Texas Instruments Incorporated — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. TI designs and manufactures semiconductors for global electronics customers, with Analog, Embedded Processing, Wireless and Other segments. Interim financial statements are unaudited.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $3.458B | $3.496B | $6.849B | $6.701B |
| Gross profit / margin | $1.753B / 50.7% | $1.894B / 54.2% | $3.480B / 50.8% | $3.583B / 53.5% |
| Operating profit / margin | $905M / 26.2% | $1.107B / 31.7% | $1.813B / 26.5% | $2.057B / 30.7% |
| Net income | $672M | $769M | $1.338B | $1.427B |
| Diluted EPS | $0.56 | $0.62 | $1.11 | $1.14 |
| Operating cash flow | — | $1.147B | $1.272B |
Q2 revenue was approximately flat year over year and up 2% sequentially. Gross margin and operating margin contracted year over year, reflecting Japan earthquake costs, lower factory utilization and lower revenue, alongside higher operating expenses. Q2 orders were $3.60B, down 3% year over year and approximately flat sequentially.
Balance sheet, cash flow and capital allocation
- At June 30, cash and cash equivalents were $4.501B and short-term investments were $1.899B; total cash and short-term investments were $6.40B. Current assets were $10.860B and current liabilities $1.753B.
- Long-term debt was $3.498B, issued in May to help fund the pending National Semiconductor acquisition. The floating-rate $1.0B portion was swapped to a fixed 0.922% rate. The $2.5B fixed-rate portion must be redeemed at 101% of principal plus accrued interest if the acquisition fails to close by April 30, 2012, or is terminated.
- Six-month capital expenditures were $470M; investing activities used $481M. Financing activities provided $2.516B, including debt proceeds; TI repurchased $1.223B of shares and paid $303M in dividends.
- Inventory rose $242M from year-end to $1.762B; days of inventory increased from 83 to 93. Receivables were $1.672B, with days sales outstanding of 44 versus 39 at year-end.
Segment trends and material changes
- Analog: Q2 revenue $1.588B, up 5% year over year and 3% sequentially; operating profit $446M. Six-month revenue grew 8% to $3.123B.
- Embedded Processing: Q2 revenue $596M, up 16% year over year and 12% sequentially; operating profit rose 23% year over year to $141M. Six-month revenue increased 18% to $1.129B.
- Wireless: Q2 revenue fell 23% year over year to $558M, primarily from lower baseband shipments to a large customer; operating profit declined 50% to $82M. Six-month revenue fell 16%. TI said substantially all baseband revenue, which was $1.7B in 2010, was expected to cease by the end of 2012.
- Other: Q2 revenue was $716M, down 3% year over year; operating profit was $236M versus $355M. Results included about $50M of Japan earthquake costs and $13M of National acquisition costs.
Outlook, management commentary and risks
- Management expected Q3 growth and planned for modest sequential growth, while warning of a broader-than-normal range of outcomes given mixed market signals. Computing and consumer demand appeared subdued, while Asian distributor resales, Japanese customer demand and backlog were improving. TI said it was prepared to support stronger demand.
- For 2011, TI estimated an effective tax rate of about 27%, R&D expense of $1.7B, capital expenditures of $0.9B and depreciation of $0.9B. Management said available resources should cover operating and other business needs for at least 12 months.
- The National acquisition was valued at approximately $6.5B ($25 per share); TI expected closing in the second half of 2011, subject to remaining regulatory approval in China. In July, TI issued $1.2B of commercial paper supported by revolving credit facilities. Failure to obtain the remaining approval could trigger a $350M reverse termination fee and redemption of the fixed-rate debt.
- The Japan earthquake caused about $80M of first-half expenses, net of ongoing insurance claims. Production loadings were nearly back to full capacity by mid-June, but shipments lag production by several months. Final losses could exceed insurance limits; the amount and timing of insurance proceeds were not estimable, and no business-interruption or lost-profit proceeds had been recognized.
- Other key exposures include semiconductor demand and industry cyclicality, factory utilization and fixed costs, dependence on a large Wireless customer, inventory risk, acquisition execution and debt obligations. TI stated that legal proceedings were not expected to have a material adverse effect. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether and when the National acquisition closes, its final funding mix, and any associated termination fee or debt redemption obligations.
- The eventual total cost of the Japan earthquake, insurance recoveries, and any remaining production or shipment effects.
- Whether Q3 demand and orders support management’s modest-growth expectation, particularly across computing, consumer and Wireless markets.
- Wireless baseband revenue runoff, customer concentration, and the pace of growth and profitability in Analog and Embedded Processing.
- Inventory normalization, manufacturing utilization, gross-margin recovery, and the company’s capacity to service its newly issued debt.