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Texas Instruments Incorporated (NASDAQ:TXN) reported revenue of $3.42 billion for the second quarter of 2007. According to the company, revenue increased 7 percent compared with the prior quarter as demand for the company’s semiconductor products began to rebound following an inventory correction in the semiconductor market.

That statement, of course, led me straight to the balance sheet to see how much the correction improved its inventory situation. Imagine my surprise when I saw that inventories were actually up during the quarter, to $1.42 billion. The sequential increase of 1% was smaller than the increase in sales, but the year/year increase of 7% was against a similar decrease in sales.

Looking at it from a longer term perspective, the days sales in inventory rose to 75.3, the highest they have been in the post-bubble period. Given that the high operating leverage inherent in semiconductor production means each chip produced costs less than the prior, it is no surprise that gross margins were a record - that is what should happen when inventory is being built.

Not being that gullible, investors realize that the boost to this period’s margins will mean a drag on the period in which the inventory is actually corrected. And that, I believe, is why the stock is down after the report - not because guidance was “only in line.”

Disclosure: The author has a short position in SMH put options at time of publication.

TXN 1-yr chart:

TXN 1-yr chart

Source: Texas Instrument Stock Down After Inventory Correction