Texas Instruments Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. Dollar amounts are in millions unless otherwise noted.
Business context
TI designs, manufactures and sells semiconductors globally. Its reportable segments are Analog and Embedded Processing; Other includes DLP products, calculators and custom ASIC products. Management focuses investment on Analog and Embedded Processing, particularly products for industrial and automotive markets.
Financial performance and liquidity
- Q3 revenue: $4.261 billion, up 4% year over year. Net income was $1.570 billion, up 22%; diluted EPS was $1.58 versus $1.26.
- Q3 margins: Gross margin was 65.8% versus 64.5%; operating margin was 45.5% versus 43.4%.
- Nine-month results: Revenue was $12.067 billion, up 8%; net income was $4.341 billion versus $3.338 billion; diluted EPS was $4.32 versus $3.26. Gross margin rose to 65.2% from 64.0%, and operating margin to 43.1% from 40.3%.
- Q3 segments: Analog revenue increased 8% to $2.907 billion, with operating profit up 14% to $1.447 billion. Embedded Processing revenue fell 4% to $894 million and operating profit fell 5% to $309 million. Other revenue declined 6% to $460 million.
- Cash flow: Nine-month operating cash flow was $5.044 billion versus $3.434 billion; capital expenditures were $808 million versus $464 million. Trailing-12-month free cash flow, a non-GAAP measure, was $5.934 billion, or 37.5% of revenue.
- Liquidity and debt: Cash and short-term investments totaled $5.113 billion at quarter-end. Total debt was $5.067 billion, including $749 million current and $4.318 billion long-term. The $2 billion revolving facility was undrawn; no commercial paper was outstanding.
- Shareholder returns: Nine-month dividends paid were $1.819 billion and repurchases were $3.091 billion. The company reported returning $6.2 billion through dividends and repurchases over the trailing 12 months.
Material changes versus comparable periods
- Q3 growth was driven by Analog; Embedded Processing and Other declined. Management said demand slowed across most markets and that it expected to enter a period of weaker demand.
- For the first nine months, Analog revenue grew 11% and Embedded Processing grew 6%, while Other declined 8%.
- Debt increased from $4.077 billion at December 31, 2017, after issuing $1.5 billion of 4.15% notes due 2048 and retiring $500 million of maturing debt. Interest and debt expense rose to $89 million for the first nine months from $57 million.
- Capital expenditures and share repurchases increased year over year. Total cash and short-term investments were up $644 million from year-end 2017; accounts receivable and inventory also increased.
Outlook, management commentary, risks and unusual items
- Management stated that it expected weaker demand, planned disciplined operating expenses while maintaining long-term investment, and believed available resources and plans would fund operating and capital needs for at least the next 12 months.
- The expected annual operating tax rate was about 20% for 2018 and about 16% starting in 2019. The company had not completed its accounting for the Tax Act and expected to complete calculations in Q4 2018.
- In September, TI announced a 24% dividend increase and an additional $12 billion share-repurchase authorization. The declared dividend was $0.62 per share for Q3, versus $0.50 a year earlier.
- Adoption of ASC 606 increased opening retained earnings by $206 million, net of taxes. Contract assets were $265 million at September 30; remaining unsatisfied performance obligations were $68 million.
- Restructuring charges were $5 million for the first nine months. Cumulative charges for the Greenock, Scotland facility phase-out were $37 million, with total charges estimated at about $40 million and remaining charges expected through 2019.
- Management said legal proceedings, product warranty and product-liability matters were not expected to have a material adverse effect. Key disclosed risks include semiconductor demand and cyclicality, competition, customer inventory and forecast variability, manufacturing capacity and supply, global trade and geopolitical conditions, cybersecurity, taxes, and intellectual-property matters.
- The filing did not provide specific next-quarter revenue or earnings guidance.
Most important facts for investors to verify
- Whether the anticipated broad-based demand weakening materializes, particularly in Analog and Embedded Processing.
- Whether higher capital spending and inventory support demand without pressuring margins or cash generation.
- How the $1.5 billion long-term debt issuance, rising interest expense and substantial shareholder returns affect future liquidity and capital allocation.
- Final Tax Act accounting and the timing and sustainability of the stated 2018 and 2019 operating tax rates.
- Progress toward the Greenock restructuring estimate and the expected timing of remaining charges.