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How Restructuring Affected Texas Instruments’ 2Q16 Margins

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Texas Instruments improves margins through restructuring

In the previous part of the series, we saw that Texas Instruments (TXN) is likely to report strong EPS (earnings per share) despite flat revenue growth in fiscal 2Q16. This growth is likely to be driven by the restructuring efforts the company has made. In this article, we’ll look at margin expectations for the company in 2Q16.

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Gross margin

Over the past five quarters, Texas Instruments has increased its gross margin from 57.7% in fiscal 1Q15 to 60.6% in fiscal 1Q16, growing at an average rate 58 basis points per quarter. If this trend continues, the company’s gross margin is expected to increase to 61.2% in fiscal 2Q16.

The gross margin is improving as the company is restructuring its manufacturing operations. It has closed its plant in Scotland and moved production to its 200-mm (millimeter) plants in Germany (EWG), Japan (EWJ), and the United States, bringing annual savings of $35 million. Moreover, Texas Instruments is the first company to use 300-mm wafers. This has further reduced production costs.

ON Semiconductor (ON) is also reducing its manufacturing footprint to cut fixed overhead costs.

Operating margin

Over the past five quarters, Texas Instruments increased its operating margin from 30.4% in fiscal 1Q15 to 32.2% in fiscal 1Q16, growing at an average rate of 36 basis points per quarter. If this trend continues, the company’s operating margin is expected to increase to 32.6% in fiscal 2Q16.

Slowing revenues have forced companies like Intel (INTC) and Micron (MU) to resort to restructuring to retain profit margins. While fiscal 2Q16 could be a flat quarter for Texas Instruments’ revenue, things look bright for the second half of 2016.

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