TXN — Q2 2026 Financial Report Analysis

Fixed-cost leverage does the work: 23% more revenue, 53% more profit

Texas Instruments — the largest maker of analog chips, the parts that handle real-world signals like sound, temperature and power rather than running software — reported second-quarter revenue of $5.463 billion, up 22.8% from $4.448 billion a year earlier and up 13% from the first quarter. Net income rose 52.9% to $1.980 billion and diluted earnings per share rose 51.8% to $2.14.

Profit grew more than twice as fast as revenue, and the reason is structural rather than a one-off. TI owns most of its own factories, so a large share of its costs stay flat whether the fabs run full or half-empty. When demand rises, the extra sales carry very little extra cost. The filing quantifies it: revenue rose $1.015 billion and gross profit rose $777 million, meaning 76.6 cents of every incremental sales dollar fell through to gross profit — far above the company's 61.4% average gross margin. Management's own framing in the MD&A: "as factory loadings increase, our fixed costs are spread over increased output and, absent other circumstances, our profit margins increase."

The numbers

Gross margin is the share of revenue left after the direct cost of making the chips. Operating margin is what's left after research and selling costs too, but before interest and tax.

Where the growth came from

Revenue rose "with broad growth led by industrial, data center and automotive," per the performance summary. The segment split shows how uneven that was:

Analog, which is 80% of the company, grew in both of its product lines "led by Signal Chain" — the chips that condition and convert real-world signals — and its operating margin expanded 7.2 percentage points. Embedded Processing grew more slowly but its operating profit nearly doubled (+98%), lifting margin from 12.5% to 21.3%. That segment's profitability is the one most worth watching: TI flags in the MD&A that its LFAB facility in Lehi, Utah "primarily supports our Embedded Processing business" and is still ramping, and that as it ramps, Embedded will "carry manufacturing costs that disproportionately benefit Embedded Processing operating profit as compared to Analog." In plain terms, part of Embedded's margin jump is an accounting-and-loading effect from a factory filling up, not purely better pricing or mix.

Geographically, growth was broad rather than concentrated: US customers +24.8% (39% of revenue), China +24.2% (22%), rest of Asia +24.4%, Europe/Middle East/Africa +20.6%, Japan +11.9%. No single region carried the quarter.

Operating expenses were essentially frozen: R&D of $535 million and SG&A of $490 million, together $1.025 billion versus $1.012 billion — up 1.3% against 22.8% revenue growth. That discipline, not cost cutting, is the second half of the margin story.

Two things that flatter the headline

The tax line. TI's effective tax rate was 12% in both quarters, which reads as neutral. It isn't. The earnings release breaks the provision into operating taxes of $309 million less $51 million of discrete tax items (mostly stock-compensation benefits), versus $199 million less $16 million a year ago. Without that $51 million one-off, net income would have been about $1.93 billion and EPS about $2.08. TI itself says EPS "included a 5-cent benefit that was not in the company's original guidance." Discrete stock-comp benefits scale with the share price and vesting timing — they are not a repeatable earnings driver.

The free cash flow figure. Trailing-12-month free cash flow of $6.534 billion versus $1.763 billion is a 271% increase, and it is the number management leads with. Decomposed, only about $2.23 billion of the $4.77 billion improvement came from higher operating cash flow. The rest is $1.62 billion of lower capital spending (capex fell to $3.31 billion from $4.94 billion on a trailing-12-month basis) and $919 million more in US CHIPS Act government incentive receipts. TI's free-cash-flow definition explicitly adds CHIPS proceeds back in. Cash flow from operations — the cleaner measure — rose a still-strong 35% to $8.667 billion.

Neither point undermines the quarter. Both mean the underlying improvement is somewhat smaller than the headline percentages suggest.

Takeaway: This is the operating-leverage half of the semiconductor cycle showing up exactly as TI's own model predicts — 77 cents of every incremental revenue dollar reaching gross profit, on flat operating costs. The catch is that the same math runs in reverse: depreciation is already rising 23% year-over-year as the new 300mm fabs come online, so the fixed-cost base that is currently amplifying growth becomes a drag the moment revenue stops climbing.

The balance sheet and the capex turn

The clearest signal in this filing is the shape of capital spending. Six-month capex of $1.190 billion was half the $2.428 billion spent a year earlier, and management guides to $2–3 billion for full-year 2026 — against $3.3 billion over the trailing twelve months and $4.9 billion the year before that. The heavy build phase for the Sherman, Texas and Lehi, Utah 300mm fabs is winding down. Meanwhile depreciation rose to $1.088 billion for the half from $884 million, up 23%, because those factories are now in service and being written off. Cash spending falls first; the accounting cost of that spending arrives later and stays.

Working capital moved in the right direction. Inventory fell $199 million to $4.605 billion even as revenue grew 23%, cutting days of inventory to 196 from 222 at year-end 2025 — management calls this "the continued execution of our inventory strategy." Days sales outstanding ticked up modestly to 42 from 40. Total cash (cash plus short-term investments) reached $7.00 billion, up $2.12 billion since year-end.

Capital returns shifted notably. TI paid $2.586 billion in dividends for the half (up from $2.473 billion on a higher rate) but bought back only $185 million of stock, versus $955 million a year ago — 0.9 million shares against 5.4 million. Combined with $754 million of employee option exercises, diluted share count actually rose to 920 million from 912 million. With $18.61 billion of repurchase authorization untouched, near-zero buybacks at a time of record cash generation points at the pending acquisition: TI agreed in February 2026 to buy Silicon Labs for $231.00 per share in cash, an enterprise value of roughly $7.5 billion, expected to close in the first half of 2027, and in June arranged a $5 billion 364-day delayed-draw term loan (undrawn at quarter-end) to help fund it. Acquisition charges of $17 million in the quarter ($34 million year-to-date) sit in the Other segment and will recur until the deal closes.

First half and outlook

Six-month revenue was $10.288 billion, up 20.8%; operating profit $4.118 billion (40.0% of revenue, versus 33.9%); net income $3.525 billion, up 42.5%; EPS $3.82 versus $2.69.

Management guided third-quarter revenue to $5.65–6.15 billion and EPS to $2.23–2.57. The midpoint, $5.90 billion, implies about 8% sequential growth and roughly 15% year-over-year — still strong, but a deceleration from this quarter's 23%, which is what you would expect as the year-ago comparison base gets harder. TI also notes its revenue is seasonally stronger in the second and third quarters, so some of that sequential step-up is calendar rather than cycle.

The forward read: the revenue recovery is real and broad-based across regions and end markets, and the cost structure is currently converting it into profit at an unusually high rate. Two things would change that. First, the depreciation from $8+ billion of recent fab investment is only beginning to land in cost of revenue, so gross margin gains from here need continued volume growth rather than just recovery. Second, guidance implies growth roughly halving on a year-over-year basis next quarter. TI's model is built to compound free cash flow per share through the cycle rather than to maximize any single quarter — but at 42.3% operating margin with capex falling and depreciation rising, this quarter is closer to the favorable end of that cycle than the middle of it.