Texas Instruments Incorporated — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise stated. TI designs and manufactures semiconductors. Its reportable segments are Analog and Embedded Processing; Other includes legacy wireless products and certain corporate and acquisition-related items. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $2.983 billion | $2.885 billion | +3% |
| Gross profit / margin | $1.607 billion / 53.9% | $1.374 billion / 47.6% | Margin +6.3 percentage points |
| Operating profit / margin | $690 million / 23.1% | $395 million / 13.7% | +75% |
| Net income | $487 million | $362 million | +35% |
| Diluted EPS | $0.44 | $0.32 | +$0.12 |
| Cash from operations | $462 million | $360 million | +$102 million |
| Capital expenditures | $77 million | $84 million | -$7 million |
| Free cash flow (non-GAAP) | $385 million | $276 million | +$109 million |
Gross-margin improvement reflected product mix, higher revenue, increased factory utilization and manufacturing efficiency. Underutilization reduced Q1 2014 results by $105 million. R&D expense declined 13% to $366 million, primarily due to the legacy wireless wind-down; SG&A rose 4% to $479 million, primarily from higher variable compensation.
Segments
- Analog: Revenue $1.837 billion, up 11%; operating profit $498 million versus $300 million. Revenue increased across all product lines.
- Embedded Processing: Revenue $656 million, up 17%; operating profit $52 million versus $7 million. All product lines grew, with Microcontrollers growing most.
- Other: Revenue $490 million, down 28%, mainly due to lower legacy wireless revenue; operating profit was $140 million versus $88 million. This result includes acquisition and restructuring-related items.
Legacy wireless revenue fell to $8 million from $210 million. Excluding it, revenue was $2.975 billion, up 11% (a non-GAAP comparison).
Liquidity, debt and shareholder returns
- At March 31, cash and cash equivalents were $1.565 billion and short-term investments were $2.467 billion, totaling $4.032 billion; 84% was held by U.S. entities.
- Total debt was approximately $5.652 billion, including $1.000 billion due in May 2014. TI issued $500 million of fixed-rate notes in March, with $498 million net proceeds expected to repay part of the maturing debt. The $2 billion revolving facility was undrawn; no commercial paper was outstanding.
- Q1 operating cash flow was $462 million; investing activities used $305 million and financing activities used $219 million. Cash and cash equivalents declined $62 million during the quarter.
- TI paid $325 million in dividends and repurchased $720 million of stock in Q1. The declared dividend was $0.30 per share, versus $0.21 a year earlier.
- For the trailing 12 months, free cash flow was $3.081 billion, up 8%, or 25% of revenue. TI reported $4.177 billion returned to shareholders over that period and a 99% return of its targeted amount; these are non-GAAP measures.
Material changes, outlook and notable items
- January 2014 restructuring actions in Embedded Processing and Japan target about 1,100 job eliminations. TI expects approximately $130 million in annualized savings by year-end 2014, with most savings expected in the second half; completion is expected by mid-2015. Total charges are expected to be about $85 million. $81 million had been recognized through March 31.
- Q1 restructuring charges and other items were a net credit of $11 million, including a $37 million gain on asset sales, partly offset by $26 million of restructuring charges. Management said the asset-sale gain increased EPS by about $0.02.
- TI reported an estimated 2014 annual effective tax rate of about 28%, excluding any reinstatement of the expired federal research tax credit. Q1 tax expense was $184 million versus $12 million in Q1 2013; the prior-year quarter included a $65 million discrete benefit from the credit’s retroactive reinstatement.
- Management described the quarter as a good start to the year and emphasized Analog and Embedded Processing as primary growth engines. It raised its free-cash-flow target to 20–30% of revenue from 20–25%. No specific revenue or EPS forecast for the next quarter is stated in the provided filing text.
- TI said its resources and operating plans should fund working capital, capital expenditures, dividends, debt payments and other requirements for at least the next 12 months. Inventory days were 112, within its stated 105–115-day model.
Risks and contingencies
Management highlighted semiconductor demand cyclicality, competition, product and technology execution, factory utilization and fixed costs, supply and manufacturing availability, customer and distributor demand or inventory changes, taxes, foreign exchange, intellectual property, product claims, debt obligations, restructuring and acquisition execution, and information-security breaches. TI noted that legal and administrative proceedings were not expected to have a material adverse effect. It estimated remaining potential exposure under specified indemnities related to its former Sensors & Controls business at no more than $200 million and did not expect future payments to materially affect its financial condition, results or liquidity. Product warranty and liability accruals or payments were not material in the periods presented.
Important facts for investors to verify
- Whether growth in Analog and Embedded Processing continues to offset the completed exit from legacy wireless products.
- Whether the expected restructuring savings are achieved on schedule and whether total charges remain near the approximately $85 million estimate.
- Repayment of the $1 billion debt maturity due May 15, 2014, and subsequent liquidity and debt levels.
- How factory utilization, inventory, and semiconductor-market conditions affect gross margins and cash generation.
- Tax-rate assumptions, including any change in tax law or the federal research tax credit, and the distinction between GAAP results and management’s non-GAAP measures.