Semiconductor giant Texas Instruments (NASDAQ: TXN) reported fourth-quarter earnings Tuesday night. The company beat Wall Street's revenue targets, but suffered a massive one-time tax charge, and share prices fell as much as 9.4% lower on Wednesday.
Texas Instruments' fourth-quarter results: The raw numbers
| Metric | Q4 2017 | Q4 2016 | Year-Over-Year Change |
|---|---|---|---|
| Revenue | $3.75 billion | $3.41 billion | 10% |
| Net income | $0.34 billion | $1.05 million | (68%) |
| GAAP earnings per share (diluted) | $0.34 | $1.09 | (69%) |
| Adjusted earnings per share (diluted) | $1.09 | $1.09 | 0% |
Data source: Texas Instruments.
Tax effects
The tax reform act that was passed in December made more than a passing impact on TI's business results. In the fourth quarter, the company recorded a $730 million charge to account for taxes on indefinitely reinvested earnings and a lower valuation of the balance sheet's deferred tax assets.
TI's operating tax rate stopped at 31% of pre-tax profits, just like it did in the year-ago period. But the effective GAAP tax rate jumped from 30% to 78%. This huge tax charge notwithstanding, TI's management still celebrated the new tax rules.
The company expects its annual operating tax rate to fall all the way down to 18% in 2019. The current fiscal year will be a stepping stone between the old and new rates, thanks to transitional tax expenses, landing near 25%.
"We applaud the reform to U.S. corporate law because it enables U.S.-headquartered companies, like TI, to compete more effectively on a global basis," said Texas Instruments' head of investor relations, Dave Pahl. "The new law recognizes and rewards companies for exporting and having manufacturing, R&D [research and development] and intellectual property in the United States."
That would translate to an approximately 18% upside to TI's quarterly and annual earnings starting in 2019.
The tax code can be confusing. Image source: Getty Images.
What else is going on in Texas?
Looking beyond the enormous tax impacts, TI's diversified business model posted another solid quarter. Sales of embedded processors rose 20% year over year, to $896 million, while operating profits in that segment increased by 43%, to $307 million.
The larger and higher-margin analog segment scored an 11% revenue gain, at $2.5 billion. Operating profits in this division gained 20%, landing at $1.2 billion.
Overall, clients in the industrial and automotive computing markets accounted for 54% of TI's total sales. That's up from 42% four years ago and 51% at the end of 2016, and TI aims to give these key sectors every chance to grow their revenue share even further.