Texas Instruments 2010 Annual Report Download - page 39

TEXAS INSTRUMENTS 2010 ANNUAL REPORT
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In addition to using foundries to supplement our wafer fabrication capacity, we selectively use subcontractors to supplement our
assembly/test capacity. We generally use subcontractors for assembly/test of products that would be less cost-efficient to complete
in-house (e.g., relatively low-volume products that are unlikely to keep internal equipment fully utilized), or when demand temporarily
exceeds our internal capacity. We believe we often have a cost advantage from maintaining internal assembly/test capacity.
Our internal/external manufacturing strategy reduces the level of our required capital expenditures, and thereby reduces our
subsequent levels of depreciation below what it would be if we sourced all manufacturing internally. Consequently, we experience
less fluctuation in our profit margins due to changing product demand, and lower cash requirements for expanding and updating our
manufacturing capabilities.
Product cycle
The global semiconductor market is characterized by constant, though generally incremental, advances in product designs and
manufacturing processes. Semiconductor prices and manufacturing costs tend to decline over time as manufacturing processes and
product life cycles mature. Typically, new chips are produced in limited quantities at first and then ramp to high-volume production over
time. Consequently, new products tend not to have a significant revenue impact for one or more quarters after their introduction. In the
results discussions below, changes in our shipments are caused by changing demand for our products unless otherwise noted.
Market cycle
The “semiconductor cycle” is an important concept that refers to the ebb and flow of supply. The semiconductor market historically has
been characterized by periods of tight supply caused by strengthening demand and/or insufficient manufacturing capacity, followed
by periods of surplus inventory caused by weakening demand and/or excess manufacturing capacity. This cycle is affected by the
significant time and money required to build and maintain semiconductor manufacturing facilities.
Seasonality
Our revenue and operating results are subject to some seasonal variation. Our semiconductor sales generally are seasonally weaker
in the first quarter than in other quarters, particularly for products sold into cell phones and other consumer electronics devices, which
have stronger sales later in the year as manufacturers prepare for the major holiday selling seasons. Calculator revenue is tied to the
U.S. back-to-school season and is therefore at its highest in the second and third quarters. Royalty revenue is not always uniform or
predictable, in part due to the performance of our licensees and in part due to the timing of new license agreements or the expiration
and renewal of existing agreements.
Tax considerations
We operate in a number of tax jurisdictions and are subject to several types of taxes including those that are based on income, capital,
property and payroll, as well as sales and other transactional taxes. The timing of the final determination of our tax liabilities varies by
jurisdiction and taxing authority. As a result, during any particular reporting period we might reflect in our financial statements one or
more tax refunds or assessments, or changes to tax liabilities, involving one or more taxing authorities.
Results of operations
2010 compared with 2009
Our 2010 revenue was $13.97 billion, net income was $3.23 billion and earnings per share (EPS) were $2.62.
2010 was an important year in the transformation of TI to a company focused on Analog and Embedded Processing. We saw strong
revenue growth of 34 percent led by those businesses as well as the part of our Wireless segment that is focused on smartphones
and tablet computers. Each of these core businesses grew more than 40 percent and gained significant market share. Success in
these businesses let us again return cash to shareholders by repurchasing $2.45 billion of our stock and paying dividends of nearly
$600 million. In 2010, we continued to expand our analog manufacturing capacity through the acquisitions of wafer fabrication facilities
in฀Japan฀and฀China,฀and฀the฀purchase฀and฀installation฀of฀analog฀wafer฀manufacturing฀equipment.฀These฀manufacturing฀assets฀were฀
purchased at very cost-effective pricing such that the impact to depreciation will be minimal. In total, the equipment and factories
purchased at discounted prices since late 2009 will support more than $5 billion of total additional revenue once fully operational.