Texas Instruments Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Dollar amounts are in millions unless noted. The interim financial statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $3,232 | $3,292 | $6,382 | $6,275 |
| Gross profit | $1,881 | $1,881 | $3,697 | $3,488 |
| Gross margin | 58.2% | 57.1% | 57.9% | 55.6% |
| Operating profit | $1,010 | $982 | $1,968 | $1,672 |
| Operating margin | 31.3% | 29.8% | 30.8% | 26.6% |
| Net income | $696 | $683 | $1,352 | $1,170 |
| Diluted EPS | $0.65 | $0.62 | $1.26 | $1.06 |
Q2 revenue declined 2% year over year, while net income rose 2% and diluted EPS rose 5%. For the first half, revenue increased 2%, net income increased 16%, and diluted EPS increased 19%. Lower manufacturing costs helped lift gross profit and margins; lower R&D and SG&A also supported operating profit. Q2 acquisition charges were $82, primarily non-cash amortization of National Semiconductor acquisition intangibles.
Segments and operating trends
- Analog: Q2 revenue rose 3% to $2,049 and operating profit rose 10% to $728. For the first half, revenue grew 7% to $4,084 and operating profit grew 25% to $1,449.
- Embedded Processing: Q2 revenue decreased 2% to $690, while operating profit rose 30% to $135, mainly on lower operating expenses. First-half revenue was essentially flat at $1,362; operating profit increased 65% to $258.
- Other: Q2 revenue fell 17% to $493 and operating profit fell 31% to $147. First-half revenue decreased 14% to $936. Declines in custom ASIC and DLP revenue drove the weakness, partly offset by calculators.
Analog and Embedded Processing together represented 85% of Q2 revenue. Management cited notably weak communications-equipment demand and continued strong automotive demand. Analog recorded its eighth consecutive quarter of year-over-year growth.
Cash flow, liquidity, and debt
- First-half operating cash flow was $1,429, up from $1,237 a year earlier. Capital expenditures were $248, versus $157.
- Trailing-12-month free cash flow, a non-GAAP measure, was $3,608, up 13% year over year and 27% of revenue, versus 25% a year earlier.
- Cash and cash equivalents plus short-term investments totaled $3,306 at June 30, down $235 from year-end 2014. Inventory was $1,885; inventory days were 126, versus 117 at year-end. Days sales outstanding were 40, versus 34.
- Total debt including unamortized premium was $4,884, of which $1,750 was classified as current. The company issued $500 of 1.75% notes due 2020 and retired $250 of debt during the first half. Its $2 billion revolving credit facility was undrawn, with no commercial paper outstanding.
- First-half financing cash outflow was $1,428, including $710 of dividends and $1,324 of share repurchases. The company repurchased 23.8 million shares during the first half and declared dividends of $0.34 per share in Q2.
Management said resources and operating plans were sufficient to meet working capital, capital expenditure, dividend, debt, and other business needs for at least the next 12 months.
Outlook, commentary, and other matters
- Management expected the overall market in Q3 to be weaker year over year than it was in Q2; no specific Q3 revenue or EPS guidance was provided in the supplied filing text.
- Management described its strategy of returning 100% of free cash flow plus equity-compensation exercise proceeds, less net debt retirement, to shareholders. It cited manufacturing efficiency, including increased use of 300-millimeter wafers, as a long-term margin and cash-flow opportunity.
- The estimated 2015 annual effective tax rate was about 30%, excluding reinstatement of the federal research tax credit, which had expired at the end of 2014.
- Restructuring actions announced in 2014 were complete. The remaining restructuring accrual was $32 at June 30. First-half 2015 included $12 of U.S. defined-benefit plan settlement losses.
- On August 3, 2015, after quarter-end, the company retired $750 of debt that matured in August.
- The company reported no material product warranty or liability accruals or payments, and stated that pending legal and administrative proceedings were not expected to materially affect its financial condition, results, or liquidity. It noted that future indemnification liabilities could not be reasonably estimated.
- Principal disclosed risks include semiconductor demand and cyclicality, factory utilization and margins, competition and innovation, customer and distributor demand or inventory changes, supply and manufacturing constraints, foreign exchange, taxes, intellectual property, legal and product claims, debt service, acquisitions, and cybersecurity. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the anticipated Q3 year-over-year market weakness affected subsequent revenue, orders, and inventory.
- Whether Analog growth and lower manufacturing costs continued to support margins as demand and factory utilization changed.
- The cash-flow sustainability of shareholder returns, including repurchases and dividends, alongside debt repayments and capital spending.
- The impact of the August 2015 $750 debt retirement on liquidity and the current debt maturity profile.
- Future tax-rate effects, including the status of the research tax credit, and ongoing acquisition-intangible amortization and pension-related charges.