Texas Instruments Incorporated — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017; balance-sheet amounts are compared with December 31, 2017. TI designs, manufactures and sells semiconductors, with reportable Analog and Embedded Processing segments. Management emphasizes industrial and automotive markets. Q1 2018 reflects adoption of ASC 606; prior-period results were not recast.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $3.789 billion | $3.402 billion | Up 11% |
| Gross profit / margin | $2.447 billion / 64.6% | $2.144 billion / 63.0% | Gross profit up 14%; margin improved |
| Operating profit / margin | $1.548 billion / 40.9% | $1.252 billion / 36.8% | Up 24% |
| Net income | $1.366 billion | $997 million | Up 37% |
| Diluted EPS | $1.35 | $0.97 | Up 39%; includes $0.14 of tax-related benefits not in original guidance |
| Operating cash flow | $1.112 billion | $795 million | Up $317 million, primarily due to higher net income |
| Capital expenditures | $189 million | $127 million | Primarily semiconductor manufacturing equipment |
| Dividends declared per share | $0.62 | $0.50 | Higher than prior year |
Q1 operating expenses for R&D and SG&A were $818 million versus $808 million. Acquisition charges were $80 million in both periods and were non-cash. The income-tax provision was $187 million versus $258 million; Q1 2018 included $129 million of discrete tax benefits, including stock-based compensation and updated Tax Act estimates.
Segments
- Analog: Revenue of $2.566 billion, up 14%; operating profit of $1.166 billion, up 25%. Growth came from Power and, to a lesser extent, Signal Chain; High Volume revenue was about flat.
- Embedded Processing: Revenue of $926 million, up 15%; operating profit of $328 million, up 37%. Both product lines grew, led by Processors.
- Other: Revenue of $297 million, down 13%; operating profit of $54 million, down 30%.
Cash, debt and liquidity
- Cash and cash equivalents were $1.717 billion and short-term investments were $2.362 billion at March 31, 2018, together down $390 million from year-end.
- Total debt, including unamortized discounts and issuance costs, was $4.078 billion: $500 million current and $3.578 billion long-term. The $2 billion revolving credit facility was undrawn; no commercial paper was outstanding.
- Q1 financing used $1.317 billion, including $611 million of dividends paid and $873 million of share repurchases. TI repurchased 8.2 million shares for $873 million, compared with 7.1 million shares for $550 million a year earlier.
- For the trailing 12 months, operating cash flow was $5.680 billion and free cash flow (operating cash flow less capital expenditures, a non-GAAP measure) was $4.923 billion, up 17% year over year and equal to 32.1% of revenue. TI said it returned $5.1 billion to owners over that period.
- Management stated it had resources and plans to meet operating, capital, dividend and debt needs for at least the next 12 months. On April 30, 2018, after quarter-end, TI agreed to issue $1.30 billion of debt for general corporate purposes, including replenishing cash following repayment of maturing debt; closing was expected May 7.
Changes, outlook and notable items
- Management attributed revenue growth to higher Analog and Embedded Processing demand, with strong demand in industrial and automotive markets. Higher revenue and lower manufacturing costs lifted gross profit and margins.
- Management estimated an annual operating tax rate of about 20% for 2018 and about 16% beginning in 2019, reduced from prior expectations of 23% and 18%, respectively. The rate excludes discrete tax items; the Q1 actual effective tax rate was 12%.
- ASC 606 adoption increased opening retained earnings by $206 million, net of taxes, as of January 1, 2018, primarily because fixed-rate patent royalty income is recognized earlier under the new accounting. TI reported $273 million in contract assets at March 31 and $75 million of remaining performance obligations, with about 20% expected to be recognized within 12 months. Management said the accounting change would not materially affect results or financial position in an individual period.
- Restructuring charges related to a Greenock, Scotland facility phase-out totaled $33 million through March 31; 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.
- TI disclosed routine IP indemnifications, product warranty and liability exposure, and ongoing legal and administrative proceedings. It reported no material warranty or product-liability accruals or payments and did not expect proceedings to materially affect its financial condition, results or liquidity.
- Key risks include semiconductor demand and cyclicality, competition, customer forecast and inventory variability, manufacturing utilization and execution, supply availability and costs, foreign exchange, cybersecurity, trade and geopolitical conditions, tax and regulatory changes, IP claims, and customer or distributor losses. The filing refers to the 2017 Form 10-K for fuller risk disclosures.
Important facts for investors to verify
- How much Q1 earnings growth reflects operating improvement versus $129 million in discrete tax benefits, including the 14-cent EPS benefit cited by management.
- Whether strength in Analog and Embedded Processing, particularly industrial and automotive demand, persists, and whether Other-segment declines continue.
- How ASC 606’s accelerated royalty recognition affects the timing and comparability of future reported income and cash collections.
- Cash deployment, including buybacks and dividends, alongside the 2018 debt maturity and the planned $1.30 billion post-quarter debt issuance.
- Execution and remaining costs of the Greenock restructuring, and developments in the risks and contingencies described in the filing.