Texas Instruments Incorporated — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. TI designs and manufactures semiconductors globally and reports four segments: Analog, Embedded Processing, Wireless and Other. National Semiconductor, acquired in September 2011, is included in Analog; this affects comparability with 2011.
Financial results
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $3.335B | $3.458B | $6.456B | $6.849B |
| Gross profit / margin | $1.651B / 49.5% | $1.753B / 50.7% | $3.182B / 49.3% | $3.480B / 50.8% |
| Operating profit / margin | $598M / 17.9% | $905M / 26.2% | $995M / 15.4% | $1.813B / 26.5% |
| Net income | $446M | $672M | $711M | $1.338B |
| Diluted EPS | $0.38 | $0.56 | $0.60 | $1.11 |
Q2 revenue declined 4% year over year, net income 34%, and diluted EPS 32%. First-half revenue fell 6%, net income 47%, and diluted EPS 46%. Q2 revenue increased 7% sequentially from Q1, while net income rose from $265M to $446M. Q2 orders were $3.41B, down 5% year over year; first-half orders of $6.65B were down 7%.
Cash flow and liquidity: First-half operating cash flow was $1.124B, versus $1.145B a year earlier. Investing activities provided $591M, including net proceeds from short-term investments; capital expenditures were $249M. Financing activities used $1.515B, including $600M of repurchases, $390M of dividends and $875M of debt and commercial-paper repayments. Cash and cash equivalents were $1.192B and short-term investments $1.141B at June 30, for total cash and short-term investments of $2.333B, down $602M from year-end.
Debt: June 30 balances included $500M commercial paper, $1.5B current long-term debt and $2.703B long-term debt. TI had a $2B revolving credit facility through March 2017; commercial paper carried a 0.28% weighted-average rate. On July 30, TI priced $1.5B of senior notes, with proceeds for general corporate purposes, potentially including repurchases; the offering was expected to close August 6.
Other metrics: Inventory was $1.885B, with 101 days of inventory versus 86 at year-end; receivables were $1.629B and days sales outstanding were 44 versus 41. Q2 dividends declared were $0.17 per share, compared with $0.13 a year earlier. TI repurchased 9.6M shares during Q2.
Segments and material changes
- Analog: Q2 revenue was $1.800B, up 13% year over year, primarily reflecting National/SVA inclusion; operating profit was $437M, down 2%. First-half revenue rose 12% to $3.486B, while operating profit fell 11% to $771M.
- Embedded Processing: Q2 revenue fell 15% to $509M and operating profit fell 64% to $51M. First-half revenue declined 13% to $982M and operating profit declined 64% to $87M.
- Wireless: Q2 revenue fell 39% to $342M, with a $51M operating loss versus $82M profit. First-half revenue declined 41% to $715M and the segment had a $75M operating loss. Baseband revenue was $90M in Q2, down 61% year over year; TI expected substantially all baseband revenue to cease by year-end 2012.
- Other: Q2 revenue declined 4% to $684M and operating profit fell 32% to $161M. First-half revenue declined 8% to $1.273B and operating profit fell 56% to $212M. This segment includes acquisition and restructuring costs, among other items.
First-half gross profit declined mainly due to lower revenue and factory underutilization; underutilization expense was $216M, up $113M year over year. Q2 underutilization expense was about $105M. Q2 acquisition charges were $104M and restructuring charges $13M; first-half acquisition charges were $257M, plus $21M of acquisition-related cost in cost of revenue, and restructuring charges were $23M. Acquisition charges mainly included acquired-intangible amortization. TI estimated about $215M total cost for closing two older facilities, with $135M recognized through June 30 and remaining costs expected through 2013.
Outlook, commentary and risks
- Management expected Q3 revenue to be about even with Q2 and below the usual seasonal growth rate, citing increasing customer and distributor caution, slower orders in June and below-normal September backlog coverage. TI said it could support higher shipments if demand improved.
- Management expected Q3 EPS to be reduced by about $0.07 from acquisition and restructuring charges.
- For 2012, TI expected an effective tax rate of about 26% (excluding reinstatement of the expired federal research tax credit), R&D expense of $1.9B, capital expenditures of $0.7B and depreciation of $1.0B. It said resources were sufficient for business needs for at least 12 months.
- Management identified semiconductor demand and cyclicality, manufacturing utilization and fixed costs, customer and distributor inventory changes, product competition and execution, acquisition integration, supply availability, debt obligations, tax-law changes, foreign exchange, natural events and legal/product claims among relevant risks.
Unusual items and contingencies
- Japan earthquake-related business-interruption insurance proceeds totaled about $110M cumulatively through June 30, including about $75M in first-half 2012, recorded as revenue. TI could not estimate timing or amount of any further insurance proceeds.
- National-related employment reductions were expected to eliminate about 350 jobs by year-end 2012; approximately $3M of similar expense was expected in the remainder of 2012.
- TI disclosed legal and administrative proceedings but did not expect them to materially affect its financial condition, results or liquidity. Potential exposure under specified indemnities related to the former Sensors & Controls business was estimated not to exceed $200M; TI did not expect future payments to have a material effect.
Investor facts to verify
- Whether cautious ordering and below-normal September backlog coverage translated into Q3 revenue and margin performance.
- How quickly Wireless/baseband revenue ran off and whether Analog and Embedded Processing delivered the expected growth.
- The extent to which acquisition, restructuring and factory-underutilization costs affected reported versus ongoing profitability.
- Completion and use of proceeds of the $1.5B note offering, and subsequent debt, repurchase and liquidity levels.
- Actual restructuring costs and timing, and any additional Japan earthquake insurance recoveries.