Texas Instruments Incorporated — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Texas Instruments designs, manufactures and sells semiconductors worldwide, with reportable segments in Analog and Embedded Processing. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3.82 billion | $3.77 billion | $10.39 billion | $11.03 billion |
| Gross profit | $2.45 billion | $2.45 billion | $6.62 billion | $7.07 billion |
| Operating profit | $1.61 billion | $1.59 billion | $4.08 billion | $4.47 billion |
| Net income | $1.35 billion | $1.43 billion | $3.91 billion | $3.95 billion |
| Diluted EPS | $1.45 | $1.49 | $4.17 | $4.12 |
- Q3 revenue rose 1% year over year and 18% sequentially. Gross margin was 64.3%, down from 64.9%; operating margin was 42.2%, versus 42.1%.
- For the first nine months, revenue fell 6% and operating profit fell 9%. Gross margin declined to 63.8% from 64.1%, and operating margin to 39.3% from 40.6%.
- Q3 segment revenue: Analog $2.87 billion, up 7% year over year; Embedded Processing $651 million, down 10%; Other $301 million, down 19%. Analog operating profit rose 7%, while Embedded Processing operating profit fell 20%.
- Nine-month segment revenue was essentially flat in Analog at $7.76 billion, down 20% in Embedded Processing to $1.85 billion, and down 22% in Other to $776 million.
Cash flow, liquidity and capital
- Operating cash flow for the first nine months was $4.01 billion, down $881 million year over year, primarily because of higher cash used for working capital. Capital expenditures were $437 million, versus $684 million.
- For the trailing 12 months, operating cash flow was $5.77 billion and free cash flow, a non-GAAP measure, was $5.17 billion, or 37.6% of revenue. Free cash flow declined 14% from the prior-year period.
- At September 30, cash and cash equivalents were $2.82 billion and short-term investments were $2.70 billion, totaling $5.52 billion. Total debt, including current maturities, was $6.80 billion. The $2 billion revolving credit facility was undrawn, with no commercial paper outstanding.
- Nine-month financing included $2.49 billion of dividends and $2.54 billion of share repurchases. The company reported returning $6.4 billion to shareholders over the trailing 12 months; dividends represented 64% of trailing-12-month free cash flow.
- Accounts receivable rose $318 million from year-end 2019; days sales outstanding increased to 33 from 29. Inventory rose $71 million; days of inventory declined to 137 from 144.
Material changes, outlook and risks
- Q3’s sequential rebound reflected strength in automotive demand and growing personal-electronics demand. Management said pandemic-related effects on lead times and order fulfillment had been minimal in the first nine months, but warned that future factory restrictions or other disruptions could constrain supply. It remained cautious about the economy and COVID-19’s duration and effects.
- Management said it was maintaining inventory to support stable lead times and product availability amid limited customer forecasting visibility, while also reducing the number of distributors and deepening direct customer relationships. It stated that resources and operating plans should fund working capital, capital expenditures, dividends, debt payments and other needs for at least the next 12 months.
- No specific revenue or earnings guidance for a future quarter is provided in the filing text. The company’s strategic focus remains Analog and Embedded Processing, particularly products for industrial and automotive markets, and it continues plans for a new 300-millimeter wafer fabrication facility in Richardson, Texas.
- Income taxes included an unusual $249 million discrete benefit in Q2 from settlement of a depreciation-related uncertain tax position, plus reversal of $46 million of accrued interest included in other income. The nine-month effective tax rate was 4%, while the estimated annual operating tax rate excluding discrete items was about 14%.
- Debt increased from $5.80 billion at year-end 2019 to $6.80 billion, reflecting $1.50 billion of 2020 debt issuance and repayment of $500 million of maturing debt. Interest and debt expense rose year over year.
- Key disclosed risks include COVID-19 and global economic conditions, semiconductor demand and customer forecasts, competition, manufacturing utilization and supply availability, cybersecurity, customer or distributor inventory changes, taxes, legal and product claims, and the ability to execute manufacturing and strategic plans. Management said existing legal proceedings and product claims were not expected to have a material adverse effect; outcomes remain uncertain.
Important facts for investors to verify
- Whether the Q3 recovery in automotive and personal electronics demand continued, and whether year-to-date weakness in Embedded Processing persisted.
- How COVID-19, customer forecasting and factory or supply-chain constraints affected subsequent orders, lead times and inventory.
- The sustainability of margins and cash generation given lower nine-month revenue, reduced operating cash flow, working-capital movements and manufacturing utilization.
- Subsequent cash returns, dividend increases and share repurchases relative to free cash flow and debt levels.
- The tax effects of the uncertain-tax-position settlement and whether the approximately 14% annual operating tax rate remained applicable.