Texas Instruments Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. TI designs, manufactures and sells semiconductors globally. Its reportable segments are Analog and Embedded Processing; Other includes DLP products, calculators and custom ASIC products.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $3.668 billion | $4.017 billion | $7.262 billion | $7.806 billion |
| Gross profit | $2.360 billion | $2.619 billion | $4.621 billion | $5.066 billion |
| Gross margin | 64.3% | 65.2% | 63.6% | 64.9% |
| Operating profit | $1.506 billion | $1.712 billion | $2.885 billion | $3.260 billion |
| Net income | $1.305 billion | $1.405 billion | $2.522 billion | $2.771 billion |
| Diluted EPS | $1.36 | $1.40 | $2.63 | $2.75 |
- Q2 operating margin was 41.1%, versus 42.6% a year earlier; first-half operating margin was 39.7%, versus 41.8%.
- First-half cash from operations was $2.903 billion, compared with $2.938 billion. Capital expenditures were $535 million, versus $438 million.
- For the trailing 12 months, cash from operations was $7.154 billion and free cash flow was $5.926 billion, or 38.9% of revenue. Free cash flow is a non-GAAP measure, calculated as operating cash flow less capital expenditures.
- At June 30, cash and cash equivalents were $3.813 billion and short-term investments were $405 million. Total debt, including current maturities, was $5.807 billion. The $2 billion revolving credit facility was undrawn; no commercial paper was outstanding.
- First-half dividends paid were $1.446 billion and stock repurchases were $2.015 billion. TI reported returning $8.0 billion to shareholders over the trailing 12 months.
Changes versus comparable periods
- Q2 revenue fell 9% year over year, which management attributed to broad-based weakness. Analog revenue declined 6%; Embedded Processing declined 16%; Other declined 10%.
- Q2 Analog operating profit fell 12% to $1.108 billion; Embedded Processing operating profit fell 21% to $265 million. Other operating profit rose 16% to $133 million.
- First-half revenue declined 7%; Analog revenue fell 4% and Embedded Processing fell 15%. First-half operating profit decreased 12%, and net income decreased 9%.
- Cash and short-term investments totaled $4.218 billion, down $15 million from year-end 2018. Receivables increased $212 million to $1.419 billion; inventory decreased $138 million to $2.079 billion.
- Debt increased in part because TI issued $750 million of 3.875% notes due 2039 in Q1. Interest and debt expense rose to $44 million in Q2 from $30 million.
Outlook, management commentary and risks
- Management expects the 2019 annual operating tax rate to be about 16%, excluding discrete tax items. The reported effective tax rate was 14% in Q2 and 13% for the first half.
- TI said it had resources and operating plans to fund working capital, capital spending, dividends, debt payments and other requirements for at least the next 12 months. It described its strategy as returning all free cash flow to shareholders.
- Management emphasized investment in Analog and Embedded Processing, especially products for industrial and automotive markets, and continued expansion of 300-millimeter manufacturing capacity.
- A $36 million restructuring/other credit reflected the April sale of the Greenock, Scotland manufacturing facility. Acquisition charges were $80 million in Q2 and $159 million in the first half, primarily non-cash amortization of acquired intangibles.
- Key disclosed risks include semiconductor demand and cyclicality, competition, customer and distributor inventory changes, trade and geopolitical conditions, manufacturing utilization and execution, supply availability, cybersecurity, product claims, regulation, taxes, and the ability to protect intellectual property.
- TI adopted the new lease accounting standard in 2019, recognizing $229 million of lease liabilities and corresponding assets at adoption; the company said adoption did not materially affect results or cash flows. Legal proceedings and product warranty matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether demand weakness persists, particularly in Embedded Processing and in Analog product lines, and how it affects factory utilization and margins.
- Whether the stated approximately 16% annual operating tax-rate expectation and the liquidity outlook remain consistent with subsequent results.
- Capital spending and manufacturing expansion plans, including the expected economics and timing of additional 300-millimeter capacity.
- Cash returned to shareholders relative to free cash flow, and debt maturities and interest costs.
- Exposure to China and global trade conditions: Q2 shipments to China were $1.8 billion; the filing notes shipment destinations may not reflect where end products are ultimately consumed.