Texas Instruments Incorporated — Q3 2014 Form 10-Q
Reporting period: Quarter ended September 30, 2014; comparisons are with Q3 2013. Year-to-date figures cover the nine months ended September 30. TI designs and manufactures semiconductors. Its principal growth segments are Analog and Embedded Processing; Other includes legacy wireless and smaller businesses, as well as certain corporate and acquisition-related items.
Financial performance
| Metric | Q3 2014 | Q3 2013 | First 9 months 2014 | First 9 months 2013 |
|---|---|---|---|---|
| Revenue | $3.501B | $3.244B | $9.776B | $9.177B |
| Gross profit / margin | $2.044B / 58.4% | $1.779B / 54.8% | $5.532B / 56.6% | $4.724B / 51.5% |
| Operating profit / margin | $1.175B / 33.6% | $844M / 26.0% | $2.847B / 29.1% | $2.145B / 23.4% |
| Net income | $826M | $629M | $1.996B | $1.651B |
| Diluted EPS | $0.76 | $0.56 | $1.81 | $1.45 |
Q3 revenue rose 8% year over year, driven by Analog and Embedded Processing; together they represented 82% of revenue, versus 80% a year earlier. Gross margin reached a record 58.4%, reflecting higher revenue, product mix and manufacturing efficiency. R&D fell 10% to $332M in Q3, while SG&A was broadly unchanged at $463M. The estimated 2014 effective tax rate was about 28%; the federal research tax credit had expired at year-end 2013.
For the first nine months, revenue increased 7%, gross profit rose 17%, and diluted EPS increased from $1.45 to $1.81. Operating profit growth benefited from higher sales and margins, while year-ago results included a $315M technology-transfer gain.
Segments
| Q3 segment | Revenue | Year-over-year change | Operating profit |
|---|---|---|---|
| Analog | $2.149B | +11% | $802M |
| Embedded Processing | $711M | +6% | $114M |
| Other | $641M | -1% | $259M |
Analog revenue grew across all product lines, led by Power. Embedded Processing growth reflected Microcontrollers, Connectivity and Processors. Other’s revenue was roughly flat as lower legacy wireless sales were mostly offset by DLP products. For the first nine months, Analog and Embedded Processing revenue each grew 12%; Other revenue fell 14%, principally due to lower legacy wireless sales and the absence of the 2013 technology-transfer gain.
Cash flow, balance sheet and capital returns
- Operating cash flow was $2.620B for the first nine months, versus $2.185B a year earlier. Capital expenditures were $260M, compared with $305M.
- Cash and cash equivalents were $1.306B and short-term investments were $1.880B at September 30, totaling $3.186B; 81% of cash and short-term investments was held by U.S. entities. Cash and equivalents declined from $1.627B at year-end 2013.
- Total debt, including current maturities, was approximately $4.645B; net debt after cash and short-term investments was approximately $1.459B. TI issued $500M of notes in March and repaid $1.0B of maturing debt in May. Its $2B revolving facility was undrawn, with no commercial paper outstanding.
- Current assets were $7.756B and current liabilities $2.643B. Inventory was $1.751B; inventory days were 108, within management’s 105–115-day target. Accounts receivable were $1.477B and days sales outstanding were 38.
- For the trailing 12 months, free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $3.452B, or 27% of revenue, up 20% from the prior-year period. TI reported returning $4.2B to shareholders over those 12 months.
- In the first nine months, TI paid $967M in dividends and repurchased $2.133B of stock. In September it announced a 13% dividend increase, from $0.30 to $0.34 per quarter, or an annualized $1.36 per share.
Outlook, notable items and risks
Management said Q3 revenue was in the upper half of its expected range and earnings were at the top of the range. It identified Analog and Embedded Processing as its primary growth engines and stated that it expects to return to shareholders free cash flow not needed for net debt retirement, plus proceeds from equity-compensation exercises. TI said it had resources and plans to fund working capital, capital expenditures, dividends, debt payments and other needs for at least the next 12 months. The filing does not provide a clear numerical forecast for a future quarter.
- Cost-saving actions announced in January 2014 target about 1,100 job eliminations and are expected to be completed by mid-2015. TI had recorded $74M in cumulative charges through Q3 and said no further material charges were expected.
- Q3 restructuring charges/other were a net credit of $9M, including $8M of asset-sale gains. The nine-month 2014 net credit was $24M, including $44M of asset-sale gains. The comparable 2013 period included the $315M technology-transfer gain.
- Ongoing amortization from the 2011 National acquisition generated $83M of Q3 acquisition charges and $248M year to date. No goodwill impairment was recorded in the first nine months.
- TI disclosed ordinary-course legal and administrative proceedings, product warranty and intellectual-property indemnities, and indemnities related to the former Sensors & Controls business. It estimated remaining potential exposure under the latter indemnities at no more than $200M and did not expect related payments to materially affect its financial condition, results or liquidity. Management did not expect the disclosed proceedings to have a material adverse effect.
- Key risks include semiconductor-market cyclicality and demand shifts, competition and pricing pressure, fixed manufacturing costs and capacity utilization, customer and distributor concentration or inventory changes, supply and manufacturing dependencies, international and currency exposures, tax changes, intellectual-property matters, product claims, debt obligations, restructuring execution and cybersecurity. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification points
- Confirm the sustainability of record gross margin and the extent to which future performance depends on Analog and Embedded Processing growth, product mix and factory utilization.
- Assess Other-segment trends and the effect of legacy wireless wind-down, asset-sale gains and the nonrecurring 2013 technology-transfer gain on comparisons.
- Reconcile cash generation with substantial dividends and repurchases, and monitor debt maturities, net debt and the dividend increase.
- Review restructuring completion and cost savings against the announced schedule, as well as tax-rate assumptions following expiration of the research credit.
- Evaluate semiconductor-cycle, customer-demand, supply-chain, international, legal and product-liability risks, including the former-business indemnities.