Texas Instruments Incorporated — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Texas Instruments designs, manufactures and sells semiconductors worldwide through its Analog and Embedded Processing segments, with remaining activities reported as Other.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3,693 | $3,273 | $7,095 | $6,281 |
| Gross profit | $2,374 | $2,007 | $4,518 | $3,836 |
| Operating profit | $1,480 | $1,131 | $2,732 | $2,115 |
| Net income | $1,056 | $819 | $2,053 | $1,530 |
| Diluted EPS | $1.03 | $0.79 | $2.00 | $1.48 |
- Q2 revenue rose 13%, net income 29% and diluted EPS 30% year over year. For the first half, revenue increased 13% and net income 34%.
- Gross margin was 64.3% in Q2 versus 61.3% a year earlier; first-half gross margin was 63.7% versus 61.1%. Operating margin was 40.1% in Q2 versus 34.6%, and 38.5% for the first half versus 33.7%.
- Q2 segment performance: Analog revenue increased 18% to $2,411 and operating profit increased 38% to $1,077; Embedded Processing revenue increased 15% to $868 and operating profit increased 41% to $271. Other revenue declined 13% to $414 and operating profit declined 16% to $132.
- Six-month operating cash flow was $1,712, down from $1,762. Capital expenditures were $278 versus $282. Trailing-12-month operating cash flow was $4.564 billion and free cash flow, a non-GAAP measure, was $4.037 billion, or 28.5% of revenue.
- At June 30, cash and cash equivalents were $1,140 and short-term investments $1,844, totaling about $2.98 billion. Total debt, including current maturities and unamortized items, was $3.583 billion. The $2 billion revolving credit facility was undrawn, with no commercial paper outstanding.
- Current assets were $7,511 and current liabilities $1,877. Inventory was $1,947, or 133 days, compared with $1,790 and 126 days at year-end 2016. Accounts receivable were $1,469; days sales outstanding increased to 36 from 33 at year-end.
- First-half dividends paid were $998 and share repurchases were $1,200. The declared dividend was $0.50 per share for Q2 versus $0.38 a year earlier.
Material changes and management commentary
- Management attributed growth to strong automotive demand and improving industrial demand. Analog and Embedded Processing together represented 89% of revenue, versus 86% a year earlier.
- Management cited portfolio quality, manufacturing efficiency and 300-millimeter Analog production as contributors to improved gross margin. It noted that R&D investment would continue to increase in 2017.
- Other income and expense shifted to $26 million of income in Q2 from $8 million of expense. TI said the change primarily reflected royalty income, which from January 2017 is recorded in other income and expense rather than revenue; prior-period royalties were not material.
- TI early adopted a pension-cost presentation standard, retrospectively recasting prior periods. It changed the classification of pension and retiree-benefit expense but did not affect revenue, net income, EPS or operating cash flow.
- Restructuring charges included costs from a product-line reorganization and the Greenock, Scotland facility phase-out. Estimated total restructuring charges were about $40 million; $28 million had been recognized by June 30, 2017, with remaining charges expected through the end of 2018.
Outlook, risks and contingencies
- TI provided no specific revenue or EPS guidance in the supplied filing text. Management said it believed available resources and operating plans would fund working capital, capital spending, dividends, debt payments and other needs for at least the next 12 months.
- The estimated annual operating tax rate, excluding discrete items, was about 31%. Actual quarterly effective tax rates may fluctuate, including with stock-based compensation and other discrete tax items.
- Management identified semiconductor demand, competition, customer forecasts and inventory, manufacturing capacity and execution, supply availability, foreign exchange, cybersecurity, regulation, taxes, intellectual property, product claims and economic and geopolitical conditions among factors that could cause actual results to differ from expectations.
- TI reported no material product-warranty or product-liability accruals or payments and did not expect pending legal and administrative proceedings to materially affect financial condition, results or liquidity. It noted that future indemnification liabilities could not be reasonably estimated.
- The filing refers investors to the company’s 2016 Form 10-K for the fuller risk-factor discussion. Results for the interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether strength in automotive and industrial demand continued, and whether segment growth and margins were sustained beyond Q2.
- Whether rising inventory days and receivables reflected planned support for demand or a developing demand/inventory imbalance.
- Cash generation after dividends, repurchases and capital expenditures, including the definition and reconciliation of non-GAAP free cash flow.
- Debt maturities, liquidity and capital-return levels, as well as the pace and remaining amount of the share-repurchase authorization.
- Progress and final costs of restructuring, the effect of increasing R&D spending, and any material effects from new accounting standards or tax-rate changes.