Texas Instruments Incorporated — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included for context. TI designs, manufactures and sells semiconductors worldwide, primarily through its Analog and Embedded Processing businesses.
Business context and strategy
TI generated revenue through three reporting categories: Analog, Embedded Processing and Other. Its strategy emphasizes Analog and Embedded Processing products, particularly for industrial and automotive markets, supported by in-house manufacturing, a broad product portfolio and direct customer channels. Management views these markets as long-term growth opportunities, citing increasing semiconductor content and long product life cycles.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $14.383 billion | $15.784 billion | Down 9% |
| Gross profit / margin | $9.164 billion / 63.7% | $10.277 billion / 65.1% | Margin down 1.4 percentage points |
| Operating profit / margin | $5.723 billion / 39.8% | $6.713 billion / 42.5% | Margin down 2.7 percentage points |
| Net income | $5.017 billion | $5.580 billion | Down 10% |
| Diluted EPS | $5.24 | $5.59 | Down 6% |
| Cash from operations | $6.649 billion | $7.189 billion | Down $540 million |
| Capital expenditures | $847 million | $1.131 billion | Down $284 million |
| Free cash flow (non-GAAP) | $5.802 billion; 40.3% of revenue | $6.058 billion; 38.4% of revenue | Down $256 million; cash-flow margin improved |
Revenue and gross profit declined primarily because of lower customer demand and shipments. TI reported a 16% annual operating tax rate, excluding discrete tax items, versus 20% in 2018; the effective tax rate including discrete items was 12.4%, compared with 16.5%. Management attributed the lower tax provision to lower pretax income and a lower annual operating tax rate.
Segment results
| Segment | 2019 revenue | Year-over-year change | 2019 operating profit |
|---|---|---|---|
| Analog | $10.223 billion | Down 5% | $4.477 billion; 43.8% of segment revenue |
| Embedded Processing | $2.943 billion | Down 17% | $907 million; 30.8% of segment revenue |
| Other | $1.217 billion | Down 15% | $339 million; 27.9% of segment revenue |
Embedded Processing revenue fell in both product lines, led by Processors. Analog declines came from Power and High Volume, and to a lesser extent Signal Chain.
Fourth-quarter context
Fourth-quarter 2019 revenue was $3.350 billion, versus $3.717 billion in fourth-quarter 2018 and $3.771 billion in third-quarter 2019. Fourth-quarter net income was $1.070 billion and diluted EPS was $1.12, compared with $1.239 billion and $1.27, respectively, a year earlier.
Cash, liquidity, debt and shareholder returns
- Cash, cash equivalents and short-term investments totaled $5.387 billion at year-end, up from $4.233 billion. Current assets were $8.761 billion and current liabilities were $2.123 billion.
- Total debt carrying value, including current maturities, was $5.803 billion, up from $5.068 billion. The year-end cash and short-term investment balance exceeded debt by about $416 million.
- The $2 billion revolving credit facility was undrawn, and TI had no commercial paper outstanding. Management said it expected available resources and operating plans to cover requirements for at least the next 12 months.
- TI paid $3.008 billion in dividends and repurchased $2.960 billion of stock, returning a combined $5.968 billion to shareholders. Dividends declared were $3.21 per share, up from $2.63. Management stated its strategy is to return all free cash flow to shareholders.
- Capital expenditures were $847 million, primarily for semiconductor manufacturing equipment. TI sourced about 20% of wafers from external foundries and about 40% of assembly/test services from subcontractors.
Outlook, commentary, risks and unusual items
- The filing provides no specific numerical revenue, earnings or margin guidance. Management reiterated its strategic focus on Analog and Embedded Processing, industrial and automotive markets, and growth in free cash flow per share.
- Management cited 300-millimeter Analog production as supporting manufacturing efficiency, with an estimated cost advantage of about 40% per unpackaged chip versus 200-millimeter production. TI was proceeding with plans for a new 300-millimeter wafer fab in Richardson, Texas.
- In January 2020, TI announced a multiyear plan to close its remaining two 150-millimeter factories in Sherman and Dallas and transition production to North Texas 300-millimeter facilities over three to five years. Closure charges could not yet be reasonably estimated.
- 2019 restructuring charges/other were a $36 million credit, primarily reflecting the sale of the Greenock, Scotland manufacturing facility. Acquisition charges were $288 million, non-cash and principally related to amortization of National Semiconductor acquisition intangibles.
- Backlog was $1.0 billion at year-end, down from $1.5 billion a year earlier; TI cautioned that backlog may not indicate future revenue and can be canceled or modified.
- Key risks include semiconductor-cycle and macroeconomic weakness, trade restrictions and exposure to China, competition and pricing pressure, inaccurate demand forecasts and inventory exposure, fixed manufacturing costs, supply-chain and capacity constraints, cybersecurity incidents, tax uncertainty, and product liability or recall claims. About 85% of revenue came from shipments outside the United States; shipments into China represented $7.2 billion in 2019.
- Legal proceedings were described as arising in the ordinary course; management did not expect them to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified uncertain tax positions as a critical audit matter.
Important facts for investors to verify
- Whether demand recovery and shipment trends support a return to revenue and margin growth, especially in Embedded Processing and industrial and automotive markets.
- Whether the factory transition and new 300-millimeter capacity deliver expected cost benefits, and the eventual timing and restructuring costs of the announced closures.
- Whether cash generation remains sufficient to fund dividends, repurchases, capital investment and debt obligations as the semiconductor cycle changes.
- How trade restrictions, particularly those affecting China, and customer or distributor inventory adjustments could affect sales and supply.
- The outcome and timing of tax audits: TI reported $303 million of uncertain tax-position liabilities and said up to $249 million could decrease in 2020 if a tax depreciation-related position is resolved.