Texas Instruments Incorporated — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless noted. TI designs, manufactures and sells semiconductors. Its reportable segments are Analog and Embedded Processing; Other includes DLP products, calculators, custom ASICs and royalties. Interim financial statements are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3.675 billion | $3.429 billion | $9.956 billion | $9.811 billion |
| Gross profit | $2.280 billion | $1.997 billion | $6.107 billion | $5.694 billion |
| Gross margin | 62.0% | 58.2% | 61.3% | 58.0% |
| Operating profit | $1.395 billion | $1.164 billion | $3.480 billion | $3.132 billion |
| Operating margin | 38.0% | 33.9% | 35.0% | 31.9% |
| Net income | $968 million | $798 million | $2.415 billion | $2.150 billion |
| Diluted EPS | $0.94 | $0.76 | $2.34 | $2.02 |
Q3 revenue increased 7%, net income 21%, and diluted EPS 24%. For the first nine months, revenue rose about 1%, net income 12%, and diluted EPS 16%. Gross-profit improvement reflected higher Q3 revenue and lower manufacturing costs; year-to-date improvement was driven mainly by lower manufacturing costs. R&D expense rose 13% in Q3 and 5% year to date; management said its ongoing resource shift toward R&D would continue increasing that expense into 2017.
Segments, Q3: Analog revenue was $2.323 billion (+6%) and operating profit $949 million (+17%; 40.9% margin). Embedded Processing revenue was $795 million (+10%) and operating profit $220 million (+26%; 27.7% margin). Other revenue was $557 million (+7%) and operating profit $226 million (+27%; 40.6% margin). Year to date, Analog revenue was essentially flat at $6.246 billion, Embedded Processing grew 9% to $2.279 billion, and Other declined 2% to $1.431 billion.
Cash flow, liquidity and capital
- Operating cash flow for the first nine months was $3.029 billion, up from $2.838 billion. Capital expenditures were $421 million, versus $387 million.
- For the trailing 12 months, operating cash flow was $4.459 billion and free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $3.874 billion (+8% year over year), or 29.5% of revenue versus 27.5%.
- At September 30, cash and cash equivalents were $1.369 billion and short-term investments were $1.768 billion, totaling $3.137 billion. Current assets were $7.181 billion and current liabilities $2.170 billion.
- Total debt was $3.611 billion, including $634 million classified as current; long-term debt was $2.977 billion. TI issued $500 million of 1.85% notes due 2022 and retired $1.0 billion of maturing debt during the period. Its $2 billion revolving credit facility was undrawn, with no commercial paper outstanding.
- Year-to-date financing used $2.695 billion, including $1.147 billion of dividends and $1.657 billion of share repurchases. TI repurchased 28.8 million shares. The company reported inventory of $1.808 billion, or 117 days, and days sales outstanding of 35.
Material changes, outlook and risks
- Management said Q3 revenue and EPS were slightly above its expected range. Demand remained strong in automotive, improved in industrial, and was about even year over year in personal electronics. It cited portfolio quality, manufacturing efficiency and 300-millimeter Analog production as contributors to margins.
- In October, TI announced a 32% increase in the quarterly dividend, from $0.38 to $0.50 per share, payable November 21, 2016. Management said it believed available resources and operating plans would fund working capital, capital expenditures, dividends, debt payments and other requirements for at least 12 months.
- TI estimated a 2016 annual effective tax rate of about 30%, below the 35% statutory rate, reflecting lower rates in certain jurisdictions and U.S. tax benefits.
- Restructuring relates primarily to the planned phase-out of the Greenock, Scotland manufacturing facility through 2018. Estimated total charges are about $40 million; $22 million had been recognized through September 30, 2016. Q3 and year-to-date charges were $1 million and $5 million.
- Acquisition charges were $80 million in Q3 and $239 million year to date, primarily ongoing non-cash amortization of intangibles from the 2011 National Semiconductor acquisition. Goodwill had no reported impairment in the nine-month period.
- TI described semiconductor demand and competition, customer and distributor inventory changes, manufacturing utilization and fixed costs, technology execution, supply availability, foreign exchange, cybersecurity, intellectual property, legal and tax matters, pensions, and acquisition or impairment risks. It reported no material product warranty or liability accruals/payments and did not expect pending legal and administrative proceedings to materially affect its financial condition, results or liquidity.
- Management was evaluating new accounting standards. It preliminarily expected no material impact from revenue recognition, financial-instrument measurement and credit-loss standards; lease accounting was still under evaluation.
Important facts for investors to verify
- Whether stronger Q3 demand, especially in automotive and industrial markets, is sustained and how customer or distributor inventory changes affect shipments.
- Whether manufacturing cost efficiencies and 300-millimeter production continue to support margins as factory utilization and product mix change.
- How the planned R&D spending increase into 2017 affects operating expenses and returns from product development.
- Cash generation, inventory and receivables trends, debt maturities, and the sustainability of dividends and repurchases following the dividend increase.
- Progress and remaining costs of the Scotland restructuring, and the eventual effects of new accounting standards, particularly leases and revenue recognition.