Texas Instruments Inc. — Q2 2009 Form 10-Q
Reporting period: Quarter ended June 30, 2009; financial statements are unaudited. TI designs, manufactures and sells semiconductors globally, with Analog, Embedded Processing, Wireless and Other segments.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $2,457 | $3,351 | $4,542 | $6,623 |
| Gross profit | $1,124 | $1,749 | $1,929 | $3,505 |
| Gross margin | 45.7% | 52.2% | 42.5% | 52.9% |
| Operating profit | $343 | $833 | $353 | $1,640 |
| Operating margin | 14.0% | 24.9% | 7.8% | 24.8% |
| Net income | $260 | $588 | $277 | $1,251 |
| Diluted EPS | $0.20 | $0.44 | $0.22 | $0.93 |
- Q2 revenue declined 27% year over year but increased 18% sequentially from Q1. Net income rose from $17 million and diluted EPS from $0.01 in Q1 2009.
- Orders were $2.80 billion in Q2, down 19% year over year and up 27% sequentially. First-half orders were $4.99 billion, down 26%.
- Q2 restructuring expense was $85 million; first-half expense was $190 million. Q2 results included $13 million of net other income and a $96 million tax provision.
- Cash dividends declared were $0.11 per share in Q2, versus $0.10 a year earlier.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $808 million, versus $1.17 billion in 2008. Investing activities provided $505 million, including $1.27 billion of short-term investment sales and maturities; capital spending was $91 million and acquisitions used $155 million.
- Financing activities used $594 million: $280 million of dividends and $351 million of share repurchases. TI repurchased 20 million shares during the first half.
- At June 30, cash and cash equivalents were $1.765 billion and short-term investments were $792 million, totaling $2.557 billion. Total cash and short-term investments were $17 million higher than at year-end 2008.
- Current assets were $5.740 billion and current liabilities $1.468 billion. Total liabilities were $2.297 billion; the balance sheet does not separately identify a debt balance. The $1 billion U.S. and $175 million non-U.S. revolving facilities were unused.
- Accounts receivable increased to $1.244 billion from $913 million at year-end; days sales outstanding were 46, versus 33. Inventory fell to $1.063 billion from $1.375 billion; inventory days declined to 72 from 89.
Material changes and segment results
- Year-over-year declines were broad-based. In Q2, Analog revenue was $983 million (-24%), Embedded Processing $350 million (-20%), Wireless $601 million (-33%) and Other $523 million (-28%). All segments grew sequentially.
- Analog was the largest sequential growth driver, with revenue up 21%. TI reported early progress in High-Volume Analog & Logic. Q2 operating profit was $96 million.
- Wireless revenue was down 33% year over year; baseband revenue was $410 million, down 40% year over year but up 3% sequentially. The segment returned to operating profit of $58 million from a Q1 loss.
- Lower factory utilization reduced Q2 gross profit by about $100 million year over year; increased utilization contributed about $200 million to the sequential gross-profit increase. First-half lower utilization reduced gross profit by about $425 million year over year.
- R&D and SG&A declined 24% each year over year in Q2, reflecting employment reductions and cost controls. These savings did not offset the fall in gross profit and restructuring costs.
Outlook, management commentary and risks
- Management said revenue was beginning to track end demand after sharp inventory corrections in the prior two quarters, but noted that economic recovery could take time and visibility remained limited. Factories responded to an 18% sequential revenue increase; TI also reported reducing its own inventory and distributor inventory by about 10% during Q2.
- For 2009, TI expected an effective tax rate of about 27%, R&D expense of $1.5 billion, capital expenditures of $300 million and depreciation of $900 million. Management expected restructuring charges equivalent to about $0.01 per share in each of Q3 and Q4.
- Restructuring actions announced in 2008 and 2009 are expected to eliminate about 3,900 jobs, reduce annualized costs by more than $700 million and generate total charges of about $460 million through Q4 2009. About 3,800 jobs had been eliminated by June 30; the remaining restructuring accrual was $225 million.
- TI was shifting Wireless investment toward applications processors and connectivity, had stopped developing merchant baseband products, and expected substantially all custom baseband revenue to cease by the end of 2012. TI cited Analog and Embedded Processing as its primary growth engines.
- TI held $463 million of illiquid auction-rate securities classified as Level 3. Auctions had failed, limiting access to principal; management expected recovery and said the illiquidity would not materially impair funding needs. Securities were principally backed by U.S.-guaranteed student loans.
- Other risks include semiconductor demand and cyclicality, manufacturing utilization and fixed costs, customer concentration and inventory changes, competition and product execution, supply availability, foreign exchange, taxes and intellectual property. TI said routine legal proceedings were not expected to have a material adverse effect. Its indemnity for specified liabilities of former Sensors & Controls has a $300 million maximum exposure, subject to stated terms.
- TI stated it had sufficient resources for at least the next 12 months. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting.
Key investor verification points
- Check subsequent quarterly filings for demand, orders, margins and whether the Q2 sequential rebound persisted.
- Track restructuring charges, the remaining accrual, job reductions and delivery of stated annualized cost savings.
- Monitor auction-rate security liquidity, valuation assumptions and any realized impairment or redemption.
- Review Wireless baseband revenue decline and progress in applications processors and connectivity, including the expected wind-down timeline.
- Reconcile cash flow and working-capital movements, particularly receivables, inventory and cash available after dividends and repurchases.
- Follow unresolved U.S. tax audit matters; TI paid $90 million of agreed audit adjustments and $20 million of accrued interest in Q2, with other issues unresolved.