Texas Instruments Incorporated — FY 2016 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2016; the filing also presents fourth-quarter results. Texas Instruments designs and manufactures semiconductors worldwide, with two reportable segments: Analog and Embedded Processing. Management focuses on these businesses for their product diversity, long life cycles and cash-generation potential.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $13.37 billion | $13.00 billion |
| Gross profit / margin | $8.24 billion / 61.6% | $7.56 billion / 58.2% |
| Operating profit / margin | $4.80 billion / 35.9% | $4.27 billion / 32.9% |
| Net income | $3.60 billion | $2.99 billion |
| Diluted EPS | $3.48 | $2.82 |
| Cash flow from operations | $4.61 billion | $4.40 billion |
| Capital expenditures | $531 million | $551 million |
| Free cash flow (non-GAAP) | $4.08 billion; 30.5% of revenue | $3.85 billion; 29.6% of revenue |
| Cash, cash equivalents and short-term investments | $3.49 billion | $3.22 billion |
| Total debt, including current portion | $3.61 billion | $4.12 billion |
All dollar amounts above are U.S. dollars. FY 2016 cash returned to investors was $3.78 billion: $1.65 billion in dividends and $2.13 billion in repurchases. The quarterly dividend rose to $0.50 per share in 2016, equivalent to an annualized $2.00 rate at year-end.
Segment results
- Analog: Revenue of $8.54 billion, up 2%; operating profit of $3.38 billion, up 11%, with a 39.6% operating margin. Growth was led by SVA and HPA; HVAL declined.
- Embedded Processing: Revenue of $3.02 billion, up 8%; operating profit of $801 million, up 34%, with a 26.5% margin. Processors, Microcontrollers and Connectivity all contributed to revenue growth.
- Other: Revenue of $1.81 billion, down 3%; operating profit of $618 million, down 2%. Lower royalties, custom ASICs and calculator revenue were partly offset by DLP growth.
Material changes versus the prior year
- Revenue increased 3%; gross profit rose 9%, mainly from lower manufacturing costs and, to a lesser extent, higher revenue. Gross margin expanded 3.4 percentage points.
- Operating profit increased 12% and net income increased 20%. Diluted EPS rose 23%, benefiting both from higher earnings and fewer average diluted shares.
- Operating cash flow increased $217 million. Free cash flow increased to $4.08 billion, or 30.5% of revenue, above the company’s stated target range of 20–30%.
- Analog and Embedded Processing together represented 86% of revenue. Cash and short-term investments increased $272 million; total debt decreased about $511 million.
Outlook, risks and unusual items
- Outlook: The filing provides no specific 2017 revenue or earnings guidance. Management said R&D expense would continue increasing in 2017. It expects sufficient resources to fund working capital, capital expenditures, dividends and debt payments for at least the next 12 months.
- Manufacturing and strategy: Management cited increased Analog factory loadings on 300-millimeter wafers and expects most Analog growth to be produced on those wafers; it stated they offer a 40% cost advantage per unpackaged chip versus 200-millimeter wafers. Capital spending is intended to remain low through opportunistic capacity purchases.
- Unusual earnings item: Other income included $188 million from intellectual-property infringement settlements in 2016, versus none in 2015. The company also recorded a $40 million gain on an intellectual-property sale, partly offset by $25 million of restructuring charges.
- Accounting change: TI early adopted ASU 2016-09 for stock compensation. The company recorded $150 million of excess tax benefits in 2016, and reported that adoption benefited 2016 EPS by $0.13. Prior-period cash-flow presentations were recast.
- Restructuring: TI plans to phase out its Greenock, Scotland manufacturing facility through 2018, with estimated total charges of about $40 million and an expected reduction of about 350 jobs. A product-line reorganization was announced in January 2017.
- Principal risks: Semiconductor cyclicality and demand or inventory forecast errors; intense competition and pricing pressure; technology and product execution; fixed manufacturing costs and factory utilization; reliance on suppliers and subcontractors; global, trade, currency and geopolitical exposure, including China; cybersecurity and natural-disaster disruptions; tax matters; intellectual-property and product claims; and pension costs.
- Liquidity and contingencies: The $2 billion revolving credit facility was undrawn and there was no commercial paper outstanding at year-end. Legal proceedings and product warranty matters were described as not expected to have a material adverse effect. Contractual obligations totaled $4.64 billion; uncertain tax liabilities of $243 million and future retirement-plan contributions were excluded from that table. Planned 2017 retirement contributions were about $100 million.
Investor verification points
- Check whether growth and margin gains persist without the $188 million settlement income and the $40 million asset-sale gain.
- Track Analog and Embedded Processing growth, segment margins, and the shift away from lower-performing Other revenue.
- Monitor inventory: year-end inventory rose to $1.79 billion and days of inventory increased to 126 from 115; backlog rose to $1.09 billion from $0.95 billion, but the company cautions backlog may not predict future revenue.
- Assess the sustainability of the dividend and repurchases against free cash flow, planned investment and debt maturities; review the Greenock transition and other restructuring costs.
- Review the $243 million uncertain-tax-position liability, tax-holiday status in Malaysia and the Philippines, and the company’s permanently reinvested foreign earnings of about $9.03 billion.