Texas Instruments Incorporated — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. TI designs, manufactures and sells semiconductors, with reportable segments in Analog and Embedded Processing. Interim financial statements are unaudited.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $3.329 billion | $3.594 billion | Down 7% |
| Gross profit / margin | $2.088 billion / 62.7% | $2.261 billion / 62.9% | Profit down 8% |
| Operating profit / margin | $1.244 billion / 37.4% | $1.379 billion / 38.4% | Down 10% |
| Net income | $1.174 billion | $1.217 billion | Down 4% |
| Diluted EPS | $1.24 | $1.26 | Down 2% |
| Operating cash flow | $851 million | $1.107 billion | Down $256 million |
Quarterly cash flow from operations fell mainly due to lower net income and increased working-capital cash use. Capital expenditures were $161 million, versus $251 million. For the trailing 12 months ended March 31, operating cash flow was $6.393 billion and free cash flow, a non-GAAP measure, was $5.636 billion, or 39.9% of revenue.
Segments and material changes
- Analog: Revenue of $2.460 billion, down 2%; operating profit of $1.025 billion, down 6%. Power increased, while Signal Chain and High Volume declined.
- Embedded Processing: Revenue of $653 million, down 18%; operating profit of $182 million, down 27%. Both product lines declined, led by Processors.
- Other: Revenue of $216 million, down 23%; operating profit of $37 million, down 12%.
- R&D and SG&A totaled $794 million, compared with $803 million. Non-cash acquisition charges declined to $50 million from $79 million.
- The income tax provision was $50 million versus $160 million. The 2020 provision included $116 million of discrete tax benefits; the estimated annual operating tax rate, excluding discrete items, was about 14%, versus 16% in 2019. The reported effective tax rate was 4% versus 12%.
Liquidity, debt and capital allocation
- At quarter-end, cash and cash equivalents were $2.518 billion and short-term investments were $2.224 billion; combined, these totaled $4.742 billion, down $645 million from year-end 2019.
- Total debt, including current maturities, was $6.550 billion, compared with $5.803 billion at year-end. Current debt was $1.051 billion and long-term debt was $5.499 billion. TI issued $750 million of 1.375% notes due 2025 in March; it repaid $500 million of 1.75% notes in April.
- The $2 billion revolving credit facility was undrawn, with no commercial paper outstanding. Management said available resources and operating plans were expected to meet requirements for at least the next 12 months.
- Q1 dividends paid were $841 million; cash used for share repurchases was $1.641 billion. Over the trailing 12 months, TI reported $6.6 billion returned to shareholders through dividends and repurchases.
- Accounts receivable rose $242 million from year-end; days sales outstanding increased to 36 from 29. Inventory was broadly unchanged at $2.003 billion.
Outlook, commentary and risks
TI did not provide a specific numerical revenue or earnings forecast in the supplied filing text. Management said COVID-19 had minimally affected lead times and order fulfillment in Q1, but warned that restrictions in Malaysia and the Philippines could constrain future fulfillment. With demand visibility reduced and a recession likely, the company used the 2008 financial crisis as a model for forecasting Q2 in an environment of potentially significant demand decline.
Key risks include the uncertain duration and economic impact of COVID-19, volatility in customer demand, supply-chain and manufacturing disruption, semiconductor cyclicality, trade restrictions and competition. TI’s substantial fixed manufacturing costs may pressure margins if factory utilization falls. Management also highlighted its internal manufacturing footprint and inventory as sources of flexibility, while cautioning that they may not eliminate disruptions. No material warranty or product-liability accruals or payments were reported for the periods presented; management did not expect pending legal and administrative proceedings to materially affect the company.
Investor facts to verify
- Subsequent results and updates on COVID-19-related customer demand and manufacturing constraints, particularly in Malaysia and the Philippines.
- Whether the sharp Embedded Processing decline and weakness in Other continue, and how Analog demand and product mix evolve.
- Cash generation and working-capital trends, including receivables and days sales outstanding.
- The impact of discrete tax benefits on reported earnings and the sustainability of the approximately 14% annual operating tax-rate estimate.
- Debt maturities, including the April 2020 repayment, and the pace of dividends and share repurchases relative to cash generation.