Texas Instruments Incorporated — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. TI designs and manufactures semiconductors. Its reportable segments are Analog, Embedded Processing and Other. All financial amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $3,292 | $3,047 | $6,275 | $5,932 |
| Gross profit | $1,881 | $1,570 | $3,488 | $2,944 |
| Gross margin | 57.1% | 51.5% | 55.6% | 49.6% |
| Operating profit | $982 | $906 | $1,672 | $1,301 |
| Operating margin | 29.8% | 29.7% | 26.6% | 21.9% |
| Net income | $683 | $660 | $1,170 | $1,022 |
| Diluted EPS | $0.62 | $0.58 | $1.06 | $0.90 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,237 | $1,035 |
- Q2 revenue rose 8% year over year; excluding legacy wireless products, revenue grew 13% (non-GAAP). Management said revenue was just above the middle of its expected range and earnings near the top.
- Q2 gross margin reached a company record of 57.1%. Management attributed the improvement to higher revenue, better manufacturing costs and utilization, and favorable product mix. Underutilization expense was about $55, versus $100 a year earlier.
- Six-month free cash flow was not separately stated. For the trailing 12 months, non-GAAP free cash flow was $3,199, up 10%, or 25% of revenue; cash from operations was $3,587 and capital expenditures were $388.
- Q2 segment revenue and operating profit: Analog $1,995 and $664; Embedded Processing $703 and $104; Other $594 and $214. Analog and Embedded Processing together represented 82% of quarterly revenue.
Balance sheet, liquidity and capital returns
- At June 30, cash and cash equivalents were $1,216 and short-term investments were $1,588, totaling $2,804. TI said 82% of total cash and short-term investments was held by U.S. entities.
- Total debt was approximately $4,648, comprising $254 current and $4,394 long-term; cash and short-term investments therefore imply net debt of about $1,844. The $2 billion revolving credit facility was undrawn, with no commercial paper outstanding.
- Current assets were $7,456 and current liabilities $1,803. Inventory was $1,744; inventory days were 111, within management’s 105–115-day target. Receivables were $1,527 and days sales outstanding were 42.
- For the first six months, TI paid $648 in dividends and repurchased $1,463 of stock. Dividends declared were $0.30 per share for Q2, versus $0.28 a year earlier.
- Management stated that available resources and operating plans should fund working capital, capital expenditures, dividends, debt payments and other requirements for at least 12 months.
Changes from the prior comparable period
- Six-month revenue rose 6%, while net income increased 14% and diluted EPS rose from $0.90 to $1.06. Higher Analog and Embedded Processing sales more than offset falling legacy wireless revenue.
- Six-month Analog revenue grew 13% and Embedded Processing revenue 15%; their operating profits increased to $1,162 and $156, respectively. Other revenue declined 20% as legacy wireless sales fell.
- Operating improvement also reflected lower underutilization expense: about $160 for the first six months, compared with $250 in 2013.
- Comparisons in Other were affected by a $315 technology-transfer gain recognized in Q2 2013; that gain did not recur. The 2014 first-half restructuring/other credit included $39 of asset-sale gains, compared with a $267 net credit in the 2013 period, which included the technology-transfer gain.
- The 2013 first-quarter tax provision benefited from a $65 discrete research-credit benefit. The credit expired at the end of 2013; TI’s estimated 2014 annual effective tax rate was about 28%.
Outlook, management commentary and risks
- TI expects Analog and Embedded Processing to be its principal growth engines. It expects about $130 in annualized savings by the end of 2014 from restructuring actions, including elimination of about 1,100 jobs; the actions are expected to finish by mid-2015.
- Management’s stated target for trailing free-cash-flow margin is 20%–30%; the reported 25% was within that range. TI said it had returned $4.2 billion to shareholders over the trailing 12 months through dividends and repurchases.
- The filing gives no specific forward revenue or EPS guidance. Semiconductor demand and pricing are cyclical; TI also highlights fixed manufacturing costs and utilization, competition, product development, customer and distributor demand or inventory changes, supply availability, taxes, foreign exchange, intellectual property, product claims, acquisitions/restructuring execution, debt service and information-technology security as risks.
- Other items: TI recognized $30 from the sale of its Nice, France site in Q1 and a further $9 of asset-sale gains year to date, including $2 in Q2. It reported no material product warranty or product-liability accruals or payments, and said pending legal matters were not expected to materially affect its financial condition, results or liquidity. Potential exposure under specified indemnities related to its former Sensors & Controls business was not expected to exceed $200.
Important facts for investors to verify
- Whether growth and record gross margin persist, particularly in Analog and Embedded Processing, and how manufacturing utilization and product mix evolve.
- The continuing decline and remaining contribution of legacy wireless products, and the effect of the nonrecurring 2013 technology-transfer gain on comparisons.
- Delivery and timing of the announced restructuring savings and completion of the actions by mid-2015.
- Cash deployment, debt maturities and repayment plans, and the sustainability of dividends and share repurchases relative to free cash flow.
- Tax-rate assumptions, including the expired federal research tax credit, and any changes to the legal, indemnity or other contingencies discussed in the filing.