Texas Instruments Inc. — Q1 2015 Form 10-Q
Business and period: Semiconductor designer, manufacturer and seller; quarter ended March 31, 2015. The interim financial statements are unaudited. Reportable segments are Analog and Embedded Processing, with remaining activities reported as Other.
Financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $3.150 billion | $2.983 billion |
| Gross profit / margin | $1.816 billion / 57.7% | $1.607 billion / about 53.9% |
| Operating profit / margin | $958 million / 30.4% | $690 million / 23.1% |
| Net income | $656 million | $487 million |
| Diluted EPS | $0.61 | $0.44 |
| Operating cash flow | $609 million | $462 million |
| Capital expenditures | $123 million | $77 million |
Q1 2015 operating cash flow less capital expenditures was $486 million (calculated from reported figures). Trailing-12-month free cash flow, a company-defined non-GAAP measure, was $3.608 billion, up 17% year over year, or 27% of revenue.
At March 31, cash and cash equivalents were $1.242 billion and short-term investments were $2.062 billion, totaling $3.304 billion. Total debt was approximately $4.638 billion, including $1.000 billion current and $3.638 billion long-term. The $2 billion revolving credit facility was undrawn; there was no commercial paper outstanding. Current assets were $7.692 billion versus current liabilities of $2.286 billion.
Changes and segment performance
- Revenue rose 6% year over year; Analog and Embedded Processing together represented 86% of revenue. Gross margin increased nearly four percentage points, reflecting higher revenue, improved factory loadings, portfolio characteristics and manufacturing efficiency.
- Analog revenue was $2.035 billion, up 11%; operating profit increased 45% to $721 million. Embedded Processing revenue was $672 million, up 2%; operating profit rose to $123 million from $52 million, primarily on lower operating expenses. Other revenue fell 10% to $443 million, and operating profit declined 19% to $114 million.
- R&D decreased 8% to $338 million and SG&A decreased 8% to $439 million, attributed to restructuring savings and other cost-alignment efforts. Acquisition charges remained $83 million, primarily ongoing National Semiconductor intangible amortization.
- Average diluted shares fell to 1.061 billion from 1.096 billion. Dividends declared per share increased to $0.34 from $0.30. TI repurchased 12.0 million shares for $670 million during the quarter.
Outlook, commentary and risks
Management reported strong automotive and industrial demand, but said Q1 revenue was in the lower half of its expected range because of weaker late-quarter demand in personal electronics—particularly PCs—and communications equipment, particularly wireless infrastructure, as well as euro weakness. TI expected continued weakness in those markets in Q2 2015 and no near-term foreign-exchange rebound. No specific Q2 revenue or EPS guidance is provided in the supplied filing text.
Management cited a strong balance sheet and said available resources and operating plans should fund working capital, capital expenditures, dividends, debt payments and other needs for at least 12 months. Its stated shareholder-return strategy is to return 100% of free cash flow plus equity-compensation exercise proceeds, less net debt retirement. Inventory was $1.844 billion, or 124 days, versus 117 days at year-end; management attributed the increase about equally to planned build-ahead of long-lived products and revenue landing in the lower half of expectations. The company reported $4.1 billion returned to shareholders over the trailing 12 months.
In April 2015, TI repaid $250 million of maturing debt and agreed to issue $500 million of debt, expected to fund repayment of maturing debt; the offering was expected to close May 6. The estimated 2015 annual effective tax rate was about 30%, excluding reinstatement of the federal research tax credit, which had expired at year-end 2014. Restructuring actions announced in 2014 were expected to finish by mid-2015; cumulative charges were $74 million, with no further material charges expected.
Risks identified include semiconductor demand and cyclicality, currency movements, competition and pricing, factory utilization and fixed costs, product development, supply and manufacturing constraints, customer or distributor inventory changes, taxes, intellectual property, legal/product claims, debt obligations, acquisition and restructuring execution, and information-technology breaches. TI said existing legal proceedings, warranty matters and indemnities were not expected to have a material adverse effect; no material warranty accruals or payments were reported for the periods presented.
Key facts for investors to verify
- Whether weakness in PCs and wireless infrastructure, together with euro movements, persisted into Q2 and affected reported demand.
- Whether inventory days and receivables (DSO rose to 40 from 34 at year-end) converted into sales and cash without adverse adjustments.
- Whether Analog and Embedded Processing growth and margin gains continued, and whether factory utilization supported margins.
- Cash deployment, including repurchases, dividends, planned debt issuance and repayment; also note that stated trailing-12-month shareholder returns and free-cash-flow figures are non-GAAP/company-reported measures.
- Tax-rate assumptions, restructuring completion and any changes to the risks or contingencies described in the filing.