Texas Instruments Incorporated (TI) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. TI designs, manufactures and sells semiconductors globally. Reportable segments are Analog and Embedded Processing; Other includes DLP products, calculators, custom ASICs and royalties. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $3,273 | $3,232 | $6,281 | $6,382 |
| Gross profit | $2,003 | $1,881 | $3,827 | $3,697 |
| Gross margin | 61.2% | 58.2% | 60.9% | 57.9% |
| Operating profit | $1,117 | $1,010 | $2,085 | $1,968 |
| Operating margin | 34.1% | 31.3% | 33.2% | 30.8% |
| Net income | $779 | $696 | $1,447 | $1,352 |
| Diluted EPS | $0.76 | $0.65 | $1.40 | $1.26 |
- Q2 revenue rose 1% year over year; net income rose 12% and diluted EPS rose 17%. Six-month revenue declined 2%, while net income increased 7% and diluted EPS increased 11%.
- Q2 gross profit increased 6%, primarily due to lower manufacturing costs. Management cited product portfolio quality, manufacturing efficiency and 300-millimeter Analog production as contributors to gross margin.
- Q2 R&D was $345 million, up 8%, reflecting continued resource shifts toward R&D and higher compensation costs. SG&A was $460 million, down 2%, partly reflecting restructuring savings. Acquisition charges were $79 million, primarily non-cash amortization of acquired intangibles.
- Segments, Q2 year over year: Analog revenue was essentially flat at $2,044 million, with operating profit up 6% to $771 million; Embedded Processing revenue rose 9% to $755 million and operating profit rose 40% to $189 million; Other revenue fell 4% to $474 million while operating profit rose 7% to $157 million.
Cash flow, balance sheet and capital allocation
- For the first six months, operating cash flow was $1,616 million, versus $1,429 million a year earlier. Capital expenditures were $282 million, compared with $248 million.
- Trailing-12-month operating cash flow was $4,455 million and free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $3,870 million, up 7% year over year. Free cash flow was 30.0% of revenue, versus 27.4%.
- At June 30, cash and cash equivalents were $1,235 million and short-term investments were $1,304 million, totaling $2,539 million. The total was down $679 million from year-end 2015. Current assets were $6,689 million and current liabilities were $1,991 million.
- Total debt, including unamortized discounts and costs, was $3,612 million, down from $4,120 million at year-end. TI issued $500 million of 1.85% notes due 2022 and retired $1 billion of maturing debt. The $2 billion revolving credit facility was undrawn; no commercial paper was outstanding.
- Six-month financing cash use was $2,019 million, including $765 million of dividends and $1,157 million of share repurchases. TI repurchased 21.4 million shares during the six-month period. The quarterly dividend declared was $0.38 per share, versus $0.34 a year earlier.
- Inventory was $1,876 million, with 133 days of inventory versus 115 at year-end. Management said inventory was staged for future shipments and its long-term model is 105–135 days.
- Management stated it believed available resources and operating plans would fund working capital, capital expenditures, dividends, debt payments and other needs for at least the next 12 months.
Management commentary, outlook and risks
- Management said Q2 revenue and EPS were in the upper half of its expected range; the filing text does not provide the numerical range. Demand remained strong in automotive and grew in industrial and communications equipment, while personal-electronics demand was down from a year earlier.
- Management expected R&D expense to continue increasing into 2017 as resources are shifted toward R&D. It attributed the longer-term margin and cash-flow opportunity in part to increased Analog production on 300-millimeter wafers.
- TI estimated a 2016 annual effective tax rate of about 30%, compared with the 35% U.S. statutory rate, citing lower rates in some operating jurisdictions and U.S. tax benefits.
- Restructuring charges of $2 million in Q2 and $4 million for the first six months related to phasing out the Greenock, Scotland manufacturing facility through 2018. Total charges were estimated at about $40 million; $21 million had been recognized by June 30, 2016. No payments for the phase-out had been made as of that date.
- TI reported no material product warranty or product-liability accruals or payments in the periods presented. It said legal and administrative proceedings were not expected to have a material adverse effect, while noting outcomes cannot be predicted.
- Disclosed risks include semiconductor demand and cyclicality, competition, customer and distributor inventory changes, factory utilization and margins, product development, supply and manufacturing execution, foreign exchange, cybersecurity, taxes, pensions, litigation and acquisition or restructuring execution. The filing refers investors to the 2015 Form 10-K risk factors.
Important facts for investors to verify
- Whether the higher inventory level and 133 days on hand converted into shipments and cash generation as expected.
- Whether Embedded Processing growth and improved segment margins continued, and whether Analog revenue stabilized after its six-month decline.
- How ongoing R&D investment, 300-millimeter manufacturing expansion and factory utilization affected margins and capital spending.
- The pace of share repurchases and dividends relative to free cash flow, debt maturities and the stated capital-return approach.
- Actual restructuring costs and timing for the Greenock facility phase-out, along with any material developments in legal, product-liability or other contingencies.