10-Q 1 txn-10q_20180331.htm 10-Q txn-10q_20180331.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, 2018

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

For the transition period from ___________ to ___________

Commission File Number 001-03761

 

TEXAS INSTRUMENTS INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

Delaware

75-0289970

(State of Incorporation)

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

 

 

 

 

12500 TI Boulevard, Dallas, Texas

75243

(Address of principal executive offices)

(Zip Code)

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

 

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

Indicate by check mark whether the registrant has submitted electronically 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  

978,918,151

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

April 24, 2018

 

 

 


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)

 

2018

 

 

2017

 

Revenue

 

$

 

3,789

 

 

$

 

3,402

 

Cost of revenue (COR)

 

 

 

1,342

 

 

 

 

1,258

 

Gross profit

 

 

 

2,447

 

 

 

 

2,144

 

Research and development (R&D)

 

 

 

385

 

 

 

 

369

 

Selling, general and administrative (SG&A)

 

 

 

433

 

 

 

 

439

 

Acquisition charges

 

 

 

80

 

 

 

 

80

 

Restructuring charges/other

 

 

 

1

 

 

 

 

4

 

Operating profit

 

 

 

1,548

 

 

 

 

1,252

 

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

 

 

 

28

 

 

 

 

21

 

Interest and debt expense

 

 

 

23

 

 

 

 

18

 

Income before income taxes

 

 

 

1,553

 

 

 

 

1,255

 

Provision for income taxes

 

 

 

187

 

 

 

 

258

 

Net income

 

$

 

1,366

 

 

$

 

997

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share (EPS):

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 

1.38

 

 

$

 

.99

 

Diluted

 

$

 

1.35

 

 

$

 

.97

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding (millions):

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

983

 

 

 

 

998

 

Diluted

 

 

 

1,005

 

 

 

 

1,019

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

 

.62

 

 

$

 

.50

 

 

 

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

 

$

 

1,366

 

 

$

 

997

 

Income allocated to RSUs

 

 

 

(11

)

 

 

 

(10

)

Income allocated to common stock for diluted EPS

 

$

 

1,355

 

 

$

 

987

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

 

 

 

For Three Months Ended

 

Consolidated Statements of Comprehensive Income

 

March 31,

 

(Millions of dollars)

 

2018

 

 

2017

 

Net income

 

$

 

1,366

 

 

$

 

997

 

Other comprehensive income (loss), net of taxes

 

 

 

 

 

 

 

 

 

 

Net actuarial losses of defined benefit plans:

 

 

 

 

 

 

 

 

 

 

Adjustments

 

 

 

(16

)

 

 

 

(12

)

Recognized within Net income

 

 

 

9

 

 

 

 

12

 

Prior service credit of defined benefit plans:

 

 

 

 

 

 

 

 

 

 

Recognized within Net income

 

 

 

(1

)

 

 

 

(1

)

Other comprehensive income (loss)

 

 

 

(8

)

 

 

 

(1

)

Total comprehensive income

 

$

 

1,358

 

 

$

 

996

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

 

 

March 31,

 

 

December 31,

 

Consolidated Balance Sheets

 

2018

 

 

2017

 

(Millions of dollars, except share amounts)

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

1,717

 

 

$

 

1,656

 

Short-term investments

 

 

 

2,362

 

 

 

 

2,813

 

Accounts receivable, net of allowances of ($8) and ($8)

 

 

 

1,454

 

 

 

 

1,278

 

Raw materials

 

 

 

144

 

 

 

 

126

 

Work in process

 

 

 

1,076

 

 

 

 

1,089

 

Finished goods

 

 

 

812

 

 

 

 

742

 

Inventories

 

 

 

2,032

 

 

 

 

1,957

 

Prepaid expenses and other current assets

 

 

 

1,025

 

 

 

 

1,030

 

Total current assets

 

 

 

8,590

 

 

 

 

8,734

 

Property, plant and equipment at cost

 

 

 

4,907

 

 

 

 

4,789

 

Accumulated depreciation

 

 

 

(2,171

)

 

 

 

(2,125

)

Property, plant and equipment

 

 

 

2,736

 

 

 

 

2,664

 

Long-term investments

 

 

 

271

 

 

 

 

268

 

Goodwill

 

 

 

4,362

 

 

 

 

4,362

 

Acquisition-related intangibles

 

 

 

866

 

 

 

 

946

 

Deferred tax assets

 

 

 

218

 

 

 

 

264

 

Capitalized software licenses

 

 

 

102

 

 

 

 

110

 

Overfunded retirement plans

 

 

 

215

 

 

 

 

208

 

Other long-term assets

 

 

 

147

 

 

 

 

86

 

Total assets

 

$

 

17,507

 

 

$

 

17,642

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

500

 

 

$

 

500

 

Accounts payable

 

 

 

488

 

 

 

 

466

 

Accrued compensation

 

 

 

344

 

 

 

 

722

 

Income taxes payable

 

 

 

133

 

 

 

 

128

 

Accrued expenses and other liabilities

 

 

 

395

 

 

 

 

442

 

Total current liabilities

 

 

 

1,860

 

 

 

 

2,258

 

Long-term debt

 

 

 

3,578

 

 

 

 

3,577

 

Underfunded retirement plans

 

 

 

92

 

 

 

 

89

 

Deferred tax liabilities

 

 

 

53

 

 

 

 

78

 

Other long-term liabilities

 

 

 

1,282

 

 

 

 

1,303

 

Total liabilities

 

 

 

6,865

 

 

 

 

7,305

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Participating cumulative preferred. None issued.

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Shares issued – 1,740,815,939

 

 

 

1,741

 

 

 

 

1,741

 

Paid-in capital

 

 

 

1,770

 

 

 

 

1,776

 

Retained earnings

 

 

 

35,619

 

 

 

 

34,662

 

Treasury common stock at cost

 

 

 

 

 

 

 

 

 

 

Shares: March 31, 2018 – 759,098,020; December 31, 2017 – 757,657,217

 

 

 

(28,096

)

 

 

 

(27,458

)

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

 

 

 

(392

)

 

 

 

(384

)

Total stockholders’ equity

 

 

 

10,642

 

 

 

 

10,337

 

Total liabilities and stockholders’ equity

 

$

 

17,507

 

 

$

 

17,642

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

4


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

 

 

For Three Months Ended

 

Consolidated Statements of Cash Flows

 

March 31,

 

(Millions of dollars)

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

Net income

 

$

 

1,366

 

 

$

 

997

 

Adjustments to Net income:

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

137

 

 

 

 

139

 

Amortization of acquisition-related intangibles

 

 

 

80

 

 

 

 

80

 

Amortization of capitalized software

 

 

 

12

 

 

 

 

11

 

Stock compensation

 

 

 

70

 

 

 

 

68

 

Deferred taxes

 

 

 

(31

)

 

 

 

9

 

Increase (decrease) from changes in:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

(176

)

 

 

 

(68

)

Inventories

 

 

 

(97

)

 

 

 

(53

)

Prepaid expenses and other current assets

 

 

 

356

 

 

 

 

(71

)

Accounts payable and accrued expenses

 

 

 

(51

)

 

 

 

(78

)

Accrued compensation

 

 

 

(372

)

 

 

 

(356

)

Income taxes payable

 

 

 

(131

)

 

 

 

149

 

Changes in funded status of retirement plans

 

 

 

(15

)

 

 

 

(14

)

Other

 

 

 

(36

)

 

 

 

(18

)

Cash flows from operating activities

 

 

 

1,112

 

 

 

 

795

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

(189

)

 

 

 

(127

)

Proceeds from asset sales

 

 

 

 

 

 

 

40

 

Purchases of short-term investments

 

 

 

(996

)

 

 

 

(757

)

Proceeds from short-term investments

 

 

 

1,455

 

 

 

 

1,120

 

Other

 

 

 

(4

)

 

 

 

(9

)

Cash flows from investing activities

 

 

 

266

 

 

 

 

267

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

Repayment of debt

 

 

 

 

 

 

 

(250

)

Dividends paid

 

 

 

(611

)

 

 

 

(500

)

Stock repurchases

 

 

 

(873

)

 

 

 

(550

)

Proceeds from common stock transactions

 

 

 

178

 

 

 

 

161

 

Other

 

 

 

(11

)

 

 

 

(4

)

Cash flows from financing activities

 

 

 

(1,317

)

 

 

 

(1,143

)

 

 

 

 

 

 

 

 

 

 

 

Net change in Cash and cash equivalents

 

 

 

61

 

 

 

 

(81

)

Cash and cash equivalents at beginning of period

 

 

 

1,656

 

 

 

 

1,154

 

Cash and cash equivalents at end of period

 

$

 

1,717

 

 

$

 

1,073

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

5


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

Notes to financial statements

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

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

 

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

 

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

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

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

Segment information

 

 

For Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

Analog

$

 

2,566

 

 

$

 

2,256

 

Embedded Processing

 

 

926

 

 

 

 

803

 

Other

 

 

297

 

 

 

 

343

 

Total revenue

$

 

3,789

 

 

$

 

3,402

 

 

 

 

 

 

 

 

 

 

 

Operating profit:

 

 

 

 

 

 

 

 

 

Analog

$

 

1,166

 

 

$

 

935

 

Embedded Processing

 

 

328

 

 

 

 

240

 

Other

 

 

54

 

 

 

 

77

 

Total operating profit

$

 

1,548

 

 

$

 

1,252

 

Geographic area information

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

 

For Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

United States

$

 

504

 

 

$

 

399

 

Asia (a)

 

 

2,215

 

 

 

 

2,004

 

Europe, Middle East and Africa

 

 

771

 

 

 

 

683

 

Japan

 

 

220

 

 

 

 

250

 

Rest of world

 

 

79

 

 

 

 

66

 

Total revenue

$

 

3,789

 

 

$

 

3,402

 

(a)

Revenue from products shipped into China, including Hong Kong, was $1.6 billion and $1.5 billion in the three months ended March 31, 2018, and March 31, 2017, respectively.

 

 

6


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

2. Basis of presentation and significant accounting policies and practices

Basis of presentation

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

Significant accounting policies and practices

Revenue recognition

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

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

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

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

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

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

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. 

7


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

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

 

 

For Three Months Ended March 31,

 

 

2018

 

 

2017

 

 

Net

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

Income

 

 

Shares

 

 

EPS

 

 

Income

 

 

Shares

 

 

EPS

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

 

1,366

 

 

 

 

 

 

 

 

 

 

 

$

 

997

 

 

 

 

 

 

 

 

 

 

Income allocated to RSUs

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

Income allocated to common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for basic EPS calculation

$

 

1,355

 

 

 

983

 

 

$

 

1.38

 

 

$

 

987

 

 

 

998

 

 

$

 

.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for dilutive shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

 

1,366

 

 

 

 

 

 

 

 

 

 

 

$

 

997

 

 

 

 

 

 

 

 

 

 

Income allocated to RSUs

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

Income allocated to common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for diluted EPS calculation

$

 

1,355

 

 

 

1,005

 

 

$

 

1.35

 

 

$

 

987

 

 

 

1,019

 

 

$

 

.97

 

 

Potentially dilutive securities representing 5 million and 6 million shares of common stock that were outstanding during the first quarters of 2018 and 2017, 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 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 may 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, 2018. 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 4 for a description of fair value and the definition of Level 2 inputs.

Changes in accounting standards – adopted standards for current period

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. We adopted Accounting Standards Codification Topic 606 (ASC 606) as of January 1, 2018, using the modified retrospective transition method applied only to contracts that were not completed as of the adoption date. The reported results for 2018 reflect the application of the new accounting guidance, while the reported results for prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under ASC 605, Revenue Recognition (ASC 605).

8


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

The most significant impact from adopting the standard relates to our accounting for royalty income on licenses of intellectual property; however, the effect of such change during any individual reporting period will not materially impact our results of operations and financial position. Although royalty income is recorded within OI&E, the new revenue guidance applies to these agreements by analogy, and therefore, such agreements have been evaluated for ASC transition considerations. Under ASC 606, royalty income for our fixed-rate royalty agreements is bifurcated between two performance obligations: providing a right to use our initial patent portfolio and the right to access our future patents when those patents are developed. We have determined that the value of these agreements is allocated more heavily to the initial performance obligation. As a result, income from these agreements is recognized predominately at the time of contract execution rather than ratably over the life of the agreements, accelerating the timing of when we recognize royalty income in OI&E.

The timing of revenue recognition, billings and cash collections may result in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities). These items are included in other current and non-current assets and liabilities on the Consolidated Balance Sheets.

The time frame between when the customer places an order for products and when it is shipped is less than 12 months. Generally, we invoice customers for payment upon shipment or when goods are pulled from consignment inventory, which results in an unconditional right to consideration. Our contract assets are primarily related to our rights to consideration for satisfied or partially satisfied performance obligations on our royalty agreements for which payment has not been received as of the reporting date.

We recognized an increase to opening retained earnings of $206 million, net of taxes, as of January 1, 2018, due to the cumulative impact of adopting ASC 606, with the impact primarily related to our fixed payment patent licensing agreements that were not completed as of the adoption date. A contract asset of $283 million and deferred tax liabilities of $55 million were recorded as of January 1, 2018, related to the transition period adjustments.

Occasionally, as of the end of a reporting period, some of the performance obligations associated with contracts will have been unsatisfied or only partially satisfied. In accordance with the practical expedients available in the guidance, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Similarly, we do not disclose information for variable-rate consideration on our sales-based or usage-based royalties for our patent licenses.

For royalty income from licensing our patent portfolios, income is allocated to performance obligations that have not yet been satisfied. The remaining performance obligations represent contracted income that has not yet been recognized, including amounts that will be invoiced and recognized as income in future periods. As of March 31, 2018, we had $75 million of remaining performance obligations that had not yet been satisfied. We expect to recognize approximately 20 percent of our remaining performance obligations as income over the next 12 months and the remainder thereafter.

As of March 31, 2018, we had contract assets of $273 million. During the three months ended March 31, 2018, our contract assets were reduced by $10 million, due to $14 million of cash received offset by $4 million of income recognized.

We incur commission expenses paid to internal sales personnel that are incremental to obtaining contracts with customers. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are included in SG&A.

Other standards

The following standards were adopted during the current period and did not have a material impact on our financial position and results of operations:

 

ASU

 

Description

 

Adopted Date

ASU No. 2016-01

 

Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

 

January 1, 2018

ASU No. 2017-01

 

Business Combinations (Topic 805): Clarifying the Definition of a Business

 

January 1, 2018

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

 

January 1, 2018

9


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

Changes in accounting standards – standards not yet adopted

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. In March 2018, the FASB tentatively approved an optional transition method to initially account for the impact of the adoption with a cumulative-effect adjustment to the January 1, 2019, rather than January 1, 2017, financial statements. This would eliminate the need to restate amounts presented prior to January 1, 2019. We plan to adopt the standard effective January 1, 2019, and expect to elect this optional transition method. We are currently evaluating 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.

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 January 1, 2020, and permits earlier application but not before periods beginning January 1, 2019. 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.

ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This standard allows a reclassification of stranded tax effects as a result of the U.S. Tax Cuts and Jobs Act (the Tax Act) from accumulated other comprehensive income to retained earnings. The provisions from this guidance are effective for interim and annual periods beginning after January 1, 2019. Early adoption is permitted. This standard should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effects of the Tax Act are recognized. We plan to adopt this standard during the interim period in which we complete our accounting for the tax effects of the enactment of the Tax Act, applying the guidance to the period of adoption. This standard will have no impact on our results of operations. We are currently evaluating the potential impact of this standard on our financial position.

 

 

3. Income taxes

Our Provision for income taxes was $187 million and $258 million for the first quarters of 2018 and 2017, respectively.

Our estimated annual effective tax rate is about 20 percent, which does not include discrete tax items. This differs from the 21 percent statutory corporate tax rate due to the effect of U.S. tax benefits, offset by a 2018 transitional tax effect.

We have included the provisions of the Tax Act in the calculation of our estimated annual effective tax rate. The estimates could change when additional information on implementation of the provisions of the Tax Act becomes available.

The Tax Act was enacted on December 22, 2017. We have not completed our accounting for the tax effects of enactment of the Tax Act. We have made reasonable estimates of the tax on indefinitely reinvested earnings and the effects on our existing deferred tax balances. This resulted in additional tax expense in 2017 of $773 million, consisting of $714 million related to the tax on indefinitely reinvested earnings and $59 million related to remeasuring our existing deferred tax balances.

The tax on indefinitely reinvested earnings is based on our non-U.S. post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We have not yet completed our calculation of the total post-1986 E&P for these non-U.S. subsidiaries.

In the first quarter of 2018 we reduced the amount of income tax expense recorded for indefinitely reinvested earnings to $669 million from $714 million recorded in 2017. This adjustment did not affect the estimated annual effective tax rate for 2018.

The calculations of the tax effect of the Tax Act for both indefinitely reinvested earnings and deferred tax assets and liabilities are expected to be completed with the preparation of the U.S. 2017 tax return in the third quarter of 2018.

10


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

 

Provision for income taxes is based on the following:

 

For Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Taxes calculated using the estimated annual effective tax rate

$

 

316

 

 

$

 

382

 

Discrete tax items

 

 

(129

)

 

 

 

(124

)

Provision for income taxes

$

 

187

 

 

$

 

258

 

 

 

 

 

 

 

 

 

 

 

Estimated annual effective tax rate

 

 

20

%

 

 

 

30

%

Actual effective tax rate

 

 

12

%

 

 

 

21

%

 

 

4. 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 non-marketable equity. Most of our investments are debt securities, which are classified as available for sale.

Available-for-sale and trading securities are stated at fair value, which is generally based on market prices or broker quotes. See Fair-value considerations below. Unrealized gains and losses from available-for-sale debt 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 debt 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 include equity-method investments and non-marketable equity investments, which are not measured at fair value. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity-method investments are recognized in OI&E based on our ownership share of the investee’s financial results.

Details of our investments are as follows:

 

 

March 31, 2018

 

 

December 31, 2017

 

 

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 debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

 

369

 

 

$

 

 

 

$

 

 

 

$

 

525

 

 

$

 

 

 

$

 

 

Corporate obligations

 

 

413

 

 

 

 

764

 

 

 

 

 

 

 

 

172

 

 

 

 

698

 

 

 

 

 

U.S. government agency and Treasury securities

 

 

699

 

 

 

 

1,598

 

 

 

 

 

 

 

 

700

 

 

 

 

2,115

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

 

 

 

 

 

 

 

 

 

243