10-Q 1 txn-10q_20170331.htm FORM 10-Q txn-10q_20170331.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

For the quarterly period ended March 31, 2017

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

For the transition period from ___________ to ___________

Commission File Number 001-03761

 

TEXAS INSTRUMENTS INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

Delaware

75-0289970

(State of Incorporation)

(I.R.S. Employer Identification No.)

 

 

 

 

12500 TI Boulevard, Dallas, Texas

75243

(Address of principal executive offices)

(Zip Code)

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

 

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

Indicate by check mark whether the registrant has submitted electronically 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 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

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

 

 

 

 

 

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

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

996,323,814

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

April 25, 2017

 

 

 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

 

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

 

 

 

For Three Months Ended

 

Consolidated Statements of Income

 

March 31,

 

(Millions of dollars, except share and per-share amounts)

 

2017

 

 

2016

 

Revenue

 

$

 

3,402

 

 

$

 

3,008

 

Cost of revenue (COR)

 

 

 

1,258

 

 

 

 

1,179

 

Gross profit

 

 

 

2,144

 

 

 

 

1,829

 

Research and development (R&D)

 

 

 

369

 

 

 

 

322

 

Selling, general and administrative (SG&A)

 

 

 

439

 

 

 

 

441

 

Acquisition charges

 

 

 

80

 

 

 

 

80

 

Restructuring charges/other

 

 

 

4

 

 

 

 

2

 

Operating profit

 

 

 

1,252

 

 

 

 

984

 

Other income (expense), net (OI&E)

 

 

 

21

 

 

 

 

(12

)

Interest and debt expense

 

 

 

18

 

 

 

 

22

 

Income before income taxes

 

 

 

1,255

 

 

 

 

950

 

Provision for income taxes

 

 

 

258

 

 

 

 

239

 

Net income

 

$

 

997

 

 

$

 

711

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share (EPS):

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 

.99

 

 

$

 

.70

 

Diluted

 

$

 

.97

 

 

$

 

.69

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding (millions):

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

998

 

 

 

 

1,007

 

Diluted

 

 

 

1,019

 

 

 

 

1,022

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

 

.50

 

 

$

 

.38

 

 

 

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

 

$

 

997

 

 

$

 

711

 

Income allocated to RSUs

 

 

 

(10

)

 

 

 

(9

)

Income allocated to common stock for diluted EPS

 

$

 

987

 

 

$

 

702

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

 

 

For Three Months Ended

 

Consolidated Statements of Comprehensive Income

 

March 31,

 

(Millions of dollars)

 

2017

 

 

2016

 

Net income

 

$

 

997

 

 

$

 

711

 

Other comprehensive income (loss), net of taxes

 

 

 

 

 

 

 

 

 

 

Net actuarial gains (losses) of defined benefit plans:

 

 

 

 

 

 

 

 

 

 

Adjustments

 

 

 

(12

)

 

 

 

(12

)

Recognized within Net income

 

 

 

12

 

 

 

 

14

 

Prior service (cost) credit of defined benefit plans:

 

 

 

 

 

 

 

 

 

 

Recognized within Net income

 

 

 

(1

)

 

 

 

(1

)

Other comprehensive income (loss)

 

 

 

(1

)

 

 

 

1

 

Total comprehensive income

 

$

 

996

 

 

$

 

712

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

 

 

March 31,

 

 

December 31,

 

Consolidated Balance Sheets

 

2017

 

 

2016

 

(Millions of dollars, except share amounts)

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

1,073

 

 

$

 

1,154

 

Short-term investments

 

 

 

1,976

 

 

 

 

2,336

 

Accounts receivable, net of allowances of ($11) and ($17)

 

 

 

1,337

 

 

 

 

1,267

 

Raw materials

 

 

 

102

 

 

 

 

102

 

Work in process

 

 

 

1,017

 

 

 

 

954

 

Finished goods

 

 

 

724

 

 

 

 

734

 

Inventories

 

 

 

1,843

 

 

 

 

1,790

 

Prepaid expenses and other current assets

 

 

 

811

 

 

 

 

910

 

Total current assets

 

 

 

7,040

 

 

 

 

7,457

 

Property, plant and equipment at cost

 

 

 

4,833

 

 

 

 

4,923

 

Accumulated depreciation

 

 

 

(2,332

)

 

 

 

(2,411

)

Property, plant and equipment, net

 

 

 

2,501

 

 

 

 

2,512

 

Long-term investments

 

 

 

241

 

 

 

 

235

 

Goodwill, net

 

 

 

4,362

 

 

 

 

4,362

 

Acquisition-related intangibles, net

 

 

 

1,184

 

 

 

 

1,264

 

Deferred income taxes

 

 

 

361

 

 

 

 

374

 

Capitalized software licenses, net

 

 

 

116

 

 

 

 

52

 

Overfunded retirement plans

 

 

 

102

 

 

 

 

96

 

Other assets

 

 

 

71

 

 

 

 

79

 

Total assets

 

$

 

15,978

 

 

$

 

16,431

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

378

 

 

$

 

631

 

Accounts payable

 

 

 

429

 

 

 

 

396

 

Accrued compensation

 

 

 

352

 

 

 

 

710

 

Income taxes payable

 

 

 

77

 

 

 

 

83

 

Accrued expenses and other liabilities

 

 

 

366

 

 

 

 

444

 

Total current liabilities

 

 

 

1,602

 

 

 

 

2,264

 

Long-term debt

 

 

 

2,980

 

 

 

 

2,978

 

Underfunded retirement plans

 

 

 

97

 

 

 

 

129

 

Deferred income taxes

 

 

 

36

 

 

 

 

33

 

Deferred credits and other liabilities

 

 

 

624

 

 

 

 

554

 

Total liabilities

 

 

 

5,339

 

 

 

 

5,958

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

Preferred stock, $25 par value. Authorized – 10,000,000 shares

 

 

 

 

 

 

 

 

 

 

Participating cumulative preferred. None issued.

 

 

 

 

 

 

 

 

Common stock, $1 par value. Authorized – 2,400,000,000 shares

 

 

 

 

 

 

 

 

 

 

Shares issued – 1,740,815,939

 

 

 

1,741

 

 

 

 

1,741

 

Paid-in capital

 

 

 

1,597

 

 

 

 

1,674

 

Retained earnings

 

 

 

33,595

 

 

 

 

33,107

 

Treasury common stock at cost

 

 

 

 

 

 

 

 

 

 

Shares: March 31, 2017 – 743,085,976; December 31, 2016 – 744,831,978

 

 

 

(25,767

)

 

 

 

(25,523

)

Accumulated other comprehensive income (loss), net of taxes (AOCI)

 

 

 

(527

)

 

 

 

(526

)

Total stockholders’ equity

 

 

 

10,639

 

 

 

 

10,473

 

Total liabilities and stockholders’ equity

 

$

 

15,978

 

 

$

 

16,431

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

 

 

For Three Months Ended

 

Consolidated Statements of Cash Flows

 

March 31,

 

(Millions of dollars)

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

Net income

 

$

 

997

 

 

$

 

711

 

Adjustments to Net income:

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

139

 

 

 

 

161

 

Amortization of acquisition-related intangibles

 

 

 

80

 

 

 

 

80

 

Amortization of capitalized software

 

 

 

11

 

 

 

 

8

 

Stock compensation

 

 

 

68

 

 

 

 

72

 

Deferred income taxes

 

 

 

9

 

 

 

 

24

 

Increase (decrease) from changes in:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

(68

)

 

 

 

(100

)

Inventories

 

 

 

(53

)

 

 

 

(114

)

Prepaid expenses and other current assets

 

 

 

(71

)

 

 

 

43

 

Accounts payable and accrued expenses

 

 

 

(78

)

 

 

 

(41

)

Accrued compensation

 

 

 

(356

)

 

 

 

(322

)

Income taxes payable

 

 

 

149

 

 

 

 

131

 

Changes in funded status of retirement plans

 

 

 

(14

)

 

 

 

18

 

Other

 

 

 

(18

)

 

 

 

(18

)

Cash flows from operating activities

 

 

 

795

 

 

 

 

653

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

(127

)

 

 

 

(124

)

Proceeds from asset sales

 

 

 

40

 

 

 

 

 

Purchases of short-term investments

 

 

 

(757

)

 

 

 

(200

)

Proceeds from short-term investments

 

 

 

1,120

 

 

 

 

900

 

Other

 

 

 

(9

)

 

 

 

(3

)

Cash flows from investing activities

 

 

 

267

 

 

 

 

573

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

Repayment of debt

 

 

 

(250

)

 

 

 

 

Dividends paid

 

 

 

(500

)

 

 

 

(383

)

Stock repurchases

 

 

 

(550

)

 

 

 

(630

)

Proceeds from common stock transactions

 

 

 

161

 

 

 

 

68

 

Other

 

 

 

(4

)

 

 

 

 

Cash flows from financing activities

 

 

 

(1,143

)

 

 

 

(945

)

 

 

 

 

 

 

 

 

 

 

 

Net change in Cash and cash equivalents

 

 

 

(81

)

 

 

 

281

 

Cash and cash equivalents at beginning of period

 

 

 

1,154

 

 

 

 

1,000

 

Cash and cash equivalents at end of period

 

$

 

1,073

 

 

$

 

1,281

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

Notes to financial statements

1. Description of business, including segment information

We design, make and sell semiconductors to electronics designers and manufacturers all over the world. Beginning January 2017, we reorganized the product lines within our two reportable segments – Analog and Embedded Processing – to realign our business structure with the way our customers select and buy products. These changes had no effect on either our previously reported consolidated financial statements or on our reportable segment amounts. Our two reportable segments are established along major categories of products as follows:

 

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

 

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

We report the results of our remaining business activities in Other. Other includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other includes DLP® products, calculators and custom ASIC products. We no longer recognize royalties as revenue. 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 and are now recorded as OI&E rather than in revenue as of January 1, 2017. Prior period amounts were not material.

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

Segment information

 

 

For Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

Analog

$

 

2,256

 

 

$

 

1,879

 

Embedded Processing

 

 

803

 

 

 

 

729

 

Other

 

 

343

 

 

 

 

400

 

Total revenue

$

 

3,402

 

 

$

 

3,008

 

 

 

 

 

 

 

 

 

 

 

Operating profit:

 

 

 

 

 

 

 

 

 

Analog

$

 

935

 

 

$

 

688

 

Embedded Processing

 

 

240

 

 

 

 

187

 

Other

 

 

77

 

 

 

 

109

 

Total operating profit

$

 

1,252

 

 

$

 

984

 

 

Operating profit amounts in the prior period have been recast as a result of our early adoption of a new accounting standard related to pension and other retiree benefit costs. See Note 2 for more information.

 

2. Basis of presentation and significant accounting policies and practices

Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and on the same basis as the audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2016. The Consolidated Statements of Income, Comprehensive Income and Cash Flows for the periods ended March 31, 2017 and 2016, and the Consolidated Balance Sheet as of March 31, 2017, are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown. Certain information and note disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Because the consolidated interim financial statements do not include all of the information and notes required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2016. The results for the three-month periods are not necessarily indicative of a full year’s results.

6

 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

The consolidated financial statements include the accounts of all subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in these notes, except per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated. We have reclassified certain amounts in the prior periods’ financial statements to conform to the current presentation, retrospectively applying the new accounting standard related to pension and other retiree benefit costs. See Adopted standards for current period for further information.

Significant accounting policies and practices

Earnings per share (EPS)

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

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

 

 

For Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

Net

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

Income

 

 

Shares

 

 

EPS

 

 

Income

 

 

Shares

 

 

EPS

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

 

997

 

 

 

 

 

 

 

 

 

 

 

$

 

711

 

 

 

 

 

 

 

 

 

 

Income allocated to RSUs

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

 

 

 

 

Income allocated to common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for basic EPS calculation

$

 

987

 

 

 

998

 

 

$

 

.99

 

 

$

 

702

 

 

 

1,007

 

 

$

 

.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for dilutive shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

 

997

 

 

 

 

 

 

 

 

 

 

 

$

 

711

 

 

 

 

 

 

 

 

 

 

Income allocated to RSUs

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

 

 

 

 

Income allocated to common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for diluted EPS calculation

$

 

987

 

 

 

1,019

 

 

$

 

.97

 

 

$

 

702

 

 

 

1,022

 

 

$

 

.69

 

 

Potentially dilutive securities representing 6 million and 22 million shares of common stock that were outstanding during the first quarters of 2017 and 2016, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive.

Derivatives and hedging

We use derivative financial instruments to manage exposure to foreign currency exchange risk. These instruments are primarily forward foreign currency exchange contracts, which are used as economic hedges to reduce the earnings impact that exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. Gains and losses from changes in the fair value of these forward foreign currency exchange contracts are credited or charged to OI&E. We do not apply hedge accounting to our foreign currency derivative instruments.

In connection with the issuance of long-term debt, we use financial derivatives such as treasury rate lock agreements that are recognized in AOCI and amortized over the life of the related debt. The results of these derivative transactions have not been material.

We do not use derivatives for speculative or trading purposes.

Fair values of financial instruments

The fair values of our derivative financial instruments were not material as of March 31, 2017. Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our deferred compensation liabilities, are carried at fair value. The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. The carrying value of our long-term debt approximates the fair value as measured using broker-dealer quotes, which are Level 2 inputs. See Note 5 for a description of fair value and the definition of Level 2 inputs.

7

 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

Changes in accounting standards

Adopted standards for current period

In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires current and deferred income taxes resulting from the intra-entity transfer of any assets other than inventory to be recognized for financial reporting purposes when the transfer occurs rather than postpone recognition until the asset has been sold to an outside party as currently allowed. This standard is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings and is effective for our interim and annual periods beginning January 1, 2018. As early adoption is permitted, we elected to early adopt this standard in the first quarter of 2017. The effect on our financial position and results of operations was not material.

In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard amends the income statement presentation of the components of net periodic benefit cost for defined benefit pension and other postretirement plans. This standard requires us to: (1) disaggregate the current service cost component from the other components of net periodic benefit cost (the “other components”) and present it in the same line items on the statement of income as other current compensation costs for related employees and (2) present the other components outside of operating profit (i.e., in OI&E). This standard is required to be applied retrospectively and is effective for annual and interim periods beginning after December 15, 2017. As early adoption is permitted, we elected to adopt this standard as of the beginning of the first quarter of 2017. While the adoption of this standard did not impact Revenue, Net income, Earnings per common share or Cash flows from operating activities, the following components on the Consolidated Statements of Income for the three months ended March 31, 2016 were affected:

 

For Three Months Ended March 31, 2016

 

 

Reported

 

 

Recast

 

COR

$

 

1,184

 

 

$

 

1,179

 

Gross profit

 

 

1,824

 

 

 

 

1,829

 

R&D

 

 

326

 

 

 

 

322

 

SG&A

 

 

448

 

 

 

 

441

 

Operating profit:

 

 

 

 

 

 

 

 

 

Analog

 

 

679

 

 

 

 

688

 

Embedded Processing

 

 

182

 

 

 

 

187

 

Other

 

 

107

 

 

 

 

109

 

Total operating profit

 

 

968

 

 

 

 

984

 

OI&E

 

 

4

 

 

 

 

(12

)

Standards not yet adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. It is effective for annual and interim reporting periods beginning after December 15, 2017. This standard permits early adoption and permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the potential impact of this standard on our financial position and results of operations, as well as our selected transition method. Based on our preliminary assessment, we believe the new standard will not have a material impact on our financial position and results of operations, as we do not expect to change the manner or timing of recognizing revenue on a majority of our revenue transactions. We recognize revenue on sales to customers and distributors upon satisfaction of our performance obligations when the goods are shipped. For consignment sales, we recognize revenue when the goods are pulled from consignment inventory.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Under this standard, all equity investments except those accounted for under the equity method are required to be measured at fair value. Equity investments that do not have a readily determinable fair value may, as a practical expedient, be measured at cost, adjusted for changes in observable prices minus impairment. This standard is effective for our interim and annual periods beginning January 1, 2018, and should be applied on a modified retrospective basis except for the amendments related to equity securities without readily determinable fair values, which would be applied on a prospective basis. We do not expect this standard to have a material impact on our financial position and results of operations, as nearly all of our equity investments are already recorded at fair value or under the equity method.

8

 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires all leases that have a term of over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard will be effective for our interim and annual periods beginning January 1, 2019, and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently evaluating the timing of adoption and the potential impact of this standard on our financial position, but we do not expect it to have a material impact on our results of operations.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which requires waiting to recognize a loss until it is probable of having been incurred. There are other provisions within the standard that affect how impairments of other financial assets may be recorded and presented, and that expand disclosures. This standard will be effective for our interim and annual periods beginning after December 15, 2019, and permits earlier application but not before December 15, 2018. The standard will be applied using a modified retrospective approach. We are currently evaluating the potential impact of this standard, but we do not expect it to have a material impact on our financial position and results of operations.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which affects areas of accounting such as acquisitions, disposals and goodwill. This standard provides guidance to evaluate whether transactions should be accounted for as an acquisition (or disposal) of assets or as a business combination. Under this new standard, if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, it may be treated as an asset acquisition rather than a business combination. This standard is to be applied on a prospective basis and will be effective for us for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The impact of this standard on our financial position, results of operation and related disclosures will be dependent upon the specific terms of any applicable future acquisitions or dispositions.

In February 2017, the FASB issued ASU No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This standard provides guidance on the recognition and measurement of gains and losses from the transfer, sale or partial sale to noncustomers of nonfinancial assets (such as intangible assets, property, plant and equipment) or an ownership interest in a consolidated subsidiary that is not a business. This standard is to be applied on either a retrospective basis to all periods presented or on a modified retrospective basis (i.e., cumulative catch up as of the beginning of the earliest period presented) and will be effective for us for annual periods beginning after December 15, 2017, including interim periods within those periods. Earlier application is permitted. We are currently evaluating the timing of adoption and the potential impact of this standard on our financial position and results of operations, but we do not expect it to have a material impact.

9

 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

 

3. Restructuring charges/other

Restructuring charges/other are recognized in Other for segment reporting purposes.

Restructuring charges

Beginning January 2017, we reorganized the product lines within our two reportable segments. We recognized $18 million of restructuring charges for severance and benefit costs in the fourth quarter of 2016 and an additional $2 million in the first quarter of 2017. Any further charges are not expected to be material. As of March 31, 2017, $2 million has been paid to terminated employees for severance and benefits.

For the three months ended March 31, 2017, we incurred restructuring charges of $2 million related to the phase-out of a manufacturing facility in Greenock, Scotland. These charges were comprised of severance and benefits costs, as well as accelerated depreciation. Total restructuring charges, primarily severance and benefit costs, are estimated to be about $40 million, of which $26 million has been recognized through March 31, 2017. The remaining charges are expected to be recognized through the end of 2018.

Changes in accrued restructuring balances

 

Balance, December 31, 2016

$

 

40

 

Restructuring charges

 

 

4

 

Payments

 

 

(4

)

Non-cash items (a)

 

 

(1

)

Balance, March 31, 2017

$

 

39

 

(a)

Reflects charges for impacts of accelerated depreciation and changes in exchange rates.

 

4. Income taxes

Our Provision for income taxes was $258 million and $239 million in the first quarters of 2017 and 2016, respectively. The increase was due to higher income before income taxes, partially offset by discrete tax items, which are primarily related to stock-based compensation. Our estimated annual effective tax rate is about 30 percent, which does not include discrete tax items. This differs from the 35 percent statutory corporate tax rate due to the effect of U.S. tax benefits and lower statutory tax rates applicable to our operations in many of the jurisdictions in which we operate. These lower non-U.S. tax rates are generally statutory in nature, without expiration and available to companies that operate in those taxing jurisdictions.

Provision for income taxes is based on the following:

 

 

For Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Taxes calculated using the estimated annual effective tax rate

$

 

382

 

 

$

 

281

 

Discrete tax items

 

 

(124

)

 

 

 

(42

)

Provision for income taxes

$

 

258

 

 

$

 

239

 

 

 

 

 

 

 

 

 

 

 

Estimated annual effective tax rate

 

 

30

%

 

 

 

30

%

Actual effective tax rate

 

 

21

%

 

 

 

25

%

 

 

5. Valuation of debt and equity investments and certain liabilities

Debt and equity investments

We classify our investments as available for sale, trading, equity method or cost method. Most of our investments are classified as available for sale.

10

 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

Available-for-sale and trading securities are stated at fair value, which is generally based on market prices or broker quotes. See the fair-value discussion below. Unrealized gains and losses on available-for-sale securities are recorded as an increase or decrease, net of taxes, in AOCI on our Consolidated Balance Sheets. We record other-than-temporary impairments on available-for-sale securities in OI&E in our Consolidated Statements of Income.

We classify certain mutual funds as trading securities. These mutual funds hold a variety of debt and equity investments intended to generate returns that offset changes in certain deferred compensation liabilities. We record changes in the fair value of these mutual funds and the related deferred compensation liabilities in SG&A.

Our other investments are not measured at fair value but are accounted for using either the equity method or cost method. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity-method investments are reflected in OI&E based on our ownership share of the investee’s financial results. Gains and losses on cost-method investments are recorded in OI&E when realized or when an impairment of the investment’s value is warranted based on our assessment of the recoverability of each investment.

Details of our investments are as follows:

 

 

March 31, 2017

 

 

December 31, 2016

 

 

Cash and Cash

 

 

Short-Term

 

 

Long-Term

 

 

Cash and Cash

 

 

Short-Term

 

 

Long-Term

 

 

Equivalents

 

 

Investments

 

 

Investments

 

 

Equivalents

 

 

Investments

 

 

Investments

 

Measured at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

 

445

 

 

$

 

 

 

$

 

 

 

$

 

346

 

 

$

 

 

 

$

 

 

Corporate obligations

 

 

25

 

 

 

 

429

 

 

 

 

 

 

 

 

107

 

 

 

 

544

 

 

 

 

 

U.S. government agency and Treasury securities

 

 

375

 

 

 

 

1,547

 

 

 

 

 

 

 

 

490

 

 

 

 

1,792

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds