Texas Instruments Incorporated (TI) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. TI designs, manufactures and sells semiconductors. Its reportable segments are Analog and Embedded Processing; “Other” includes DLP products, calculators, custom ASICs and royalties. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $3,008 | $3,150 | Down 5% |
| Gross profit / margin | $1,824 / 60.6% | $1,816 / 57.7% | Profit roughly flat; margin improved |
| Operating profit / margin | $968 / 32.2% | $958 / 30.4% | Up 1% / 1.8 percentage points |
| Net income | $668 | $656 | Up 2% |
| Diluted EPS | $0.65 | $0.61 | Up 7% |
| Cash flow from operations | $547 | $609 | Down $62 |
| Capital expenditures | $124 | $123 | About flat |
| Dividends paid / stock repurchases | $383 / $630 | $356 / $670 | Repurchases covered 12.4 million shares in 2016 |
Trailing-12-month free cash flow, a non-GAAP measure, was $3.654 billion, up 1% year over year, or 28.4% of revenue versus 27.3%. Trailing-12-month operating cash flow was $4.206 billion. Q1 segment revenue and operating profit: Analog $1,879 and $679; Embedded Processing $729 and $182; Other $400 and $107.
Financial position and liquidity
At March 31, 2016, cash and cash equivalents were $1.281 billion and short-term investments were $1.519 billion, totaling $2.80 billion, down $418 million from year-end 2015. Current assets were $6.659 billion and current liabilities $2.420 billion. Inventory was $1.805 billion; days of inventory rose to 137 from 115 at year-end, while days sales outstanding increased to 38 from 33.
Total debt was $4.118 billion, including $1.249 billion classified as current and $2.869 billion long-term. The $2 billion revolving credit facility was undrawn, with no commercial paper outstanding. TI reported a $22 million interest and debt expense for the quarter. Management said it had resources and plans to meet requirements for at least the next 12 months.
Material changes and management commentary
- Revenue fell mainly because of lower Analog sales and, to a lesser extent, lower Other revenue. Embedded Processing grew 8%, while Analog fell 8% and Other fell 10%.
- Management cited continuing automotive strength and improvement in industrial and communications equipment, offset by expected weakness in personal electronics.
- Gross margin reached a quarterly record of 60.6%. Management attributed the improvement to lower manufacturing costs, product mix and manufacturing efficiency, including 300-millimeter Analog production.
- Embedded Processing operating profit rose 48%, supported by higher revenue and lower operating expenses. Analog operating profit declined 6% as lower revenue was partly offset by cost and mix benefits.
- Management said inventory was staged for increased Q2 shipments; 3–4 days of inventory related to slowing personal-electronics demand late in Q4 2015 was expected to ship later in 2016.
Outlook, risks and unusual items
- Q1 revenue was in the upper half of the company’s expected range. The filing text does not provide a clear numerical forward revenue or earnings guidance range.
- TI’s stated capital-return strategy is to return 100% of free cash flow plus equity-compensation exercise proceeds, less net debt retirement. It returned $4.2 billion to shareholders over the preceding 12 months.
- On April 29, 2016, after quarter-end, TI agreed to issue $500 million of debt, expected to close May 6, to repay part of maturing debt.
- TI recorded $2 million of Q1 restructuring charges for phasing out its Greenock, Scotland manufacturing facility through 2018. Total charges were estimated at about $40 million, with $19 million recognized through March 31; no payments had been made as of that date.
- Acquisition charges were $80 million, primarily non-cash amortization of intangibles from the 2011 National Semiconductor acquisition. Goodwill was $4.362 billion, with no goodwill impairment reported.
- Management identified demand and semiconductor-cycle changes, competition and pricing, customer and inventory fluctuations, factory utilization, manufacturing and technology execution, foreign exchange, legal and regulatory matters, taxes, pensions and other factors as risks to results. TI said pending legal matters and product warranty or liability matters were not expected to have a material adverse effect; it reported no material warranty accruals or payments in the periods presented.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether staged inventory converts into the expected Q2 shipments, and how inventory days and receivables evolve.
- Whether growth in Embedded Processing and automotive, industrial and communications demand offsets weakness in Analog and personal electronics.
- Whether record gross margin and elevated free-cash-flow conversion are sustainable as factory utilization and product mix change.
- The timing and terms of the announced $500 million debt issuance and repayment of maturing debt, alongside the $1.249 billion current debt balance.
- Future restructuring costs and progress on the Greenock facility phaseout; the filing estimates about $21 million of charges remained to be recognized.