Texas Instruments Incorporated — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The interim financial statements are unaudited. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Texas Instruments designs, manufactures and sells semiconductors worldwide. Its reportable segments are Analog and Embedded Processing; Other includes DLP products, calculators and custom ASIC products. Management cited strong industrial and automotive demand. Beginning in 2017, product lines were reorganized within the two reportable segments without changing previously reported segment totals.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Revenue | $4.116 billion | $3.675 billion | +12% |
| Gross profit / gross margin | $2.656 billion / 64.5% | $2.284 billion / 62.1% | Margin +2.4 percentage points |
| Operating profit / margin | $1.788 billion / 43.4% | $1.408 billion / 38.3% | Margin +5.1 percentage points |
| Net income | $1.285 billion | $1.018 billion | +26% |
| Diluted EPS | $1.26 | $0.98 | +29% |
Q3 operating expenses for R&D and SG&A totaled $787 million, versus $795 million. R&D rose as resources continued to shift toward development; lower SG&A partly offset the increase. Acquisition charges were $80 million in each quarter, principally non-cash amortization of National Semiconductor intangibles.
For the first nine months, revenue was $11.211 billion (+13%), operating profit $4.520 billion (+28%), net income $3.338 billion (+31%) and diluted EPS $3.26 versus $2.46. Gross margin was 64.0%, compared with 61.5%; operating margin was 40.3%, compared with 35.4%.
Segments and material changes
| Q3 segment | Revenue, year-over-year | Operating profit, year-over-year |
|---|---|---|
| Analog | $2.698 billion, +16% | $1.268 billion, +32%; margin 47.0% versus 41.2% |
| Embedded Processing | $931 million, +17% | $325 million, +45%; margin 34.9% versus 28.2% |
| Other | $487 million, -13% | $195 million, -14% |
Analog growth was led by Power; Embedded Processing growth was led by Processors. Both core segments improved operating margins, primarily on higher revenue and gross profit. Analog and Embedded Processing together represented 88% of Q3 revenue, up from 85%. Other revenue and profit declined.
Other income and expense shifted to $20 million of income from $9 million of expense, partly reflecting the 2017 change to recognize royalties in other income and expense rather than revenue. Prior-period royalty amounts were not material.
Cash flow, liquidity and debt
- Operating cash flow for the first nine months was $3.434 billion, up from $3.227 billion. Capital expenditures were $464 million, compared with $421 million.
- For the trailing 12 months, operating cash flow was $4.821 billion and free cash flow was $4.247 billion, or 29.0% of revenue. Free cash flow is a non-GAAP measure defined as operating cash flow less capital expenditures.
- Cash and cash equivalents plus short-term investments totaled $3.444 billion at September 30, 2017, down $46 million from year-end 2016. Current assets were $7.991 billion and current liabilities $2.055 billion.
- Total debt, including unamortized discounts, premiums and issuance costs, was $3.583 billion: $499 million current and $3.084 billion long-term. The $2 billion revolving facility was undrawn, with no commercial paper outstanding.
- Nine-month financing cash outflow was $3.063 billion, including $1.493 billion of dividends and $1.850 billion of share repurchases. TI repurchased 23.2 million shares. It announced a 24% dividend increase and an additional $6 billion share-repurchase authorization in September.
- In May, TI issued $600 million principal amount of notes and retired $625 million of maturing debt during the first half. After quarter-end, it agreed to issue another $500 million of debt, expected to close November 3, 2017.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance for the next quarter or full year is stated in the provided filing text. Management said it expected R&D expense to continue increasing in 2017 and believed available resources and operating plans would fund requirements for at least the next 12 months.
- Management attributed improved gross margin partly to its manufacturing strategy, including 300-millimeter Analog production. It reported trailing-12-month cash flow from operations of $4.8 billion and said it intended to return all free cash flow to owners over time.
- Management estimated an annual operating tax rate of about 31%, excluding discrete items; the Q3 effective tax rate was 28%. Tax rates may vary with discrete items and other factors.
- Restructuring charges were $8 million for the first nine months. Estimated total charges are about $40 million, with $29 million recognized through September 30; remaining charges were expected through 2019. Greenock facility phase-out costs were included.
- TI early adopted pension-cost presentation guidance, moving non-service pension and retiree-benefit costs outside operating profit; prior periods were recast. It said this did not affect revenue, net income, EPS or operating cash flow. The company expected no material effect from the new revenue-recognition standard then under evaluation.
- Stated risk factors include semiconductor demand and competition, inventory and customer forecasts, manufacturing capacity and supply, technology execution, foreign exchange and geopolitical conditions, cybersecurity, taxes, product claims, intellectual property, and acquisition or restructuring execution. TI said pending legal proceedings and product warranty/liability matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether growth and margin expansion in Analog and Embedded Processing continued, and whether the weaker Other segment stabilized.
- Whether improved margins and strong operating cash flow translated into sustainable free cash flow, especially as capital spending and manufacturing utilization change.
- Progress on shareholder returns, including the higher dividend and expanded repurchase authorization, relative to cash generation and debt issuance.
- Actual restructuring costs and timing, and the effects of tax-rate changes and discrete tax items.
- Subsequent debt issuance terms and any material effects from adoption of new accounting standards.