Texas Instruments Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. TI designs, manufactures and sells semiconductors; its reportable segments are Analog and Embedded Processing.
Financial performance
Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $4,017 | $3,693 | $7,806 | $7,095 |
| Gross profit | $2,619 | $2,374 | $5,066 | $4,518 |
| Gross margin | 65.2% | 64.3% | 64.9% | 63.7% |
| Operating profit | $1,712 | $1,480 | $3,260 | $2,732 |
| Operating margin | 42.6% | 40.1% | 41.8% | 38.5% |
| Net income | $1,405 | $1,056 | $2,771 | $2,053 |
| Diluted EPS | $1.40 | $1.03 | $2.75 | $2.00 |
| Operating cash flow | Not separately stated for Q2 | $2,938 | $1,712 |
- Q2 revenue rose 9% year over year; net income rose 33% and diluted EPS rose 36%. First-half revenue increased 10%, net income 35% and diluted EPS 38%.
- Segment revenue in Q2: Analog $2,690 million, up 12%; Embedded Processing $943 million, up 9%; Other $384 million, down 7%. Analog and Embedded Processing gains reflected higher demand, while Other declined.
- Q2 operating expenses (R&D and SG&A) were $825 million versus $812 million. Acquisition amortization charges were $79 million in Q2 and $159 million in the first half, non-cash in the periods reported.
Cash flow, liquidity and capital
- At June 30, cash and cash equivalents were $2.919 billion and short-term investments $2.211 billion, totaling $5.130 billion. Total debt was $5.066 billion, all classified as long-term; current debt was zero.
- Current assets were $9.592 billion and current liabilities $1.466 billion. TI reported $2.938 billion of operating cash flow and $438 million of capital expenditures for the first half.
- Trailing-12-month operating cash flow was $6.589 billion; capital expenditures were $855 million and free cash flow, a non-GAAP measure, was $5.734 billion, or 36.6% of revenue.
- TI issued $1.5 billion of 4.15% notes due 2048 and retired $500 million of maturing debt. Its $2 billion revolving facility was undrawn, with no commercial paper outstanding.
- First-half dividends paid were $1.217 billion and stock repurchases were $1.891 billion. Q2 dividends declared were $0.62 per share, versus $0.50 a year earlier. TI said it returned $5.6 billion through buybacks and dividends over the trailing 12 months.
- Accounts receivable rose to $1.551 billion from $1.278 billion at year-end; days sales outstanding increased to 35 from 31. Inventory rose to $2.090 billion from $1.957 billion; days of inventory were 135 versus 134.
Management commentary, outlook and notable items
- Management cited continued strength in industrial and automotive demand for Analog and Embedded Processing products, and highlighted its manufacturing strategy, including 300-millimeter Analog production.
- TI expected its ongoing annual operating tax rate to be about 20% in 2018 and 16% beginning in 2019. Q2 EPS included a 3-cent discrete tax benefit not included in original guidance. The filing gives no clear numerical revenue or EPS forecast for the next quarter.
- The estimated annual effective tax rate was about 20% in 2018 versus 31% in 2017; actual first-half rates were 15% and 25%, respectively. The company had not completed its accounting for the 2017 Tax Act and expected to complete related calculations with its 2017 U.S. tax return in Q4 2018.
- TI adopted ASC 606 on January 1, 2018, using the modified retrospective method. Adoption increased opening retained earnings by $206 million, net of taxes. The change accelerates recognition of some fixed-rate patent royalty income; management said the impact in any individual reporting period would not materially affect results or financial position. Remaining royalty performance obligations were $72 million at June 30.
- Restructuring charges were $4 million in the first half. Cumulative charges for the Greenock, Scotland facility phase-out were $36 million; total charges were estimated at about $40 million, with remaining charges expected through 2019. Further charges for a separate product-line reorganization were not expected to be material.
- Management believed available resources and operating plans would fund working capital, capital expenditures, dividends, debt payments and other needs for at least 12 months. It said product warranty and legal proceedings were not expected to have a material adverse effect; outcomes cannot be predicted.
- Disclosed risks include semiconductor demand and competition, customer forecast and inventory changes, global economic and trade conditions, cybersecurity, manufacturing execution and capacity utilization, supply availability, tax and regulatory changes, intellectual-property claims, and customer or distributor losses.
Key facts for investors to verify
- Whether industrial and automotive demand and the growth of Analog and Embedded Processing persist, and how product mix affects margins.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside the planned level of capital spending.
- Execution of shareholder returns and debt management, including the new 2048 notes and remaining repurchase authorization.
- Final Tax Act accounting and the expected operating tax rate reduction to about 16% in 2019.
- Timing and financial effects of patent royalty recognition under ASC 606, and remaining restructuring costs through 2019.