Texas Instruments Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. TI designs and manufactures semiconductors, principally in its Analog and Embedded Processing segments.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $4.531B | $5.212B | $8.910B | $10.117B |
| Gross profit | $2.910B | $3.625B | $5.773B | $7.067B |
| Gross margin | 64.2% | 69.6% | 64.8% | 69.9% |
| Operating profit | $1.972B | $2.723B | $3.906B | $5.286B |
| Net income | $1.722B | $2.291B | $3.430B | $4.492B |
| Diluted EPS | $1.87 | $2.45 | $3.72 | $4.80 |
| Operating cash flow | — | $2.559B | $3.912B | |
| Capital expenditures | — | $2.428B | $1.040B |
Q2 revenue fell 13% year over year, while net income declined 25% and diluted EPS declined 24%. Operating margin was 43.5%, versus 52.2% a year earlier. Higher manufacturing costs from planned capacity expansion and lower revenue reduced gross profit and margins. Operating expenses rose to $938 million from $836 million, primarily due to higher employee-related costs. Other income was $119 million in Q2, mainly reflecting higher interest income; interest and debt expense increased to $89 million from $49 million.
- Segments, Q2 year over year: Analog revenue declined 18% to $3.278B and operating profit fell 34% to $1.463B. Embedded Processing revenue increased 9% to $894M, while operating profit decreased 2% to $318M. Other revenue declined 10% to $359M; operating profit rose 10% to $191M.
- Liquidity and debt: Cash and cash equivalents plus short-term investments totaled $9.552B at June 30. Total debt was $11.219B, including $299M current and $10.920B long-term. TI issued $3.0B of long-term debt and repaid $500M during the first half. Its $1B revolving credit facility was undrawn, with no commercial paper outstanding.
- Cash returns: First-half dividends paid were $2.250B; share repurchases were $182M, versus $1.771B in the comparable 2022 period.
Material changes and management commentary
Management reported weakness across end markets except automotive. Q2 revenue increased 3% sequentially but declined year over year, chiefly because of lower Analog sales; Embedded Processing grew. Inventory reached $3.729B, up $972M from year-end 2022; days of inventory rose to 207 from 157. Management said cash used for working capital increased as TI strategically built inventory.
For the trailing 12 months ended June 30, operating cash flow was $7.367B and free cash flow (a non-GAAP measure, defined as operating cash flow less capital expenditures) was $3.182B, or 16.9% of revenue. Free cash flow was down 46% from the comparable trailing period, reflecting higher capital expenditures. TI stated that capital expenditures are expected to remain above historical levels as it invests in manufacturing capacity and technology. Management believes available resources and operating plans are sufficient for needs over at least the next 12 months.
TI reported a $921M U.S. CHIPS and Science Act investment tax credit asset in other long-term assets, up from $395M at December 31, 2022, and expects cash benefits for qualifying capital expenditures in future periods. The filing does not provide a specific revenue or earnings forecast.
Risks, contingencies, and unusual items
- Management cited risks including semiconductor demand and customer inventory adjustments, competition and pricing, manufacturing utilization and execution of capacity investments, supply and equipment availability, cybersecurity, trade and geopolitical conditions, key customer or distributor changes, taxes, and intellectual-property or product-liability claims.
- TI said routine indemnification, warranty, and legal proceedings are not expected to have a material adverse effect; no material warranty or product-liability accruals or payments were reported for the periods presented.
- Q2 2022 included $66M of Lehi, Utah, preproduction costs in restructuring charges/other; the first half of 2022 included $132M. These costs shifted primarily to cost of revenue after production began in December 2022. Q2 and first-half 2023 reported no restructuring charges/other.
- TI stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether end-market demand, especially outside automotive, stabilizes and whether Analog revenue recovers.
- Assess inventory levels and days of inventory against customer demand and subsequent shipments.
- Monitor factory loading, manufacturing-cost trends, margins, and returns on elevated capital spending.
- Verify timing and realization of CHIPS Act investment tax-credit benefits and the cash-flow impact of qualifying investment.
- Review debt maturities, interest expense, and capital returns alongside cash and short-term investment balances.