Texas Instruments Incorporated — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless stated otherwise. Texas Instruments designs, manufactures and sells semiconductors worldwide, principally through its Analog and Embedded Processing segments. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $3,402 | $3,008 | +13% |
| Gross profit | $2,144 | $1,829 | +17% |
| Gross margin | 63.0% | 60.8% | +2.2 percentage points |
| Operating profit | $1,252 | $984 | +27% |
| Operating margin | 36.8% | 32.7% | +4.1 percentage points |
| Net income | $997 | $711 | +40% |
| Diluted EPS | $0.97 | $0.69 | +$0.28 |
| Cash dividends declared per share | $0.50 | $0.38 | +32% |
| Cash from operating activities | $795 | $653 | +$142 |
| Capital expenditures | $127 | $124 | +$3 |
Management reported trailing-12-month operating cash flow of $4,756 and free cash flow of $4,222, up 9% and 11%, respectively, year over year. Free cash flow equaled 30.7% of revenue, versus 29.5% a year earlier; free cash flow is a non-GAAP measure.
Segments and material changes
- Analog: Revenue of $2,256, up 20%; operating profit of $935, up 36%, and operating margin of 41.4% versus 36.6%. Growth was primarily in Power and Signal Chain, with High Volume also growing.
- Embedded Processing: Revenue of $803, up 10%; operating profit of $240, up 28%, and operating margin of 29.9% versus 25.7%. Revenue increased in both product lines.
- Other: Revenue of $343, down 14%; operating profit of $77, down 29%. This category includes DLP products, calculators and custom ASIC products.
Analog and Embedded Processing together represented 90% of revenue, compared with 87% in the prior-year quarter. Management attributed overall growth to stronger demand, particularly in automotive and improving industrial markets, and cited higher revenue and manufacturing efficiency—including 300-millimeter Analog production—as contributors to margin improvement.
R&D expense rose 15% to $369 as the company continued shifting resources toward research and development; management expected R&D expense to continue increasing in 2017. SG&A was broadly flat at $439. Acquisition charges were $80 in both periods, primarily ongoing amortization of National Semiconductor acquisition-related intangibles.
Cash, debt and liquidity
- Cash and cash equivalents were $1,073 and short-term investments were $1,976 at March 31, 2017, totaling approximately $3.05 billion, down $441 from year-end 2016. Management said about 80% of these funds were held by U.S. entities.
- Total debt, including unamortized discounts and costs, was $3,358: $378 current and $2,980 long-term. The company repaid $250 of maturing debt during the quarter. Interest and debt expense was $18, versus $22.
- A $2 billion revolving credit facility, available through March 2022, was undrawn; there was no commercial paper outstanding. Management stated it expected available resources and operating plans to fund requirements for at least the next 12 months.
- Quarterly financing cash flows used $1,143, including $500 of dividends, $550 of share repurchases and $250 of debt repayment. The company repurchased 7.1 million shares. Cash declined by $81 during the quarter.
- Accounts receivable increased $70 to $1,337; days sales outstanding rose to 35 from 33. Inventory increased $53 to $1,843; days of inventory rose to 132 from 126.
Outlook, accounting, risks and contingencies
- No specific revenue or earnings guidance is stated in the provided filing text. Management’s estimated annual operating tax rate was about 30%, excluding discrete items; the effective tax rate, including discrete items, was expected to be about 27% for 2017 as of March 31. Quarterly tax rates may vary, including with employee stock-option exercises.
- On April 27, 2017, the company agreed to issue $600 of debt, expected to close May 4; proceeds were intended partly for maturing debt and partly for general corporate purposes.
- Beginning January 1, 2017, royalties were no longer reported as revenue and were instead recorded in other income and expense. Management said royalties were decreasingly significant to core operations; the change contributed to the year-over-year improvement in other income and expense.
- The company early adopted pension-cost presentation guidance, moving non-service pension and retiree-benefit components outside operating profit. Prior-period figures were recast; adoption did not affect revenue, net income, EPS or operating cash flow. It also early adopted intra-entity asset-transfer tax guidance, with no material effect.
- Restructuring charges were $4 in Q1. Estimated total charges for the Greenock, Scotland facility phase-out were about $40, with $26 recognized through March 31, 2017; remaining charges were expected through the end of 2018. Further charges for the separate product-line reorganization were not expected to be material.
- The filing cites risks including semiconductor demand and cyclicality, competition, forecast and inventory mismatches, manufacturing utilization and execution, technology and supply availability, foreign exchange and geopolitical conditions, cybersecurity, customer or distributor changes, tax matters, intellectual-property and product claims, and pension costs. Management did not expect pending legal proceedings or product warranty/liability matters to have a material adverse effect; historical product-claim payments were low.
Important facts for investors to verify
- Whether automotive and industrial demand, especially Analog growth, remains strong and supports the improved margins.
- Whether rising inventory days and receivable days reflect expected growth or a change in demand or customer inventory patterns.
- The impact of higher planned R&D spending, manufacturing loadings and 300-millimeter capacity on future margins and cash generation.
- The final terms and use of proceeds of the announced $600 million debt issuance, and the schedule for upcoming debt maturities.
- The effect of discrete tax items on the full-year effective tax rate; management’s 27% estimate may fluctuate.
- Restructuring charges through 2018 and the company’s progress on the Greenock facility phase-out.