Texas Instruments Incorporated — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
TI designs and manufactures semiconductors, with two primary segments: Analog and Embedded Processing. Management emphasizes these businesses for their diverse markets, long product lives and cash-generation potential. In 2015, they represented 86% of revenue. Other includes DLP products, calculators, custom ASICs, royalties and certain corporate and restructuring items.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $13.00 billion | $13.05 billion |
| Gross profit / gross margin | $7.56 billion / 58.2% | $7.43 billion / 56.9% |
| Operating profit / margin | $4.27 billion / 32.9% | $3.95 billion / 30.3% |
| Net income | $2.99 billion | $2.82 billion |
| Diluted EPS | $2.82 | $2.57 |
| Cash flow from operations | $4.27 billion | $3.89 billion |
| Capital expenditures | $551 million | $385 million |
| Free cash flow (non-GAAP) | $3.72 billion; 28.6% of revenue | $3.51 billion; 26.9% of revenue |
Revenue was essentially flat year over year: Analog and Embedded Processing growth was offset by lower Other revenue. Foreign-exchange changes reduced 2015 revenue by about $150 million. Gross profit rose 2%, primarily from lower manufacturing costs. Net income increased 6%; reduced average share count from repurchases contributed about $0.07 to EPS. Effective tax rate was 29%, versus 27%.
Segment results
| Segment | 2015 revenue | Change | 2015 operating profit |
|---|---|---|---|
| Analog | $8.34 billion | +3% | $3.05 billion; 36.6% margin |
| Embedded Processing | $2.79 billion | +2% | $596 million; 21.4% margin |
| Other | $1.87 billion | -15% | $630 million; 33.6% margin |
Analog growth was led by High Volume Analog & Logic; Embedded Processing growth came mainly from Connectivity and Microcontrollers. Other declined primarily because of lower custom ASIC revenue.
Fourth quarter: Revenue was $3.19 billion, operating profit $1.14 billion, net income $836 million and diluted EPS $0.80. Revenue and gross profit were below the third quarter, while net income and EPS increased.
Liquidity, debt and capital returns
- Cash, cash equivalents and short-term investments totaled $3.22 billion at year-end, down from $3.54 billion. Current assets were $7.07 billion and current liabilities $2.56 billion.
- Total debt, including current maturities, was $4.12 billion, compared with $4.63 billion a year earlier; cash and short-term investments therefore were about $902 million below total debt. The $2 billion revolving credit facility was undrawn, and no commercial paper was outstanding.
- TI generated $4.27 billion of operating cash flow and $3.72 billion of free cash flow. Financing activities used $4.17 billion.
- Cash returned to investors totaled about $4.2 billion: $2.74 billion in share repurchases and $1.44 billion in dividends. The annual dividend declared was $1.40 per share; the quarterly rate rose to $0.38 during 2015.
- Management said it expected sufficient resources to fund requirements for at least the next 12 months. Planned 2016 retirement-plan contributions were about $100 million.
Outlook, commentary and notable items
- For the first quarter of 2016, management expected revenue to be about $150 million lower than in first-quarter 2015, due to weakness in a sector of personal electronics. The filing does not provide broader numerical revenue or earnings guidance.
- Management targeted free cash flow of 20%–30% of revenue over time; 2015’s 28.6% was within that range. It highlighted the long-term cost and cash-flow benefits of shifting more Analog production to 300-millimeter wafers.
- In January 2016, TI announced plans to phase out its Greenock, Scotland, facility over three years and transfer production to other sites. Estimated charges are about $40 million, including $17 million recognized in fourth-quarter 2015; expected annual savings are about $35 million.
- 2015 restructuring charges/other were a net credit of $71 million, including $83 million of asset-sale gains, partly offset by restructuring charges and other costs. National Semiconductor acquisition-related charges were $329 million, primarily non-cash amortization of acquired intangibles.
- Key risks include semiconductor cyclicality, competitive pricing and technology, demand or inventory shifts, fixed manufacturing costs, customer concentration and distributor exposure, foreign-exchange and international risks, supply-chain disruption, cybersecurity, tax uncertainty and pension costs. Apple represented about 11% of 2015 revenue; approximately 85% of revenue came from shipments outside the U.S., and shipments into China were $5.8 billion.
- TI reported ordinary-course legal proceedings that management did not expect to materially affect financial condition, results or liquidity. The financial-statement and internal-control audits received unqualified opinions.
Important facts for investors to verify
- Whether Analog and Embedded Processing growth can continue to offset declines in Other and weakness in personal electronics.
- How much of the higher gross margin and free cash flow reflects durable manufacturing efficiencies versus volume, mix or other period-specific factors.
- The impact of the Greenock transition, including the timing and realization of expected savings and restructuring costs.
- Customer and geographic concentration, particularly Apple’s 11% revenue share and significant China-related shipments.
- Debt maturities, cash availability and capital-return levels relative to free cash flow; also note that free cash flow is a non-GAAP measure.
- Tax contingencies: the filing disclosed $84 million of uncertain tax positions and stated that this liability could increase by up to $150 million in 2016, with no net profit impact expected for the described depreciation-related position.