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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3


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.

 

 

 

 

 

 

 

 

 

 

 

 

 

4


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.

 

 

 

 

 

 

 

 

 

 

 

 

 

5


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.

 

 

6


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.

7


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