Texas Instruments Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. TI designs, manufactures and sells semiconductors. Its reportable segments are Analog and Embedded Processing; Other includes DLP products, calculators and custom ASIC products. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $3.594 billion | $3.789 billion; down 5% |
| Gross profit / margin | $2.261 billion / 62.9% | $2.447 billion / 64.6% |
| Operating profit / margin | $1.379 billion / 38.4% | $1.548 billion / 40.9% |
| Net income / net margin | $1.217 billion / 33.9% | $1.366 billion / 36.0% |
| Diluted EPS | $1.26 | $1.35 |
| Operating cash flow | $1.107 billion | $1.112 billion |
| Capital expenditures | $251 million | $189 million |
| Quarterly free cash flow* | $856 million | $923 million |
Liquidity and debt: At March 31, cash and cash equivalents were $3.720 billion and short-term investments were $366 million, totaling $4.086 billion, down $147 million from year-end 2018. Total debt, including unamortized costs, was $5.807 billion; net debt against cash and short-term investments was approximately $1.721 billion. Current assets were $7.951 billion and current liabilities $2.159 billion. The $2 billion revolving credit facility was undrawn, with no commercial paper outstanding. TI issued $750 million of 3.875% notes due 2039 during the quarter.
Trailing 12 months: Operating cash flow was $7.184 billion and free cash flow* was $5.991 billion, or 38.4% of revenue. TI reported returning $8.0 billion to shareholders through dividends and repurchases over the preceding 12 months.
Material changes and management commentary
- Revenue fell as demand slowed across most markets; management cited current strength in communications equipment. Gross profit declined 8%, reflecting lower revenue and reduced factory loadings.
- Analog revenue declined 2% to $2.518 billion; operating profit fell 7% to $1.088 billion. Embedded Processing revenue declined 14% to $796 million; operating profit fell 24% to $249 million. Other revenue declined 6% to $280 million.
- R&D and SG&A totaled $803 million versus $818 million. Acquisition charges were $79 million, described as non-cash and primarily ongoing amortization of acquired intangibles.
- Interest and debt expense increased to $38 million from $23 million, reflecting additional long-term debt. The reported effective tax rate was 12%; management expects an annual operating tax rate of about 16% in 2019, excluding discrete tax items.
- TI’s strategy emphasizes Analog and Embedded Processing, particularly products for industrial and automotive markets, in-house manufacturing and returning free cash flow to shareholders. Management stated it expects adequate resources to fund operating needs, capital expenditures, dividends and debt payments for at least the next 12 months.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management’s stated 2019 tax-rate expectation is approximately 16% on an annual operating basis.
- Management identified semiconductor demand, competition, customer forecasts and inventory, global economic and trade conditions, manufacturing utilization and supply availability among risks that could affect results. TI also cited cybersecurity, currency, legal and regulatory, tax, product liability, intellectual property and other risks.
- TI adopted the new lease accounting standard on January 1, 2019, recognizing $229 million of lease liabilities and corresponding assets at adoption; the company said the adoption did not materially affect results or cash flows. March 31 lease liabilities were $346 million.
- The company entered into an agreement to sell its Greenock, Scotland manufacturing facility in February; the sale closed in April 2019. TI reported no material product warranty or product-liability accruals or payments during the periods presented and did not expect pending legal and administrative proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether demand weakness across most end markets persists, particularly in Embedded Processing, and how communications equipment strength develops.
- Factory utilization, gross-margin trends and progress on planned 300-millimeter manufacturing capacity expansion.
- Cash conversion and capital allocation: quarterly cash flow, capital spending, dividends and repurchases; confirm the distinction between GAAP operating cash flow and non-GAAP free cash flow.
- Debt maturities and interest costs, including the $750 million of notes due in 2019 and the new 2039 issuance; assess liquidity alongside shareholder returns.
- Whether the approximately 16% annual operating tax-rate expectation remains applicable, and the impact of discrete tax items.
*Free cash flow is a non-GAAP measure defined by TI as operating cash flow less capital expenditures.