filings.toolsTexas Instruments 10-K 2017-12-31
Filed 2018-02-22. 21 sections, 263K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
10-K 1 txn-10k_20171231.htm 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|
for the fiscal year ended December 31, 2017
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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for the transition period from to
Commission File Number 1-3761
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
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
|---|---|---|
| Common Stock, par value $1.00 | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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 Act). Yes ☐ No ☒
The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $76,179,967,734 as of June 30, 2017.
983,787,502 (Number of shares of common stock outstanding as of February 20, 2018)
Part III hereof incorporates information by reference to the Registrant’s proxy statement for the 2018 annual meeting of stockholders.
PART I
Item 1. Business.
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We design and make semiconductors that we sell to electronics designers and manufacturers all over the world. We began operations in 1930. We are incorporated in Delaware, headquartered in Dallas, Texas, and have design, manufacturing or sales operations in more than 30 countries. We have two reportable segments: Analog and Embedded Processing. We report the results of our remaining business activities in Other. In 2017, we generated $14.96 billion of revenue.
Our business model is designed around four sustainable competitive advantages, that we believe, in combination, put us in a unique class of companies. These advantages include (1) a strong foundation of manufacturing and technology, (2) a broad portfolio of differentiated analog and embedded processing products, (3) the broadest reach of market channels and (4) diversity and longevity of our products, markets and customer positions. Our strategic focus, and where we invest the majority of our resources, is on Analog and Embedded Processing, with a particular emphasis on designing and selling those products into the industrial and automotive markets, which we believe represent the best growth opportunities. Analog and embedded processing products sold into industrial and automotive markets provide long product life cycles, intrinsic diversity, and less capital-intensive manufacturing, which we believe offer stability, profitability and strong cash generation. This business model is the foundation of our capital management strategy, which is based on our belief that free cash flow growth, especially on a per-share basis, is important for maximizing shareholder value over the long term. We also believe that free cash flow will be valued only if it is productively invested in the business or returned to shareholders. Free cash flow is cash flow from operations less capital expenditures.
The combined effect of these sustainable competitive advantages is that over time we have gained market share in Analog and Embedded Processing and have grown and returned free cash flow. TI’s business model puts us in a unique class of companies with the ability to grow, generate cash, and return that cash to shareholders.
Product information
Semiconductors are electronic components that serve as the building blocks inside modern electronic systems and equipment. Semiconductors, generally known as “chips,” combine multiple transistors to form a complete electronic circuit. We have tens of thousands of products that are used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution. This broad portfolio includes products that are integral to almost all electronic equipment.
Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels. Our segments also reflect how management allocates resources and measures results. In 2017, we reorganized the product lines within our segments to align our business structure with the way our customers select and buy products.
Analog
Our Analog segment generated $9.90 billion of revenue in 2017. Analog semiconductors change real-world signals, such as sound, temperature, pressure or images, by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors. Analog semiconductors also are used to manage power in all electronic equipment by converting, distributing, storing, discharging, isolating and measuring electrical energy, whether the equipment is plugged into a wall or running off a battery. Our Analog products are used in many markets, particularly industrial, automotive and personal electronics.
Sales of our Analog products generated about 66 percent of our revenue in 2017. According to external sources, the market for analog semiconductors was about $53 billion in 2017. Our Analog segment’s revenue in 2017 was about 19 percent of this fragmented market, the leading position. We believe we are well positioned to increase our market share over time.
Our Analog segment includes the following major product lines: Power, Signal Chain and High Volume.
Power
Power includes products that help customers manage power in electronic systems. Our broad portfolio is designed to manage power requirements across different voltage levels using battery management solutions, portable components, power supply controls, point-of-load products, switches and interfaces, integrated protection devices, high-voltage products, and mobile lighting and display products.
Signal Chain
Signal Chain includes products that sense, condition and measure real-world signals to allow information to be transferred or converted for further processing and control. Our Signal Chain products, which serve a variety of end markets, include amplifiers, data converters, interface products, motor drives, clocks and sensing products.
High Volume
High Volume includes integrated analog and standard products that are primarily sold into markets such as personal electronics, industrial and automotive. These products support applications like touch screens and automotive safety systems.
Embedded Processing
Our Embedded Processing segment generated $3.50 billion of revenue in 2017. Embedded Processing products are the “brains” of many types of electronic equipment. Embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. Our devices vary from simple, low-cost microcontrollers used in electric toothbrushes to highly specialized, complex devices used in automotive applications such as infotainment systems and advanced driver assistance systems (ADAS). Our Embedded Processing products are used in many markets, particularly industrial and automotive.
An important characteristic of our Embedded Processing products is that our customers often invest their own research and development (R&D) to write software that operates on our products. This investment tends to increase the length of our customer relationships because many customers prefer to re-use software from one product generation to the next.
Sales of Embedded Processing products generated about 23 percent of our revenue in 2017. According to external sources, the market for embedded processors was about $20 billion in 2017. Our Embedded Processing segment’s revenue in 2017 was about 18 percent of this fragmented market, among the leaders. We believe we are well positioned to increase our market share over time.
Our Embedded Processing segment includes the following major product lines: Connected Microcontrollers and Processors.
Connected Microcontrollers
Connected Microcontrollers includes microcontrollers, microcontrollers with integrated wireless capabilities and stand-alone wireless connectivity solutions. Microcontrollers are self-contained systems with a processor core, memory and peripherals that are designed to control a set of specific tasks for electronic equipment. Microcontrollers tend to have minimal requirements for memory, program length and software complexity. Our products are used in a wide range of applications and incorporate both wired and wireless communication with integrated analog functions to enable electronic equipment to sense, connect, log and transfer data.
Processors
Processors includes digital signal processors (DSPs) and applications processors. DSPs perform mathematical computations almost instantaneously to process or improve digital data. Applications processors are designed for specific computing activity.
Other
We report the results of our remaining business activities in Other, which includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other generated $1.56 billion of revenue in 2017 and includes revenue from DLP® products (primarily used in projectors to create high-definition images), calculators and certain custom semiconductors known as application-specific integrated circuits (ASICs).
In Other, we also include items that are not used in evaluating the results of or in allocating resources to our segments. Examples of these items include acquisition charges; restructuring charges; and certain corporate-level items, such as litigation expenses, environmental costs, insurance settlements, and gains and losses from other activities, including asset dispositions.
Financial information with respect to our segments and our operations outside the United States is contained in Note 1 to the financial statements, which is included in Item 8, “Financial Statements and Supplementary Data.” Risks attendant to our foreign operations are described in Item 1A, “Risk Factors.”
Markets for our products
The table below lists the major markets for our products in 2017 and the estimated percentage of our 2017 revenue that the market represented. The chart also lists, in declining order of our revenue, the sectors within each market.
| Market | Sector | |
|---|---|---|
| Industrial (35% of TI revenue) | Factory automation and control Building automation Medical/healthcare/fitness Grid infrastructure Test and measurement Motor drives Space/avionics/defense Appliances Power delivery Electronic point of sale Display Industrial transportation Lighting Industrial other | |
| Automotive (19% of TI revenue) | Infotainment and cluster Passive safety Advanced driver assistance systems (ADAS) Hybrid/electric vehicle and powertrain Body electronics and lighting | |
| Personal electronics (25% of TI revenue) | Mobile phones Personal and notebook computers Portable electronics Storage Tablets Printers and other peripherals Home theater and entertainment Wearables (non-medical) TV Gaming | |
| Communications equipment (12% of TI revenue) | Wireless infrastructure Telecom infrastructure Enterprise switching Residential | |
| Enterprise systems (6% of TI revenue) | Projectors Servers Multi-function printers High-performance computing Thin client | |
| Other (calculators and other) (3% of TI revenue) |
Market characteristics
Competitive landscape
Despite recent consolidation, the analog and embedded processing markets remain highly fragmented. As a result, we face significant global competition from dozens of large and small companies, including both broad-based suppliers and niche suppliers. Our competitors also include emerging companies, particularly in Asia, that sell products into the same markets in which we operate.
We believe that competitive performance in the semiconductor market generally depends on several factors, including the breadth of a company’s product line, the strength and depth of its channels to market, technological innovation, product development execution, technical support, customer service, quality, reliability, capacity and price. In addition, manufacturing process technologies that provide differentiated levels of performance are a competitive factor for our Analog products and customers’ prior investments in software development is a competitive factor for our Embedded Processing products.
Product cycle
The global semiconductor market is characterized by constant, though generally incremental, advances in product designs and manufacturing processes. Semiconductor prices and manufacturing costs tend to decline over time as manufacturing processes and product life cycles mature.
Market cycle
The “semiconductor cycle” refers to the ebb and flow of supply and demand and the building and depleting of inventories. The semiconductor market historically has been characterized by periods of tight supply caused by strengthening demand and/or insufficient manufacturing capacity, followed by periods of surplus inventory caused by weakening demand and/or excess manufacturing capacity. These are typically referred to as upturns and downturns in the semiconductor cycle. The semiconductor cycle could be affected by the significant time and money required to build and maintain semiconductor manufacturing facilities.
We employ several strategies to dampen the effect of the semiconductor cycle on TI. We acquire our manufacturing facilities and equipment ahead of demand, which usually allows us to acquire this capacity at lower costs. We focus our resources on our Analog and Embedded Processing segments, which serve diverse markets and diverse customers. This diversity reduces our dependence on the performance of a single market or small group of customers. Additionally, we utilize consignment inventory programs with our customers and distributors that give us improved insight into customer demand.
Seasonality
Our revenue is subject to some seasonal variation. Historically, our sequential revenue growth rate tends to be weaker in the first and fourth quarters when compared with the second and third quarters.
Customers, sales and distribution
We sell our products to about 100,000 customers. Our customer base is diverse, with more than one-third of our revenue derived from customers outside our largest 100.
We market and sell our semiconductor products through direct sales and distributors, and online. We have sales or marketing offices in more than 30 countries, and we continue to expand and enhance our online presence. About 65 percent of our sales are fulfilled through distribution channels. Our distributors maintain an inventory of our products and sell directly to a wide range of customers. They also sell products from our competitors.
Manufacturing
Semiconductor manufacturing begins with a sequence of photolithographic and chemical processing steps that fabricate a number of semiconductor devices on a thin silicon wafer. Each device on the wafer is packaged and tested. The entire process takes place in highly specialized facilities and requires an average of 12 weeks, with most products being completed within 6 to 14 weeks.
We own and operate semiconductor manufacturing facilities in North America, Asia, Japan and Europe. These include both wafer fabrication and assembly/test facilities. Our facilities require substantial investment to construct and are largely fixed-cost assets once in operation.
We do most of our manufacturing in-house. This strategic decision to directly control our manufacturing helps ensure a consistent supply of products for our customers and also allows us to invest in technology that differentiates the features of our products. We have focused on creating a competitive manufacturing cost advantage by increasing factory loadings of our advanced analog 300-millimeter wafers, which have about a 40 percent cost advantage per unpackaged chip over 200-millimeter wafers. 300-millimeter wafers will support the majority of our Analog growth going forward.
Additionally, we keep our manufacturing costs low by using mature assets acquired ahead of demand when their prices are most attractive. We expect to continue to maintain sufficient internal manufacturing capacity to meet the vast majority of our production needs, and to obtain manufacturing equipment to support new technology developments and revenue growth. To supplement our manufacturing capacity and maximize our responsiveness to customer demand, we use the capacity of outside suppliers, commonly known as foundries, and subcontractors. In 2017, we sourced about 20 percent of our total wafers from external foundries and about 40 percent of our assembly/test services from subcontractors.
Research and Development
Our R&D expense was $1.51 billion in 2017, compared with $1.36 billion in 2016 and $1.27 billion in 2015. We continually grow and strengthen our broad Analog and Embedded Processing portfolios through disciplined allocation of R&D resources. We invest in R&D to develop differentiated products, with a particular emphasis on designing for the industrial and automotive markets.
We conduct most of our R&D internally. We also closely engage with a wide range of third parties, including software suppliers, universities and select industry consortia, and we collaborate with our foundry suppliers on semiconductor manufacturing technology.
Inventory
Our long-term inventory strategy is to maintain high levels of customer service and stable lead times, minimize inventory obsolescence and improve manufacturing asset utilization. To capitalize on manufacturing efficiencies, we build in advance of demand low-volume, long-lived devices with a broad customer base and a low risk of obsolescence. Additionally, we sometimes maintain product inventory in unfinished wafer form to allow greater flexibility in periods of high demand. Further, we have improved insight into demand and are better able to manage our factory loadings because over time we have increased consignment inventory programs with our customers and distributors. About 60 percent of TI revenue is fulfilled from consignment programs. Our strategy and expected customer demand will cause our inventory levels to fluctuate over time.
Longer term, we expect to carry more inventory than we have in the past as we move towards higher consignment levels and more long-lived, low-volume devices to serve industrial customers, a growing portion of our business.
Backlog
We define backlog as of a particular date as purchase orders with a customer-requested delivery date within a specified length of time. Our backlog at any particular date may not be indicative of revenue for any future period. As customer requirements and industry conditions change, orders may be subject to cancellation or modification of terms such as pricing, quantity or delivery date. Customer order placement practices continually evolve based on customers’ individual business needs and capabilities, as well as industry supply and capacity considerations. Further, our consignment programs do not result in backlog because the order occurs at the same time as delivery, i.e., when the customer pulls the product from consigned inventory. Our backlog of orders was $1.32 billion at December 31, 2017, and $1.09 billion at December 31, 2016.
Raw materials
We purchase materials, parts and supplies from a number of suppliers. In some cases we purchase such items from sole source suppliers. The materials, parts and supplies essential to our business are generally available at present, and we believe that such materials, parts and supplies will be available in the foreseeable future.
Intellectual property
We own many patents, and have many patent applications pending, in the United States and other countries in fields relating to our business. We have developed a strong, broad-based patent portfolio and continually add patents to that portfolio. We also have license agreements, which vary in duration, involving rights to our portfolio or those of other companies. We do not consider our business materially dependent upon any one patent or patent license.
We often participate in industry initiatives to set technical standards. Our competitors may participate in the same initiatives. Participation in these initiatives may require us to license certain of our patents to other companies on reasonable and non-discriminatory terms.
We own trademarks that are used in the conduct of our business. These trademarks are valuable assets, the most important of which are “Texas Instruments” and our corporate monogram.
Acquisitions and divestitures
From time to time we consider acquisitions and divestitures. We focus on transactions that are a strategic fit and strengthen our portfolio, and that also meet our financial objectives.
Executive officers of the Registrant
The following is an alphabetical list of the names and ages of the executive officers of the company and the positions or offices with the company held by each person named:
| Name | Age | Position |
|---|---|---|
| Niels Anderskouv | 48 | Senior Vice President |
| Stephen A. Anderson | 56 | Senior Vice President |
| Ellen L. Barker | 55 | Senior Vice President and Chief Information Officer |
| Brian T. Crutcher* | 45 | Director, Executive Vice President and Chief Operating Officer |
| R. Gregory Delagi | 55 | Senior Vice President |
| Haviv Ilan | 49 | Senior Vice President |
| Rafael R. Lizardi | 45 | Senior Vice President, Chief Financial Officer and Chief Accounting Officer |
| Kevin J. Ritchie | 61 | Senior Vice President |
| Richard K. Templeton* | 59 | Director, Chairman of the Board, President and Chief Executive Officer |
| Cynthia Hoff Trochu | 54 | Senior Vice President, Secretary and General Counsel |
| Julie M. Van Haren | 49 | Senior Vice President |
| Darla H. Whitaker | 52 | Senior Vice President |
| Bing Xie | 50 | Senior Vice President |
- On January 18, 2018, Mr. Crutcher was appointed to succeed Mr. Templeton as president and chief executive officer, effective June 1, 2018. Mr. Templeton will continue as chairman of the board.
The term of office of these officers is from the date of their election until their successor shall have been elected and qualified. All have been employees of the company for more than five years. Messrs. Anderson, Crutcher, Delagi, Ritchie and Templeton and Ms. Whitaker have served as executive officers of the company for more than five years. Ms. Trochu and Mr. Xie became executive officers of the company in 2015. Messrs. Anderskouv, Ilan and Lizardi and Mses. Barker and Van Haren became executive officers of the company in 2017. Mr. Anderskouv was previously an executive officer of the company from 2012 to 2014.
Employees
At December 31, 2017, we had 29,714 employees.
Available information
Our internet address is www.ti.com. Information on our website is not part of this report. We make available free of charge through our Investor Relations website our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed with the SEC. Also available through the TI Investor Relations website are reports filed by our directors and executive officers on Forms 3, 4 and 5, and amendments to those reports.
Available on our website at www.ti.com/corporategovernance are: (i) our Corporate Governance Guidelines; (ii) charters for the Audit, Compensation, and Governance and Stockholder Relations Committees of our board of directors; (iii) our Code of Conduct; and (iv) our Code of Ethics for TI Chief Executive Officer and Senior Finance Officers. Stockholders may request copies of these documents free of charge by writing to Texas Instruments Incorporated, P.O. Box 660199, MS 8657, Dallas, Texas, 75266-0199, Attention: Investor Relations.
Item 1A. Risk Factors.
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You should read the following risk factors in conjunction with the factors discussed elsewhere in this and other of our filings with the Securities and Exchange Commission (SEC) and in materials incorporated by reference into these filings. These risk factors are intended to highlight certain factors that may affect our financial condition and results of operations and are not meant to be an exhaustive discussion of risks that apply to TI, a company with broad international operations. Like other companies, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate and our performance and the performance of our customers. Similarly, the price of our securities is subject to volatility due to fluctuations in general market conditions, actual financial results that do not meet our and/or the investment community’s expectations, changes in our and/or the investment community’s expectations for our future results and other factors, many of which are beyond our control.
We face substantial competition that requires us to respond rapidly to product development and pricing pressures.
We face intense technological and pricing competition in the markets in which we operate. We expect this competition will continue to increase from large competitors and from small competitors serving niche markets, and also from emerging companies, particularly in Asia, that sell products into the same markets in which we operate. For example, we may face increased competition as a result of China actively promoting and reshaping its domestic semiconductor industry through policy changes and investment. These actions may restrict us from participating in the China market or may prevent us from competing effectively with Chinese companies. Certain competitors possess sufficient financial, technical and management resources to develop and market products that may compete favorably against our products, and consolidation among our competitors may allow them to compete more effectively. Additionally, traditional intellectual property licensors are increasingly providing functionality, designs and complete hardware or software solutions that compete with our products. The price and product development pressures that result from competition may lead to reduced profit margins and lost business opportunities in the event that we are unable to match the price declines or cost efficiencies, or meet the technological, product, support, software or manufacturing advancements of our competitors.
Changes in expected demand for our products could have a material adverse effect on our results of operations.
Our customers include companies in a wide range of end markets and sectors within those markets. If demand in one or more sectors within our end markets declines or the rate of growth slows, our results of operations may be adversely affected. The cyclical nature of the semiconductor market may lead to significant and rapid increases and decreases in product demand. Additionally, the loss or significant curtailment of purchases by one or more of our large customers, including curtailments due to a change in the design or manufacturing sourcing policies or practices of these customers, or the timing of customer or distributor inventory adjustments, may adversely affect our results of operations and financial condition.
Our results of operations also might suffer because of a general decline in customer demand resulting from, for example: uncertainty regarding the stability of global credit and financial markets; natural events or domestic or international political, social, economic or other conditions; breaches of customer information technology systems that disrupt customer operations; or a customer’s inability to access credit markets and other sources of needed liquidity.
Our ability to match inventory and production with the product mix needed to fill orders may affect our ability to meet a quarter’s revenue forecast. In addition, when responding to customers’ requests for shorter shipment lead times, we manufacture products based on forecasts of customers’ demands. These forecasts are based on multiple assumptions. If we inaccurately forecast customer demand, we may hold inadequate, excess or obsolete inventory that would reduce our profit margins and adversely affect our results of operations and financial condition.
Our global operations subject us to risks associated with domestic or international political, social, economic or other conditions.
We have facilities in more than 30 countries. About 85 percent of our revenue comes from shipments to locations outside the United States; in particular, shipments of products into China typically represent a large portion of our revenue. We are exposed to political, social and economic conditions, security risks, terrorism or other hostile acts, health conditions, labor conditions, and possible disruptions in transportation, communications and information technology networks of the various countries in which we operate, including the United States. Additionally, certain countries where we operate have experienced, and other countries may experience, increasing protectionism that may impact global trade. This could result in an adverse effect on our operations and our financial results. In addition, our global operations expose us to periods when the U.S. dollar significantly fluctuates in relation to the non-U.S. currencies in which we transact business. The remeasurement of non-U.S. dollar transactions can have an adverse effect on our results of operations and financial condition.
Our operating results and our reputation could be adversely affected by breaches or disruptions of information technology systems.
Breaches or disruptions of our information technology systems or the systems of our customers, vendors and other third parties could be caused by factors such as computer viruses, system failures, restricted network access, unauthorized access, terrorism, employee malfeasance, or human error. These events could, among other things, compromise our information technology networks; result in corrupt or lost data or the unauthorized release of our, our customers’ or our suppliers’ confidential or proprietary information; cause a disruption to our manufacturing and other operations; result in the release of personal data; or cause us to incur costs associated with increased protection, remediation or penalties, any of which could adversely affect our operating results and our reputation. Cybersecurity threats are frequent and constantly evolving, thereby increasing the difficulty of defending against them.
Our results of operations could be affected by natural events in the locations in which we operate.
We have manufacturing, data and design facilities and other operations in locations subject to natural occurrences such as severe weather, geological events or health epidemics that could disrupt operations. A natural disaster that results in a prolonged disruption to our operations may adversely affect our results and financial condition.
Rapid technological change in markets we serve requires us to develop new technologies and products.
Rapid technological change in markets we serve could contribute to shortened product life cycles and a decline in average selling prices of our products. Our results of operations depend in part upon our ability to successfully develop, manufacture and market innovative products in a timely manner. We make significant investments in research and development to improve existing technology and products and develop new ones to meet changing customer demands. In some cases, we might not realize a return on our investments because they are generally made before commercial viability can be assured. Further, projects that are commercially viable may not contribute significant revenue until at least a few years after they are completed.
We face supply chain and manufacturing risks.
We rely on third parties to supply us with goods and services in a cost-effective and timely manner. Our access to needed goods and services may be adversely affected by potential disputes with suppliers or disruptions in our suppliers’ operations as a result of, for example: quality excursions; uncertainty regarding the stability of global credit and financial markets; domestic or international political, social, economic and other conditions; natural events in the locations in which our suppliers operate; or limited or delayed access to key raw materials, natural resources and utilities. Additionally, a breach of our suppliers’ information technology systems could result in a release of our confidential or proprietary information. If our suppliers are unable to access credit markets and other sources of needed liquidity, we may be unable to obtain needed supplies, collect accounts receivable or access needed technology.
In particular, our manufacturing processes and critical manufacturing equipment require that certain key raw materials, natural resources and utilities be available. Limited or delayed access to and high costs of these items could adversely affect our results of operations. Our products contain materials that are subject to conflict minerals reporting requirements. Our relationships with customers and suppliers may be adversely affected if we are unable to describe our products as conflict-free. Additionally, our costs may increase if one or more of our customers demand that we change the sourcing of materials we cannot identify as conflict-free.
Our inability to timely implement new manufacturing technologies or install manufacturing equipment could adversely affect our results of operations. We subcontract a portion of our wafer fabrication and assembly and testing of our products, and we depend on third parties to provide advanced logic manufacturing process technology development. We do not have long-term contracts with all of these suppliers, and the number of alternate suppliers is limited. Reliance on these suppliers involves risks, including possible shortages of capacity in periods of high demand, suppliers’ inability to develop and deliver advanced logic manufacturing process technology in a timely, cost effective, and appropriate manner and the possibility of suppliers’ imposition of increased costs on us.
Our operations could be affected by the complex laws, rules and regulations to which our business is subject.
We are subject to complex laws, rules and regulations affecting our domestic and international operations relating to, for example, the environment, safety and health; exports and imports; bribery and corruption; tax; data privacy and protection; labor and employment; competition; market access; intellectual property ownership and infringement; and the movement of currency. Compliance with these laws, rules and regulations may be onerous and expensive and could restrict our ability to manufacture or ship our products and operate our business. If we fail to comply or if we become subject to enforcement activity, we could be subject to fines, penalties or other legal liability. Furthermore, should these laws, rules and regulations be amended or expanded, or new ones enacted, we could incur materially greater compliance costs or restrictions on our ability to manufacture our products and operate our business.
Some of these complex laws, rules and regulations – for example, those related to environmental, safety and health requirements – may particularly affect us in the jurisdictions in which we manufacture products, especially if such laws and regulations: require the use of abatement equipment beyond what we currently employ; require the addition or elimination of a raw material or process to or from our current manufacturing processes; or impose costs, fees or reporting requirements on the direct or indirect use of energy, natural resources, or materials or gases used or emitted into the environment in connection with the manufacture of our products. A substitute for a prohibited raw material or process might not be available, or might not be available at reasonable cost.
Our results of operations and our reputation could be affected by warranty claims, product liability claims, product recalls or legal proceedings.
We could be subject to claims based on warranty, product liability, epidemic or delivery failures, or other grounds relating to our products, manufacturing, services, designs, communications or cybersecurity that could lead to significant expenses as we defend such claims or pay damage awards or settlements. In the event of a claim, we may also incur costs if we decide to compensate the affected customer or end consumer. We maintain product liability insurance, but there is no guarantee that such insurance will be available or adequate to protect against all such claims. In addition, it is possible for one of our customers to recall a product containing a TI part, for example, with respect to products used in automotive applications or handheld electronics, which may cause us to incur costs and expenses relating to the recall. Any of these events could adversely affect our results of operations, financial condition and our reputation.
Our results of operations could be affected by changes in tax-related matters.
We have facilities in more than 30 countries and as a result are subject to taxation and audit by a number of taxing authorities. Tax rates vary among the jurisdictions in which we operate. A number of factors could cause our tax rate to increase, including a change in the jurisdictions in which our profits are earned and taxed; a change in the mix of profits from those jurisdictions; changes in available tax credits; changes in applicable tax rates; changes in tariff regulations or surcharges; changes in accounting principles; or adverse resolution of audits by taxing authorities. We have deferred tax assets on our balance sheet. Changes in applicable tax laws and regulations or in our business performance could affect our ability to realize those deferred tax assets, which could also affect our results of operations. If our tax rate increases, our results of operations could be adversely affected.
In addition, we are subject to laws and regulations in various jurisdictions that determine how much profit has been earned and when it is subject to taxation in that jurisdiction. Changes in these laws and regulations, including those that align with the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting recommendations, could affect the locations where we are deemed to earn income, which could in turn affect our results of operations. Each quarter we forecast our tax liability based on our forecast of our performance for the year. If that performance forecast changes, our forecasted tax liability will change.
Our initial estimates of the financial impact of the U.S. Tax Cuts and Jobs Act, enacted in December 2017, may change as we refine our analysis and as additional guidance becomes available. If in the future we repatriate any of the earnings represented by non-cash, operating assets such as inventory and fixed assets, we might incur incremental non-U.S. taxes, which could affect our results of operations.
Our results of operations and financial condition could be adversely affected if a customer or a distributor suffers a loss with respect to our inventory.
We have consignment inventory programs in place for some of our largest customers and distributors. If a customer or distributor were to experience a loss with respect to TI-consigned inventory, our results of operations and financial condition may be adversely affected if we do not recover the full value of the lost inventory from the customer, distributor or insurer, or if our recovery is delayed.
Our results of operations could be adversely affected by our distributors’ promotion of competing product lines or our distributors’ financial performance.
In 2017, about 65 percent of our revenue was generated from sales of our products through distributors. Our distributors carry competing product lines, and our sales could be affected if our distributors promote competing products over our products. Moreover, our results of operations could be affected if our distributors suffer financial difficulties that result in their inability to pay amounts owed to us. Disputes with or the loss of a significant number of distributors could be disruptive or harmful to our current business.
Our margins may vary over time.
Our profit margins may be adversely affected by a number of factors, including decreases in customer demand and shipment volume; obsolescence of our inventory; shifts in our product mix; changes in tariffs; changes in our manufacturing processes; and new accounting pronouncements or changes in existing accounting practices or standards. In addition, we operate in a highly competitive market environment that might adversely affect pricing for our products. Because we own much of our manufacturing capacity, a significant portion of our operating costs is fixed. In general, these fixed costs do not decline with reductions in customer demand or factory loadings, and can adversely affect profit margins as a result.
Our performance depends in part on our ability to enforce our intellectual property rights and to maintain freedom of operation.
Access to worldwide markets depends in part on the continued strength of our intellectual property portfolio in all jurisdictions where we conduct business. There can be no assurance that, as our business evolves, we will obtain the necessary intellectual property rights, or that we will be able to independently develop the technology, software or know-how necessary to conduct our business or that we can do so without infringing the intellectual property rights of others. To the extent that we have to rely on licensed technology from others, there can be no assurance that we will be able to obtain licenses at all or on terms we consider reasonable. We may, directly or indirectly, face infringement claims from third parties, including non-practicing entities that have acquired patents to pursue enforcement actions against other companies. We may also face infringement claims where we or our customers make, use or sell products and where the intellectual property laws may be less established or less predictable. These assertions, whether or not of any merit, could expose us to claims for damages and/or injunctions from third parties, as well as claims for indemnification by our customers in instances where we have a contractual or other legal obligation to indemnify them against damages resulting from infringement claims.
We actively enforce and protect our own intellectual property rights. However, our efforts cannot prevent all misappropriation or improper use of our protected technology and information, including, for example, third parties’ use of our patented or copyrighted technology, or our trade secrets in their products without the right to do so, or third parties’ sale of counterfeit products bearing our trademark. The risk of unfair copying or cloning may impede our ability to sell our products. The laws of countries where we operate may not protect our intellectual property rights to the same extent as U.S. laws.
Our debt could affect our operations and financial condition.
From time to time, we issue debt securities with various interest rates and maturities. While we believe we will have the ability to service this debt, our ability to make principal and interest payments when due depends upon our future performance, which will be subject to general economic conditions, industry cycles, and business and other factors affecting our operations, including our other risk factors, many of which are beyond our control. In addition, our obligation to make principal and interest payments could divert funds that otherwise would be invested in our operations or returned to shareholders, or could cause us to raise funds by, for example, issuing new debt or equity or selling assets.
Our results of operations and liquidity could be affected by changes in the financial markets.
We maintain bank accounts, one or more multi-year revolving credit agreements, and a portfolio of investments to support the financing needs of the company. Our ability to fund our operations, invest in our business, make strategic acquisitions, service our debt obligations and meet our cash return objectives depends upon continuous access to our bank and investment accounts, and may depend on access to our bank credit lines that support commercial paper borrowings and provide additional liquidity through short-term bank loans. If we are unable to access these accounts and credit lines (for example, due to instability in the financial markets), our results of operations and financial condition could be adversely affected and our ability to access the capital markets or redeem our investments could be restricted.
Increases in health care and pension benefit costs could affect our results of operations and financial condition.
Federal and state health care reform programs could increase our costs with regard to medical coverage of our employees, which could reduce profitability and affect our results of operations and financial condition. In addition, obligations related to our pension and other postretirement plans reflect assumptions that affect the planned funding and costs of these plans, including the actual return on plan assets, discount rates, plan participant population demographics and changes in pension regulations. Changes in these assumptions may affect plan funding, cash flow and results of operations, and our costs and funding obligations could increase significantly if our plans’ actual experience differs from these assumptions.
Our continued success depends in part on our ability to retain and recruit a sufficient number of qualified employees in a competitive environment.
Our continued success depends in part on the retention and recruitment of skilled personnel, including engineering, management, marketing, technical and staff personnel. Skilled and experienced personnel in our industry are in high demand, and competition for their talents is intense. There can be no assurance that we will be able to successfully retain and recruit the key engineering, management and technical personnel that we require to execute our business strategy. Our ability to recruit internationally or deploy employees to various locations may be limited by immigration laws.
Our ability to successfully implement business and organizational changes could affect our business plans and results of operations.
From time to time, we undertake business and organizational changes, including acquisitions, divestitures and restructuring actions, to support or carry out our strategic objectives. Our failure to successfully implement these changes could adversely affect our business plans and operating results. For example, we may not realize the expected benefits of an acquisition if we are unable to timely and successfully integrate acquired operations, product lines and technology, and our pre-acquisition due diligence may not identify all possible issues and risks that might arise with respect to an acquisition. Further, we may not achieve or sustain the expected growth or cost savings benefits of business and organizational changes, and restructuring charges could differ materially in amount and timing from our expectations.
Material impairments of our goodwill or intangible assets could adversely affect our results of operations.
We have a significant amount of goodwill and intangible assets on our consolidated balance sheet. Charges associated with impairments of goodwill or intangible assets could adversely affect our financial condition and results of operations.
Item 1B. Unresolved Staff Comments.
| --- | --- |
Not applicable.
Item 2. Properties.
| --- | --- |
Our principal executive offices are located at 12500 TI Boulevard, Dallas, Texas. The following table indicates the general location of our principal manufacturing and design operations and the reportable segments that make major use of them. Except as otherwise indicated, we own these facilities.
| Analog | Embedded Processing | |||
|---|---|---|---|---|
| Dallas, Texas | X | X | ||
| Houston, Texas | X | |||
| Sherman, Texas | X | |||
| Tucson, Arizona* | X | |||
| Santa Clara, California | X | |||
| South Portland, Maine | X | |||
| Chengdu, China† | X | X | ||
| Shanghai, China* | X | X | ||
| Freising, Germany | X | X | ||
| Bangalore, India† | X | X | ||
| Aizu, Japan | X | X | ||
| Miho, Japan | X | X | ||
| Kuala Lumpur, Malaysia† | X | X | ||
| Melaka, Malaysia† | X | |||
| Aguascalientes, Mexico* | X | |||
| Baguio, Philippines† | X | X | ||
| Pampanga (Clark), Philippines† | X | X | ||
| Greenock, Scotland | X | |||
| Taipei, Taiwan† | X | X |
| * | Leased. |
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| † | Portions of the facilities are leased and owned. This may include land leases. |
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Our facilities in the United States contained approximately 13.1 million square feet at December 31, 2017, of which approximately 0.7 million square feet were leased. Our facilities outside the United States contained approximately 10.0 million square feet at December 31, 2017, of which approximately 1.5 million square feet were leased.
At the end of 2017, we occupied substantially all of the space in our facilities.
Leases covering our currently occupied leased facilities expire at varying dates, generally within the next five years. We believe our current properties are suitable and adequate for their intended purpose.
Item 3. Legal Proceedings.
| --- | --- |
We are involved in various inquiries and proceedings that arise in the ordinary course of our business. We believe that the amount of our liability, if any, will not have a material adverse effect upon our financial condition, results of operations or liquidity.
Item 4. Mine Safety Disclosures.
| --- | --- |
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
| --- | --- |
The information concerning the number of stockholders of record at December 31, 2017, is contained in Item 6, “Summary of Selected Financial Data.”
Common stock prices and dividends
TI common stock is listed on The NASDAQ Global Select Market. The table below shows the high and low closing prices of TI common stock as reported by Bloomberg L.P. and the dividends paid per common share in each quarter during the past two years.
| Quarter | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1st | 2nd | 3rd | 4th | |||||||||||||||
| Stock prices: | ||||||||||||||||||
| 2017 | High | $ | 82.20 | $ | 84.34 | $ | 89.65 | $ | 104.82 | |||||||||
| Low | 72.92 | 76.90 | 76.41 | 89.65 | ||||||||||||||
| 2016 | High | 58.37 | 63.30 | 71.42 | 74.87 | |||||||||||||
| Low | 48.03 | 56.43 | 61.06 | 67.60 | ||||||||||||||
| Dividends paid: | ||||||||||||||||||
| 2017 | $ | 0.50 | $ | 0.50 | $ | 0.50 | $ | 0.62 | ||||||||||
| 2016 | 0.38 | 0.38 | 0.38 | 0.50 |
Issuer purchases of equity securities
The following table contains information regarding our purchases of our common stock during the fourth quarter of 2017.
| Total Number | Approximate | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| of Shares | Dollar Value | |||||||||||||||||
| Purchased as | of Shares that | |||||||||||||||||
| Part of | May Yet Be | |||||||||||||||||
| Total | Publicly | Purchased | ||||||||||||||||
| Number of | Average | Announced | Under the | |||||||||||||||
| Shares | Price Paid | Plans or | Plans or | |||||||||||||||
| Period | Purchased | per Share | Programs (1) | Programs (1) | ||||||||||||||
| October 1, 2017 through October 31, 2017 | 2,575,154 | $ | 93.49 | 2,560,953 | $ | 9.71 billion | ||||||||||||
| November 1, 2017 through November 30, 2017 | 3,324,228 | 97.71 | 3,324,228 | 9.39 billion | ||||||||||||||
| December 1, 2017 through December 31, 2017 | 1,456,816 | 97.63 | 1,456,816 | 9.24 billion | ||||||||||||||
| Total | 7,356,198 | (2) | $ | 96.22 | (2) | 7,341,997 | $ | 9.24 billion | (3) |
| (1) | All open-market purchases during the quarter were made under the authorization from our board of directors to purchase up to $7.5 billion of additional shares of TI common stock announced September 17, 2015. On September 21, 2017, our board of directors authorized the purchase of an additional $6.0 billion of our common stock. |
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| (2) | In addition to open-market purchases, 14,201 shares of common stock were surrendered by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock units. |
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| (3) | As of December 31, 2017, this amount consisted of the remaining portion of the $7.5 billion authorized in September 2015 and the $6.0 billion authorized in September 2017. No expiration date has been specified for these authorizations. |
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Item 6. Selected Financial Data.
| --- | --- |
| For Years Ended December 31, | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Millions of dollars, except share and per-share amounts) | 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||
| Cash flow data: | |||||||||||||||||||||||||
| Cash flows from operating activities | $ | 5,363 | $ | 4,614 | $ | 4,397 | $ | 4,054 | $ | 3,514 | |||||||||||||||
| Capital expenditures | 695 | 531 | 551 | 385 | 412 | ||||||||||||||||||||
| Free cash flow (a) | 4,668 | 4,083 | 3,846 | 3,669 | 3,102 | ||||||||||||||||||||
| Dividends paid | 2,104 | 1,646 | 1,444 | 1,323 | 1,175 | ||||||||||||||||||||
| Stock repurchases | 2,556 | 2,132 | 2,741 | 2,831 | 2,868 | ||||||||||||||||||||
| Income statement data: | |||||||||||||||||||||||||
| Revenue by segment: | |||||||||||||||||||||||||
| Analog | 9,900 | 8,536 | 8,339 | 8,104 | 7,194 | ||||||||||||||||||||
| Embedded Processing | 3,498 | 3,023 | 2,787 | 2,740 | 2,450 | ||||||||||||||||||||
| Other | 1,563 | 1,811 | 1,874 | 2,201 | 2,561 | ||||||||||||||||||||
| Revenue | 14,961 | 13,370 | 13,000 | 13,045 | 12,205 | ||||||||||||||||||||
| Gross profit (b) | 9,614 | 8,257 | 7,575 | 7,447 | 6,400 | ||||||||||||||||||||
| Operating expenses (R&D and SG&A) (b) | 3,202 | 3,098 | 2,995 | 3,164 | 3,329 | ||||||||||||||||||||
| Acquisition charges | 318 | 319 | 329 | 330 | 341 | ||||||||||||||||||||
| Restructuring charges/other (b) | 11 | (15 | ) | (71 | ) | (50 | ) | (192 | ) | ||||||||||||||||
| Operating profit (b) | 6,083 | 4,855 | 4,322 | 4,003 | 2,922 | ||||||||||||||||||||
| Net income | $ | 3,682 | $ | 3,595 | $ | 2,986 | $ | 2,821 | $ | 2,162 | |||||||||||||||
| As a result of accounting rule ASC 260, which requires a portion of Net income to be allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents, diluted earnings per share (EPS) is calculated using the following: | |||||||||||||||||||||||||
| Net income | $ | 3,682 | $ | 3,595 | $ | 2,986 | $ | 2,821 | $ | 2,162 | |||||||||||||||
| Income allocated to RSUs | (33 | ) | (44 | ) | (42 | ) | (43 | ) | (36 | ) | |||||||||||||||
| Income allocated to common shares for diluted EPS | $ | 3,649 | $ | 3,551 | $ | 2,944 | $ | 2,778 | $ | 2,126 | |||||||||||||||
| Average diluted shares outstanding, in millions | 1,012 | 1,021 | 1,043 | 1,080 | 1,113 | ||||||||||||||||||||
| Diluted EPS | $ | 3.61 | $ | 3.48 | $ | 2.82 | $ | 2.57 | $ | 1.91 | |||||||||||||||
| Cash dividends declared per common share | $ | 2.12 | $ | 1.64 | $ | 1.40 | $ | 1.24 | $ | 1.07 |
| (a) | Free cash flow is a non-GAAP measure derived by subtracting Capital expenditures from Cash flows from operating activities. |
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| (b) | Prior periods reclassified to conform to the 2017 presentation, having adopted ASU 2017-07. See Note 2 to the financial statements. |
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| December 31, | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Millions of dollars, except Other data items) | 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||
| Balance sheet data: | |||||||||||||||||||||||||
| Cash, cash equivalents and short-term investments | $ | 4,469 | $ | 3,490 | $ | 3,218 | $ | 3,541 | $ | 3,829 | |||||||||||||||
| Total assets | 17,642 | 16,431 | 16,230 | 17,372 | 18,554 | ||||||||||||||||||||
| Current portion of long-term debt | 500 | 631 | 1,000 | 1,001 | 1,000 | ||||||||||||||||||||
| Long-term debt | 3,577 | 2,978 | 3,120 | 3,630 | 4,145 | ||||||||||||||||||||
| Other data - Number of: | |||||||||||||||||||||||||
| Employees | 29,714 | 29,865 | 29,977 | 31,003 | 32,209 | ||||||||||||||||||||
| Stockholders of record | 14,260 | 14,910 | 15,563 | 16,361 | 17,213 |
See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Financial Statements and Supplementary Data.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
| --- | --- |
Overview
We design, make and sell semiconductors to electronics designers and manufacturers all over the world. Our business model is designed around the following four sustainable competitive advantages, that we believe, in combination, put us in a unique class of companies:
| • | A strong foundation of manufacturing and technology. We invest in manufacturing technologies and do most of our manufacturing in-house. This strategic decision to directly control our manufacturing helps ensure a consistent supply of products for our customers and also allows us to invest in technology that differentiates the features of our products. We have focused on creating a competitive manufacturing cost advantage by increasing factory loadings of our advanced analog 300-millimeter wafers, which have about a 40 percent cost advantage per unpackaged chip over 200-millimeter wafers. 300-millimeter wafers will support the majority of our Analog growth going forward. Additionally, we keep our manufacturing costs low by using mature assets acquired ahead of demand when their prices are most attractive. |
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| • | Broad portfolio of differentiated analog and embedded processing semiconductors. Our customers need multiple chips for their systems. The breadth of our portfolio means we can solve more of these needs than our competitors, which gives us access to more customers and the opportunity to sell more products and generate more revenue per customer system. We invest more than $1 billion each year to develop new products for our portfolio, which includes tens of thousands of products. |
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| • | Broadest reach of market channels. Customers often begin their initial product selection process and design-in journey on our website, and the breadth of our portfolio attracts more customers to our website than any of our competitors. Our web presence, combined with our global sales force that is also greater in size than those of our competitors, are advantages that give us unique access to about 100,000 customers designing TI semiconductors into their end products. |
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| • | Diversity and longevity of our products, markets and customer positions. Together, the attributes above result in diverse and long-lived positions that deliver high terminal value to our shareholders. Because of the breadth of our portfolio, we are not dependent on any single product, and because of the breadth of our markets we are not dependent on any single application or customer. Some of our products generate revenue for decades, which strengthens the return on our investments. |
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Our strategic focus, and where we invest the majority of our resources, is on Analog and Embedded Processing, with a particular emphasis on designing and selling those products into the industrial and automotive markets, which we believe represent the best growth opportunities. Analog and embedded processing products sold into industrial and automotive markets provide long product life cycles, intrinsic diversity, and less capital-intensive manufacturing, which we believe offer stability, profitability and strong cash generation. This business model is the foundation of our capital management strategy, which is based on our belief that free cash flow growth, especially on a per share basis, is important for maximizing shareholder value over the long term. We also believe that free cash flow will be valued only if it is productively invested in the business or returned to shareholders.
The combined effect of these sustainable competitive advantages is that over time we have gained market share in Analog and Embedded Processing and have grown free cash flow. Our business model puts us in a unique class of companies with the ability to grow, generate cash, and return that cash to shareholders.
Management’s discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. In the following discussion of our results of operations:
| • | Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels, and how management allocates resources and measures results. See Note 1 to the financial statements for more information regarding our segments. |
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| • | All dollar amounts in the tables are stated in millions of U.S. dollars. |
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| • | When we discuss our results: |
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| o | Unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are evidenced by fluctuations in shipment volumes. |
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| o | New products tend not to have a significant impact on our revenue in any given period because we sell such a large number of products. |
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| o | From time to time, our revenue and gross profit are affected by changes in demand for higher-priced or lower-priced products, which we refer to as changes in the “mix” of products shipped. |
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| o | Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed. When factory loadings decrease, our fixed costs are spread over reduced output and, absent other circumstances, our profit margins decrease. Conversely, as factory loadings increase, our fixed costs are spread over increased output and, absent other circumstances, our profit margins increase. Increases and decreases in factory loadings tend to correspond to increases and decreases in demand. |
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| o | Over time, we have been allocating resources from areas like manufacturing support and SG&A into R&D activities. |
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| • | The recently enacted U.S. Tax Cuts and Jobs Act (the Tax Act) will reduce our annual operating tax rate, which does not include discrete tax items, from 31 percent in 2017 to an ongoing rate of about 18 percent starting in 2019, comprehending the benefits of exports and having manufacturing, R&D and intellectual property in the United States. In 2018, our annual operating tax rate is expected to be about 23 percent, 5 percentage points higher, primarily due to a transitional non-cash expense. For an explanation of the term “annual operating tax rate,” see the Non-GAAP financial information section after the Liquidity and capital resources section. |
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| • | In the first quarter of 2017, we adopted ASU 2017-07 related to certain pension and other retiree benefit costs. We applied the new standard on a full retrospective basis for all periods presented in the Consolidated Statements of Income, which have been recast as a result. See Note 2 to the financial statements for more details. |
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| • | As of January 1, 2017, we no longer recognize royalties as revenue; instead, they are recorded as OI&E. We continue to receive royalties from arrangements involving license rights to our patent portfolio. Although we expect royalties to continue for many years, they are of decreasing significance to our core operations. |
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Results of operations
We continued to perform well in 2017, reflecting our focus on Analog and Embedded Processing, with a particular emphasis on the industrial and automotive markets. These products serve highly diverse markets with thousands of applications and have long-term growth opportunities. In 2017, Analog and Embedded Processing represented 90 percent of revenue. Gross margin of 64.3 percent reflected the quality of our product portfolio, as well as the efficiency of our manufacturing strategy.
Our focus on Analog and Embedded Processing allows us to generate strong cash flow from operations. Our cash flow from operations of $5.36 billion underscored the strength of our business model. Free cash flow was $4.67 billion and represented 31.2 percent of revenue, up from 30.5 percent a year ago. During 2017, we returned $4.66 billion to shareholders through a combination of stock repurchases and dividends, consistent with our strategy to return all of our free cash flow to shareholders. Our dividends represented 45 percent of free cash flow, underscoring their sustainability. Free cash flow is a non-GAAP financial measure. See the Non-GAAP financial information section.
Details of financial results – 2017 compared with 2016
Revenue of $14.96 billion was up $1.59 billion, or 12 percent, due to higher revenue from Analog and Embedded Processing.
Gross profit of $9.61 billion was up $1.36 billion, or 16 percent, primarily due to higher revenue. As a percentage of revenue, gross profit increased to 64.3 percent from 61.8 percent.
Operating expenses (R&D and SG&A) were $3.20 billion compared with $3.10 billion, as we continued our ongoing allocation of resources to R&D activities.
Acquisition charges of $318 million were non-cash. See Note 13 to the financial statements.
Restructuring charges/other was a charge of $11 million compared with a credit of $15 million in 2016. These amounts are included in Other for segment reporting purposes. See Note 3 to the financial statements.
Operating profit was $6.08 billion, or 40.7 percent of revenue, compared with $4.86 billion, or 36.3 percent of revenue.
OI&E was $75 million of income compared with $155 million in 2016. See Note 13 to the financial statements.
Our Provision for income taxes was $2.40 billion compared with $1.34 billion. The increase was due to the enactment of the Tax Act and, to a lesser extent, higher income before income taxes. Our effective tax rate, which includes discrete tax items, was 39 percent in 2017 and 27 percent in 2016. This change was due to tax adjustments made in 2017 as a result of the Tax Act. See Note 6 to the financial statements for a reconciliation of the U.S. statutory income tax rate to the effective tax rate.
Net income was $3.68 billion compared with $3.60 billion. EPS was $3.61 compared with $3.48.
Segment results – 2017 compared with 2016
Analog (includes Power, Signal Chain and High Volume product lines)
| 2017 | 2016 | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | $ | 9,900 | $ | 8,536 | 16 | % | |||||||||
| Operating profit | 4,468 | 3,416 | 31 | % | |||||||||||
| Operating profit % of revenue | 45.1 | % | 40.0 | % |
Analog revenue increased due to Power and Signal Chain. High Volume also grew, but to a lesser extent. Operating profit increased primarily due to higher revenue and associated gross profit.
Embedded Processing (includes Connected Microcontrollers and Processors product lines)
| 2017 | 2016 | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | $ | 3,498 | $ | 3,023 | 16 | % | |||||||||
| Operating profit | 1,143 | 817 | 40 | % | |||||||||||
| Operating profit % of revenue | 32.7 | % | 27.0 | % |
Embedded Processing revenue increased due to growth in both product lines, led by Processors. Operating profit increased primarily due to higher revenue and associated gross profit.
Other (includes DLP® products, calculators and custom ASIC products)
| 2017 | 2016 | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | $ | 1,563 | $ | 1,811 | (14 | )% | |||||||||
| Operating profit * | 472 | 622 | (24 | )% | |||||||||||
| Operating profit % of revenue | 30.2 | % | 34.3 | % | |||||||||||
| * Includes Acquisition charges and Restructuring charges/other |
Other revenue declined $248 million primarily due to custom ASIC products and the move of royalties from revenue to OI&E, which began in the first quarter of 2017. Operating profit decreased $150 million.
Details of financial results – 2016 compared with 2015
Revenue of $13.37 billion was up $370 million, or 3 percent, from 2015 due to higher revenue from Embedded Processing and Analog.
Gross profit was $8.26 billion, an increase of $682 million, or 9 percent, due to lower manufacturing costs and, to a lesser extent, higher revenue. Gross profit margin was 61.8 percent compared with 58.3 percent.
Operating expenses were $1.36 billion for R&D and $1.74 billion for SG&A. R&D expense increased $89 million, or 7 percent, due to a combination of our allocation of resources into R&D activities and higher compensation-related costs. SG&A expense increased $14 million, primarily due to higher compensation-related costs.
Acquisition charges associated with our 2011 acquisition of National Semiconductor were $319 million compared with $329 million. These non-cash charges resulted from the amortization of intangible assets. See Note 13 to the financial statements.
Restructuring charges/other was a credit of $15 million, which included a gain on the sale of intellectual property of $40 million that was partially offset by $25 million related to restructuring charges. This compared with a credit of $71 million in 2015, which included gains on sales of assets of $83 million that were partially offset by $12 million related to restructuring charges and other credits. These amounts are included in Other for segment reporting purposes. See Note 3 to the financial statements.
Operating profit was $4.86 billion, or 36.3 percent of revenue, compared with $4.32 billion, or 33.2 percent of revenue.
OI&E was $155 million of income compared with $16 million of expense. The increase is due to income of $188 million from settlements related to intellectual property infringement.
Our income tax provision was $1.34 billion compared with $1.23 billion. The increase was primarily due to higher income before income taxes, partially offset by a tax benefit for stock compensation. Our annual operating tax rates, which do not include discrete tax items, were 30 percent in 2016 and 29 percent in 2015. Our effective tax rates were 27 percent in 2016 and 29 percent in 2015.
Net income was $3.60 billion, an increase of $609 million, or 20 percent. EPS was $3.48 compared with $2.82. EPS benefited $0.13 in 2016 due to the adoption of a stock compensation accounting standard.
Segment results – 2016 compared with 2015
Analog
| 2016 | 2015 | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | $ | 8,536 | $ | 8,339 | 2 | % | |||||||||
| Operating profit | 3,416 | 3,077 | 11 | % | |||||||||||
| Operating profit % of revenue | 40.0 | % | 36.9 | % |
Analog revenue increased due to Power and Signal Chain, while High Volume declined. Operating profit increased due to higher gross profit, which benefited from lower manufacturing costs.
Embedded Processing
| 2016 | 2015 | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | $ | 3,023 | $ | 2,787 | 8 | % | |||||||||
| Operating profit | 817 | 611 | 34 | % | |||||||||||
| Operating profit % of revenue | 27.0 | % | 21.9 | % |
Embedded Processing revenue increased due to Processors and, to a lesser extent, Connected Microcontrollers. Processors revenue increased due to the mix of products shipped. Operating profit increased primarily due to higher revenue and associated gross profit.
Other
| 2016 | 2015 | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | $ | 1,811 | $ | 1,874 | (3 | )% | |||||||||
| Operating profit * | 622 | 634 | (2 | )% | |||||||||||
| Operating profit % of revenue | 34.3 | % | 33.8 | % | |||||||||||
| * Includes Acquisition charges and Restructuring charges/other |
Other revenue decreased due to, in declining order, royalties, custom ASIC products and calculators. This decrease was partially offset by growth in DLP products. Operating profit decreased $12 million.
Financial condition
At the end of 2017, total cash (Cash and cash equivalents plus Short-term investments) was $4.47 billion, an increase of $979 million from the end of 2016.
Accounts receivable were $1.28 billion at the end of 2017, an increase of $11 million compared with the end of 2016. Days sales outstanding at the end of 2017 were 31 compared with 33 at the end of 2016.
Inventory was $1.96 billion at the end of 2017, an increase of $167 million from the end of 2016. Days of inventory at the end of 2017 were 134 compared with 126 at the end of 2016.
Liquidity and capital resources
Our primary source of liquidity is cash flow from operations. Additional sources of liquidity are Cash and cash equivalents, Short-term investments and a variable rate, revolving credit facility. Cash flows from operating activities for 2017 was $5.36 billion, an increase of $749 million from 2016 that was driven by an increase in Income before income taxes.
Our revolving credit facility is with a consortium of investment-grade banks and allows us to borrow up to $2 billion until March 2022. This credit facility also serves as support for the issuance of commercial paper. As of December 31, 2017, our credit facility was undrawn, and we had no commercial paper outstanding.
In 2017, investing activities used $1.13 billion compared with $650 million in 2016. For 2017, Capital expenditures were $695 million compared with $531 million in 2016. Capital expenditures in both periods were primarily for semiconductor manufacturing equipment. In 2017, we had purchases of short-term investments, net of sales, that used cash of $460 million compared with $113 million in 2016. In 2017, we received $40 million from asset sales compared with none in 2016.
In 2017, financing activities used $3.73 billion compared with $3.81 billion in 2016. In 2017, we received net proceeds of $1.10 billion from the issuance of fixed-rate, long-term debt and repaid $625 million of maturing debt. In 2016, we received net proceeds of $499 million from the issuance of fixed-rate, long-term debt and repaid $1.00 billion of maturing debt. Dividends paid in 2017 were $2.10 billion compared with $1.65 billion in 2016. During 2017, the quarterly dividend increased to $0.62 from $0.50 per share, resulting in an annualized dividend payment of $2.48 per share. During 2016, we increased our quarterly dividend to $0.50 from $0.38 per share. In 2017, we used $2.56 billion to repurchase 30.6 million shares of our common stock. This compared with $2.13 billion used in 2016 to repurchase 35.5 million shares. In 2017, employee exercises of stock options provided cash proceeds of $483 million compared with $472 million in 2016.
We had $1.66 billion of Cash and cash equivalents and $2.81 billion of Short-term investments as of December 31, 2017, with our U.S. entities owning about 80 percent of these amounts combined at the end of 2017. We believe we have the necessary financial resources and operating plans to fund our working capital needs, capital expenditures, dividend and debt-related payments, and other business requirements for at least the next 12 months.
In 2017, we recorded a provisional tax liability of $690 million on indefinitely reinvested earnings of our non-U.S. subsidiaries related to the enactment of the Tax Act. This amount will be paid over eight years and is not expected to have a significant impact on our liquidity.
Non-GAAP financial information
This MD&A includes references to free cash flow and ratios based on that measure. These are financial measures that were not prepared in accordance with generally accepted accounting principles in the United States (GAAP). Free cash flow was calculated by subtracting Capital expenditures from the most directly comparable GAAP measure, Cash flows from operating activities (also referred to as cash flow from operations).
We believe that free cash flow and the associated ratios provide insight into our liquidity, our cash-generating capability and the amount of cash potentially available to return to shareholders, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures.
Reconciliation to the most directly comparable GAAP-based measures is provided in the table below.
| For Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||||
| Cash flow from operations (GAAP) | $ | 5,363 | $ | 4,614 | $ | 4,397 | ||||||||
| Capital expenditures | (695 | ) | (531 | ) | (551 | ) | ||||||||
| Free cash flow (non-GAAP) | $ | 4,668 | $ | 4,083 | $ | 3,846 | ||||||||
| Revenue | $ | 14,961 | $ | 13,370 | $ | 13,000 | ||||||||
| Cash flow from operations as a percent of revenue (GAAP) | 35.8 | % | 34.5 | % | 33.8 | % | ||||||||
| Free cash flow as a percent of revenue (non-GAAP) | 31.2 | % | 30.5 | % | 29.6 | % |
This MD&A also includes references to an annual operating tax rate, a non-GAAP term we use to describe the estimated annual effective tax rate, a GAAP measure that by definition does not include discrete tax items. We believe the term annual operating tax rate more clearly communicates that discrete tax items are excluded from such rate. The term also helps differentiate from the effective tax rate, which includes discrete tax items. No adjustments are made to the estimated annual effective tax rate when using the term annual operating tax rate.
Long-term contractual obligations
| Payments Due by Period | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual Obligations | 2018 | 2019/2020 | 2021/2022 | Thereafter | Total | ||||||||||||||||||||
| Long-term debt (a) | $ | 581 | $ | 1,385 | $ | 1,133 | $ | 1,385 | $ | 4,484 | |||||||||||||||
| Purchase commitments (b) | 391 | 601 | 67 | 35 | 1,094 | ||||||||||||||||||||
| Tax on indefinitely reinvested earnings (c) | 55 | 110 | 110 | 415 | 690 | ||||||||||||||||||||
| Operating leases (d) | 68 | 94 | 53 | 56 | 271 | ||||||||||||||||||||
| Deferred compensation plans (e) | 15 | 49 | 51 | 112 | 227 | ||||||||||||||||||||
| Total (f) | $ | 1,110 | $ | 2,239 | $ | 1,414 | $ | 2,003 | $ | 6,766 |
| (a) | Includes the related interest payments and amounts classified as the current portion of long-term debt, specifically obligations that will mature within 12 months. |
|---|
| (b) | Includes payments for software licenses and contractual arrangements with suppliers where there is a fixed, non-cancellable payment schedule or minimum payments due with a reduced delivery schedule. Excluded from the table are cancellable arrangements. |
|---|
| (c) | Includes the provisional amount of the tax on indefinitely reinvested earnings related to the enactment of the Tax Act. See Note 6 to the financial statements for more details. |
|---|
| (d) | Includes minimum payments for leased facilities and equipment and purchases of industrial gases under contracts accounted for as operating leases. |
|---|
| (e) | Includes an estimate of payments for certain liabilities that existed at December 31, 2017. |
|---|
| (f) | Excluded from the table are $300 million of uncertain tax liabilities under ASC 740, as well as any planned future funding contributions to retirement benefit plans. Amounts associated with uncertain tax liabilities have been excluded because of the difficulty in making reasonably reliable estimates of the timing of cash settlements with the respective taxing authorities. Regarding future funding of retirement benefit plans, we plan to contribute about $50 million in 2018, but funding projections beyond 2018 are not practical to estimate due to the rules affecting tax-deductible contributions and the impact from the plans' asset performance, interest rates and potential U.S. and non-U.S. legislation. |
|---|
Critical accounting policies
Our accounting policies are more fully described in Note 2 of the consolidated financial statements. As disclosed in Note 2, the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. However, based on facts and circumstances inherent in developing estimates and assumptions, management believes it is unlikely that applying other estimates and assumptions would have a material impact on the financial statements. We consider the following accounting policies to be those that are most important to the portrayal of our financial condition and that require a higher degree of judgment.
Revenue recognition
Based on management’s assessment of the revenue recognition criteria, we usually recognize revenue from sales of our products to distributors upon shipment or delivery to the distributors. For our consignment arrangements with distributors, delivery occurs when the distributor pulls product from consignment inventory that we store at designated locations. Recognition is not contingent upon resale of the products to the distributors’ customers in either scenario.
Revenue is recognized net of allowances, which are management’s estimates of future credits to be granted to distributors under programs common in the semiconductor industry. These allowances are not material and generally include special pricing arrangements, product returns due to quality issues, and incentives designed to maximize growth opportunities.
Allowances are based on analysis of historical data and contractual terms and are recorded when revenue is recognized. We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner.
Income taxes
In determining Net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax provisions and the resultant tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense.
In the ordinary course of global business, there may be many transactions and calculations where the ultimate tax outcome is uncertain. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.
As part of our financial process, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to be ultimately recoverable. In this process, certain relevant criteria are evaluated including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior years that can be used to absorb net operating losses and credit carrybacks, and taxable income in future years. Our judgment regarding future recoverability of our deferred tax assets based on these criteria may change due to various factors, including changes in U.S. or international tax laws and changes in market conditions and their impact on our assessment of taxable income in future periods. These changes, if any, may require material adjustments to the deferred tax assets and an accompanying reduction or increase in Net income in the period when such determinations are made. Also, our plans for the permanent reinvestment or eventual repatriation of the accumulated earnings of certain non-U.S. operations could change. Such changes could have a material effect on tax expense in future years.
Inventory valuation allowances
Inventory is valued net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. Statistical allowances are determined quarterly for raw materials and work-in-process based on historical disposals of inventory for salability and obsolescence reasons. For finished goods, quarterly statistical allowances are determined by comparing inventory levels of individual parts to historical shipments, current backlog and estimated future sales in order to identify inventory judged unlikely to be sold. A specific allowance for each material type will be carried if there is a significant event not captured by the statistical allowance. Examples are an end-of-life part or demand with imminent risk of cancellation. Allowances are also calculated quarterly for instances where inventoried costs for individual products are in excess of market prices for those products. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and other factors.
Changes in accounting standards
See Note 2 to the financial statements for information on new accounting standards.
Off-balance sheet arrangements
As of December 31, 2017, we had no significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Commitments and contingencies
See Note 12 to the financial statements for a discussion of our commitments and contingencies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
| --- | --- |
Foreign exchange risk
The U.S. dollar is the functional currency for financial reporting. Our non-U.S. entities own assets or liabilities denominated in U.S. dollars or other currencies. Exchange rate fluctuations can have a significant impact on taxable income in those jurisdictions, and consequently on our effective tax rate.
Our balance sheet also reflects amounts remeasured from non-U.S. dollar currencies. Because most of the aggregate non-U.S. dollar balance sheet exposure is hedged by forward currency exchange contracts, based on year-end 2017 balances and currency exchange rates, a hypothetical 10 percent plus or minus fluctuation in non-U.S. currency exchange rates relative to the U.S. dollar would result in a pre-tax currency exchange gain or loss of about $6 million.
We use these forward currency exchange contracts to reduce the earnings impact exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. For example, at year-end 2017, we had forward currency exchange contracts outstanding with a notional value of $365 million to hedge net balance sheet exposures (including $140 million to sell Japanese yen, $59 million to sell British pound sterling and $49 million to sell euros). Similar hedging activities existed at year-end 2016.
Interest rate risk
We have the following potential exposure to changes in interest rates: (1) the effect of changes in interest rates on the fair value of our investments in cash equivalents and short-term investments, which could produce a gain or a loss; and (2) the effect of changes in interest rates on the fair value of our debt.
As of December 31, 2017, a hypothetical 100 basis point increase in interest rates would decrease the fair value of our investments in cash equivalents and short-term investments by $8 million and decrease the fair value of our long-term debt by $141 million. Because interest rates on our long-term debt are fixed, changes in interest rates would not affect the cash flows associated with long-term debt.
Equity risk
Long-term investments at year-end 2017 include the following:
| • | Investments in mutual funds – includes mutual funds that were selected to generate returns that offset changes in certain liabilities related to deferred compensation arrangements. The mutual funds hold a variety of debt and equity investments. |
|---|
| • | Investments in venture capital funds – includes investments in limited partnerships (accounted for under either the equity or cost method). |
|---|
| • | Equity investments – includes non-marketable (non-publicly traded) equity securities. |
|---|
Investments in mutual funds are stated at fair value. Changes in prices of the mutual fund investments are expected to offset related changes in deferred compensation liabilities such that a 10 percent increase or decrease in the investments' fair values would not materially affect operating results. Non-marketable equity securities and some venture capital funds are stated at cost. Impairments deemed to be other-than-temporary are expensed in Net income. Investments in the remaining venture capital funds are stated using the equity method. See Note 8 to the financial statements for details of equity and other long-term investments.
Item 8. Financial Statements and Supplementary Data.
| --- | --- |
List of Financial Statements (Item 15(a))
Income for each of the three years in the period ended December 31, 2017
Comprehensive income for each of the three years in the period ended December 31, 2017
Balance sheets at December 31, 2017 and 2016
Cash flows for each of the three years in the period ended December 31, 2017
Stockholders’ equity for each of the three years in the period ended December 31, 2017
Schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
| Consolidated Statements of Income | For Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Millions of dollars, except share and per-share amounts) | 2017 | 2016 | 2015 | ||||||||||||
| Revenue | $ | 14,961 | $ | 13,370 | $ | 13,000 | |||||||||
| Cost of revenue (COR) | 5,347 | 5,113 | 5,425 | ||||||||||||
| Gross profit | 9,614 | 8,257 | 7,575 | ||||||||||||
| Research and development (R&D) | 1,508 | 1,356 | 1,267 | ||||||||||||
| Selling, general and administrative (SG&A) | 1,694 | 1,742 | 1,728 | ||||||||||||
| Acquisition charges | 318 | 319 | 329 | ||||||||||||
| Restructuring charges/other | 11 | (15 | ) | (71 | ) | ||||||||||
| Operating profit | 6,083 | 4,855 | 4,322 | ||||||||||||
| Other income (expense), net (OI&E) | 75 | 155 | (16 | ) | |||||||||||
| Interest and debt expense | 78 | 80 | 90 | ||||||||||||
| Income before income taxes | 6,080 | 4,930 | 4,216 | ||||||||||||
| Provision for income taxes | 2,398 | 1,335 | 1,230 | ||||||||||||
| Net income | $ | 3,682 | $ | 3,595 | $ | 2,986 | |||||||||
| Earnings per common share (EPS): | |||||||||||||||
| Basic | $ | 3.68 | $ | 3.54 | $ | 2.86 | |||||||||
| Diluted | $ | 3.61 | $ | 3.48 | $ | 2.82 | |||||||||
| Average shares outstanding (millions): | |||||||||||||||
| Basic | 991 | 1,003 | 1,030 | ||||||||||||
| Diluted | 1,012 | 1,021 | 1,043 | ||||||||||||
| Cash dividends declared per common share | $ | 2.12 | $ | 1.64 | $ | 1.40 | |||||||||
| As a result of accounting rule ASC 260, which requires a portion of Net income to be allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents, diluted EPS is calculated using the following: | |||||||||||||||
| Net income | $ | 3,682 | $ | 3,595 | $ | 2,986 | |||||||||
| Income allocated to RSUs | (33 | ) | (44 | ) | (42 | ) | |||||||||
| Income allocated to common stock for diluted EPS | $ | 3,649 | $ | 3,551 | $ | 2,944 | |||||||||
| See accompanying notes. |
| Consolidated Statements of Comprehensive Income | For Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Millions of dollars) | 2017 | 2016 | 2015 | ||||||||||||
| Net income | $ | 3,682 | $ | 3,595 | $ | 2,986 | |||||||||
| Other comprehensive income (loss) | |||||||||||||||
| Net actuarial losses of defined benefit plans: | |||||||||||||||
| Adjustment, net of tax effect of ($26), $6 and $36 | 92 | (43 | ) | (74 | ) | ||||||||||
| Recognized within Net income, net of tax effect of ($27), ($25) and ($25) | 56 | 51 | 53 | ||||||||||||
| Prior service credit of defined benefit plans: | |||||||||||||||
| Adjustment, net of tax effect of $1, $0 and ($11) | (2 | ) | — | 20 | |||||||||||
| Recognized within Net income, net of tax effect of $1, $2 and $0 | (5 | ) | (3 | ) | — | ||||||||||
| Derivative instruments: | |||||||||||||||
| Recognized within Net income, net of tax effect of $0, $0 and ($1) | 1 | 1 | 1 | ||||||||||||
| Other comprehensive income (loss), net of taxes | 142 | 6 | — | ||||||||||||
| Total comprehensive income | $ | 3,824 | $ | 3,601 | $ | 2,986 | |||||||||
| See accompanying notes. |
| Consolidated Balance Sheets | December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (Millions of dollars, except share amounts) | 2017 | 2016 | ||||||||
| Assets | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 1,656 | $ | 1,154 | ||||||
| Short-term investments | 2,813 | 2,336 | ||||||||
| Accounts receivable, net of allowances of ($8) and ($17) | 1,278 | 1,267 | ||||||||
| Raw materials | 126 | 102 | ||||||||
| Work in process | 1,089 | 954 | ||||||||
| Finished goods | 742 | 734 | ||||||||
| Inventories | 1,957 | 1,790 | ||||||||
| Prepaid expenses and other current assets | 1,030 | 910 | ||||||||
| Total current assets | 8,734 | 7,457 | ||||||||
| Property, plant and equipment at cost | 4,789 | 4,923 | ||||||||
| Accumulated depreciation | (2,125 | ) | (2,411 | ) | ||||||
| Property, plant and equipment | 2,664 | 2,512 | ||||||||
| Long-term investments | 268 | 235 | ||||||||
| Goodwill | 4,362 | 4,362 | ||||||||
| Acquisition-related intangibles | 946 | 1,264 | ||||||||
| Deferred tax assets | 264 | 374 | ||||||||
| Capitalized software licenses | 110 | 52 | ||||||||
| Overfunded retirement plans | 208 | 96 | ||||||||
| Other long-term assets | 86 | 79 | ||||||||
| Total assets | $ | 17,642 | $ | 16,431 | ||||||
| Liabilities and stockholders’ equity | ||||||||||
| Current liabilities: | ||||||||||
| Current portion of long-term debt | $ | 500 | $ | 631 | ||||||
| Accounts payable | 466 | 396 | ||||||||
| Accrued compensation | 722 | 710 | ||||||||
| Income taxes payable | 128 | 83 | ||||||||
| Accrued expenses and other liabilities | 442 | 444 | ||||||||
| Total current liabilities | 2,258 | 2,264 | ||||||||
| Long-term debt | 3,577 | 2,978 | ||||||||
| Underfunded retirement plans | 89 | 129 | ||||||||
| Deferred tax liabilities | 78 | 33 | ||||||||
| Other long-term liabilities | 1,303 | 554 | ||||||||
| Total liabilities | 7,305 | 5,958 | ||||||||
| Stockholders’ equity: | ||||||||||
| Preferred stock, $25 par value. Authorized – 10,000,000 shares | ||||||||||
| Participating cumulative pr |
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
| --- | --- |
Not applicable.
Item 9A. Controls and Procedures.
| --- | --- |
Disclosure controls and procedures
An evaluation as of the end of the period covered by this report was carried out under the supervision and with the participation of TI’s management, including its chief executive officer and chief financial officer, of the effectiveness of the design and operation of TI’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the chief executive officer and chief financial officer concluded that those disclosure controls and procedures were effective.
Internal control over financial reporting
Report by management on internal control over financial reporting
The management of TI is responsible for establishing and maintaining effective internal control over financial reporting. TI’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements issued for external purposes in accordance with generally accepted accounting principles. There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the fourth quarter of 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
TI management assessed the effectiveness of internal control over financial reporting as of December 31, 2017. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria) in Internal Control − Integrated Framework. Based on our assessment, we believe that, as of December 31, 2017, our internal control over financial reporting is effective based on the COSO criteria.
TI’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which immediately follows this report.
Report of independent registered public accounting firm on internal control over financial reporting
To the Shareholders and the Board of Directors of Texas Instruments Incorporated
Opinion on Internal Control over Financial Reporting
We have audited Texas Instruments Incorporated’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Texas Instruments Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Texas Instruments Incorporated as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes, and our report dated February 22, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report by management on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate
Dallas, Texas
February 22, 2018
Item 9B. Other Information.
| --- | --- |
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
| --- | --- |
The information with respect to directors’ names, ages, positions, term of office and periods of service, which is contained under the caption “Election of directors” in our proxy statement for the 2018 annual meeting of stockholders, is incorporated herein by reference to such proxy statement.
The information with respect to directors’ business experience, which is contained under the caption “Diversity and qualifications” in our proxy statement for the 2018 annual meeting of stockholders, is incorporated herein by reference to such proxy statement.
The information with respect to Section 16(a) beneficial ownership reporting compliance contained under the caption of the same name in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
A list of our executive officers and their biographical information appears in Part I, Item 1 of this report.
Code of Ethics
We have adopted the Code of Ethics for TI Chief Executive Officer and Senior Finance Officers. A copy of the Code can be found on our website at www.ti.com/corporategovernance. We intend to satisfy the disclosure requirements of the SEC regarding amendments to, or waivers from, the Code by posting such information on the same website.
Audit Committee
The information contained under the caption “Committees of the board” with respect to the audit committee and the audit committee financial expert in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
Item 11. Executive Compensation.
| --- | --- |
The information contained under the captions “Director compensation” and “Executive compensation” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement, provided that the Compensation Committee report shall not be deemed filed with this Form 10-K.
The information contained under the caption “Compensation committee interlocks and insider participation” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
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Equity compensation plan information
The information contained under the caption “Equity compensation plan information” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
Security ownership of certain beneficial owners and management
The information that is contained under the captions “Security ownership of certain beneficial owners” and “Security ownership of directors and management” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
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The information contained under the captions “Related person transactions” and “Director independence” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
Item 14. Principal Accountant Fees and Services.
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The information with respect to principal accountant fees and services contained under the caption “Proposal to ratify appointment of independent registered public accounting firm” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
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The financial statements are listed in the index included in Item 8, “Financial Statements and Supplementary Data.”
| Designation of Exhibit | Description of Exhibit | Incorporated by Reference | Filed or Furnished Herewith | ||||
|---|---|---|---|---|---|---|---|
| Form | File Number | Date of Filing | Exhibit Number | ||||
| 3(a) | Restated Certificate of Incorporation of the Registrant, dated April 18, 1985, as amended | 10-K | 001-3761 | February 24, 2015 | 3(a) | ||
| 3(b) | By-Laws of the Registrant | 8-K | 001-3761 | December 12, 2016 | 3 | ||
| 4(a) | Indenture | 8-K | 001-3761 | May 23, 2011 | 4.2 | ||
| 4(b) | Officer’s Certificate | 8-K | 001-3761 | May 23, 2011 | 4.3 | ||
| 4(c) | Officer’s Certificate | 8-K | 001-3761 | May 8, 2013 | 4.2 | ||
| 4(d) | Officer’s Certificate | 8-K | 001-3761 | March 12, 2014 | 4.2 | ||
| 4(e) | Officer’s Certificate | 8-K | 001-3761 | May 6, 2015 | 4.1 | ||
| 4(f) | Officer’s Certificate | 8-K | 001-3761 | May 6, 2016 | 4.1 | ||
| 4(g) | Officer’s Certificate | 8-K | 001-3761 | May 4, 2017 | 4.1 | ||
| 4(h) | Officer’s Certificate | 8-K | 001-3761 | November 3, 2017 | 4.1 | ||
| 4(i) | The Registrant has omitted certain instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). The Registrant undertakes to furnish a copy of such instruments to the Securities and Exchange Commission upon request. | ||||||
| 10(a) | TI Deferred Compensation Plan, as amended* | 10-K | 001-3761 | February 24, 2016 | 10(a) | ||
| 10(b) | TI Employees Non-Qualified Pension Plan, effective January 1, 2009, as amended* | 10-K | 001-3761 | February 24, 2016 | 10(b) | ||
| 10(c) | TI Employees Non-Qualified Pension Plan II* | 10-K | 001-3761 | February 24, 2016 | 10(c) | ||
| 10(d) | Texas Instruments Long-Term Incentive Plan, adopted April 15, 1993* | 10-K | 001-3761 | February 24, 2012 | 10(c) | ||
| 10(e) | Texas Instruments 2000 Long-Term Incentive Plan as amended October 16, 2008* | 10-K | 001-3761 | February 24, 2015 | 10(e) | ||
| 10(f) | Texas Instruments 2003 Long-Term Incentive Plan as amended October 16, 2008 | 10-K | 001-3761 | February 24, 2015 | 10(f) | ||
| 10(g) | Texas Instruments Executive Officer Performance Plan as amended September 17, 2009* | 10-K | 001-3761 | February 24, 2015 | 10(g) | ||
| 10(h) | Texas Instruments Restricted Stock Unit Plan for Directors, as amended, dated April 16, 1998 | 10-K | 001-3761 | February 24, 2012 | 10(h) | ||
| 10(i) | Texas Instruments Directors Deferred Compensation Plan, as amended, dated April 16, 1998 | 10-K | 001-3761 | February 24, 2012 | 10(i) | ||
| 10(j) | Texas Instruments 2003 Director Compensation Plan as amended January 19, 2012 | 10-K | 001-3761 | February 24, 2015 | 10(j) |
*Management compensation plans and arrangements
Notice regarding forward-looking statements
This report includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as TI or its management “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of similar import. Similarly, statements herein that describe TI’s business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in forward-looking statements.
We urge you to carefully consider the following important factors that could cause actual results to differ materially from the expectations of TI or our management:
| • | Market demand for semiconductors, particularly in our end markets; |
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| • | Our ability to compete in products and prices in an intensely competitive industry; |
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| • | Customer demand that differs from forecasts and the financial impact of inadequate or excess company inventory that results from demand that differs from projections; |
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| • | Economic, social and political conditions in the countries in which we, our customers or our suppliers operate, including security risks; global trade policies; political and social instability; health conditions; possible disruptions in transportation, communications and information technology networks; and fluctuations in foreign currency exchange rates; |
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| • | Evolving cybersecurity threats to our information technology systems or those of our customers or suppliers; |
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| • | Natural events such as severe weather, geological events or health epidemics in the locations in which we, our customers or our suppliers operate; |
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| • | Our ability to develop, manufacture and market innovative products in a rapidly changing technological environment; |
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| • | Timely implementation of new manufacturing technologies and installation of manufacturing equipment, and the ability to obtain needed third-party foundry and assembly/test subcontract services; |
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| • | Availability and cost of raw materials, utilities, manufacturing equipment, third-party manufacturing services and manufacturing technology; |
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| • | Compliance with or changes in the complex laws, rules and regulations to which we are or may become subject, or actions of enforcement authorities, that restrict our ability to manufacture or ship our products or operate our business, or subject us to fines, penalties or other legal liability; |
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| • | Product liability or warranty claims, claims based on epidemic or delivery failure, or other claims relating to our products, manufacturing, services, design or communications, or recalls by our customers for a product containing one of our parts; |
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| • | Changes in tax law and accounting standards that can impact the tax rate applicable to us, the jurisdictions in which profits are determined to be earned and taxed, adverse resolution of tax audits, increases in tariff rates, and the ability to realize deferred tax assets; |
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| • | A loss suffered by one of our customers or distributors with respect to TI-consigned inventory; |
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| • | Financial difficulties of our distributors or their promotion of competing product lines to our detriment, or the loss of a significant number of distributors; |
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| • | Losses or curtailments of purchases from key customers or the timing and amount of distributor and other customer inventory adjustments; |
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| • | Our ability to maintain or improve profit margins, including our ability to utilize our manufacturing facilities at sufficient levels to cover our fixed operating costs, in an intensely competitive and cyclical industry and despite changes in the regulatory environment; |
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| • | Our ability to maintain and enforce a strong intellectual property portfolio and maintain freedom of operation in all jurisdictions where we conduct business; or our exposure to infringement claims; |
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| • | Instability in the global credit and financial markets that affects our ability to fund our daily operations, invest in the business, make strategic acquisitions, or make principal and interest payments on our debt; |
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| • | Increases in health care and pension benefit costs; |
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| • | Our ability to recruit and retain skilled engineering, management and technical personnel; |
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| • | Our ability to successfully integrate and realize opportunities for growth from acquisitions, or our ability to realize our expectations regarding the amount and timing of restructuring charges and associated cost savings; and |
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| • | Impairments of our non-financial assets. |
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For a more detailed discussion of these factors see the Risk Factors discussion in Item 1A of this report. The forward-looking statements included in this report are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TEXAS INSTRUMENTS INCORPORATED | ||
|---|---|---|
| By: | /s/ Rafael R. Lizardi | |
| Rafael R. Lizardi Senior Vice President, Chief Financial Officer and Chief Accounting Officer |
Date: February 22, 2018
Each person whose signature appears below constitutes and appoints each of Richard K. Templeton, Rafael R. Lizardi, and Cynthia Hoff Trochu, or any of them, each acting alone, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in his or her name, place and stead, in any and all capacities in connection with the annual report on Form 10-K of Texas Instruments Incorporated for the year ended December 31, 2017, to sign any and all amendments to the Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of the 22nd day of February 2018.
| Signature | Title | |
| /s/ Ralph W. Babb, Jr. | ||
| Ralph W. Babb, Jr. | Director | |
| /s/ Mark A. Blinn | ||
| Mark A. Blinn | Director | |
| /s/ Todd M. Bluedorn | ||
| Todd M. Bluedorn | Director | |
| /s/ Daniel A. Carp | ||
| Daniel A. Carp | Director | |
| /s/ Janet F. Clark | ||
| Janet F. Clark | Director | |
| /s/ Carrie S. Cox | ||
| Carrie S. Cox | Director | |
| /s/ Brian T. Crutcher | ||
| Brian T. Crutcher | Director, Executive Vice President and Chief Operating Officer | |
| /s/ Jean M. Hobby | ||
| Jean M. Hobby | Director | |
| /s/ Ronald Kirk | ||
| Ronald Kirk | Director | |
| /s/ Pamela H. Patsley | ||
| Pamela H. Patsley | Director | |
| /s/ Robert E. Sanchez | ||
| Robert E. Sanchez | Director | |
| /s/ Wayne R. Sanders | ||
| Wayne R. Sanders | Director | |
| /s/ Richard K. Templeton | ||
| Richard K. Templeton | Director, Chairman of the Board, President and Chief Executive Officer | |
| /s/ Rafael R. Lizardi | ||
| Rafael R. Lizardi | Senior Vice President, Chief Financial Officer and Chief Accounting Officer |
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