An In-depth Analysis of Financial Position: Firm Overview and Analysis of Cash Flows

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Part 1: Firm Overview

PART A:

Texas Instruments is a manufacturer of semiconductors which it sells across the globe; generating total revenue of $15.784 billion in fiscal 2018 alone. Semiconductor products are used for a variety of purposes such as “converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, cancelling noise and improving signal resolution.” The company has two major product types: Analog and Embedded Processing. The first type, Analog, produced $10.80 billion in revenue in 2018 and consists of signal chain, power, and high-volume semiconductors. The second type, embedded processing, produced $3.55 billion in revenue in 2018 and consists of two major sections: connected microcontrollers and processors. Other products that do not fit into these segments including calculators and custom semiconductors brought in $1.43 billion in revenue in 2018. The markets for Texas instruments products by percentage of total revenue include “36% industrial, 23% personal electronics, 20% automotive, 11% communications equipment, 7% enterprise systems, and 3% other.” Texas instruments faces competition from both large-scale and small-scale companies especially in the emerging Asian sector due to an inability to monopolize within the ever-globalizing industry. As of the end of fiscal 2018 Texas instruments had 29,888 employees headed by a group of 13 executive officers with headquarters in North America, Europe, and Asia. As its name implies Texas Instruments was established in Texas in the year 1930 as an oil and gas exploration company and within two decades had become the leading innovator in semiconductor technology.

PART B:

Texas instruments capital structure is primarily composed of equity but it also utilities its debt faculties. In fiscal 2018 net income totaled $5.58 billion of which $2.555 billion was paid out in dividends and $17 million was paid out in dividend equivalents on restricted stock units. The remaining $3.008 billion from net income as well as $236 million in proceeds from accounting changes was added to retained earnings which totaled $37.906 billion. The primary use of retained earnings was stock repurchases costing $5.10 billion and capital expenditures costing $1.131 billion. $500 million was also used for the repayment of debt and $60 million was used for other financing and investing activities. $5.641 billion of retained earnings was used for the purchase of short-term investments which in turn brought in $6.708 billion in proceeds by fiscal year end providing a net profit on short-term investments of $1.607 billion. Texas instruments also had proceeds of $373 million from common stock transactions and proceeds of $9 million from the sale of assets. Proceeds of $1.50 billion came from the issuance of long-term debt; the only form of debt currently used in Texas instruments capital structure. Aside from this, Texas instruments possess a variable rate revolving credit product with a combination of investment-grad banks which allows the company to borrow up to $2.00 billion until March 2023. An important finding to note is that as of the end of fiscal 2018 this credit facility was untouched with no loan debt outstanding. Texas instruments believes it has the required funds and forecast for all its operating activities, financing activities, and investing activities for at least the next 12 months.

Part 2: Analysis of Cash Flows

Operating

The data in the cash flow graphs shown above for operating, investing, and financing activities are directly derived from Texas instruments statement of cash flows in their 2018 annual report. Upon analysis of the data we can see several changes in Texas instruments cash flows which in turn affect the companies free cash flow. Looking at the significant changes in cash flows from operating activities from years 2016-2018 we can see an increase in net income from each year to the next with net income figures of $3.595 billion, $3.682 billion, and $5.580 billion respectively; signifying an increasingly positive contribution of net income to cash flows. There is also an increase in accounts receivable being collected allowing for a positive contribution to cash flows in 2018 of $71 million as opposed to 2016 and 2017 which both had negative contributions to cash flows of -$108 million and -$7 million respectively. The biggest change to be noted is a significant positive contribution of prepaid expenses and other current assets in 2018 of $669 million as opposed to in 2016 and 2017 which had slightly negative and slightly positive contributions to cash flows of -$81 million and $76 million respectively. The only major negative contributor to cash flows from operating activities in 2018 was inventories expense which used $282 million; the purchasing of inventory gradually increased from 2016 to 2018, with 2016 and 2017 in comparison having an inventory expense of $99 million and $167 million respectively. This increase in inventory expense is due to Texas instruments intention to increase liquid assets as part of a plan to increase sales; a plan which proved successful. The combination of these factors allowed for a positive increase in net cash flows from operating activities in 2018 which had net cash flows from operating activities of $7.189 billion compared to 2016 and 2017 which had $4.614 billion and $5.363 billion respectively.

Investing

Regarding the change in net cash flows from investing activity there was a significant positive increase in 2018 which had net cash flows of -$78 million compared to 2016 and 2017 which had net cash flows of -$650 million and -$1.127 billion respectively; although the figure is still a negative number. The numerically negative factors contributing to this include a significant increase in capital expenditures which in 2018 used $1.131 billion compared to 2016 and 2017 which used $531 million and $695 million respectively. As well as a major series of purchases of short-term investments which in 2018 used $5.641 billion compared to 2016 and 2017 which used $3.503 billion and $4.555 billion respectively. This is offset by significant proceeds from short term investments of $6.708 billion compared to 2016 and 2017 which had proceeds of $3.390 billion and $4.095 billion respectively; allowing for a net profit from short-term investment activities of $1.067 billion. There was also a small proceed from the sale of assets in 2018 of $9 million which decreased from 2017 which had proceeds of $40 million; 2016 had $0 in proceeds from the sale of assets. A small expense categorized under other investments also increased from year to year with 2016, 2017, and 2018 having other investment expenses of $6 million, $12 million, and $23 million respectively.

Financing

Financing activities had a significant change in net cash flows in 2018 steaming from several major executive decisions resulting in a much greater net negative regarding cash flows from financing activities. One major decision was to repurchase stocks from Texas instruments shareholders which in 2018 accumulated a cost of $5.100 billion compared to 2016 and 2017 which had stock repurchase expenses of $2.132 billion and $2.556 billion respectively. As well as an increase in the dividends paid which in 2018 had an expense of $2.555 billion in comparison to 2016 and 2017 which had dividends paid expenses of $1.646 billion and $2.104 billion respectively. There was also a large repayment of debt expense in 2018 of $500 million which however was lower than 2016 and 2017 which had repayment of debt expenses of $1 billion and $625 million respectively; this expense is decreasing over time due to a decrease in debt outstanding. Regarding the financing activities categorized under other there was an increase in that expense from year to year with 2016, 2017 and 2018 having expenses of $3 million, $31 million, and $47 million respectively. The proceeds from financing that partially offset these expenses were the proceeds from the issuance of long-term debt which increased in from year to year with 2016, 2017, and 2018 having proceeds of $499 million, $1.099 billion, and $1.500 billion respectively. As well as proceeds from common stock transactions which although positive did slightly decrease in 2018 which had proceeds of $373 million compared to 2016 and 2017 which had proceeds of $472 million and $483 million respectively. Overall there was a significantly larger net negative in Texas instruments cash flows from financing activities in 2018 which had net cash flows of -$6.329 billion compared to 2016 and 2017 which had net cash flows of -$3.810 billion and -$3.734 billion respectively. As stated, this is primarily due to an executive decision to repurchase a significantly higher amount of company stock in comparison to previous years. Regarding net change in total cash and cash equivalents this positively increased in 2018 with net cash and cash equivalents of $782 million compared to 2016 and 2017 which had net cash and cash equivalents of $154 million and $502 million respectively; allowing for an increase in retained earnings.

Free Cash Flow

Texas instruments free cash flow increased consecutively from 2016 to 2017 to 2018; however, there was a more significant increase in 2018. Numerically Free cash flow in these years were $4.083 billion, $4.668 billion, and $6.058 billion respectively. Texas instruments defines free cash flow as “cash flow from operations less capital expenditure” (Page 2). Their strategy is to “return all free cash flow to shareholders through a combination of stock repurchases and dividends” (Page 17). This can clearly be seen in the statement of cash flows as examined above. To break the uses of free cash flow down further, it is used to pay dividends to shareholders, to repurchase stock from shareholders, to pay interest to debtholders, to repay debtholders outright, and to buy short-term investments and other nonoperating assets (Tb Pg41). Free cash flow is calculated as being equal to net operating profit after taxes less net investing in operating capital (Tb pg41) which is synonymous with the Texas instruments definition given. Looking at the figures for the years given: 2016 Free cash flow is equal to net cash flows from operations of $4.614 billion less capital expenditures of $531 million to equal $4.083 billion. 2017 Free cash flow is equal to net cash flows from operations of $5.363 billion less capital expenditures of $695 million to equal $4.668 billion. 2018 Free cash flow is equal to net cash flows from operations of $7.189 billion less capital expenditures of $1.131 billion to equal $6.058 billion. The analysis of Texas instruments net cash flows and free cash flows shows a positive increase, directly correlating to an increase in Texas instruments corporate value from the years 2016 to 2018.

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