Texas Instruments Inc. (TXN) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Texas Instruments designs and manufactures semiconductors, primarily in its Analog and Embedded Processing segments. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First 9 months 2023 | First 9 months 2022 |
|---|---|---|---|---|
| Revenue | $4,532 | $5,241 | $13,442 | $15,358 |
| Gross profit | $2,815 | $3,617 | $8,588 | $10,684 |
| Gross margin | 62.1% | 69.0% | 63.9% | 69.6% |
| Operating profit | $1,892 | $2,678 | $5,798 | $7,964 |
| Operating margin | 41.7% | 51.1% | 43.1% | 51.9% |
| Net income | $1,709 | $2,295 | $5,139 | $6,787 |
| Diluted EPS | $1.85 | $2.47 | $5.58 | $7.27 |
Q3 revenue was flat sequentially but down 14% year over year. Management attributed the annual decline mainly to weaker Analog revenue; automotive growth continued while industrial weakness broadened. Gross profit and margins fell due to lower revenue, higher manufacturing costs from capacity expansion, and reduced factory loadings. R&D and SG&A rose to $923 million from $862 million in Q3, primarily reflecting higher employee-related costs. Interest and debt expense increased to $98 million from $53 million in Q3, and to $255 million from $154 million year to date, following additional debt issuance. Higher interest income contributed to increased other income.
Segments and material changes
- Analog: Q3 revenue decreased 16% to $3,353 million and operating profit fell 31% to $1,504 million; operating margin declined to 44.9% from 54.7%. Year-to-date revenue fell 16% and operating profit fell 31%.
- Embedded Processing: Q3 revenue increased 8% to $890 million, attributed to product mix, while operating profit decreased 20% to $258 million. Year-to-date revenue rose 8% and operating profit fell 15%.
- Other: Q3 revenue decreased 32% to $289 million and operating profit decreased 24% to $130 million. Year-to-date revenue fell 20%, while operating profit was approximately flat.
- Prior-year restructuring/other included Lehi facility preproduction costs of $77 million in Q3 and $209 million year to date. Production began in December 2022, and those costs shifted primarily to cost of revenue.
Cash flow, balance sheet and capital allocation
- For the first nine months, operating cash flow was $4,496 million, down from $6,678 million. Capital expenditures were $3,923 million versus $1,830 million; investing cash outflow totaled $4,051 million.
- For the 12 months ended September 30, 2023, operating cash flow was $6,538 million and free cash flow (a non-GAAP measure, operating cash flow less capital expenditures) was $1,648 million, or 9.1% of revenue. The comparable prior-year free cash flow was $5,923 million, or 29.3% of revenue.
- Cash and cash equivalents plus short-term investments totaled $8,948 million at September 30, 2023, down $119 million from year-end 2022. Current assets were $15,097 million and current liabilities were $2,652 million.
- Inventory increased to $3,908 million from $2,757 million at year-end; inventory days rose to 205 from 157. Receivables were $1,976 million, and days sales outstanding rose to 39 from 37.
- Total debt, including current maturities, was $11,222 million, compared with $8,735 million at year-end. The company issued $3.0 billion of long-term debt and repaid $500 million during the first nine months. Its $1 billion revolving facility was undrawn, with no commercial paper outstanding.
- Dividends paid were $3,376 million and share repurchases were $228 million in the first nine months, versus $3,174 million and $2,767 million, respectively, in the prior-year period. TI announced a 5% dividend increase in September 2023, its 20th consecutive annual increase.
Outlook, risks and notable items
The filing provides no specific revenue or earnings guidance. Management expects capital expenditures to remain above historical levels as it invests in manufacturing capacity and technology, and believes available resources and operating plans can fund requirements for at least the next 12 months. TI expects cash benefits from the CHIPS and Science Act investment tax credit in future periods; the related asset recorded in other long-term assets was $1,153 million, up from $395 million at year-end 2022.
Management identifies semiconductor demand—particularly in industrial and automotive markets—customer inventory adjustments, factory utilization and fixed-cost absorption, competition, manufacturing execution and capacity returns, supply availability, trade and geopolitical conditions, cybersecurity, tax changes, and legal or product claims as risks that could affect results. The filing reports no material product-warranty accruals or payments and states that pending legal and administrative proceedings are not expected to have a material adverse effect. Disclosure controls were concluded to be effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether industrial demand and customer inventory adjustments improve, and whether automotive growth continues.
- How inventory accumulation, reduced factory loadings and elevated manufacturing costs affect margins and cash conversion.
- The pace and returns of higher capital spending, including expected CHIPS Act tax-credit realization.
- Debt growth, higher interest expense and the company’s ability to sustain dividends and other capital returns amid lower free cash flow.
- That free cash flow is a non-GAAP measure; assess it alongside GAAP operating cash flow and capital expenditures.