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TXN > SEC Filings for TXN > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for TEXAS INSTRUMENTS INC

Form 10-Q for TEXAS INSTRUMENTS INC


2-May-2014

Quarterly Report


ITEM 2. Management's discussion and analysis of financial condition and results
of operations

The following should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. All dollar amounts in the tables in this discussion are stated in millions of U.S. dollars, except per-share amounts.

Overview
We design and make semiconductors that we sell to electronics designers and manufacturers all over the world. We began operations in 1930. We are incorporated in Delaware, headquartered in Dallas, Texas, and have design, manufacturing or sales operations in 35 countries. We have three segments:
Analog, Embedded Processing and Other. We expect Analog and Embedded Processing to be our primary growth engines in the years ahead, and we therefore focus our resources on these segments.
Product information
Semiconductors are electronic components that serve as the building blocks inside modern electronic systems and equipment. Semiconductors come in two basic forms: individual transistors and integrated circuits (generally known as "chips") that combine multiple transistors on a single piece of material to form a complete electronic circuit. Our products, more than 100,000 orderable parts, are integrated circuits that are used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution. This broad portfolio includes products that are integral to almost all electronic equipment.
We sell catalog and application-specific standard semiconductor products, both of which we market to multiple customers. Catalog products are designed for use by many customers and/or many applications and are sold through both distribution and direct channels. The vast majority of our catalog products are differentiated. We also sell catalog commodity products, but they account for a small percentage of our revenue. The life cycles of catalog products generally span multiple years, with some products continuing to sell for decades after their initial release. Application-specific standard products (ASSPs) are designed for use by a smaller number of customers and are targeted to a specific application. The life cycles of ASSPs are generally determined by end-equipment upgrade cycles and can be as short as 12 to 24 months, although some can be used across multiple generations of customers' products.
Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels, and how management allocates resources and measures results. Additional information regarding each segment's products follows.
Analog
Analog semiconductors change real-world signals - such as sound, temperature, pressure or images - by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors. Analog semiconductors are also used to manage power in every electronic device, whether plugged into a wall or running off a battery. We estimate that we sell our Analog products to more than 100,000 customers. Our Analog products are used in many markets, particularly personal electronics and industrial.
Sales of our Analog products generated about 60 percent of our revenue in 2013. According to external sources, the worldwide market for analog semiconductors was about $40 billion in 2013. Our Analog segment's revenue in 2013 was $7.2 billion, or about 18 percent of this fragmented market, the leading position. We believe that we are well positioned to increase our market share over time. Our Analog segment includes the following major product lines: High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA).
HVAL products: These include high-volume integrated analog products for specific applications and high-volume catalog products. HVAL products support applications like automotive safety devices, touch screen controllers, low voltage motor drivers and integrated motor controllers.
Power products: These include both catalog products and ASSPs that help customers manage power in electronic systems. Our broad portfolio of Power products is designed to enhance the efficiency of powered devices using battery management solutions, portable power conversion devices, power supply controls and point-of-load products.


HPA products: These include catalog analog products that we market to many different customers who use them in manufacturing a wide range of products. HPA products include high-speed data converters, amplifiers, sensors, high reliability products, interface products and precision analog products that are typically used in systems that require high performance. HPA products generally have long life cycles, often more than 10 years.
SVA products: These include a broad portfolio of power management, data converter, interface and operational amplifier catalog analog products used in manufacturing a wide range of products. SVA products support applications like video and data interface products, electrical fault/arc detection systems and mobile lighting and display systems. SVA products generally have long life cycles, often more than 10 years. SVA consists primarily of products that we acquired through our purchase of National Semiconductor Corporation (National) in 2011.
Embedded Processing
Embedded Processing products are the "brains" of many electronic devices. Embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. The devices vary from simple, low-cost products used in electric toothbrushes to highly specialized, complex devices used in communications infrastructure equipment. Our Embedded Processing products are used in many markets, particularly industrial and automotive.
An important characteristic of our Embedded Processing products is that our customers often invest their own research and development (R&D) to write software that operates on our products. This investment tends to increase the length of our customer relationships because many customers prefer to re-use software from one product generation to the next.
Sales of Embedded Processing products generated about 20 percent of our revenue in 2013. According to external sources, the worldwide market for embedded processors was about $17 billion in 2013. Our Embedded Processing segment's revenue in 2013 was $2.4 billion. This was the number two position and represented about 14 percent of this fragmented market. We believe we are well positioned to increase our market share over time.
Our Embedded Processing segment includes the following major product lines:
Processors, Microcontrollers and Connectivity.
Processor products: These include digital signal processors (DSPs) and applications processors. DSPs perform mathematical computations almost instantaneously to process or improve digital data. Applications processors are typically tailored for a specific class of applications such as communications infrastructure, automotive (infotainment and advanced driver assistance systems) and broad industrial applications.
Microcontroller products: Microcontrollers are self-contained systems with a processor core, memory and peripherals that are designed to control a set of specific tasks for electronic equipment. Microcontrollers tend to have minimal requirements for memory and program length, with no operating system and low software complexity. Analog components that control or interface with sensors and other systems are often integrated into microcontrollers. Connectivity products: Connectivity products enable electronic devices to seamlessly connect and transfer data, and the requirements for speed, data capability, distance and power vary depending on the application. Our Connectivity products support many wireless technologies to meet these requirements, including low-power wireless network standards like Zigbee® and other technologies like Bluetooth®, WiFi and GPS. Our Connectivity products are usually designed into customer devices alongside our processor and microcontroller products, enabling data to be collected, transmitted and acted upon.
Other
Other includes revenue from our smaller product lines, such as DLP® (primarily used in projectors to create high-definition images), certain custom semiconductors known as application-specific integrated circuits (ASICs) and calculators. It includes royalties received for our patented technology that we license to other electronics companies and revenue from transitional supply agreements related to acquisitions and divestitures. We also include revenue from our baseband products and from our OMAPTM applications processors and connectivity products sold into smartphones and consumer tablets, all of which are product lines that we previously announced we are exiting and are collectively referred to as "legacy wireless products." Revenue from legacy wireless products declined throughout 2013, and our exit from these products is complete. Other generated $2.6 billion of revenue in 2013.
We also include in Other restructuring charges and certain acquisition-related charges, as these charges are not used in evaluating the results of or in allocating resources to our segments. Acquisition-related charges include certain fair-value adjustments, restructuring charges, transaction expenses, acquisition-related retention bonuses and amortization of intangible assets. Other also includes certain corporate-level items, such as litigation expenses, environmental costs, insurance proceeds,


and assets and liabilities associated with our centralized operations, such as our worldwide manufacturing, facilities and procurement operations. Product cycle
The global semiconductor market is characterized by constant, though generally incremental, advances in product designs and manufacturing processes. Semiconductor prices and manufacturing costs tend to decline over time as manufacturing processes and product life cycles mature. Market cycle
The "semiconductor cycle" is an important concept that refers to the ebb and flow of supply and demand. The semiconductor market historically has been characterized by periods of tight supply caused by strengthening demand and/or insufficient manufacturing capacity, followed by periods of surplus inventory caused by weakening demand and/or excess manufacturing capacity. These are typically referred to as upturns and downturns in the semiconductor cycle. The semiconductor cycle is affected by the significant time and money required to build and maintain semiconductor manufacturing facilities. Seasonality
Our revenue is subject to some seasonal variation. Our semiconductor revenue tends to be weaker in the first and fourth quarters when compared to the second and third quarters. Calculator revenue is tied to the U.S. back-to-school season and is therefore at its highest in the second and third quarters. Manufacturing
Semiconductor manufacturing begins with a sequence of photo-lithographic and chemical processing steps that fabricate a number of semiconductor devices on a thin silicon wafer. Each device on the wafer is tested, the wafer is cut into individual units and each unit is assembled into a package that then is usually retested. The entire process takes place in highly specialized facilities and requires an average of 12 weeks, with most products completing within 8 to 16 weeks.
The cost and lifespan of the equipment and processes we use to manufacture semiconductors vary by technology. Our Analog products and most of our Embedded Processing products can be manufactured using mature and stable, and therefore less expensive, equipment than is needed for manufacturing advanced logic products, such as some of our processor products.
We own and operate semiconductor manufacturing facilities in North America, Asia, Japan and Europe. These include both wafer fabrication and assembly/test facilities. Our facilities require substantial investment to construct and are largely fixed-cost assets once in operation. Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed. In general, these fixed costs do not decline with reductions in customer demand or utilization of capacity, potentially lowering our profit margins. Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over increased output, potentially benefiting our profit margins. We expect to maintain sufficient internal manufacturing capacity to meet the vast majority of our production needs. To supplement our manufacturing capacity and maximize our responsiveness to customer demand and return on capital, we utilize the capacity of outside suppliers, commonly known as foundries, and subcontractors. In 2013, we sourced about 20 percent of our total wafers from external foundries and about 35 percent of our assembly/test services from subcontractors.
In 2013, we closed older wafer fabrication facilities in Hiji, Japan, and Houston, Texas. In December 2013, we acquired an assembly/test facility in the Hi-Tech Zone of Chengdu, China, adjacent to our existing fabrication facility in Chengdu.
Inventory
Our inventory practices differ by product, but we generally maintain inventory levels that are consistent with our expectations of customer demand. Because of the longer product life cycles of catalog products and their inherently lower risk of obsolescence, we generally carry more inventory of those products than application-specific products. Additionally, we sometimes maintain product inventory in unfinished wafer form, as well as higher finished-goods inventory of low-volume catalog products, allowing greater flexibility in periods of high demand. We also have consignment inventory programs in place for our largest customers and some distributors.


Tax considerations
We operate in a number of tax jurisdictions and are subject to several types of taxes including those that are based on income, capital, property and payroll, as well as sales and other transactional taxes. The timing of the final determination of our tax liabilities varies by jurisdiction and taxing authority. As a result, during any particular reporting period we may reflect in our financial statements one or more tax refunds or assessments, or changes to tax liabilities, involving one or more taxing authorities. First-Quarter 2014 results
Our first-quarter revenue was $2.98 billion, net income was $487 million and earnings per share (EPS) were 44 cents. Results include a gain of $37 million, which increased earnings by 2 cents per share, for sales of a site and other assets associated with previously announced restructuring actions.

Revenue and earnings for the quarter marked a good start to the year.

We delivered 3 percent year-over-year revenue growth, or 11 percent when legacy wireless revenue is excluded. Analog and Embedded Processing comprised 84 percent of first-quarter revenue.

Gross margin of 53.9 percent remained strong and reflects the quality of our Analog and Embedded Processing portfolio and the efficiency of our manufacturing strategy.

Our business model continues to generate strong cash flow from operations. Free cash flow for the trailing twelve-month period was up 8 percent to $3.1 billion, or 25 percent of revenue when compared with the year-ago trailing twelve-month period. This is consistent with our target of 20-30 percent, which we increased in the first quarter from our prior target of 20-25 percent. We returned $4.2 billion to shareholders in the past twelve months through dividends paid and stock repurchases. Our strategy to return to shareholders all free cash flow not needed for debt repayment, and to return proceeds from exercises of equity compensation, reflects our confidence in the long-term sustainability of our business model. In the past twelve months, we returned 99 percent of this targeted amount.

Our balance sheet remains strong, with $4.0 billion of cash and short-term investments at the end of the quarter, 84 percent of which was owned by the company's U.S. entities. Inventory days were 112, consistent with our model of 105-115 days.

Revenue excluding legacy wireless and free cash flow are non-GAAP financial measures. Free cash flow is Cash flow from operations less Capital expenditures. For reconciliations to GAAP and an explanation for the purpose of providing these non-GAAP measures, see the Non-GAAP financial information section after the Liquidity and capital resources section.


                       Summary of Selected Financial Data
                (Millions of dollars, except per-share amounts)

                                                For Three Months Ended
                                               March 31,          March 31,
                                                 2014               2013

Revenue                                    $     2,983          $    2,885
Gross profit                                     1,607               1,374
Research and development (R&D)                     366                 419
Selling, general and administrative (SG&A)         479                 459
Acquisition charges                                 83                  86
Restructuring charges/other                        (11 )                15
Operating profit                                   690                 395

Net income                                 $       487          $      362

Diluted earnings per common share          $       .44          $      .32

Percentage of revenue:
Gross profit                                      53.9    %           47.6 %
R&D                                               12.3    %           14.5 %
SG&A                                              16.1    %           15.9 %
Operating profit                                  23.1    %           13.7 %

Our exit from legacy wireless products and the elimination (effective January 1, 2013) of the Wireless segment resulted in changes to our corporate-level expense allocations, which negatively affected segment-level profitability in the year ended December 31, 2013. We expect a similar, although less significant, effect through the end of 2014. We allocate our corporate-level expenses, which are largely fixed, among our product lines in proportion to the operating expenses directly generated by them. Because we stopped investing in legacy wireless products, the corporate-level expenses allocated to them were proportionately lower, and the corporate-level expenses allocated to the remaining product lines were proportionately higher. This allocation change affects the profitability of each of our segments, but does not impact operating expense or profitability trends at the consolidated level.

Throughout the following discussion of our results of operations, unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are evidenced by fluctuations in shipment volumes. New products tend not to have a significant impact on our results in any given period because our revenue is derived from such a large number of products. From time to time, our revenue and gross profit are affected by changes in demand for higher-priced or lower-priced products, which we refer to as changes in the "mix" of products shipped.
Details of financial results
Revenue for the first quarter of 2014 was $2.98 billion, an increase of $98 million, or 3 percent, from the year-ago quarter as higher revenue from Analog and Embedded Processing more than offset lower revenue from legacy wireless products.

Gross profit for the first quarter of 2014 was $1.61 billion, or 53.9 percent of revenue, an increase of $233 million, or 17 percent, from the year-ago quarter primarily due to, in decreasing order, a more favorable mix of products shipped, higher revenue, higher utilization of our manufacturing assets and the efficiency of our manufacturing operations. The impact of underutilization in the first quarter of 2014 was $105 million.

Operating expenses for the first quarter of 2014 were $366 million for R&D and $479 million for SG&A. R&D expense decreased $53 million, or 13 percent, from the year-ago quarter, primarily due to reductions from the wind-down of our legacy wireless products. SG&A expense increased $20 million, or 4 percent, compared with the year-ago quarter primarily due to higher variable compensation costs.


In the first quarter of 2014, we recorded in Other $83 million of Acquisition charges associated with our acquisition in 2011 of National, compared with $86 million in the year-ago quarter. These Acquisition charges are from the ongoing amortization of intangible assets. See Note 2 to the financial statements for detailed information.

Restructuring charges/other for the first quarter of 2014 was a net credit of $11 million. This represents a gain of $37 million from sales of a site and other assets associated with previously announced restructuring actions, partially offset by net restructuring charges of $26 million. Restructuring charges/other in the year-ago quarter were $15 million. All of these charges and credits are included in Other. For details on restructuring actions, see the Restructuring actions section of this MD&A and Note 3 to the financial statements for detailed information.

For the first quarter of 2014, our operating profit was $690 million, or 23.1 percent of revenue, an increase of $295 million, or 75 percent, from the year-ago quarter.

Interest and debt expense was $25 million, about even with the year-ago quarter. See Note 8 to the financial statements for details regarding debt outstanding.

Quarterly income taxes are calculated using the estimated annual effective tax rate. As of March 31, 2014, our estimated annual effective tax rate for 2014 is about 28 percent. The tax rate is based on current tax law and does not include the effect of the federal research tax credit, which expired at the end of 2013. Our annual effective tax rate benefits from lower tax rates (as compared with the U.S. statutory rate) applicable to our operations in many of the jurisdictions in which we operate and from U.S. tax benefits. These lower non-U.S. tax rates are generally statutory in nature, without expiration and available to companies that operate in those taxing jurisdictions. See Note 4 to the financial statements for additional information.

For the first quarter of 2014, our tax provision was $184 million compared with $12 million in the year-ago quarter. The increase in the tax provision from the year-ago quarter was due to higher income before income taxes and, to a lesser extent, a $65 million discrete tax benefit in the first quarter of 2013 from the reinstatement of the federal research tax credit retroactively to the beginning of 2012.

In the first quarter of 2014, our net income was $487 million compared with $362 million for the year-ago quarter. EPS was $0.44 compared with $0.32 for the year-ago quarter.

Segment results
Analog
                                   1Q14          1Q13        Change
Revenue                         $ 1,837       $ 1,648            11 %
Operating profit                    498           300            66 %
Operating profit % of revenue      27.1 %        18.2 %

Compared with the year-ago quarter, Analog revenue increased 11 percent as revenue increased in all product lines. Power and HPA grew about equally, followed by SVA and then HVAL. Operating profit increased primarily due to higher revenue and associated gross profit.

Embedded Processing
                                   1Q14         1Q13        Change
Revenue                         $ 656        $ 561              17  %
Operating profit                   52            7             643  %
Operating profit % of revenue     7.9  %       1.3  %

Compared with the year-ago quarter, Embedded Processing revenue increased 17 percent due to higher revenue from all product lines. Revenue from Microcontrollers grew the most, followed by revenue from Processors and then Connectivity. Operating profit increased due to higher revenue and associated gross profit.


Other
                                   1Q14          1Q13         Change
Revenue                         $  490        $  676             -28  %
Operating profit *                 140            88              59  %
Operating profit % of revenue     28.7  %       13.1  %

* Includes Acquisition charges and Restructuring charges/other. Compared with the year-ago quarter, Other revenue decreased 28 percent due to lower revenue from legacy wireless products. Operating profit increased due to lower operating expenses and, to a lesser extent, lower Restructuring charges/other. These were partially offset by lower gross profit. Restructuring charges/other in the first quarter of 2014 benefited from sales of a site and other assets. See Note 3 to the financial statements for more details.

Restructuring actions
We periodically undertake restructuring actions to focus our investments on opportunities that have the best potential for sustainable growth and returns. In January 2014, we announced cost-saving actions in Embedded Processing and in Japan to focus on markets with greater potential for sustainable growth and strong long-term returns. Cost reductions from these actions include the elimination of about 1,100 jobs worldwide, and we expect annualized savings of about $130 million by the end of 2014. We expect that we will see most of the cost savings from these actions in the second half of 2014 and that they will be substantially complete by mid-2015. Total restructuring charges related to these actions are expected to be about $85 million, most of which will be severance and related benefit costs. Additionally, in 2012 we announced a restructuring of our Wireless business and closure of two older semiconductor manufacturing facilities in Houston, Texas, and Hiji, Japan. Both of these actions were completed in 2013.

Restructuring charges in the first quarter of 2014 included a net of $21 million for severance and related benefit costs and $5 million of other exit costs primarily associated with the actions in Embedded Processing and in Japan.

Restructuring charges of $15 million in the year-ago quarter relate about equally to the Wireless restructuring and closing of the manufacturing facilities and consisted of about $8 million of accelerated depreciation, $4 million for severance and related benefit costs, and about $3 million for other exit costs.

See Note 3 to the financial statements for details on the breakdown of costs between the various restructuring actions.

Financial condition

At the end of the first quarter of 2014, total cash (Cash and cash equivalents plus Short-term investments) was $4.03 billion, with 84 percent owned by our U.S. entities.
Accounts receivable were $1.35 billion at the end of the first quarter. This was an increase of $152 million from the end of 2013 as a result of higher revenue at the end of the first quarter compared with year-end 2013. Days sales outstanding were 41 at the end of the first quarter compared with 36 at the end of 2013.
Inventory was $1.71 billion at the end of the first quarter. This was a decrease . . .

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