Texas Instruments Incorporated — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. TI designs, manufactures and sells semiconductors globally. Its reportable segments are Analog and Embedded Processing; remaining activities are reported as Other. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3,429 | $3,501 | $9,811 | $9,776 |
| Gross profit | $1,997 | $2,044 | $5,694 | $5,532 |
| Gross margin | 58.2% | 58.4% | 58.1% | 56.6% |
| Operating profit | $1,164 | $1,175 | $3,132 | $2,847 |
| Operating margin | 33.9% | 33.6% | 31.9% | 29.1% |
| Net income | $798 | $826 | $2,150 | $1,996 |
| Diluted EPS | $0.76 | $0.76 | $2.02 | $1.81 |
Third-quarter revenue fell 2% year over year and net income declined about 3%; diluted EPS was unchanged. For the first nine months, revenue was approximately flat, while net income rose about 8% and diluted EPS about 12%. Q3 cost of revenue was $1,432; R&D was $316, SG&A $434, acquisition charges $83, and restructuring/other was zero.
Segments and material changes
- Analog: Q3 revenue of $2,182 (+2%); operating profit $812 (+1%). Nine-month revenue was $6,266 (+5%) and operating profit $2,261 (+15%). Management cited growth in High Volume Analog and Logic; year-to-date operating profit also benefited from higher revenue and gross profit.
- Embedded Processing: Q3 revenue of $725 (+2%) and operating profit of $174 (+53%). Nine-month revenue was $2,087 (+1%) and operating profit $432 (+60%), primarily reflecting lower operating expenses.
- Other: Q3 revenue of $522 (-19%) and operating profit of $178 (-31%); nine-month revenue of $1,458 (-15%) and operating profit $439 (-28%). Declines reflected lower custom ASIC and DLP revenue, and in Q3 lower calculator revenue as well.
For the first nine months, gross profit increased 3%, mainly from lower manufacturing costs. R&D and SG&A declined 7% and 5%, respectively, due to cost-alignment efforts, partly offset by higher compensation costs. Q3 gross margin eased slightly despite the benefit of the product portfolio and manufacturing efficiency, including 300-millimeter analog production.
Cash flow, liquidity and capital allocation
- Operating cash flow for the first nine months was $2,838, up from $2,620. Capital expenditures were $387, versus $260.
- Trailing-12-month free cash flow, a non-GAAP measure, was $3,598, up 4%; free cash flow was 28% of revenue versus 27% a year earlier. The filing defines it as operating cash flow less capital expenditures.
- At September 30, cash and cash equivalents were $1,133 and short-term investments $1,602, totaling about $2.74 billion. Combined cash and short-term investments had declined $806 since year-end 2014.
- Total debt including net unamortized premium was $4,132, including $1,000 current and $3,132 long-term. TI retired $1.0 billion of maturing debt and issued $500 million of 1.75% notes due 2020. Its $2 billion revolving facility was undrawn; no commercial paper was outstanding.
- Financing activities used $3,277 in the first nine months, including $1,058 in dividends and $2,114 in share repurchases. TI repurchased 39.7 million shares during that period.
- The quarterly dividend was raised 12% to $0.38 per share, payable November 16, 2015. The board authorized an additional $7.5 billion in buybacks; remaining authorization was $8.56 billion at quarter-end.
- Accounts receivable was $1,481; days sales outstanding were 39 versus 34 at year-end. Inventory was $1,771; inventory days were 111 versus 117 at year-end and 126 at Q2-end.
Outlook, commentary and risks
The filing provides no specific revenue or earnings guidance. Management said overall demand remained weak, although Q3 revenue was stronger than expected; Analog and Embedded Processing had each posted nine consecutive quarters of year-over-year growth. TI stated it expected its financial resources and operating plans to fund working capital, capital expenditures, dividends, debt payments and other needs for at least the next 12 months.
Management’s outlook depends on semiconductor demand, factory utilization and fixed-cost absorption, product and pricing competition, customer and distributor demand or inventory changes, supply and manufacturing capacity, technology execution, foreign exchange, tax developments, and other factors. The 2015 estimated annual effective tax rate was about 30%; it did not assume reinstatement of the federal research tax credit, which had expired at the end of 2014.
Acquisition charges were primarily noncash amortization of National Semiconductor-related intangibles: $83 in Q3 and $248 for the first nine months. There were no Q3 restructuring charges; prior-year comparisons included asset-sale gains, including $47 in the first nine months of 2014. TI reported $23 remaining in restructuring accruals at September 30. It said legal proceedings, product warranty and liability matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether weak overall demand persists, and whether growth in Analog and Embedded Processing offsets continued declines in Other.
- Whether margin and cash-flow performance is sustainable, including the effects of factory utilization, manufacturing costs and 300-millimeter production.
- How share repurchases, the higher dividend and future debt maturities affect liquidity and the balance sheet.
- The actual tax rate and any impact from changes to tax law, including the research tax credit.
- Potential outcomes of legal, warranty, indemnification and other contingencies; the filing does not quantify possible future losses.