Texas Instruments said in April that the economic damage from the coronavirus could hurt its business as badly as the the global financial crisis over a decade ago. But on Tuesday, the world's largest vendor of analog semiconductors said that, while it continues to grapple with uncertainty, second-quarter sales in its chip business turned out better than expected.
Texas Instruments said it foresees sales of $3.26 billion to $3.54 billion for the third quarter, falling from $3.77 billion in the comparable quarter a year ago. The company said it expects earnings in the range of $1.14 to $1.34 per share in the fourth quarter. On average, analysts believed it would forecast earnings of around 98 cents a share and revenue of $3.07 billion.
"While second quarter did not experience the depth of decline we saw in the 2008 financial crisis, nonetheless we remain cautious on how the economy might behave over the next few years," cautioned Dave Pahl, vice president at Texas Instruments, on a conference call with analysts. "During second quarter, we were able to respond to unforecasted demand," he said.
Rich Templeton, chief executive officer at TI, said in July that it would maintain production at its plants at around the same level before the lethal virus started to shut down large parts of the global economy. The company said that it needed more inventory on hand to handle any rebound in chip demand as lockdowns loosen and the virus's spread subsides. The company said it would probably start carrying more inventory as customers pause or push out orders.
On Tuesday, Texas Instruments said it plans to keep up production so that it can handle any unforeseen surge in demand in the second half of the year. The company said it could afford to build up inventory because most of its analog, power, and other chips have long shelf lives, with many of its most popular products remaining on the market for more than a decade.
Early in the year, Texas Instruments and other chip companies faced delays in the production, packaging, and testing of chips due to lockdowns that shut down factories in Southeast Asia, China, the United States, and other regions. Lockdowns to stall the spread of infections have made moving parts around the world a challenge, further slowing the supply chain for chips.
"We have informed our customers that lead times on our products remain short," Lizardi said on the conference call, adding that more than 40,000 of the 80,000 products in its portfolio are currently in stock and ready to be shipped out to tens of thousands of customers. "Our product portfolio of mostly long-lived parts afford us to have a steady hand, and therefore, we will take a similar approach to our factory operating plan in third quarter," Lizardi added.
The virus has ravaged the global electronics supply chain, which is tightly interconnected. Short delays in one region can compromise production in others, leading to inefficiencies and breakdowns that can cascade through the supply chain. The spread of the pathogen is out of control in parts of the US. That could convince more electronics manufacturers to stockpile chips in case of future disruptions. Texas Instruments has in excess of 100,000 customers.
Texas Instruments said it believes some of its customers are building up inventory to "limit exposure" to any supply delays amid the pandemic. But chief financial officer Rafael Lizardi said it was tough to tell how those customers impacted its business. "It's just difficult to draw conclusions on such a huge number of customers that have different idiosyncrasies," he said.
More than 15 million people have been infected by the virus, including more than 4 million cases in the US, according to data from Johns Hopkins University. The nation's overall death toll has topped more than 140,000. Electronics manufacturers have been plagued by the potential for a prolonged fight against the disease, which could compound the economic damage and hit demand for smartphones, cars, and other devices containing analog chips.
Texas Instruments said income increased to $1.38 billion, or $1.48 per share, in the second quarter of 2020, up from $1.31 billion, or $1.36 per share, in the second quarter of 2019. The company said it added more than 30 cents per share in profit as a result of tax reprieves. It also returned $1.705 billion to shareholders in the form of dividends and stock repurchases.
Texas Instruments is also in the process of pulling more of its inventory from its electronics distributors and shifting to sell more of its products directly to customers. The company said the value of the inventory in the hands of distributors declined by around $150 million in the last quarter, the latest in a long line of planned reductions in distributor-owned inventory, said Lizardi. He said serving more of its customers directly would help it fill orders faster.
"We're very well positioned," he added. "Of the parts we sell, the majority are catalog parts. They sell to many, many customers and last a long, long time. We don't have to scrap them. The upside is very high, the downside is limited." Texas Instruments said that it increased its inventory by more than $130 million to about $2.14 billion at the end of the second quarter.
Texas Instruments said it plans to continue investing in research and development. It is also pushing ahead with billions of dollars of long-term spending to boost its production capacity.
Texas Instruments said sales in the second quarter declined 12% to $3.24 billion. It was impacted by its 40% slump in sales to the automobile market, without which sales slipped only 3% from the same quarter last year and jumped by 8% from the first three months of the year. The automobile business accounted for more than 20% of its total sales in 2019, while sales of semiconductors used on factory floors came out to more than 35% of its revenue.
TI said the automobile market probably bottomed out early in the quarter as factories in the United States and Europe restarted operations after the lifting of lockdowns in those regions.
The core analog business dipped 4% in the second quarter to $2.43 billion as demand for power management and standard analog chips waned. Sales of microcontrollers and other chips embedded in various devices declined more than 31% as the pandemic forced auto manufacturers around the world to shut down plants. Consumer electronics sales soared 20%. It was also buoyed by booming demand for its chips in medical devices, Lizardi said.
"The environment continues to be uncertain," he added, "and we remain cautious how the global economy will behave for the next several years. That is one way we're looking at this."
