Texas Instruments Incorporated — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Financial amounts are in U.S. dollars; annual figures below are in millions unless stated otherwise.
Business context
TI designs, manufactures and sells semiconductors worldwide. Its reportable segments are Analog and Embedded Processing; Other includes DLP products, calculators, custom ASICs and certain corporate-level items. Management prioritizes Analog and Embedded Processing, especially industrial and automotive applications, citing product longevity, market diversity and cash-generation potential. Those two segments produced about 90% of 2017 revenue.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Revenue | $14.961 billion | $13.370 billion | Up 12% |
| Gross profit / margin | $9.614 billion / 64.3% | $8.257 billion / 61.8% | Margin up 2.5 percentage points |
| Operating profit / margin | $6.083 billion / 40.7% | $4.855 billion / 36.3% | Margin up 4.4 percentage points |
| Net income | $3.682 billion | $3.595 billion | Up 2% |
| Diluted EPS | $3.61 | $3.48 | Up 4% |
| Cash from operations | $5.363 billion | $4.614 billion | Up $749 million |
| Capital expenditures / free cash flow | $695 million / $4.668 billion | $531 million / $4.083 billion | Free cash flow, a non-GAAP measure, was 31.2% of revenue versus 30.5% |
| Cash and short-term investments | $4.469 billion | $3.490 billion | Up $979 million |
| Debt | $4.077 billion carrying value | $3.609 billion | $500 million current; $3.577 billion long-term |
At year-end, TI had a $2 billion revolving credit facility available through March 2022, undrawn, and no commercial paper outstanding. Management said available resources and operating plans were sufficient for at least the next 12 months. Inventory rose to $1.957 billion from $1.790 billion; days of inventory increased to 134 from 126. Backlog was $1.32 billion, up from $1.09 billion, though the company cautions that backlog may not predict future revenue.
Segments and material changes
- Analog: Revenue of $9.900 billion, up 16%; operating profit of $4.468 billion, up 31%, with operating margin rising to 45.1% from 40.0%. Growth came primarily from Power and Signal Chain.
- Embedded Processing: Revenue of $3.498 billion, up 16%; operating profit of $1.143 billion, up 40%, with margin rising to 32.7% from 27.0%. Growth in both product lines was led by Processors.
- Other: Revenue of $1.563 billion, down 14%; operating profit of $472 million, down 24%. The filing attributes the revenue decline mainly to custom ASIC products and the change in royalty presentation.
- TI stopped presenting royalties as revenue beginning in 2017 and recorded them in other income; 2017 royalty income was $119 million. Segment product lines were reorganized, with no effect on previously reported consolidated statements or segment amounts.
- Dividends paid increased to $2.104 billion from $1.646 billion; stock repurchases were $2.556 billion versus $2.132 billion. TI reported returning $4.66 billion to shareholders, approximately its 2017 free cash flow.
Fourth-quarter results
Fourth-quarter 2017 revenue was $3.750 billion, versus $3.414 billion in fourth-quarter 2016. Operating profit was $1.563 billion versus $1.332 billion. Net income was $344 million and diluted EPS was $0.34, compared with $1.047 billion and $1.02, respectively, a year earlier. The unusually low fourth-quarter earnings reflected the 2017 tax charge associated with the U.S. Tax Cuts and Jobs Act; the filing does not provide a quarter-specific tax reconciliation in the supplied text.
Outlook, tax matters and risks
- TI estimated an annual operating tax rate of about 23% for 2018, including a transitional non-cash expense, and about 18% on an ongoing basis starting in 2019. The 2017 effective tax rate was 39.4%, including $773 million of additional tax expense provisionally recorded for the Tax Act.
- The company had not completed its accounting for the Tax Act. The provisional charge included $714 million for tax on indefinitely reinvested foreign earnings and $59 million for remeasurement of deferred tax balances. TI said the $690 million liability would be paid over eight years and was not expected to significantly affect liquidity.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management emphasized continued focus on industrial and automotive markets and investment in Analog and Embedded Processing.
- Key disclosed risks include semiconductor cyclicality, demand and inventory forecasting, pricing and technology competition, fixed manufacturing costs, supply-chain and foundry dependence, global trade and currency exposure, cybersecurity, and tax-law changes. About 85% of revenue came from shipments outside the United States; shipments into China were $6.6 billion in 2017.
- TI announced that Brian Crutcher would succeed Richard Templeton as president and CEO effective June 1, 2018; Templeton was to remain chairman. The Greenock, Scotland facility phaseout was expected to continue through 2019, with estimated total restructuring charges of about $40 million.
- TI reported no significant off-balance-sheet arrangements and stated that ordinary-course legal proceedings were not expected to materially affect its financial condition, results or liquidity. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Final Tax Act accounting, including the provisional foreign-earnings tax, deferred-tax remeasurement and the expected 2018 and 2019 tax rates.
- Whether Analog and Embedded Processing growth and operating margins remain durable, particularly across industrial and automotive end markets.
- Whether higher inventory and backlog translate into sales without material obsolescence, cancellations or margin pressure.
- Cash generation relative to capital spending, dividends, buybacks and debt maturities; free cash flow is non-GAAP.
- Execution of the Greenock transition and CEO succession, and ongoing exposure to China, global trade, manufacturing capacity and third-party suppliers.