Edgar Filing: TEXAS INSTRUMENTS INC

txn-10q_20180930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number 001-03761

TEXAS INSTRUMENTS INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)




Delaware	75-0289970
(State of Incorporation)	(I.R.S. Employer Identification No.)




12500 TI Boulevard, Dallas, Texas	75243
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code 214-479-3773

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

960,543,238

Number of shares of Registrant’s common stock outstanding as of

October 23, 2018

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

	For Three Months Ended						For Nine Months Ended
Consolidated Statements of Income	September 30,						September 30,
(Millions of dollars, except share and per-share amounts)	2018			2017			2018			2017
Revenue	$	4,261		$	4,116		$	12,067		$	11,211
Cost of revenue (COR)		1,457			1,460			4,197			4,037
Gross profit		2,804			2,656			7,870			7,174
Research and development (R&D)		390			375			1,159			1,122
Selling, general and administrative (SG&A)		396			412			1,270			1,285
Acquisition charges		80			80			239			239
Restructuring charges/other		1			1			5			8
Operating profit		1,937			1,788			5,197			4,520
Other income (expense), net (OI&E)		23			20			75			67
Interest and debt expense		36			19			89			57
Income before income taxes		1,924			1,789			5,183			4,530
Provision for income taxes		354			504			842			1,192
Net income	$	1,570		$	1,285		$	4,341		$	3,338

Earnings per common share (EPS):
Basic	$	1.61		$	1.29		$	4.41		$	3.33
Diluted	$	1.58		$	1.26		$	4.32		$	3.26

Average shares outstanding (millions):
Basic		969			988			976			993
Diluted		989			1,008			997			1,014

Cash dividends declared per common share	$	.62		$	.50		$	1.86		$	1.50

A portion of Net income is allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents. Diluted EPS is calculated using the following:

Net income	$	1,570		$	1,285		$	4,341		$	3,338
Income allocated to RSUs		(11	)		(11	)		(34	)		(31	)
Income allocated to common stock for diluted EPS	$	1,559		$	1,274		$	4,307		$	3,307

See accompanying notes.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

	For Three Months Ended						For Nine Months Ended
Consolidated Statements of Comprehensive Income	September 30,						September 30,
(Millions of dollars)	2018			2017			2018			2017
Net income	$	1,570		$	1,285		$	4,341		$	3,338
Other comprehensive income (loss), net of taxes
Net actuarial losses of defined benefit plans:
Adjustments		3			(1	)		2			(16	)
Recognized within Net income		15			17			33			40
Prior service credit of defined benefit plans:
Recognized within Net income		(1	)		(1	)		(3	)		(3	)
Derivative instruments:
Change in fair value		—			—			(2	)		—
Other comprehensive income (loss)		17			15			30			21
Total comprehensive income	$	1,587		$	1,300		$	4,371		$	3,359

See accompanying notes.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

	September 30,			December 31,
Consolidated Balance Sheets	2018			2017
(Millions of dollars, except share amounts)
Assets
Current assets:
Cash and cash equivalents	$	1,502		$	1,656
Short-term investments		3,611			2,813
Accounts receivable, net of allowances of ($13) and ($8)		1,585			1,278
Raw materials		171			126
Work in process		1,058			1,089
Finished goods		887			742
Inventories		2,116			1,957
Prepaid expenses and other current assets		654			1,030
Total current assets		9,468			8,734
Property, plant and equipment at cost		5,250			4,789
Accumulated depreciation		(2,199	)		(2,125	)
Property, plant and equipment		3,051			2,664
Long-term investments		278			268
Goodwill		4,362			4,362
Acquisition-related intangibles		707			946
Deferred tax assets		243			264
Capitalized software licenses		94			110
Overfunded retirement plans		220			208
Other long-term assets		150			86
Total assets	$	18,573		$	17,642

Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	749		$	500
Accounts payable		492			466
Accrued compensation		613			722
Income taxes payable		104			128
Accrued expenses and other liabilities		424			442
Total current liabilities		2,382			2,258
Long-term debt		4,318			3,577
Underfunded retirement plans		86			89
Deferred tax liabilities		43			78
Other long-term liabilities		1,228			1,303
Total liabilities		8,057			7,305
Stockholders’ equity:
Preferred stock, $25 par value. Authorized – 10,000,000 shares
Participating cumulative preferred. None issued.		—			—
Common stock, $1 par value. Authorized – 2,400,000,000 shares
Shares issued – 1,740,815,939		1,741			1,741
Paid-in capital		1,918			1,776
Retained earnings		37,378			34,662
Treasury common stock at cost
Shares: September 30, 2018 – 775,952,837; December 31, 2017 – 757,657,217		(30,167	)		(27,458	)
Accumulated other comprehensive income (loss), net of taxes (AOCI)		(354	)		(384	)
Total stockholders’ equity		10,516			10,337
Total liabilities and stockholders’ equity	$	18,573		$	17,642

See accompanying notes.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

	For Nine Months Ended
Consolidated Statements of Cash Flows	September 30,
(Millions of dollars)	2018			2017
Cash flows from operating activities
Net income	$	4,341		$	3,338
Adjustments to Net income:
Depreciation		432			406
Amortization of acquisition-related intangibles		239			239
Amortization of capitalized software		34			35
Stock compensation		190			197
Deferred taxes		(82	)		(47	)
Increase (decrease) from changes in:
Accounts receivable		(307	)		(306	)
Inventories		(181	)		(118	)
Prepaid expenses and other current assets		568			43
Accounts payable and accrued expenses		6			(19	)
Accrued compensation		(112	)		(85	)
Income taxes payable		11			(226	)
Changes in funded status of retirement plans		26			36
Other		(121	)		(59	)
Cash flows from operating activities		5,044			3,434

Cash flows from investing activities
Capital expenditures		(808	)		(464	)
Proceeds from asset sales		—			40
Purchases of short-term investments		(5,308	)		(3,105	)
Proceeds from short-term investments		4,545			3,305
Other		(12	)		(5	)
Cash flows from investing activities		(1,583	)		(229	)

Cash flows from financing activities
Proceeds from issuance of long-term debt		1,500			605
Repayment of debt		(500	)		(625	)
Dividends paid		(1,819	)		(1,493	)
Stock repurchases		(3,091	)		(1,850	)
Proceeds from common stock transactions		335			321
Other		(40	)		(21	)
Cash flows from financing activities		(3,615	)		(3,063	)

Net change in Cash and cash equivalents		(154	)		142
Cash and cash equivalents at beginning of period		1,656			1,154
Cash and cash equivalents at end of period	$	1,502		$	1,296

See accompanying notes.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

Notes to financial statements

1. Description of business, including segment and geographic area information

We design, make and sell semiconductors to electronics designers and manufacturers all over the world. We have two reportable segments, which are established along major categories of products as follows:

•

Analog – consisting of the following product lines: Power, Signal Chain and High Volume.

•

Embedded Processing – consisting of the following product lines: Connected Microcontrollers and Processors.

We report the results of our remaining business activities in Other. Other includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other includes DLP^® products, calculators and custom ASIC products.

Our centralized manufacturing and support organizations, such as facilities, procurement and logistics, provide support to our operating segments, including those in Other. Costs incurred by these organizations, including depreciation, are charged to the segments on a per-unit basis. Consequently, depreciation expense is not an independently identifiable component within the segments’ results and, therefore, is not provided.

Segment information

	For Three Months Ended				For Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Revenue:
Analog	$	2,907	$	2,698	$	8,163	$	7,365
Embedded Processing		894		931		2,763		2,602
Other		460		487		1,141		1,244
Total revenue	$	4,261	$	4,116	$	12,067	$	11,211

Operating profit:
Analog	$	1,447	$	1,268	$	3,876	$	3,280
Embedded Processing		309		325		971		836
Other		181		195		350		404
Total operating profit	$	1,937	$	1,788	$	5,197	$	4,520

Geographic area information

The following geographic area information includes revenue based on product shipment destination. The revenue information is not necessarily indicative of the geographic area in which the end applications containing our products are ultimately consumed because our products tend to be shipped to the locations where our customers manufacture their products. Specifically, many of our products are shipped to our customers in China who may include these parts in the manufacture of their own end products, which they may in turn export to their customers around the world.

	For Three Months Ended				For Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Revenue:
United States	$	665	$	563	$	1,783	$	1,434
Asia (a)		2,520		2,398		7,075		6,561
Europe, Middle East and Africa		769		812		2,304		2,228
Japan		218		272		656		783
Rest of world		89		71		249		205
Total revenue	$	4,261	$	4,116	$	12,067	$	11,211

(a)	Revenue from products shipped into China, including Hong Kong, was $2.0 billion and $1.8 billion in the third quarters of 2018 and 2017, respectively, and $5.3 billion and $4.9 billion in the first nine months of 2018 and 2017, respectively.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

2. Basis of presentation and significant accounting policies and practices

Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and on the same basis as the audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2017, except for the effects of adopting Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Consolidated Statements of Income, Comprehensive Income and Cash Flows for the periods ended September 30, 2018 and 2017, and the Consolidated Balance Sheet as of September 30, 2018, are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown. Certain information and note disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Because the consolidated interim financial statements do not include all of the information and notes required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2017. The results for the three- and nine-month periods are not necessarily indicative of a full year’s results.

Significant accounting policies and practices

Revenue recognition

We generate revenue primarily from the sale of semiconductor products, either directly to a customer or to a distributor, or at the conclusion of a consignment process. We have a variety of types of contracts with our customers and distributors. In determining whether a contract exists, we evaluate the terms of the agreement, the relationship with the customer or distributor and their ability to pay.

We recognize revenue from sales of our products, including sales to our distributors, at a point in time, generally upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order. Control is considered transferred when title and risk of loss pass, when the customer becomes obligated to pay and, where required, when the customer has accepted the products. For sales to distributors, payment is due on our standard commercial terms and is not contingent upon resale of the products.

Revenue from sales of our products that is subject to inventory consignment agreements is recognized at a point in time, when the customer or distributor pulls product from consignment inventory that we store at designated locations. Transfer of control occurs at that point, when title and risk of loss transfers and the customer or distributor becomes obligated to pay for the products pulled from inventory. Until the products are pulled for use or sale by the customer or distributor, we retain control over the products’ disposition, including the right to pull back or relocate the products.

The amount of revenue recognized is adjusted based on allowances, which are prepared on a portfolio basis using a most likely amount methodology based on analysis of historical data, current economic conditions and contractual terms. These allowances, which are not material, generally include adjustments for pricing arrangements, product returns and incentives. The length of time between invoicing and payment is not significant under any of our payment terms. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component.

In addition, we record allowances for accounts receivable that we estimate may not be collected. We monitor collectability of accounts receivable primarily through review of accounts receivable aging. When collection is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, record a charge in the period such determination is made.

We recognize shipping fees, if any, received from customers in revenue. We include shipping and handling costs in COR. The majority of our customers pay these fees directly to third parties.

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

Earnings per share (EPS)

Unvested share-based payment awards that contain non-forfeitable rights to receive dividends or dividend equivalents, such as our restricted stock units (RSUs), are considered to be participating securities and the two-class method is used for purposes of calculating EPS. Under the two-class method, a portion of Net income is allocated to these participating securities and, therefore, is excluded from the calculation of EPS allocated to common stock, as shown in the table below.

Computation and reconciliation of earnings per common share are as follows (shares in millions):

	For Three Months Ended September 30,
	2018					2017
	Net					Net
	Income			Shares	EPS	Income			Shares	EPS
Basic EPS:
Net income	$	1,570				$	1,285
Income allocated to RSUs		(12	)				(11	)
Income allocated to common stock
for basic EPS calculation	$	1,558