TXN

Texas Instruments Incorporated (TXN)

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Texas Instruments (TXN)

Q4 2012 Earnings Call

January 22, 2013 5:30 pm ET

Executives

Ron Slaymaker

Kevin P. March - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Analysts

Christopher J. Muse - Barclays Capital, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

Glen Yeung - Citigroup Inc, Research Division

Vivek Arya - BofA Merrill Lynch, Research Division

James Covello - Goldman Sachs Group Inc., Research Division

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

Joseph Moore - Morgan Stanley, Research Division

Ambrish Srivastava - BMO Capital Markets U.S.

Shawn R. Webster - Macquarie Research

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

Good day, and welcome to the Texas Instruments Fourth Quarter Year-end Earnings Conference Call. At this time, I would like to turn the conference over to Ron Slaymaker. Please go ahead, sir.

Ron Slaymaker

Good afternoon. Thank you for joining our fourth quarter and year-end 2012 earnings conference call. As usual, Kevin March, TI's CFO, is with me today. For any of you who missed the release, you can find it and relevant non-GAAP reconciliations on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through TI's website. A replay will be available through the web.

This call will include forward-looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the news release published today, as well as TI's most recent SEC filings for a more complete description.

Our mid-quarter update to our outlook is scheduled this quarter for March 7. At that time, we expect to adjust the revenue and earnings guidance ranges as appropriate.

Let me start with the market environment. Revenue in the fourth quarter was in the upper half of our range of expectations. We expected the environment to be weak again last quarter, and it was. Visibility remains poor, and it is difficult to predict our business trends with precision. That said, we expect revenue in the first quarter to be seasonal except for those wireless mobile product lines that we are exiting. We continue to believe that inventory levels at OEMs and our distribution channels remain low.

Even in this weak demand environment, our strategy is producing strong results. Notably, we generated almost $1 billion of free cash flow in the quarter and almost $3 billion in the year. This is a result of a strengthening product portfolio as more of our revenue comes from Analog and Embedded Processing products, 72% in the fourth quarter. It is also a result of our strategic capacity investments over the past few years that have allowed us to reduce capital spending and will now allow us to maintain capital spending at historically low levels in the years ahead, while continuing to have a strong capability for growth.

We continue to return our excess capital to our shareholders last year, returning 90% of free cash flow through share repurchases and dividends. Kevin will provide more on this in a few minutes.

Let me now walk through the quarter's results. Revenue of $2.98 billion, declined 13% from a year ago and 12% sequentially. Analog revenue declined 2% from a year ago and 9% sequentially. From a year ago, Silicon Valley Analog and High Performance Analog, both catalog-oriented product lines, declined, while High Volume Analog & Logic was about even and Power Management grew. Sequentially, revenues declined in all product lines. In this sequential comparison, we were encouraged that Silicon Valley Analog performed about the same as the other product lines, despite the additional revenue headwinds associated with our conversion of its distribution business to a consignment inventory model. We estimate that we are about 1/3 of the way through the consignment program transition for this product line.

Embedded Processing increased 6% from a year ago, mostly due to higher revenue from products sold into communications infrastructure, although revenue from catalog products and automotive products was also higher. Sequentially, Embedded Processing declined 10% with lower revenue in all 3 major product lines.

Wireless revenue declined 56% from a year ago. Baseband revenue fell to $64 million and was the majority of the decline, although OMAP applications processors and connectivity products also declined significantly. Sequentially, Wireless revenue fell 2% with connectivity products down, OMAP even and baseband revenue up.

Our other segment revenues declined 7% from a year ago and 25% sequentially. From a year ago, the decline was mostly due to the expiration of transitional supply agreements, although DLP revenue also declined. Revenue from custom ASIC products and royalties increased. Sequentially, revenue declined primarily due to the seasonal drop in calculator revenue. Revenue from DLP products and custom ASIC products also declined, while royalties increased. The sequential revenue was also impacted by the non-recurrence of $60 million of business interruption insurance proceeds associated with the 2011 Japan earthquake.

Turning to distribution. Revenues -- or resales grew 4% from a year ago and declined 2% from the prior quarter. Distributors reduced their TI inventory by several days in the quarter to a little below 6 weeks.

Now Kevin will review profitability and our outlook.

Kevin P. March

Thanks, Ron, and good afternoon, everyone. Let me start by walking through some of the charges and benefits in the quarter that were included in our reported results. Acquisition charges in the fourth quarter were $88 million. We recorded charges on the restructuring charges/other line of our income statement of $12 million, associated with the previously announced planned closure of several older factories. Together, these acquisition and restructuring charges negatively impacted EPS by $0.06 in the quarter as we had expected and included in our guidance.

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