TEXAS INSTRUMENTS INC quarterly report, Q1 FY2013

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Texas Instruments Inc. — Q1 2013 Form 10-Q

Reporting period: Three months ended March 31, 2013. TI designs and manufactures semiconductors worldwide. Its reportable segments are Analog, Embedded Processing and Other. Effective January 1, 2013, TI eliminated its Wireless segment and recast prior-period segment results to reflect the new structure.

Financial performance and position

  • Revenue: $2.885 billion, down 8% year over year and 3% sequentially.
  • Profitability: Gross profit was $1.374 billion; gross margin was 47.6%, versus 49.0% a year earlier. Operating profit was $395 million (13.7% margin), roughly flat year over year. Net income was $362 million, versus $265 million; diluted EPS was $0.32, versus $0.22.
  • Cash flow: Operating cash flow was $360 million, down from $449 million. Capital expenditures were $84 million. Trailing-12-month free cash flow, a non-GAAP measure, was $2.848 billion, up 16% year over year and 23% of revenue.
  • Liquidity and debt: Cash and cash equivalents were $1.393 billion and short-term investments were $2.469 billion. Debt totaled approximately $5.683 billion, including $1.5 billion current and $4.183 billion long-term. The $2 billion revolving credit facility was undrawn; no commercial paper was outstanding.
  • Other balance-sheet measures: Total assets were $19.701 billion; inventory was $1.700 billion, or 101 days. TI returned $911 million to shareholders during the quarter through dividends and share repurchases.

Material changes and segment results

  • Revenue declined primarily because of lower sales of legacy wireless products. Gross profit also faced the nonrecurrence of approximately $65 million in business-interruption insurance proceeds received in the prior-year quarter.
  • Analog: Revenue of $1.648 billion, down 2%; operating profit of $300 million, down 10%.
  • Embedded Processing: Revenue of $561 million, up 4%; operating profit of $7 million, down from $35 million. Management cited higher manufacturing-related costs and, to a lesser extent, operating expenses.
  • Other: Revenue of $676 million, down 24%, primarily from lower legacy wireless sales. Operating profit was $88 million, compared with $27 million.
  • R&D fell 18% year over year to $419 million, reflecting the legacy wireless wind-down. Acquisition charges fell to $86 million from $153 million, mainly because prior-year integration-related compensation did not recur.

Outlook, commentary and risks

  • TI expects legacy wireless revenue to substantially cease by the end of 2013. Its restructuring action is expected to eliminate about 1,700 jobs, generate approximately $450 million in annualized expense reductions when complete, and be substantially complete by year-end 2013. The company had recognized $360 million in cumulative charges for this action by March 31.
  • TI identified Analog and Embedded Processing as its primary growth engines. Management said customers continued ordering in a real-time manner with minimal component inventory. No specific revenue or earnings guidance for the next quarter or full year is provided in the filing text.
  • Management said it expected sufficient resources to fund working capital, capital expenditures, dividends, debt payments and other needs for at least 12 months. It also announced a 33% dividend increase to $0.28 quarterly ($1.12 annualized) and an additional $5 billion share-repurchase authorization.
  • Tax provision was $12 million, including a $65 million discrete benefit from reinstatement of the federal research tax credit. The estimated 2013 effective tax rate was about 22%; the reported quarter’s tax benefit makes earnings comparisons less representative of recurring performance.
  • Key risks include semiconductor demand cyclicality, competition and pricing, factory utilization and fixed costs, customer and distributor inventory changes, supply and manufacturing execution, technology and product development, tax outcomes, and restructuring execution.
  • TI disclosed routine legal and administrative proceedings that it did not believe would materially affect its financial condition, results or liquidity. Potential exposure under specified indemnities related to its former Sensors & Controls business was estimated not to exceed $200 million; management did not expect future payments to have a material effect.
  • Subsequent event: On May 1, 2013, TI priced $1 billion of senior notes due 2018 and 2023, with proceeds expected to repay debt; closing was expected May 8.

Important facts for investors to verify

  1. Whether the legacy wireless exit proceeds on schedule and achieves the expected cost savings, and how much revenue remains as the product lines wind down.
  2. Whether weaker gross margin and Embedded Processing profitability reflect temporary manufacturing costs or a sustained trend.
  3. How much of the increase in net income reflects recurring operations versus the discrete tax benefit and other period-specific items.
  4. Cash generation, shareholder returns and debt repayment plans, including the terms and use of proceeds from the May 2013 notes offering.
  5. Segment comparisons use the recast reporting structure; the filing notes that changed corporate expense allocations affected segment-level profitability but not consolidated results.