Texas Instruments Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. TI designs, manufactures and sells semiconductors worldwide, with reportable segments Analog and Embedded Processing; “Other” includes DLP products, calculators and custom ASIC products. Unless noted, amounts are U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $3.239 billion | $3.668 billion | $6.568 billion | $7.262 billion |
| Gross profit | $2.082 billion | $2.360 billion | $4.170 billion | $4.621 billion |
| Gross margin | 64.3% | 64.3% | 63.5% | 63.6% |
| Operating profit | $1.228 billion | $1.506 billion | $2.472 billion | $2.885 billion |
| Operating margin | 37.9% | 41.1% | 37.6% | 39.7% |
| Net income | $1.380 billion | $1.305 billion | $2.554 billion | $2.522 billion |
| Diluted EPS | $1.48 | $1.36 | $2.72 | $2.63 |
- Cash flow: First-half operating cash flow was $2.571 billion, down from $2.903 billion. Capital expenditures were $291 million, compared with $535 million. Trailing-12-month operating cash flow was $6.317 billion and free cash flow (non-GAAP) was $5.714 billion, or 41.7% of revenue.
- Liquidity: At June 30, cash and cash equivalents were $4.294 billion and short-term investments were $666 million, totaling $4.960 billion. Total cash declined $427 million from year-end 2019. The $2 billion revolving credit facility was undrawn; no commercial paper was outstanding. Management said available resources and plans were sufficient for at least the next 12 months.
- Debt: Debt carrying value, including current maturities, was $6.796 billion, versus $5.803 billion at year-end 2019. TI issued $750 million of 1.375% notes due 2025 and $750 million of 1.75% notes due 2030, and repaid $500 million of maturing debt. Estimated debt fair value was $7.74 billion.
- Shareholder returns: First-half dividends paid were $1.664 billion and stock repurchases were $2.523 billion. Over the trailing 12 months, TI returned $6.7 billion through dividends and repurchases.
Changes versus prior periods
- Q2 revenue fell 12% year over year; first-half revenue fell 10%. Management attributed the Q2 decline primarily to automotive weakness, with lower Embedded Processing revenue and a smaller decline in Analog.
- Q2 Analog revenue decreased 4% to $2.434 billion; Embedded Processing fell 31% to $546 million; Other fell 25% to $259 million. Embedded Processing operating profit declined 53% to $125 million.
- Q2 gross margin held at 64.3%, but operating margin declined 3.2 percentage points. Operating expenses (R&D and SG&A) were lower, but lower revenue and a $24 million restructuring charge, compared with a $36 million prior-year credit, weighed on operating profit.
- Net income and EPS rose despite lower sales, largely because the tax line included a discrete benefit. The filing reports a $249 million benefit from settlement of a depreciation-related uncertain tax position and a reversal of $46 million accrued interest included in other income.
- First-half inventory increased $135 million to $2.136 billion; days of inventory rose to 166 from 144 at year-end. Receivables increased $102 million to $1.176 billion; days sales outstanding rose to 33 from 29.
Outlook, risks and unusual items
- Outlook: The filing provides no specific revenue or EPS guidance. Management said the pandemic’s duration and economic effects remain uncertain and it is cautious about the economy over the next few years.
- COVID-19: TI reported minimal impact on lead times and order fulfillment in the first half, but warned that local factory restrictions or other pandemic effects could constrain future supply. It said inventory and a broader, internally owned manufacturing footprint helped limit disruption but might not eliminate it.
- Tax and restructuring: The estimated annual operating tax rate was about 13%, excluding discrete items, versus 16% in 2019. The Q2 tax settlement benefit produced a tax benefit overall for the quarter. TI recorded $24 million of Embedded Processing severance and benefit charges in Q2; no payments had been made by June 30.
- Demand and operating risks: Management cited semiconductor demand, particularly in industrial and automotive markets; customer forecasts and inventory adjustments; factory utilization and fixed costs; competition; supply availability; trade and geopolitical conditions; cybersecurity; and product, legal, tax and regulatory matters.
- Contingencies: TI said it could not reasonably estimate future intellectual-property indemnification liabilities. It reported no material warranty or product-liability accruals or payments during the periods and did not expect proceedings to materially harm financial condition, results or liquidity.
Important facts for investors to verify
- Whether demand weakness, especially in automotive and Embedded Processing, continued after Q2 and how it affected revenue and factory utilization.
- Whether the $249 million tax benefit was nonrecurring and how subsequent effective tax rates compare with the stated approximately 13% annual operating rate.
- Whether inventory growth and longer inventory days reflected deliberate supply flexibility or changing customer demand and channel inventory.
- How debt issuance, cash balances, capital spending, dividends and repurchases affected liquidity and per-share performance.
- Whether pandemic-related factory, supply-chain or customer-demand disruptions emerged after the filing date; forward-looking statements were made as of the report date and TI undertook no obligation to update them.