure to China (about $5.4 billiond of 2012 revenue) and to customers in communications and computing, and roughly $4.2 billion of long-term debt that rose after the National acquisition. Gross margin held steady at 49.6%, and the balance sheet remains solid with $3.96 billion in total cash and investments, but the lower operating profit and the Wireless write-down underscore the earnings pressure the company faced entering 2013.
02—Key points
Key Highlights
- Revenue declined 7% to $12.83 billion in 2012 from $13.74 billion, primarily due to weak demand and the exit from Wireless baseband products.
- Operating profit fell to $1.97 billion (15.4% margin) from $2.99 billion (21.8%), hit by a $351 million Wireless restructuring charge and $450 million in National acquisition charges.
- Diluted EPS was $1.51 versus $1.88 in 2011, while gross margin held relatively steady at 49.6% versus 49.3%.
- Analog (about 55% of revenue) grew 10% to $7.0 billion, and Analog plus Embedded Processing now make up 70% of revenue, the core of TI's growth strategy.
- Wireless segment is being eliminated; about 1,700 jobs will be cut and roughly $450 million in annualized cost savings targeted by the end of 2013.
- Free cash flow rose to $2.92 billion (23% of revenue), and TI returned about 90% of it to shareholders through $1.80 billion in buybacks and $819 million in dividends; the quarterly dividend was raised 24% to $0.21.
- Balance sheet remains strong with $3.96 billion in cash and short-term investments against $5.6 billion in total debt; no customer accounted for 10% or more of revenue, though about 90% of revenue came from outside the U.S.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Texas Instruments kept $0.14.
- Revenue$12.82B100.0%
- Cost of revenue−$6.46B50.3%
- Gross profit$6.37B49.7%
- Operating costs−$4.39B34.3%
- Operating income$1.97B15.4%
- Interest, other & tax−$214.0M1.7%
- Net income$1.76B13.7%
Where FY2012 revenue went
$12.82B- Cost of revenue: $6.46B, 50% of revenue
- R&D: $1.88B, 15% of revenue
- SG&A: $1.80B, 14% of revenue
- Net income: $1.76B, 14% of revenue
- Other operating costs: $714.0M, 5.6% of revenue
- Interest, other & tax: $214.0M, 1.7% of revenue
Kept 14% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 22, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $12.82B$13.73B | −6.6% |
| Cost of Revenue | $6.46B$6.96B | −7.3% |
| Gross Profit | $6.37B$6.77B | −6.0% |
| R&D Expenses | $1.88B$1.72B | +9.4% |
| SG&A Expenses | $1.80B$1.64B | +10.1% |
| Operating Income | $1.97B$2.99B | −34.1% |
| Net Income | $1.76B$2.20B | −20.1% |
| EPS (Basic) | $1.53$1.91 | −19.9% |
| EPS (Diluted) | $1.51$1.88 | −19.7% |
| Shares Outstanding (Basic) | 1.13B1.15B | −1.7% |
| Shares Outstanding (Diluted) | 1.15B1.17B | −2.1% |
05—Questions
Frequently Asked Questions
Why did TI's earnings decline so sharply in 2012?
Earnings fell because of lower revenue from a weak demand environment and the planned exit from Wireless baseband products, which dropped about $1.16 billion in Wireless revenue. Operating expenses also rose with a full year of National Semiconductor, and the company booked a $351 million Wireless restructuring charge, including a $90 million non-deductible goodwill impairment. Net income fell 21% to $1.76 billion, partly offset by $252 million in discrete tax benefits.
What is TI doing about the Wireless business?
TI is winding down its Wireless segment. It will stop investing in OMAP and connectivity products aimed at smartphones and consumer tablets, where large customers increasingly design their own chips, and redirect those products toward embedded markets with long life cycles. Smartphone and tablet revenue is expected to decline rapidly in 2013 and substantially cease by year-end, with the remaining products folded into Embedded Processing and Other starting in Q1 2013. The restructuring is expected to reduce annualized expenses by about $450 million.
How strong is TI's competitive position and growth outlook?
TI describes itself as the world's fourth-largest semiconductor company by 2012 revenue. It holds a leading position in the roughly $39 billion analog market with about 18% share, and it ranks second in the roughly $17 billion embedded processing market with about 12% share. Management expects Analog and Embedded Processing to be the primary growth engines, supported by a broad catalog of more than 100,000 orderable parts and long product life cycles, though the filing also warns of intense competition from larger rivals and emerging Asian companies.
How exposed is TI to China and the broader global economy?
Exposure is significant. About 90% of revenue comes from shipments outside the United States, and products shipped into China totaled $5.38 billion in 2012, roughly 42% of revenue. The company also has manufacturing or operations in more than 35 countries, which exposes it to currency swings, political and trade risks, and natural disasters such as earthquakes. TI manages foreign exchange risk with forward contracts, though a 10% currency move would have only about a $1 million effect after hedging.
What does TI's capital allocation look like, and is the dividend secure?
TI generated $3.41 billion in operating cash flow and $2.92 billion in free cash flow in 2012. It returned about 90% of free cash flow to shareholders through $1.80 billion in share repurchases, retiring about 59.8 million shares, and $819 million in dividends. The quarterly dividend was increased 24% to $0.21 per share, an annualized $0.84. With $3.87 billion remaining on its buyback authorization and about $4.0 billion in cash and investments, the dividend appears well covered by free cash flow, though lower earnings would pressure payout ratios.
06—Continue