Edgar Filing: TEXAS INSTRUMENTS INC

txn-10q_20170630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number 001-03761

TEXAS INSTRUMENTS INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)




Delaware	75-0289970
(State of Incorporation)	(I.R.S. Employer Identification No.)




12500 TI Boulevard, Dallas, Texas	75243
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code 214-479-3773

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒		Accelerated filer	☐
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act				☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

990,038,629

Number of shares of Registrant’s common stock outstanding as of

July 25, 2017

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

	For Three Months Ended						For Six Months Ended
Consolidated Statements of Income	June 30,						June 30,
(Millions of dollars, except share and per-share amounts)	2017			2016			2017			2016
Revenue	$	3,693		$	3,273		$	7,095		$	6,281
Cost of revenue (COR)		1,319			1,266			2,577			2,445
Gross profit		2,374			2,007			4,518			3,836
Research and development (R&D)		378			341			747			663
Selling, general and administrative (SG&A)		434			454			873			895
Acquisition charges		79			79			159			159
Restructuring charges/other		3			2			7			4
Operating profit		1,480			1,131			2,732			2,115
Other income (expense), net (OI&E)		26			(8	)		47			(20	)
Interest and debt expense		20			21			38			43
Income before income taxes		1,486			1,102			2,741			2,052
Provision for income taxes		430			283			688			522
Net income	$	1,056		$	819		$	2,053		$	1,530

Earnings per common share (EPS):
Basic	$	1.05		$	.81		$	2.04		$	1.50
Diluted	$	1.03		$	.79		$	2.00		$	1.48

Average shares outstanding (millions):
Basic		994			1,004			996			1,005
Diluted		1,015			1,020			1,017			1,021

Cash dividends declared per common share	$	.50		$	.38		$	1.00		$	.76

As a result of accounting rule ASC 260, which requires a portion of Net income to be allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents, diluted EPS is calculated using the following:

Net income	$	1,056		$	819		$	2,053		$	1,530
Income allocated to RSUs		(10	)		(10	)		(20	)		(19	)
Income allocated to common stock for diluted EPS	$	1,046		$	809		$	2,033		$	1,511

See accompanying notes.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

	For Three Months Ended						For Six Months Ended
Consolidated Statements of Comprehensive Income	June 30,						June 30,
(Millions of dollars)	2017			2016			2017			2016
Net income	$	1,056		$	819		$	2,053		$	1,530
Other comprehensive income (loss), net of taxes
Net actuarial gains (losses) of defined benefit plans:
Adjustments		(3	)		(18	)		(15	)		(30	)
Recognized within Net income		11			13			23			27
Prior service (cost) credit of defined benefit plans:
Adjustments		—			1			—			1
Recognized within Net income		(1	)		(1	)		(2	)		(2	)
Other comprehensive income (loss)		7			(5	)		6			(4	)
Total comprehensive income	$	1,063		$	814		$	2,059		$	1,526

See accompanying notes.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

	June 30,			December 31,
Consolidated Balance Sheets	2017			2016
(Millions of dollars, except share amounts)
Assets
Current assets:
Cash and cash equivalents	$	1,140		$	1,154
Short-term investments		1,844			2,336
Accounts receivable, net of allowances of ($16) and ($17)		1,469			1,267
Raw materials		109			102
Work in process		1,099			954
Finished goods		739			734
Inventories		1,947			1,790
Prepaid expenses and other current assets		1,111			910
Total current assets		7,511			7,457
Property, plant and equipment at cost		4,656			4,923
Accumulated depreciation		(2,142	)		(2,411	)
Property, plant and equipment, net		2,514			2,512
Long-term investments		250			235
Goodwill, net		4,362			4,362
Acquisition-related intangibles, net		1,105			1,264
Deferred income taxes		412			374
Capitalized software licenses, net		114			52
Overfunded retirement plans		99			96
Other assets		71			79
Total assets	$	16,438		$	16,431

Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	499		$	631
Accounts payable		450			396
Accrued compensation		489			710
Income taxes payable		86			83
Accrued expenses and other liabilities		353			444
Total current liabilities		1,877			2,264
Long-term debt		3,084			2,978
Underfunded retirement plans		101			129
Deferred income taxes		33			33
Deferred credits and other liabilities		635			554
Total liabilities		5,730			5,958
Stockholders’ equity:
Preferred stock, $25 par value. Authorized – 10,000,000 shares
Participating cumulative preferred. None issued.		—			—
Common stock, $1 par value. Authorized – 2,400,000,000 shares
Shares issued – 1,740,815,939		1,741			1,741
Paid-in capital		1,683			1,674
Retained earnings		34,149			33,107
Treasury common stock at cost
Shares: June 30, 2017 – 749,098,850; December 31, 2016 – 744,831,978		(26,345	)		(25,523	)
Accumulated other comprehensive income (loss), net of taxes (AOCI)		(520	)		(526	)
Total stockholders’ equity		10,708			10,473
Total liabilities and stockholders’ equity	$	16,438		$	16,431

See accompanying notes.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

	For Six Months Ended
Consolidated Statements of Cash Flows	June 30,
(Millions of dollars)	2017			2016
Cash flows from operating activities
Net income	$	2,053		$	1,530
Adjustments to Net income:
Depreciation		273			316
Amortization of acquisition-related intangibles		159			159
Amortization of capitalized software		23			16
Stock compensation		143			148
Deferred income taxes		(45	)		(35	)
Increase (decrease) from changes in:
Accounts receivable		(200	)		(176	)
Inventories		(157	)		(185	)
Prepaid expenses and other current assets		12			35
Accounts payable and accrued expenses		(66	)		(1	)
Accrued compensation		(225	)		(175	)
Income taxes payable		(236	)		106
Changes in funded status of retirement plans		5			32
Other		(27	)		(8	)
Cash flows from operating activities		1,712			1,762

Cash flows from investing activities
Capital expenditures		(278	)		(282	)
Proceeds from asset sales		40			—
Purchases of short-term investments		(1,887	)		(1,193	)
Proceeds from short-term investments		2,385			2,110
Other		(1	)		3
Cash flows from investing activities		259			638

Cash flows from financing activities
Proceeds from issuance of long-term debt		605			499
Repayment of debt		(625	)		(1,000	)
Dividends paid		(998	)		(765	)
Stock repurchases		(1,200	)		(1,157	)
Proceeds from common stock transactions		245			261
Other		(12	)		(3	)
Cash flows from financing activities		(1,985	)		(2,165	)

Net change in Cash and cash equivalents		(14	)		235
Cash and cash equivalents at beginning of period		1,154			1,000
Cash and cash equivalents at end of period	$	1,140		$	1,235

See accompanying notes.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

Notes to financial statements

1. Description of business, including segment information

We design, make and sell semiconductors to electronics designers and manufacturers all over the world. Beginning January 2017, we reorganized the product lines within our two reportable segments – Analog and Embedded Processing – to realign our business structure with the way our customers select and buy products. These changes had no effect on either our previously reported consolidated financial statements or on our reportable segment amounts. Our two reportable segments are established along major categories of products as follows:

•

Analog – consisting of the following product lines: Power, Signal Chain and High Volume.

•

Embedded Processing – consisting of the following product lines: Connected Microcontrollers and Processors.

We report the results of our remaining business activities in Other. Other includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other includes DLP^® products, calculators and custom ASIC products. As of January 1, 2017, we no longer recognize royalties as revenue; instead, they are now recorded as OI&E. We continue to receive royalties from arrangements involving license rights to our patent portfolio. Although we expect royalties to continue for many years, they are of decreasing significance to our core operations. Prior period amounts were not material.

Our centralized manufacturing and support organizations, such as facilities, procurement and logistics, provide support to our operating segments, including those in Other. Costs incurred by these organizations, including depreciation, are charged to the segments on a per-unit basis. Consequently, depreciation expense is not an independently identifiable component within the segments’ results and, therefore, is not provided.

Segment information

	For Three Months Ended				For Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Revenue:
Analog	$	2,411	$	2,044	$	4,667	$	3,923
Embedded Processing		868		755		1,671		1,484
Other		414		474		757		874
Total revenue	$	3,693	$	3,273	$	7,095	$	6,281

Operating profit:
Analog	$	1,077	$	781	$	2,012	$	1,469
Embedded Processing		271		192		511		379
Other		132		158		209		267
Total operating profit	$	1,480	$	1,131	$	2,732	$	2,115

Operating profit amounts in the prior period have been recast as a result of our early adoption of a new accounting standard related to pension and other retiree benefit costs. See Note 2 for more information.

2. Basis of presentation and significant accounting policies and practices

Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and on the same basis as the audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2016. The Consolidated Statements of Income, Comprehensive Income and Cash Flows for the periods ended June 30, 2017, and June 30, 2016, and the Consolidated Balance Sheet as of June 30, 2017, are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown. Certain information and note disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Because the consolidated interim financial statements do not include all of the information and notes required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2016. The results for the three- and six-month periods are not necessarily indicative of a full year’s results.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

The consolidated financial statements include the accounts of all subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in these notes, except per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated. We have reclassified certain amounts in the prior periods’ financial statements to conform to the current presentation, retrospectively applying the new accounting standard related to pension and other retiree benefit costs. See Adopted standards for current period for further information.

Significant accounting policies and practices

Earnings per share (EPS)

Unvested share-based payment awards that contain non-forfeitable rights to receive dividends or dividend equivalents, such as our restricted stock units (RSUs), are considered to be participating securities and the two-class method is used for purposes of calculating EPS. Under the two-class method, a portion of Net income is allocated to these participating securities and, therefore, is excluded from the calculation of EPS allocated to common stock, as shown in the table below.

Computation and reconciliation of earnings per common share are as follows (shares in millions):

	For Three Months Ended June 30,
	2017							2016
	Net							Net
	Income			Shares		EPS		Income			Shares		EPS
Basic EPS:
Net income	$	1,056						$	819
Income allocated to RSUs		(10	)						(10	)
Income allocated to common stock
for basic EPS calculation	$	1,046			994	$	1.05	$	809			1,004	$	.81

Adjustment for dilutive shares:
Stock compensation plans					21							16

Diluted EPS:
Net income	$	1,056						$	819
Income allocated to RSUs		(10	)