Texas Instruments Incorporated — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial statements are unaudited. TI designs and manufactures semiconductors. Its reportable segments are Analog, Embedded Processing, and Other. TI is shifting focus toward Analog and Embedded Processing and winding down legacy wireless products.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $3.244B | $3.390B | $9.177B | $9.846B |
| Gross profit / margin | $1.779B / 54.8% | $1.740B / 51.3% | $4.724B / 51.5% | $4.922B / 50.0% |
| Operating profit / margin | $844M / 26.0% | $840M / 24.8% | $2.145B / 23.4% | $1.834B / 18.6% |
| Net income | $629M | $784M | $1.651B | $1.495B |
| Diluted EPS | $0.56 | $0.67 | $1.45 | $1.27 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2.185B | $2.329B |
Q3 revenue increased 6% sequentially but fell 4% year over year; revenue excluding legacy wireless products rose 10% sequentially (a company-defined non-GAAP measure). Q3 gross margin reached a company-record 54.8%. Management attributed the improvement mainly to product mix and lower factory underutilization expense, which was about $70M versus $150M a year earlier. For the first nine months, revenue fell 7%, while net income rose 10% and diluted EPS rose 14% year over year.
Q3 R&D expense was $368M, down 21% year over year, primarily reflecting the legacy wireless wind-down. SG&A was $465M, up 3%. Nine-month acquisition charges were $257M, mainly acquired-intangible amortization. The estimated 2013 annual effective tax rate was about 24%; nine-month tax expense included a $65M benefit from reinstatement of the federal research tax credit.
Segments and material changes
- Analog: Q3 revenue of $1.931B, up 5% year over year; operating profit of $583M, up 27%. Nine-month revenue was nearly flat at $5.325B, with operating profit up 5% to $1.298B.
- Embedded Processing: Q3 revenue of $668M, up 13%; operating profit of $83M, up 38%. Nine-month revenue rose 8% to $1.846B, while operating profit declined 2% to $144M.
- Other: Q3 revenue of $645M, down 33%, mainly from lower legacy wireless sales. Nine-month revenue fell 29% to $2.006B. Results include acquisition and restructuring items; segment profitability comparisons are affected by these items and by changed corporate expense allocations.
- Analog and Embedded Processing represented 80% of Q3 revenue, eight percentage points more than a year earlier. Legacy wireless products were below 2% of Q3 revenue.
Cash flow, balance sheet and capital returns
- Nine-month operating cash flow was $2.185B, versus $2.329B a year earlier. Capital expenditures were $305M, versus $399M. Trailing-12-month free cash flow, a non-GAAP measure, was $2.868B, or 24% of revenue, versus $2.747B a year earlier.
- At September 30, cash and cash equivalents were $1.435B and short-term investments were $2.158B, totaling approximately $3.593B; 82% was held by U.S. entities. Current assets were $8.101B and current liabilities $2.723B.
- Total debt was $5.161B, including $1.000B current and $4.161B long term. TI issued $1.0B of fixed-rate notes in May 2013 and used the net proceeds toward repayment of $1.5B of maturing debt. Its $2.0B revolving credit facility was undrawn; no commercial paper was outstanding.
- Nine-month financing cash outflow was $2.286B, including $849M of dividends and $2.134B of share repurchases. Over the trailing 12 months, TI returned $3.818B to shareholders, equal to 133% of free cash flow.
- TI announced a 7% quarterly dividend increase, from $0.28 to $0.30 per share, effective for the November 2013 payment. It stated a strategy of returning free cash flow not needed for debt repayment.
Outlook, unusual items and risks
- Book-to-bill was 0.97, which management said was consistent with an expected seasonal Q4 revenue decline. TI expected legacy wireless revenue to substantially cease by the end of 2013.
- The 2012 Wireless restructuring was expected to be substantially complete by year-end 2013, eliminate about 1,700 jobs, and reduce annualized expenses by about $450M. TI also expected its older Houston and Hiji manufacturing facility closures to be substantially complete in 2013.
- A $315M gain from transferring wireless connectivity technology to a customer was recognized in Q2 2013; it substantially affected nine-month Other results. Q3 2012 included a $144M gain from transferring part of a Japan pension obligation, contributing to year-over-year comparison effects.
- Management said it had resources to fund working capital, capital expenditures, dividends, debt payments, and other requirements for at least the next 12 months. It did not provide a numerical full-year revenue or earnings forecast in the supplied filing text.
- Disclosed risks include semiconductor demand cyclicality, competition, manufacturing utilization and fixed costs, customer and inventory forecast variability, technology and product execution, supply availability, foreign exchange, tax changes, intellectual property, and operational or cybersecurity disruptions. TI said pending legal and administrative matters were not expected to materially affect its financial condition, results, or liquidity. Potential remaining exposure under specified divestiture indemnities was estimated not to exceed $200M, with no material effect expected.
Important facts for investors to verify
- Whether the Q3 record gross margin and improved segment trends persist as demand and factory utilization change.
- Whether legacy wireless revenue exits as planned and restructuring delivers the projected expense reductions and completion timetable.
- The sustainability of free cash flow and shareholder returns relative to debt repayments, capital spending, and business conditions.
- The effect of one-time gains, tax benefits, and comparison-period pension items on reported earnings and segment performance.
- Potential developments in semiconductor demand, customer inventory, manufacturing costs, legal matters, and indemnification exposures.