Texas Instruments (TXN, or TI) reported fourth-quarter earnings that grew 22.5% year over year and were in line with the Zacks Consensus Estimate.
TI reported revenue of $3.27 billion, which was down 6.6% sequentially and up 8.0% year over year (in line with the guidance of $3.26 billion at the mid-point) and in line with the Zacks Consensus Estimate.
Distributor resales jumped 14% from last year, with distributor inventories dropping by a week to 4.5 weeks. Internal inventories were up slightly.
Industrial and personal electronics remained the two most important end markets for the company, although communications equipment and automotive also made sizeable contributions.
Management has successfully steered the business into analog and embedded processing applications, which typically yield a more stable business as well as stronger margins.
Segment Revenue
The Analog, Embedded Processing and Other Segments generated 65%, 20% and 15% of quarterly revenue, respectively.
The Analog business grew -1.2% sequentially and 13.6% year over year. Power management was the main driver of growth from the year-ago quarter although HPA, HVAL and SVA also grew.
The Embedded Processing segment, which includes the processor, microcontroller and connectivity product lines, was down 5.8% sequentially and up 10.9% from last year. Growth from the year-ago quarter was fairly broad-based across product lines.
The Other segment, which includes DLPs, custom ASICs, calculators, royalties and some legacy wireless products was down 25.7% sequentially but down 14.2% year over year. Legacy wireless products again impacted the year-over-year decline and custom ASICs were also down.
Orders
Net product orders were $3.18 billion in the last quarter, down 4.8% sequentially and up 12.3% year over year. Backlog declined 12.0% sequentially and was 16.1% below the year-ago level. Turns sales dropped 2.7% sequentially, growing as a percentage of sales from the previous quarter.
Margins
TI’s gross margin of 58.0% was down 41 bps sequentially and up 381 bps from the year-ago quarter. The gross margin benefited from higher volumes, higher utilization and a better mix of analog and embedded processing revenue (now 85% of revenue). TI exceeded its long-term gross margin target of 55% in the last quarter and its low-cost manufacturing capacity will continue to expand margins as long as loading remains high.
Operating expenses of $760 million were down 4.4% sequentially. The operating margin was 34.7%, down 96 bps sequentially and up 721 bps from the year-ago quarter. All expenses increased as a perentage of sales from the previous quarter but were down from the year-ago quarter.
The Analog, Embedded Processing and Other segments generated operating margins of 38.7%, 17.0% and 34.5%, respectively. The Analog margin expanded 140 bps sequentially, Embedded Processing 98 bps with Other declining 595 bps. Margin increases from the year-ago quarter were significant across all segments.
Net Income
Management called out two adjustments (a 5 cent gain from the re-instatement of the federal research tax credit and a 2 cent gain from the sale of assets) excluding which the pro forma net income came to 69 cents,
Ongoing restructuring gains and acquisition charges (that will remain steady over the next five years) were around 5 cents.
The pro forma net income was $730 million, or a 22.3% net income margin compared to $826 million, or 23.6% in the previous quarter and $618 million, or 20.4% in the year-ago quarter.
On a GAAP basis, the company reported a net profit of $ 76 cents a share compared to a net profit of 77 cents in the previous quarter and a net profit of 46 cents in the comparable prior-year quarter.
Balance Sheet
Inventories increased 1.9% sequentially to around $1.78 billion, with inventory turns remaining up from 3.3X to 3.08X. Days sales outstanding (DSOs) went from 39 to around 35. TI generated $1.27 billion in cash from operations, spending $125 million on capex, $698 mllion on share repurchases and $356 million on cash dividends. During the quarter, spending on share repurchases dropped 1% while dividends increased 13%.
At quarter-end, TI had $3.64 billion in long-term debt and $1.00 billion in short-term debt. During the quarter, the net debt position dropped by $358 million. It also had net underfunded retirement plans of $98 million.
Guidance
TI provided guidance for the first quarter.
Accordingly, TI expects revenue between $3.07 billion and $3.33 billion (up 7.3% sequentially at the mid-point) and in line with the Zacks Consensus Estimate of $3.20 billion.
Restructuring charges will be negligible and non-cash amortization charges related to acquisitions will remain in the range of $80- $85 million for the next five years. The annual effective tax rate will be around 30%.
The EPS for the quarter is expected to be 57 to 67 cents, in line with the Zacks Consensus Estimate of 62 cents.
Recommendation
Texas Instruments is prudently investing its R&D dollars into several high-margin, high-growth areas of the analog and embedded processing markets. This is gradually increasing its exposure to the industrial and automotive markets, while reducing its exposure to the volatile consumer/computing markets.
TI, along with chipmaker Intel (INTC) remains one of the few semiconductor companies that depend on internal capacity for manufacturing the bulk of its devices. But since it has the policy of building out capacity ahead of demand, it is able to make opportunistic purchases. As a result, it is able to contain capex at up to 4% of sales even while on any expansion plan.
We remain optimistic about TI’s compelling product line, the differentiation in its business and lower-cost 300mm capacity that should in combination drive earnings. We note that channel inventories remain very low, meaning that demand is likely to remain strong, driving factory loadings and therefore, sustainable margins.
TI shares carry a Zacks Rank #1 (Strong Buy). Other semiconductor stocks worth considering include Microchip (MCHP), Monolithic (MPWR) and Maxim (MXIM), all of which have a Zacks Rank #2 (Buy).
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