Texas Instruments Incorporated — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. TI designs, manufactures and sells semiconductors worldwide, principally through its Analog and Embedded Processing businesses.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $15.784 billion | $14.961 billion |
| Gross profit / margin | $10.277 billion / 65.1% | $9.614 billion / 64.3% |
| Operating profit / margin | $6.713 billion / 42.5% | $6.083 billion / 40.7% |
| Net income | $5.580 billion | $3.682 billion |
| Diluted EPS | $5.59 | $3.61 |
| Cash from operations | $7.189 billion | $5.363 billion |
| Capital expenditures | $1.131 billion | $695 million |
| Free cash flow | $6.058 billion | $4.668 billion |
Free cash flow is a non-GAAP measure defined by TI as operating cash flow less capital expenditures. It was 38.4% of revenue, versus 31.2% in 2017.
- Segment revenue: Analog $10.801 billion, up 9%; Embedded Processing $3.554 billion, up 2%; Other $1.429 billion, down 9%. Segment operating margins were 47.3%, 33.9% and 27.9%, respectively.
- Liquidity: Cash, cash equivalents and short-term investments totaled $4.233 billion at year-end. Current assets were $8.097 billion and current liabilities $2.474 billion.
- Debt: Balance-sheet debt was $5.068 billion, including $749 million current and $4.319 billion long-term. The $2 billion revolving credit facility was undrawn; no commercial paper was outstanding. Cash and short-term investments were less than total debt.
- Shareholder returns: TI paid $2.555 billion in dividends and repurchased $5.100 billion of stock. Total returned was $7.66 billion, exceeding reported free cash flow. The annual dividend declared per share was $2.63.
Changes versus the prior comparable period
- Revenue grew 6% as reported, led by Analog; gross margin increased 0.8 percentage points and operating margin increased 1.8 points.
- Net income rose $1.898 billion, substantially reflecting lower taxes: the effective tax rate was 16.5% in 2018 versus 39.4% in 2017. The 2017 rate included significant Tax Act enactment effects; 2018 included a transitional non-cash tax expense and a discrete tax benefit.
- Operating cash flow increased $1.826 billion. Capital expenditures rose $436 million, while inventory increased $260 million to $2.217 billion; days of inventory increased to 152 from 134.
- Debt increased year over year, including a 2018 issuance of $1.5 billion of fixed-rate notes due 2048. Interest and debt expense increased to $125 million from $78 million.
- Fourth-quarter revenue was $3.717 billion versus $3.750 billion in Q4 2017; Q4 2018 diluted EPS was $1.27 versus $0.34. The filing attributes the unusually low prior-year quarter’s earnings context to tax effects, not a comparable operating collapse.
Outlook, commentary and risks
- Management said the semiconductor market entered a downturn in late 2018, product demand weakened, and weakness was expected to continue in 2019. TI gave no specific numerical 2019 revenue or earnings guidance in this filing.
- Management plans to remain disciplined on operating expenses while maintaining long-term investment, including expansion of 300-millimeter analog manufacturing capacity. TI estimates this capacity has about a 40% cost advantage per unpackaged chip over 200-millimeter production.
- The Tax Act reduced the U.S. statutory rate to 21%; TI expected an ongoing annual operating tax rate of about 16% beginning in 2019. This is management’s estimate and excludes discrete tax items.
- Key exposures include semiconductor cyclicality, demand and inventory forecasting, fixed manufacturing costs, intense competition and pricing pressure, trade tensions and China exposure, global operating and currency risks, cybersecurity, supply-chain constraints, and tax and regulatory uncertainty. About 85% of revenue came from shipments outside the U.S.; shipments into China were $7.0 billion.
- Backlog was $1.45 billion at year-end, up from $1.32 billion, but TI cautions it may not indicate future revenue and orders may be changed or canceled. About 65% of sales were fulfilled through distributors and about 65% of revenue through consignment programs.
- TI reported no significant off-balance-sheet arrangements and said ordinary-course legal proceedings were not expected to materially affect financial condition, results or liquidity. Auditors issued unqualified opinions on the financial statements and internal controls.
- TI adopted ASC 606 in 2018, recording a $206 million after-tax increase to opening retained earnings. The new lease standard was scheduled for adoption in 2019 and expected to increase reported assets by about 2% through recognition of operating-lease assets and liabilities.
Important facts for investors to verify
- Whether the expected 2019 semiconductor downturn translated into weaker revenue, margins and inventory levels, particularly after inventory days rose to 152.
- How much of 2018 net-income and EPS growth came from lower taxes and share repurchases versus sustained operating improvement.
- Whether shareholder distributions exceeding free cash flow remain supportable alongside higher capital spending, debt service and manufacturing investment.
- Execution and returns from planned 300-millimeter capacity expansion, and the effect of factory utilization on margins in a downturn.
- Developments in China-related trade and customer demand, plus potential resolution of uncertain tax positions; TI disclosed $286 million of uncertain tax liabilities and said up to $223 million could decrease in 2019 through resolution of a tax position.