NHC.TO: Zacks reviews of Northstar Healthcare’s strategy and 2013 results


By Steven Ralston, CFA

TSX:NHC.TO

Northstar Healthcare (NHC.TO) holds interests in and operates four ambulatory surgical centers (ASCs) in Houston, Dallas and Scottsdale. The company has experienced a dramatic increase in revenues over the last several quarters as a result of the implementation of management’s growth strategy composed of enhanced Direct-to-Consumer marketing programs, re-syndication of partnerships and acquisitions. A new ASC was opened recently in Scottsdale, and two MRI and one Urgent Care Centers were acquired in the metropolitan Houston area.

Management’s growth strategy entails generating organic growth through physician referrals and targeted direct-to-consumer marketing campaigns, augmented by acquisitions. Northstar Healthcare’s business model revolves around establishing strategic partnerships with the physicians associated with Ambulatory Surgical Centers in order to drive organic growth (cases and procedures) through increasing patient flow.

To generate incremental case flow through the company’s facilities, Northstar embarked upon a program of marketing campaigns to drive case volume. By educating and motivating potential patients to contact the physicians at the ASCs, the marketing campaigns augment the traditional source of net patient revenue (physician referrals). Initially, the company developed the integrated marketing campaign to educate and motivate prospective patients to contact the company’s ASCs. Building upon that platform, the company developed the enhanced Direct-to-Consumer marketing program, augmenting the campaigns with dedicated websites, listings on local online directories, social media pages, YouTube videos and paid search-engine keywords.  Northstar Healthcare launched its first direct-to-consumer marketing programs during 2013, which helped contribute to the 49% increase in net patient revenues.

Northstar Healthcare’s acquisition strategy entails building a network of ASCs and other complementary healthcare facilities in metropolitan areas of the United States. Management is focused on replicating the ASC network-building process thus far employed in the Houston market, where the healthcare facilities act as a platform for scalable growth through in-network physician referrals and lead generation from Direct-to-Consumer marketing campaigns. Potential acquisition candidates may be in-network local hospitals, ASCs, Urgent Care Centers, MRI facilities or other complementary healthcare service offices in order to leverage the effect of current marketing programs or out-of-network operations that establish platforms in new geographic locations.

Around year-end 2013, Northstar Healthcare announced two acquisitions. In December 2013, Northstar announced that the company was the winning bidder to acquire the former Brown Hand Center outpatient surgery facility in an upscale neighborhood of Phoenix, Arizona. The surgery center has four operating rooms and 27,000 square feet of floor space. In January 2014, the company announced the closing of an acquisition of ownership interests in two imaging centers and one urgent care clinic in the Houston area. The total purchase price for Spring Northwest Management, LLC (Katy, TX), Spring Northwest Operating, LLC (Katy, TX) and Willowbrook Imaging, LLC (Houston, TX) was $ 1.4 million in cash and stock. Through the purchase, Northstar Healthcare’s revenue generation platform will be augmented with additional revenue streams derived from the 19 physician partners in these facilities.

Last month, on March 6th, Northstar Healthcare reported financial results for the fourth quarter and year ending December 31, 2013. For the fourth quarter, net patient service revenue increased 108.7% to $ 13.5 million compared to $ 6.5 million in the fourth quarter of 2012, primarily due to an increase in case volume. Total cases increased 37.7% to 1,811 and increased in all specialties except pain management and gastro-intestinal. Procedure volume increased 18.7% to 5,977. Net income attributable to common shareholders improved to $ 0.08 per diluted share compared with $ 0.01 per diluted share in the comparable quarter last year. However, without the one-time gain of $ 2.39 million from a bargain purchase, net income attributable to common shareholders would have been $ 0.02 per diluted share.

During 2013, net patient service revenue increased 49.0%
from to $ 20.9 million to $ 31.1 million primarily due higher case volume in all specialties, along with the addition of the gynecology specialty. Total cases for the year increased 23.0% from 4,468 to 5,496 cases. Procedure volume increased 26.6% from 15,579 to 19,718. Operating salaries and benefits increased 39.1% to $ 5.33 million, primarily due to increased staffing needs. Higher case volume increased medical supply expense higher by 85.0% to $ 4.42 million. Operating general and administrative expense increased 137% to $ 10.6 million, primarily due to the company’s growing marketing effort, along with higher physician contracting and revenue cycle expenses. The operating margin for the year was 32.4%. Total corporate costs increased 38.3% as a result of hiring new corporate employees and stock-based compensation expense. Management determined that no provision for bad debts was necessary in 2013. The company’s payer mix improved as the percentage of net patient revenue from Private insurance and other private pay increased year-over-year from 91.0% to 95.8% while the proportion of revenue from Medicare reimbursements declined from 3.7% to 1.8%. Net income attributable to common shareholders increased 18.1% from $ 1.199 million to $ 1.416 million driving diluted EPS up 12.2% from $ 0.03 to $ 0.04 per share. Diluted weighted average shares outstanding increased 5.2% to 37,637,662 from 35,764,295.

During 2013, Northstar Healthcare raised net proceeds of approximately $ 4.09 million through a private placement and about $ 168,000 from the exercise of stock options. Working capital improved from $ 7.11 million at the end of 2012 to $ 8.69 million on December 31, 2013.

For 2014, management’s primary focus is to increase net patient revenues and EBITDA through scaling direct-to-consumer marketing programs in the Houston, Dallas and Scottsdale markets, along with completing selective acquisitions. During the first quarter, the NueStep podiatry direct-to-consumer marketing campaign was launched in Dallas, and management is planning an advertising program for bariatric weight-loss surgery in Dallas. In addition, Northstar will present at several national surgical center meetings in order to identify potential new partnerships for surgical centers elsewhere in the U.S. Longer-term, management anticipates entering two new markets in 2015 (possibly San Antonio) and four additional markets in 2016.

Our price target of $ 2.10 is based on price-to-sales (P/S) and enterprise value-to-EBITDA (EV/EBITDA) valuation methodologies.
Northstar Healthcare is a small-capitalization company with a revenue profile that should experience rapid growth both through internal growth as the company’s Direct-to-Consumer marketing program is rolled out and through the execution of management’s acquisition strategy. The growing revenue stream has already manifested itself into the positive earnings reported for the last two calendar years. Based on current valuation of similar specialty providers of healthcare services companies, we expect NHC to trade in an EV/EBITDA valuation range between 17.0 and 6.5, and specifically, our target is based on NHC attaining the first quartile valuation benchmark of an 16.8 EV-to-EBITDA ratio due to the revenue and net income progress attained thus far from the implementation of management’s growth strategies. Also, valuation based on the price-to-sales metric confirms and reinforces the price target. We expect NHC to trade in a P/S valuation range between 3.3 and 1.4, which is also based on current valuations of similar companies. The first quartile valuation benchmark is 2.8 price-to-sales or $ 2.00 per share utilizing annualized revenues from operations from the most recent quarter’s results. Price-to-sales valuation also incorporates a company’s ability to increase revenues. Given management’s stated business plan of becoming a creator, owner and operator of health care networks in multiple metropolitan areas, Northstar Healthcare is expected to expand its revenue base significantly.

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Texas Instruments Management Discusses Q4 2013 Results – Earnings Call Transcript


Texas Instruments (TXN) Q4 2013 Earnings Call January 21, 2014 5:00 PM ET

Executives

Ron Slaymaker – VP, IR

Kevin March – SVP and CFO

Analysts

John Pitzer – Credit Suisse Securities

Doug Freedman – RBC Capital Markets

Christopher Danely – JPMorgan Securities

Blayne Curtis – Barclays Capital

Stephen Chin – UBS Securities

Timothy Arcuri – Cowen & Co.

Jim Covello – Goldman Sachs

Ambrish Srivastava – BMO Capital Markets-US

Vivek Arya – Bank of America Merrill Lynch

Tore Svanberg – Stifel Nicolaus

Ross Seymore – Deutsche Bank

Operator

Good day, and welcome to the Texas Instruments Fourth Quarter and 2013 Year-End Earnings Conference Call. At this time, I’d like to turn the conference over to Ron Slaymaker. Please go ahead, sir.

Ron Slaymaker

Good afternoon, and thank you for joining our fourth quarter and yearend 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 earnings release published today, as well as TI’s most recent SEC filings, for a more complete description.

The fourth quarter was a good one and wraps up a good year. We are entering the first quarter of 2014 feeling better than we did entering the first quarter of 2013. Before I review the quarter, let me provide some information that is important to your calendars.

Starting this quarter, we will not be providing a mid-quarter update to our outlook. Our business is now sufficiently diverse across markets and customers that we believe a mid-quarter update is no longer necessary. The diversity in our business means that TI’s results should mostly reflect broader industry tech trends as opposed to TI’s specific considerations such as adjustments in demand from a large customer. In fact, in our last eight updates, we narrowed to the middle of the range six times on a revenue basis.

We do plan to hold a call on March 13 to update you on our capital management strategy. This will be a follow-on to the call we did a year ago on this topic. In this call, Kevin March will provide insight into our strategy and also answer some of the most frequent questions that we are asked about this strategy. More details will be forthcoming.

Revenue in the fourth quarter was in the upper half of our range of expectations. Once again cash generation and returns remained strong. Free cash flow was $ 3 billion or 24% of revenue for the trailing 12 months period, or in this case, the full year of 2013. Over that same period, we returned over $ 4 billion of cash to investors through a combination of dividends and stock repurchases. This return was 136% of free cash flow for the year. Again our strategy is to return all of our free cash flow to our shareholders except what is needed to repay debt.

EPS was at midpoint of our range. However it also included $ 0.03 of charges for a restructuring action that was not previously included in our guidance. So overall a good quarter.

The restructuring that is underway is a result of our ongoing assessment of our investments and the market opportunities that we are addressing with those investments. First, we are reducing costs in certain embedded processing product lines that either have matured or do not offer the return opportunities we are looking for. These changes will accelerate a profit margin improvement in the embedded business while still maintaining its pace of growth.

Of note that we are not exiting any markets or discontinuing any existing products but are aligning resources consistent with our updated views of the market opportunities.

We are also lowering costs in Japan by reducing resources in that country to levels that are appropriate to the opportunity. Combined, these actions are expected to result in annualized savings of about $ 130 million by the end of 2014. As a result of these actions, we will eliminate about 1100 jobs.

Total charges are estimated to be about $ 80 million where $ 49 million included in the fourth quarter results and the remaining charges of about $ 30 million to be included in the first quarter. These charges are recognized in the other segment.

In the fourth quarter results, TI revenue grew 2% from a year ago. Excluding legacy wireless, revenue grew 10% with double digit growth in both analog and embedded processing. Sequentially, revenue declined 7% with half of the declines due to seasonally lower calculated revenue.

Analog revenue grew 12% from a year ago and declined 3% sequentially. From a year ago, all four major product lines were up with power management leading the growth. Sequentially, all major product lines were down with high performance analog declining the most.

Embedded processing revenue grew 11% from a year ago and declined 10% sequentially. From a year ago, the growth was due to strengthened micro-controllers. Connectivity revenue grew a single-digit percentage rate and processors were about even. Sequentially, all areas were down with the biggest decline in processors.

In our other segment, revenue declined $ 209 million or 27% from a year ago. The decline was due to legacy wireless dropping $ 216 million. Sequentially, other revenue was down $ 90 million due to the seasonal decline in calculators. Legacy wireless revenue was $ 54 million in the fourth quarter and we expect it to be essentially gone in the first quarter.

Turning to distribution. Resales declined 3% sequentially, trending about the same as our semiconductor product revenue. Distributors’ inventory levels were about even with the prior quarter.

Let me make a couple of observations about the year overall. For 2013, analog and embedded processing revenue grew a combined 4% with analog up 3% and embedded up 9%. These two key areas were 79% of TI revenue for the year, up from 72% in 2012.

Operating margin for analog was 25.8% and it exceeded 30% during the second half. Operating margin for embedded processing was 7.6%, a level that should increase as we continue to grow and as we execute our restructuring plans to better align resources with the opportunities that we are pursuing.

Finally, we are refining descriptions of our end market mix to more closely match our perspective of our markets and investments. Traditionally, we and many other companies have described the markets as communications, computing, industrial, consumer, automotive and education. The real world didn’t always align so cleanly and some of the categorizations became blurred. For example, consumer smartphones were included with infrastructure equipment in the communications market and consumer tablets were included with servers in the computing market. In both of these examples, high volume consumer products were grouped together with enterprise equipment that have very different life cycles and market characteristics.

We believe our revised segmentation is more description and reflective of the markets we sell into and therefore more helpful for our understanding of our business. Starting now we will provide an annual snapshot of our product mix along the following market descriptions. Industrial which is 24% of revenue in 2013; automotive which was 13% of revenue; personal electronics which was 37% of revenue and include subsets which we call sectors such as notebooks, tablets, mobile phones and consumer products.

Communications equipment which was 16% of revenue; enterprise systems which include sectors such as servers and projectors was 6% of revenue; and calculators which was 4% of revenue. We have matched [ph] our product revenue in these markets as well as the sectors and even in the equipment levels below that, we find this especially beneficial for the industrial markets where the market definition has historically not been very clear and where we have a strong strategic focus.

We now have a reasonably precise profile of where our revenue is shifting that is more accurate than we’ve had in the past. We’ve included on our website this 2013 product revenue breakout by market along with the 2011 and 2012 historical breakouts. We’ve also identified the sectors below the markets provide you a clear understanding of how we are mapping the revenue. We will not be disclosing our revenue breakout below the market level. We plan to update this for you annually.

Now Kevin will review profitability and our outlook.

Kevin March

Thanks, Ron, and good afternoon, everyone. Gross profit in the quarter was $ 1.64 billion, or 54.2% of revenue. Gross profit declined 8% sequentially – about the same as the 7% decline in revenue. Gross margin held up very well, slipping only 60 basis points from last quarter’s record high.

From a year ago, gross profit was up 13% – well above the 2% increase in revenue. The result was a 570 basis point expansion in gross margin. There are a couple of major reasons for gross profit expanding significantly faster than revenue.

First, the quality of our portfolio has improved as the higher proportion of our revenue is from Analog and Embedded Processing products. Second, our factory utilization has improved as we have increased loadings in our most advanced factories and we have shut down older, less-efficient manufacturing assets, such as our Houston and Hiji 6-inch factories.

Moving to operating expenses. Combined R&D and SG&A expense of $ 807 million was down $ 26 million sequentially and down $ 48 million from a year ago. The sequential decline is mostly due to seasonality, as employees typically take more vacation and holiday time in the fourth quarter. The decline from a year ago was due to the wind down of our legacy wireless products.

Acquisition charges were $ 84 million, almost all of which is the on-going amortization of intangibles, a non-cash expense.

Restructuring and other charges were $ 62 million. This included a $ 49 million charge for the restructuring action that Ron discussed. This was not included in our prior guidance and negatively impacted earnings by $ 0.03 per share.

Operating profit was $ 687 million, or 22.7 % of revenue. Our tax rate in the quarter was 25%, a point above the 24% that we had guided. The effective tax rate remained 24% but we had several small discrete items that pulled the rate up in the quarter.

Net income in the fourth quarter was $ 511 million, or $ 0.46 per share.

Let me now comment on our capital management, starting with our cash generation. Cash flow from operations was $ 1.20 billion in the quarter. We increased our inventory by $ 5 million compared with the prior quarter. Inventory days increased by 6 days to 112 days, consistent with our model of 105 to 115 days.

Capital expenditures were $ 107 million in the quarter. I should note this includes our purchase of a 358,000 square foot assembly and test facility in Chengdu, China, that is adjacent to our existing wafer fab. We expect to have this facility equipped and in production by the fourth quarter of this year.

On a trailing 12 months basis, Cash flow from operations was $ 3.38 billion. Trailing 12 months capital expenditures were $ 412 million, or 3% of revenue. As a result, free cash flow was $ 2.97 billion, or 24% of revenue. This is within our expected range of 20% to 25% of revenue.

I’ll note that depreciation expense for the full year was $ 879 million. Depreciation exceeded our capital expenditures by $ 467 million, or 3.8% of revenue. Over the next few years, as we continue to hold capital spending to low levels, depreciation will decline to the rate of capital spending and our gross margin will directly benefit.

And as we’ve said, strong cash flow, particularly free cash flow, means that we can continue to provide significant cash returns to our shareholders. In the fourth quarter, TI paid $ 326 million in dividends and repurchased $ 734 million of our stock for a total return of $ 1.06 billion.

Our capital management strategy is to return all of our free cash flow to shareholders, except for what we need to repay debt. In the full year 2013, free cash flow was $ 2.97 billion and we reduced our debt level by $ 500 million. We returned a total of $ 4.04 billion to shareholders, or 136% of free cash flow. This return was 54% higher than in 2012. We returned more than our full free cash flow in the year because proceeds from exercises of employee stock options, totaling $ 1.31 billion in the year, have also been an additional source of cash for the company, all of which was used to repurchase stock.

There was an abnormally high level of exercises in the year due to the stock price performance. Although the exercises were somewhat of a headwind for the share count reduction, we more than offset this with stock repurchases. In the end, we reduced our shares outstanding by 25 million shares, or 2.3%, in 2013 similar to the last couple years. In total, we have reduced our share count by 37% since the beginning of 2005 with our repurchases.

Fundamental to our cash return strategy are our cash management and tax practices. We ended the fourth quarter with $ 3.83 billion of cash and short-term investments with 82% of that amount owned by TI’s U.S. entities. Because our cash is largely on-shore, it is readily available for a variety of uses, including paying dividends and repurchasing our stock.

TI’s orders declined 10% sequentially and our book-to-bill ratio was 0.94.

Turning to our outlook, we expect TI revenue in the range of $ 2.83 billion to $ 3.07 billion in the first quarter. At the middle of this range, revenue would decline 3% sequentially with most of the decline coming from the final step-down in legacy wireless revenue, which is now essentially gone and should not be a factor in the sequential trends after the first quarter. Therefore, if you exclude the legacy wireless revenue from the fourth quarter of 2013, revenue at the middle of this range would be almost even sequentially. If you exclude it from the first quarter of 2013, growth would be 10%

.

We expect first-quarter earnings per share to be in the range of $ 0.36 to $ 0.44, which includes a $ 0.02 EPS impact from the $ 30 million of restructuring charges discussed earlier. We expect our effective tax rate in 2014 to increase to 27% and this is the rate you should use in your models for the first quarter. This is about 3 percentage points higher than our 2013 effective tax rate, negatively impacting EPS by $ 0.02 in the first quarter. This rate is higher due to the expiration of the R&D tax credit at the end of 2013 and our forecast for higher profits in the year. Historically, the R&D tax credit has expired and was later reinstated retroactively to its expiration date.

In summary, we’re encouraged that a lot of hard work at TI over the past few years is producing results. Today, we’re a company firmly rooted in Analog and Embedded Processing – areas that have strong potential for growth and good profits that require low capital investments and, therefore, can generate a lot of cash.

Although much of the heavy lifting associated with the structural improvement at TI is now behind us, our work is not done. The restructuring action we discussed today is a result of an on-going process at TI of review and continuous improvement. This process helps ensure we focus our investments on opportunities that have the best potential for sustainable growth and returns.

With that, I’ll turn it back to Ron.

Ron Slaymaker

Thanks, Kevin. Operator, you can now open the lines up for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we will provide you an opportunity for an additional follow-up. Operator?

Earnings Call Part 2:

  • Q&A with Texas Instruments Inc. CEO

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Texas Instruments Management Discusses Q3 2013 Results – Earnings Call Transcript

Texas Instruments (TXN) Q3 2013 Earnings Call October 21, 2013 5:30 PM ET

Executives

Ron Slaymaker – Vice President of Investor Relations

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

Analysts

John W. Pitzer – Crédit Suisse AG, Research Division

Blayne Curtis – Barclays Capital, Research Division

Doug Freedman – RBC Capital Markets, LLC, Research Division

Stephen Chin – UBS Investment Bank, Research Division

Tristan Gerra – Robert W. Baird & Co. Incorporated, Research Division

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

Vivek Arya – BofA Merrill Lynch, Research Division

Glen Yeung – Citigroup Inc, Research Division

Jonathan Steven Smigie – Raymond James & Associates, Inc., Research Division

David Wong

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

Patrick Wang – Evercore Partners Inc., Research Division

Ambrish Srivastava – BMO Capital Markets U.S.

James Covello – Goldman Sachs Group Inc., Research Division

Ross Seymore – Deutsche Bank AG, Research Division

Operator

Good day, and welcome to the Texas Instruments Third Quarter 2013 Earnings Conference call. At this time, I’d like to turn the conference over to Mr. Ron Slaymaker. Please go ahead, sir.

Ron Slaymaker

Good afternoon, and thank you for joining our third quarter 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 earnings 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 December 9. At that time, we expect to adjust the revenue and earnings guidance ranges as appropriate.

This was a good quarter for TI. Revenue came in just above the midpoint of our guidance range, growing 6% sequentially and growing 10% if you exclude legacy wireless revenue, which declined to less than 2% of TI revenue in the quarter. Analog and Embedded Processing increased to 80% of TI revenue. The improved quality of our revenue is reflected in record gross margin in the quarter. Kevin will discuss this more in a few minutes.

Revenue growth in the quarter was supported by some of the vertical markets that were especially weak in the second quarter, including computing, game consoles and handset revenue outside of our legacy wireless revenue. Revenue from the communications infrastructure market continued to grow in the quarter. These areas were complemented by a continued strength in our automotive and industrial revenue.

From a year ago, revenue declined 4% due to the decrease in legacy wireless revenue. Excluding this revenue, we grew 3% from the year-ago quarter. On this basis, this was the first quarter of year-on-year growth since the third quarter of 2012. Again, excluding legacy wireless, we expect growth to accelerate to 8% in the fourth quarter at the middle of our guidance range.

The strength of our business model not only provides strong profitability, it also gives us confidence that we can sustainably generate $ 0.20 to $ 0.25 of free cash flow for every dollar of revenue. This metric is especially important to our shareholders as our capital management strategy is to return all of our free cash flow to them, except what is needed to repay debt. When measured over the trailing 12 months, free cash flow was 24% of revenue. Over that same period, we returned 133% of free cash flow to shareholders. In the third quarter alone, we returned $ 1 billion to shareholders through a combination of dividends and stock repurchases.

Earnings in the third quarter were above our expected range, a result of better-than-expected revenue and gross profit, tight operating expense control and some help from discrete tax items.

Let me walk through a few details of revenue. Analog revenue grew 11% sequentially. All 4 Analog product lines contributed to this growth, although Power Management was up the most, followed by High Volume Analog & Logic. These areas benefited from sequential growth across many markets, including those vertical markets that were impacted by inventory reductions in the second quarter.

Embedded Processing revenue grew 8% sequentially, with processors up the most, followed by growth in microcontrollers and connectivity. Processors were driven by applications processor sales into consumer and automotive applications and DSP sales into industrial applications. Microcontrollers were lifted mostly by sales of MSP430 products into industrial applications, as well as sales of microcontrollers into automotive safety applications.

In our Other segment, sequential growth in both product areas was offset by decline in legacy wireless. Legacy wireless revenue fell by $ 91 million to $ 57 million as we had expected. This decline was partially offset by growth in calculators and in custom ASIC revenue, which grew as a result of communications infrastructure. Royalties also grew, and DLP product revenue was about even.

Turning to distribution. Resales grew 9% sequentially. Distributors’ inventory levels declined by about a day to just over 5 weeks.

Now Kevin will review profitability and our outlook.

Kevin P. March

Thanks, Ron, and good afternoon, everyone. This quarter, gross profit was $ 1.78 billion, up 13% sequentially. Gross margin was a record 54.8% of revenue and expanded 330 basis points sequentially. I think it is useful to compare this quarter’s gross margin to that of the third quarter of 2010, wherein our last high-water mark for gross margin was set at 54.5%. In that earlier quarter, revenue was $ 3.74 billion, up — 15% higher than our revenue this past quarter. Factory utilization in that earlier quarter was 8 points higher and our manufacturing capacity was lower since we have not yet brought online our cost-efficient, 300-millimeter analog wafer fab in Richardson, Texas or our yet to be acquired wafer fab in Chengdu, China. We were also still in the early stages of ramping our recently acquired Aizu Japan wafer fab. In addition, Analog and Embedded Processing were also much smaller then, contributing 60% of our revenue at that time.

The conclusion one can draw from this is that due to the structural changes that we’ve made at TI over the past few years, the quality of our revenue is much higher today. It is more diverse, more profitable and less capital intensive; and we remain better positioned to support future growth from a manufacturing capacity standpoint.

Continuing to operating expense. Combined R&D and SG&A expense of $ 833 million was reduced by $ 27 million sequentially. Acquisition charges were $ 86 million, unchanged from last quarter. Almost all of this amount is the ongoing amortization of intangibles, which is a noncash expense. The restructuring charges and other line of our income statement transitioned from a $ 282 million gain last quarter to a $ 16 million charge this quarter. As a reminder, last quarter’s gain was due to the transfer of wireless connectivity technology to a customer. This quarter’s charge is associated with the shutdown costs from the previously announced factory closings in Houston and Hiji, Japan.

Operating profit was $ 844 million or 26% of revenue. Our tax rate in the quarter was 23%, a point below our 24% annual effective tax due to discrete items that were included in the third quarter. Our annual effective tax rate is unchanged and 24% is the rate you should use in your models for the fourth quarter. Net income in the third quarter was $ 629 million or $ 0.56 per share, which includes $ 0.01 of discrete tax benefits.

Let me now comment on our capital management strategy, starting with cash generation. Cash flow from operations was $ 1.15 billion in the quarter. We increased our inventory by $ 6 million compared with the prior quarter. Inventory days increased by 1 day to 106 days, consistent with our model of 105 to 115 days. Capital expenditures were $ 124 million in the quarter and free cash flow was $ 1.03 billion.

On a trailing 12-month basis, cash flow from operations was $ 3.27 billion, about the same as a year ago. Trailing 12 months’ capital expenditures were $ 402 million, down 27% from the year ago. As a result, free cash flow was $ 2.87 billion, up 4% from a year ago. Free cash flow was 24% of revenue for the trailing 12-month period, within our expected range of 20% to 25% of revenue. In the year-ago trailing 12 months period, free cash flow was 21% of revenue. Capital expenditures for the past 12 months were 3% of revenue. Our continued low capital spending level is a direct result of the strong capacity position that we have built with our strategic investments of the past few years. The cash flow that will result as we continue to fill up this capacity should be stronger in the years ahead.

I’ll note that depreciation expense for the past 12 months exceeded our capital expenditures by $ 496 million. As a percent of revenue, depreciation was more than 400 basis points higher than our capital expenditures. This is one of the reasons why our free cash flow has been trending higher than our net income. Of course, as depreciation declines at the rate of capital spending over the next few years, gross margin will benefit. Another reason why free cash flow has trended higher than net income is the noncash amortization expense of $ 80 million to $ 85 million per quarter, that will remain on our income statement for another 6 years. For the past 12 months, amortization expense was $ 339 million or about 3% of revenue.

And as we’ve said, strong cash flow, particularly cash flow — free cash flow, means that we can continue to provide significant cash returns to our shareholders. In the third quarter, TI paid $ 308 million in dividends and repurchased $ 734 million of our stock. Our capital management strategy is to return all of our free cash flow to shareholders, except for what we need to repay debt. In the last year, we reduced our debt level by $ 500 million. Free cash flow was $ 2.87 billion and we returned a total of $ 3.82 billion to shareholders or 133% of free cash flow. We’ve been able to return more than our free cash flow because proceeds from exercises of employee stock options, totaling $ 1.28 billion over the past 12 months, have also been an additional source of cash for the company. To break out the cash return, in the past 12 months, we repurchased $ 2.7 billion of our stock or 95% of free cash flow. Similarly, we paid $ 1.08 billion in dividends or 38% of our free cash flow.

Fundamental to our cash return strategy and our cash management and our tax practices, we ended the third quarter with $ 3.59 billion of cash and short-term investments, with 82% of that amount owned by TI’s U.S. entities. Because our cash is largely onshore, it’s readily available for a variety of uses, including paying dividends and repurchasing our stock. TI orders were about even sequentially and our book-to-bill ratio was 0.97, consistent with seasonal declines in the fourth quarter.

We expect TI revenue in the range of $ 2.86 billion to $ 3.10 billion in the fourth quarter. At the middle of this range, revenue would decline 8% sequentially, with about half of that decline coming from the seasonal drop in calculators. The remainder of the decline is consistent with the semiconductor industry’s pattern over the past 3 years: 2010, 2011 and 2012, as well as our own history over that same period when legacy wireless revenue is excluded. In the fourth quarter, legacy wireless products should decline to about $ 50 million. We continue to expect that revenue from these products will essentially be gone as we enter next year. We expect earnings per share to be in the range of $ 0.42 to $ 0.50.

In summary, we believe the third quarter provides a preview of what TI is capable of producing as a company focused on Analog and Embedded Processing. The improved quality of our revenue is evident from the higher gross margin and free cash flow generation compared with our past. We also believe our top line performance and potential will become more evident without the steady headwind of declining wireless revenue in the past few years. Our manufacturing capacity position remains strong and we have a good opportunity for continued growth, while maintaining our capital expenditures at lower levels in the years ahead.

With that, let me turn it back to Ron.

Ron Slaymaker

Thanks, Kevin. Operator, you can now open the lines up for questions. [Operator Instructions] Operator?

Earnings Call Part 2:

  • Q&A with Texas Instruments Inc. CEO

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Full planes help boost US Airways 1Q results

Full planes were good to US Airways.

The nation’s fifth-largest airline posted a bigger adjusted first-quarter profit as it carried more passengers, and collected more from them.

US Airways Group Inc. earned $ 44 million, or 26 cents per share. Its adjusted profit was 31 cents per share, topping the expectations of analysts polled by FactSet.

Revenue rose 3.5 percent to $ 3.38 billion.

The airline earned 28 cents per share in the year-ago quarter, but that was inflated by a swap with Delta for landing rights in Washington.

Occupancy rose 2.4 percentage points to 81.7 percent.

US Airways plans to merge with American Airlines. The combined airline would be the biggest in the world. US Airways says it still expects the deal to close by the end of September.


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Earnings Preview: Discover to report 1Q results

LOS ANGELES (AP) — Discover Financial Services is expected to post a smaller profit in the December-February quarter, a period that typically sees robust holiday spending before cardholders shift toward paying down debt. The credit-card issuer and payments-network operator reports before markets open Tuesday.

WHAT TO WATCH FOR: How cardholder spending and payment trends fared during the quarter, as well as an update on the company’s efforts to press further into direct banking and home equity loans.

Investors also will want to know whether its cardholders’ late payment rates took a hit this year after an increase in Social Security payroll taxes went into effect in January.

Sales at U.S. retailers declined a seasonally adjusted 0.4 percent in March. That followed a 1 percent gain in February and a 0.1 percent decline in January.

Still, that didn’t slow spending by holders of rival credit card issuers American Express and Capital One Financial.

Earlier this week, American Express said cardholder spending rose 6 percent in the first three months of the year, while Capital One noted annual increases in revenue in its domestic card business.

Wall Street also will be seeking an update on Discover’s payment-services business, which competes with Visa and MasterCard. In the fourth quarter, Discover saw dollar volume increase 13 percent.

Last summer, Discover acquired a foothold in mortgage lending after purchasing the business from Tree.com Inc. for $ 45.9 million. Discover also has waded into fixed-rate private student loans.

Its latest results also should provide some sense of how the new lines of businesses are paying off.

WHY IT MATTERS: Discover, which is based in Riverwoods, Ill., is best known for its namesake card and is the sixth-largest U.S. credit-card issuer. The company has been working to grow its credit card business, while also pushing further into direct banking, offering auto, personal and student loans. Last month, it announced plans to begin offering home equity loans beginning in the second half of this year.

Consumers are feeling wealthier and more inclined to spend, thanks to rising home values and stock prices that have hit records. When consumers spend more, that can help boost credit card use, benefiting card issuers like Discover.

WHAT’S EXPECTED: Analysts polled by FactSet, on average, expect Discover to report earnings of $ 1.12 per share on $ 1.98 billion in revenue.

LAST YEAR’S QUARTER: In last year’s fiscal first quarter, Discover posted earnings of $ 1.18 per share on revenue of $ 1.84 billion.


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