Texas Instruments Incorporated — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. TI designs and manufactures semiconductors. Effective January 1, 2013, it reported Analog, Embedded Processing and Other; prior-period segment data was recast to match.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $3.047B | $3.335B | $5.932B | $6.456B |
| Gross profit / margin | $1.570B / 51.5% | $1.651B / 49.5% | $2.944B / 49.6% | $3.182B / 49.3% |
| Operating profit / margin | $906M / 29.7% | $598M / 17.9% | $1.301B / 21.9% | $995M / 15.4% |
| Net income | $660M | $446M | $1.022B | $711M |
| Diluted EPS | $0.58 | $0.38 | $0.90 | $0.60 |
- Q2 revenue fell 9% year over year but rose 6% sequentially; revenue excluding legacy wireless grew 8% sequentially. First-half revenue declined 8% year over year, primarily due to legacy wireless.
- Q2 R&D was $389M, down 19% year over year as legacy wireless development wound down. SG&A was $471M, up 3%. First-half R&D fell 18% to $808M; SG&A was approximately flat at $931M.
- Q2 operating profit included a $315M gain from transferring wireless-connectivity technology. Restructuring charges of $33M partly offset the gain, producing a net $282M credit in restructuring charges/other. The filing says these items together benefited Q2 EPS by $0.16.
- Q2 segment revenue/profit: Analog $1.745B/$416M; Embedded Processing $618M/$54M; Other $684M/$436M. Other profit reflects the technology-transfer gain. Analog revenue was down 3% year over year; Embedded Processing revenue rose 7%, while Other revenue declined 28%, mainly from legacy wireless.
Cash flow, liquidity and debt
- First-half operating cash flow was $1.035B, versus $1.124B a year earlier. Capital expenditures were $182M, versus $249M. Trailing-12-month free cash flow, a non-GAAP measure, was $2.896B, up 10% year over year and 24% of revenue.
- At June 30, cash and cash equivalents were $1.180B and short-term investments $2.064B, totaling $3.244B. The $2B revolving credit facility was undrawn; no commercial paper was outstanding. Management said resources and plans were adequate for at least the next 12 months.
- Total debt was approximately $5.165B, including $1B current debt and $4.165B long-term debt. In May, TI issued $1B of fixed-rate notes due 2018 and 2023; proceeds helped repay $1.5B of maturing debt. Net debt, using cash and short-term investments, was approximately $1.9B.
- First-half dividends paid were $541M and share repurchases were $1.4B. Over the trailing 12 months, TI returned $3.571B to shareholders, or 123% of free cash flow, and declared Q2 dividends of $0.28 per share.
Changes, outlook and risks
- Management said Q2 revenue was as expected, backlog increased and visibility into the second half improved. Industrial and automotive demand contributed to sequential growth; Analog and Embedded Processing reached 78% of revenue. Legacy wireless was below 5% of Q2 revenue and expected to fall below 2% in Q3; TI expected that revenue to substantially cease by year-end 2013.
- The 2012 Wireless restructuring was expected to reduce annualized expenses by about $450M and eliminate approximately 1,700 jobs; the action and planned closures of older facilities were expected to be substantially complete in 2013. Management also cautioned that changes in corporate expense allocations would affect segment-level profitability through year-end, but not consolidated trends.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management cited semiconductor cyclicality, demand and inventory uncertainty, fixed manufacturing costs and utilization, competition, product development, supply availability, foreign exchange, tax changes, customer concentration, IP and legal matters, and debt obligations among risks.
- TI reported no material product warranty or product-liability accruals or payments and believed ongoing legal proceedings would not materially harm its financial condition, results or liquidity. Potential remaining exposure under specified indemnities related to the former Sensors & Controls business was estimated not to exceed $200M; management did not expect material impact.
Key facts for investors to verify
- How much of reported profit and EPS growth depended on the one-time $315M technology-transfer gain and the stated $0.16 per-share net benefit from unusual items.
- Whether legacy wireless revenue exited on the expected timetable and whether the restructuring delivers the projected annualized savings.
- Underlying demand, backlog conversion, factory utilization and inventory trends, including inventory days of 105 and the increase in days sales outstanding to 44.
- Cash generation, shareholder distributions relative to free cash flow, and the timing and terms of upcoming debt maturities.
- Segment trends under the revised reporting structure and the impact of corporate-cost reallocations on segment comparisons.