UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
S
|
QUARTERLY REPORT UNDER SECTION
13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2008
¨
|
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, P.O. Box 660199, Dallas, Texas
|
75266-0199
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code 972-995-3773
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 S No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer S
|
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No S
1,310,877,425
Number of
shares of Registrant’s common stock outstanding as of
June 30,
2008
PART
I - FINANCIAL INFORMATION
ITEM
1. Financial Statements.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Income
(Millions
of dollars, except share and per-share amounts)
|
|
For
Three Months Ended June 30,
|
|
|
For
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
3,351 |
|
|
$ |
3,424 |
|
|
$ |
6,623 |
|
|
$ |
6,615 |
|
Cost
of revenue
(COR)
|
|
|
1,602 |
|
|
|
1,640 |
|
|
|
3,118 |
|
|
|
3,194 |
|
Gross
profit
|
|
|
1,749 |
|
|
|
1,784 |
|
|
|
3,505 |
|
|
|
3,421 |
|
Research and development (R&D)
|
|
|
488 |
|
|
|
551 |
|
|
|
1,002 |
|
|
|
1,104 |
|
Selling,
general and administrative (SG&A)
|
|
|
428 |
|
|
|
424 |
|
|
|
863 |
|
|
|
828 |
|
Operating
profit
|
|
|
833 |
|
|
|
809 |
|
|
|
1,640 |
|
|
|
1,489 |
|
Other
income (expense)
net
|
|
|
17 |
|
|
|
56 |
|
|
|
49 |
|
|
|
95 |
|
Income
from continuing operations before income taxes
|
|
|
850 |
|
|
|
865 |
|
|
|
1,689 |
|
|
|
1,584 |
|
Provision
for income
taxes
|
|
|
262 |
|
|
|
251 |
|
|
|
438 |
|
|
|
454 |
|
Income
from continuing
operations
|
|
|
588 |
|
|
|
614 |
|
|
|
1,251 |
|
|
|
1,130 |
|
Loss
from discontinued operations, net of taxes
|
|
|
-- |
|
|
|
(4 |
) |
|
|
-- |
|
|
|
(4 |
) |
Net
income
|
|
$ |
588 |
|
|
$ |
610 |
|
|
$ |
1,251 |
|
|
$ |
1,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
.45 |
|
|
$ |
.43 |
|
|
$ |
.95 |
|
|
$ |
.79 |
|
Net
income
|
|
$ |
.45 |
|
|
$ |
.42 |
|
|
$ |
.95 |
|
|
$ |
.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
.44 |
|
|
$ |
.42 |
|
|
$ |
.93 |
|
|
$ |
.77 |
|
Net
income
|
|
$ |
.44 |
|
|
$ |
.42 |
|
|
$ |
.93 |
|
|
$ |
.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,320 |
|
|
|
1,437 |
|
|
|
1,323 |
|
|
|
1,439 |
|
Diluted
|
|
|
1,341 |
|
|
|
1,469 |
|
|
|
1,344 |
|
|
|
1,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share of common stock
|
|
$ |
.10 |
|
|
$ |
.08 |
|
|
$ |
.20 |
|
|
$ |
.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income
(Millions
of dollars)
|
|
For
Three Months Ended June 30,
|
|
|
For
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
588 |
|
|
$ |
614 |
|
|
$ |
1,251 |
|
|
$ |
1,130 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment,
net of
taxes
|
|
|
5 |
|
|
|
(1 |
) |
|
|
(8 |
) |
|
|
-- |
|
Reclassification
of recognized transactions, net of taxes
|
|
|
-- |
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
Unrecognized
net actuarial loss of defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment,
net of
taxes
|
|
|
11 |
|
|
|
68 |
|
|
|
(11 |
) |
|
|
68 |
|
Reclassification
of recognized transactions, net of taxes
|
|
|
7 |
|
|
|
6 |
|
|
|
12 |
|
|
|
13 |
|
Unrecognized
prior service cost of defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment,
net of
taxes
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
3 |
|
|
|
(1 |
) |
Total
|
|
|
20 |
|
|
|
71 |
|
|
|
(7 |
) |
|
|
79 |
|
Total
from continuing
operations
|
|
|
608 |
|
|
|
685 |
|
|
|
1,244 |
|
|
|
1,209 |
|
Loss
from discontinued operations, net of taxes
|
|
|
-- |
|
|
|
(4 |
) |
|
|
-- |
|
|
|
(4 |
) |
Total
comprehensive
income
|
|
$ |
608 |
|
|
$ |
681 |
|
|
$ |
1,244 |
|
|
$ |
1,205 |
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Balance Sheets
(Millions of
dollars, except share amounts)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
1,317 |
|
|
$ |
1,328 |
|
Short-term
investments
|
|
|
331 |
|
|
|
1,596 |
|
Accounts receivable, net of
allowances of ($24) and ($26)
|
|
|
1,811 |
|
|
|
1,742 |
|
Raw materials
|
|
|
111 |
|
|
|
105 |
|
Work in process
|
|
|
997 |
|
|
|
876 |
|
Finished goods
|
|
|
543 |
|
|
|
437 |
|
Inventories
|
|
|
1,651 |
|
|
|
1,418 |
|
Deferred income
taxes
|
|
|
641 |
|
|
|
654 |
|
Prepaid expenses and other
current assets
|
|
|
259 |
|
|
|
180 |
|
Total current
assets
|
|
|
6,010 |
|
|
|
6,918 |
|
Property,
plant and equipment at cost
|
|
|
7,603 |
|
|
|
7,568 |
|
Less
accumulated depreciation
|
|
|
(3,999 |
) |
|
|
(3,959 |
) |
Property,
plant and equipment, net
|
|
|
3,604 |
|
|
|
3,609 |
|
Long-term investments
|
|
|
766 |
|
|
|
267 |
|
Goodwill
|
|
|
840 |
|
|
|
838 |
|
Acquisition-related
intangibles
|
|
|
108 |
|
|
|
115 |
|
Deferred
income taxes
|
|
|
626 |
|
|
|
510 |
|
Capitalized
software licenses, net
|
|
|
220 |
|
|
|
227 |
|
Overfunded
retirement plans
|
|
|
128 |
|
|
|
105 |
|
Other
assets
|
|
|
80 |
|
|
|
78 |
|
Total
assets
|
|
$ |
12,382 |
|
|
$ |
12,667 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
677 |
|
|
$ |
657 |
|
Accrued expenses and other
liabilities
|
|
|
955 |
|
|
|
1,117 |
|
Income taxes
payable
|
|
|
26 |
|
|
|
53 |
|
Accrued profit sharing and
retirement
|
|
|
102 |
|
|
|
198 |
|
Total current
liabilities
|
|
|
1,760 |
|
|
|
2,025 |
|
Underfunded
retirement plans
|
|
|
187 |
|
|
|
184 |
|
Deferred
income taxes
|
|
|
57 |
|
|
|
49 |
|
Deferred
credits and other liabilities
|
|
|
394 |
|
|
|
434 |
|
Total
liabilities
|
|
|
2,398 |
|
|
|
2,692 |
|
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: June 30, 2008 – 1,739,712,567; December 31, 2007 –
1,739,632,601
|
|
|
1,740 |
|
|
|
1,740 |
|
Paid-in
capital
|
|
|
940 |
|
|
|
931 |
|
Retained
earnings
|
|
|
20,773 |
|
|
|
19,788 |
|
Less
treasury common stock at cost: Shares: June
30, 2008 – 428,835,142; December 31, 2007 – 396,421,798
|
|
|
(13,138 |
) |
|
|
(12,160 |
) |
Accumulated
other comprehensive loss, net of taxes
|
|
|
(331 |
) |
|
|
(324 |
) |
Total
stockholders’ equity
|
|
|
9,984 |
|
|
|
9,975 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
12,382 |
|
|
$ |
12,667 |
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Millions of
dollars)
|
|
For
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,251 |
|
|
$ |
1,126 |
|
Adjustments
to reconcile net income to cash provided by operating activities of
continuing operations:
|
|
|
|
|
|
|
|
|
Loss
from discontinued
operations
|
|
|
-- |
|
|
|
4 |
|
Depreciation
|
|
|
487 |
|
|
|
508 |
|
Stock-based
compensation
|
|
|
108 |
|
|
|
146 |
|
Amortization
of acquisition-related
intangibles
|
|
|
19 |
|
|
|
28 |
|
Loss
on sale of
assets
|
|
|
6 |
|
|
|
-- |
|
Deferred
income
taxes
|
|
|
(81 |
) |
|
|
(6 |
) |
Increase
(decrease) from changes in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(60 |
) |
|
|
(127 |
) |
Inventories
|
|
|
(233 |
) |
|
|
13 |
|
Prepaid
expenses and other current
assets
|
|
|
(75 |
) |
|
|
(37 |
) |
Accounts
payable and accrued
expenses
|
|
|
(147 |
) |
|
|
(57 |
) |
Income
taxes
payable
|
|
|
(16 |
) |
|
|
(43 |
) |
Accrued
profit sharing and
retirement
|
|
|
(99 |
) |
|
|
(64 |
) |
Other
|
|
|
-- |
|
|
|
(39 |
) |
Net
cash provided by operating activities of continuing
operations
|
|
|
1,160 |
|
|
|
1,452 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and
equipment
|
|
|
(489 |
) |
|
|
(353 |
) |
Purchases
of short-term
investments
|
|
|
(362 |
) |
|
|
(2,325 |
) |
Sales
and maturities of short-term
investments
|
|
|
1,069 |
|
|
|
2,540 |
|
Purchases
of long-term
investments
|
|
|
(5 |
) |
|
|
(11 |
) |
Sales
of long-term
investments
|
|
|
16 |
|
|
|
5 |
|
Acquisitions,
net of cash
acquired
|
|
|
(19 |
) |
|
|
(27 |
) |
Net
cash provided by (used in) investing activities of continuing
operations
|
|
|
210 |
|
|
|
(171 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Payments
on long-term
debt
|
|
|
-- |
|
|
|
(43 |
) |
Dividends
paid
|
|
|
(265 |
) |
|
|
(173 |
) |
Sales
and other common stock
transactions
|
|
|
165 |
|
|
|
528 |
|
Excess
tax benefit from share-based
payments
|
|
|
16 |
|
|
|
90 |
|
Stock
repurchases
|
|
|
(1,307 |
) |
|
|
(1,599 |
) |
Net
cash used in financing activities of continuing operations
|
|
|
(1,391 |
) |
|
|
(1,197 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on
cash
|
|
|
10 |
|
|
|
(1 |
) |
Net
(decrease) increase in cash and cash
equivalents
|
|
|
(11 |
) |
|
|
83 |
|
Cash
and cash equivalents , beginning of
period
|
|
|
1,328 |
|
|
|
1,183 |
|
Cash
and cash equivalents, end of
period
|
|
$ |
1,317 |
|
|
$ |
1,266 |
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Notes to Financial
Statements
1.
|
Description of
Business and Significant Accounting Policies and Practices. Texas Instruments
(TI) makes, markets and sells high-technology components; about 80,000
customers all over the world buy our
products.
|
Acquisitions – In the
second quarter of 2008, we made two acquisitions that were integrated into the
Semiconductor segment. In the first quarter of 2007, we made an asset
acquisition that was integrated into the Semiconductor segment.
Change in Capitalization
- On April 2, 2007, we retired $43 million of 8.75% notes at
maturity.
Basis of Presentation - The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the U.S. (US 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, 2007. The consolidated
statements of income, statements of comprehensive income and statements of cash
flows for the periods ended June 30, 2008 and 2007, and the balance sheet as of
June 30, 2008, 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. The consolidated balance sheet as of December 31,
2007, presented herein is derived from the audited consolidated balance sheet
presented in our annual report on Form 10-K at that date. Certain amounts
in the prior periods' financial statements have been reclassified to conform to
the current period presentation. 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 US 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, 2007. The results for the
six-month period are not necessarily indicative of a full year's
results.
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 the notes, except share and per-share amounts, are stated in millions
of U.S. dollars unless otherwise indicated.
Changes in Accounting Standards
– In September 2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” which provides
guidance on how to measure assets and liabilities that are recorded at fair
value. SFAS 157 does not expand the use of fair value to any new
circumstances, but does require additional disclosures in both annual and
quarterly reports. We adopted SFAS 157 and its related amendments for
financial assets and liabilities effective as of January 1, 2008 (see Note 5
below). SFAS 157 is effective for non-financial assets and
liabilities in financial statements issued for fiscal years beginning after
November 15, 2008. We have
evaluated the non-financial assets and liabilities portion of the standard and
anticipate it will have no material impact on our financial position or results
of operations.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – An Amendment of FASB Statement No.
133.” This standard applies to derivative instruments,
nonderivative instruments that are designated and qualify as hedging instruments
and related hedged items accounted for under SFAS 133. SFAS 161 does
not change the accounting for derivatives and hedging activities, but requires
enhanced disclosures concerning the effect on the financial statements from
their use. SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008.
In June
2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” Under the provisions of this standard, unvested
awards of share-based payments with rights to receive dividends or dividend
equivalents, such as our restricted stock units (RSUs), are considered
participating securities for purposes of calculating earnings per
share. As a result, these participating securities will be included
in the weighted average number of shares outstanding as disclosed on the face of
the income statement. This FSP is effective for fiscal years
beginning after December 15, 2008, and interim periods within those
years. All prior period earnings per share data presented in
financial reports after the effective date shall be adjusted retrospectively to
conform with the provisions of this FSP. Early application is not
permitted. We have evaluated the potential impact of this standard
and anticipate it will have no material impact on our previously reported
earnings per share amounts.
2.
|
Earnings Per Share
(EPS). Computation and reconciliation of earnings per
common share from continuing operations are as
follows:
|
|
|
For
Three Months Ended
|
|
|
For
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$ |
588 |
|
|
|
1,320 |
|
|
$ |
.45 |
|
|
$ |
614 |
|
|
|
1,437 |
|
|
$ |
.43 |
|
Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
plans
|
|
|
-- |
|
|
|
21 |
|
|
|
|
|
|
|
-- |
|
|
|
32 |
|
|
|
|
|
Diluted
EPS
|
|
$ |
588 |
|
|
|
1,341 |
|
|
$ |
.44 |
|
|
$ |
614 |
|
|
|
1,469 |
|
|
$ |
.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
Six Months Ended
|
|
|
For
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$ |
1,251 |
|
|
|
1,323 |
|
|
$ |
.95 |
|
|
$ |
1,130 |
|
|
|
1,439 |
|
|
$ |
.79 |
|
Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
plans
|
|
|
-- |
|
|
|
21 |
|
|
|
|
|
|
|
-- |
|
|
|
30 |
|
|
|
|
|
Diluted
EPS
|
|
$ |
1,251 |
|
|
|
1,344 |
|
|
$ |
.93 |
|
|
$ |
1,130 |
|
|
|
1,469 |
|
|
$ |
.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Stock-based
Compensation. We have several stock-based employee
compensation plans, which are more fully described in Note 9 in our 2007
annual report on Form 10-K.
|
The
amounts of stock-based compensation expense recognized in the periods presented
are as follows:
|
|
For
Three Months Ended June 30,
|
|
|
For
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COR
|
|
$ |
11 |
|
|
$ |
13 |
|
|
$ |
21 |
|
|
$ |
28 |
|
R&D
|
|
|
15 |
|
|
|
21 |
|
|
|
32 |
|
|
|
43 |
|
SG&A
|
|
|
28 |
|
|
|
35 |
|
|
|
55 |
|
|
|
75 |
|
Total
|
|
$ |
54 |
|
|
$ |
69 |
|
|
$ |
108 |
|
|
$ |
146 |
|
The
amounts above include the impact of recognizing compensation expense related to
RSUs, non-qualified stock options and stock options offered under the employee
stock purchase plan. Stock-based compensation expense has not been
allocated between segments, but is reflected in Corporate.
|
4.
|
Investments in
Auction-rate
Securities. As of December 31, 2007, we held $1.04
billion of auction-rate securities at par value, which was equal to fair
value as of that date. During the first quarter of 2008, we sold
$473 million of these auction-rate securities at par through the normal
auction process. Beginning in mid-February 2008, liquidity issues in
the global credit markets resulted in the failure of auctions representing
substantially all of the auction-rate securities we hold, as the amount of
securities submitted for sale in those auctions exceeded the amount of
bids. For each unsuccessful auction, the interest rate moves to a
maximum rate defined for each security, generally reset periodically at a
level higher than defined short-term interest benchmarks. To date we
have collected all interest payable on all of our auction-rate securities
when due and expect to continue to do so in the future. The
principal associated with failed auctions will not be accessible until
successful auctions occur, a buyer is found outside of the auction
process, the issuers establish a different form of financing to replace
these securities, issuers repay principal over time from cash flows prior
to final maturity, or final payments come due according to contractual
maturities ranging from 15 to 40 years. We understand that issuers
and financial markets are working on alternatives that may improve
liquidity, although it is not yet clear when or to what extent such
efforts will be successful. We expect that we will receive the
principal associated with these auction-rate securities through one of the
means described above. Due to the failed auctions and the
uncertainty regarding the liquidity of these securities, beginning in the
first quarter of 2008 we reclassified our investments in auction-rate
securities with a par value of $571 million from short-term investments to
long-term investments.
|
As of
June 30, 2008, we held auction-rate securities with a par value of $568
million. Of this amount, $518 million are backed by pools of student
loans guaranteed by the U.S. Department of Education and we continue to believe
that the credit quality of these securities is high based on this
guarantee. As of June 30, 2008, these securities were all rated
AAA/Aaa by the major credit rating agencies. The remaining $50
million of our auction-rate securities are covered by bond insurance and were
rated Aa3 by Moody’s as of June 30, 2008.
During
the quarter ended June 30, 2008, $3 million of student loan auction-rate
securities were redeemed by the issuer at par. During the second
quarter, we received formal notice that an additional $15 million covered by
bond insurance have been called by the issuer for redemption at par during the
third quarter. These securities have been reclassified from long-term
investments to short-term investments as of June 30. In addition,
subsequent to the end of the second quarter, we received formal notice from
another issuer that $11 million classified as long-term investments on the June
30, 2008, balance sheet have been called for redemption at par during the
quarter.
Based on
the fair value determinations described in Note 5 below, the fair value of our
investments in auction-rate securities at June 30, 2008, was $562 million
compared with a par value of $568 million. The $6 million difference
is considered temporary and is recorded as an unrealized loss, net of taxes, in
accumulated other comprehensive income (OCI) on the balance sheet.
While the
auction failures will limit our ability to liquidate these investments for some
period of time, we do not believe the auction failures will materially impact
our ability to fund our working capital needs, capital expenditures, dividend
payments or other business requirements.
|
5.
|
Fair Value
Measurement. As discussed in Note 1, SFAS 157 became
effective for measuring and reporting financial assets and liabilities in
our financial statements as of January 1,
2008.
|
SFAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date.
SFAS 157
establishes a three-level hierarchy for disclosure to show the extent and level
of judgment used to estimate fair value measurements.
Level 1 –
Uses unadjusted quoted prices that are available in active markets for identical
assets or liabilities as of the reporting date.
Level 2 –
Uses inputs other than Level 1 that are either directly or indirectly observable
as of the reporting date through correlation with market data, including quoted
prices for similar assets and liabilities in active markets and quoted prices in
markets that are not active. Level 2 also includes assets and
liabilities that are valued using models or other pricing methodologies that do
not require significant judgment since the input assumptions used in the models,
such as interest rates and volatility factors, are corroborated by readily
observable data.
Level 3 –
Uses inputs that are unobservable and are supported by little or no market
activity and reflect the use of significant management
judgment. These values are generally determined using pricing models
for which the assumptions utilize management’s estimates of market participant
assumptions.
Investments
in auction-rate securities are our only Level 3 assets, and in the first quarter
of 2008 were transferred from Level 2 because quoted prices from
broker-dealers were unavailable due to events described in Note 4. We
used a discounted cash flow (DCF) model to determine the estimated fair value of
these investments as of March 31, 2008, and June 30, 2008. The
assumptions used in preparing the DCF model included estimates for the amount
and timing of future interest and principal payments and the rate of return
required by investors to own these securities in the current
environment. In making these assumptions we considered relevant
factors including: the formula applicable to each security which defines the
interest rate paid to investors in the event of a failed auction; forward
projections of the interest rate benchmarks specified in such formulas; the
likely timing of principal repayments; the probability of full repayment
considering the guarantees by the U.S. Department of Education of the underlying
student loans, guarantees by other third parties, and additional credit
enhancements provided through other means; and, publicly available pricing data
for recently issued student loan asset-backed securities which are not subject
to auctions. Our estimate of the rate of return required by investors
to own these securities also considers the current reduced liquidity for
auction-rate securities.
The table
below sets forth, by level, our financial assets and liabilities that were
accounted for at fair value as of June 30, 2008. The table does not
include cash on hand or assets and liabilities that are measured at historical
cost or any basis other than fair value.
|
|
Portion
of Carrying Value Measured
at
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
Items
measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate commercial
paper
|
|
$ |
90 |
|
|
$ |
-- |
|
|
$ |
90 |
|
|
$ |
-- |
|
U.S. Treasury and government
agency securities
|
|
|
250 |
|
|
|
250 |
|
|
|
-- |
|
|
|
-- |
|
Money market
funds
|
|
|
777 |
|
|
|
777 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities –
Government Sponsored Enterprise (GSE) guaranteed
|
|
|
140 |
|
|
|
-- |
|
|
|
140 |
|
|
|
-- |
|
Mortgage-backed securities –
senior bonds
|
|
|
167 |
|
|
|
-- |
|
|
|
167 |
|
|
|
-- |
|
Auction-rate
securities
|
|
|
15 |
|
|
|
-- |
|
|
|
15 |
|
|
|
-- |
|
Other
|
|
|
9 |
|
|
|
2 |
|
|
|
7 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate
securities
|
|
|
547 |
|
|
|
-- |
|
|
|
-- |
|
|
|
547 |
|
Mutual
funds
|
|
|
131 |
|
|
|
131 |
|
|
|
-- |
|
|
|
-- |
|
Total
|
|
$ |
2,126 |
|
|
$ |
1,160 |
|
|
$ |
419 |
|
|
$ |
547 |
|
Deferred
compensation
liabilities
|
|
$ |
180 |
|
|
$ |
180 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in fair value during the period (pre-tax):
|
|
|
|
|
|
|
|
Balance, December 31,
2007
|
|
$ |
-- |
|
Transfers into Level
3
|
|
|
556 |
|
Unrealized loss – included in
OCI
|
|
|
(20 |
) |
Balance, March 31,
2008
|
|
$ |
536 |
|
Change in unrealized loss from
prior quarter – included in
OCI
|
|
|
14 |
|
Redemption at
par
|
|
|
(3 |
) |
Balance, June 30,
2008
|
|
$ |
547 |
|
All of
our financial assets measured at fair value, except for investments in
mutual funds, are classified as available-for-sale
securities. Adjustments to fair value of these investments are
recorded as an increase or decrease, net of taxes, in accumulated other
comprehensive income except where losses are considered to be
other-than-temporary, in which case the losses are recorded in other income
(expense) net. Our investments in mutual funds, which are intended to
generate returns that offset changes in certain liabilities related to deferred
compensation arrangements, are classified as trading
securities. Adjustments to fair value of both the mutual funds and
the related deferred compensation liabilities are recorded in selling, general
and administrative expense.
6.
|
Post-employment
Benefit Plans. Components of net periodic employee
benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
three months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
10 |
|
Interest
cost
|
|
|
13 |
|
|
|
11 |
|
|
|
7 |
|
|
|
6 |
|
|
|
16 |
|
|
|
13 |
|
Expected
return on plan assets
|
|
|
(11 |
) |
|
|
(12 |
) |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
(21 |
) |
|
|
(18 |
) |
Amortization
of prior service cost
|
|
|
-- |
|
|
|
-- |
|
|
|
1 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(1 |
) |
Recognized
net actuarial loss
|
|
|
4 |
|
|
|
6 |
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
Net
periodic benefit cost
|
|
$ |
12 |
|
|
$ |
11 |
|
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
six months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
12 |
|
|
$ |
13 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
22 |
|
|
$ |
20 |
|
Interest
cost
|
|
|
25 |
|
|
|
21 |
|
|
|
14 |
|
|
|
12 |
|
|
|
31 |
|
|
|
25 |
|
Expected
return on plan assets
|
|
|
(22 |
) |
|
|
(24 |
) |
|
|
(14 |
) |
|
|
(13 |
) |
|
|
(42 |
) |
|
|
(36 |
) |
Amortization
of prior service cost
|
|
|
-- |
|
|
|
-- |
|
|
|
1 |
|
|
|
1 |
|
|
|
(2 |
) |
|
|
(1 |
) |
Recognized
net actuarial loss
|
|
|
8 |
|
|
|
11 |
|
|
|
4 |
|
|
|
4 |
|
|
|
2 |
|
|
|
5 |
|
Net
periodic benefit cost
|
|
$ |
23 |
|
|
$ |
21 |
|
|
$ |
7 |
|
|
$ |
6 |
|
|
$ |
11 |
|
|
$ |
13 |
|
7.
|
Income
Taxes. Federal income taxes for the interim periods
presented have been included in the accompanying financial statements on
the basis of an estimated annual effective tax rate. As of June 30,
2008, the estimated annual effective tax rate for 2008 is about 31
percent. The estimated annual effective tax rate for 2008
differs from the 35 percent statutory corporate tax rate primarily due to
the effects of non-U.S. tax rates. Additionally, during the first
quarter of 2008, we recorded a discrete tax benefit of $81 million
primarily due to our decision to indefinitely reinvest the accumulated
earnings of a non-U.S. subsidiary.
|
8.
|
Contingencies. We
routinely sell products with a limited intellectual property
indemnification included in the terms of sale. Historically, we
have had only minimal and infrequent losses associated with these
indemnities. Consequently, any future liabilities brought about
by the intellectual property indemnities cannot reasonably be estimated or
accrued.
|
We accrue
for known product-related claims if a loss is probable and can be reasonably
estimated. During the periods presented, there have been no material
accruals or payments regarding product warranty or product liability, and
historically we have experienced a low rate of payments on product
claims. Consistent with general industry practice, we enter into
formal contracts with certain customers in which the parties define warranty
remedies. Typically, under these agreements, our warranty for
semiconductor products covers three years; an obligation to repair, replace or
refund; and a maximum payment obligation tied to the price paid for our
products. In some cases, product claims may be disproportionate to the price of
our products.
We are
subject to various other legal and administrative
proceedings. Although it is not possible to predict the outcome of
these matters, we believe that the results of these proceedings will not have a
material adverse effect upon our financial condition, results of operations or
liquidity.
Discontinued Operations Indemnity
– In connection with the sale of the former Sensors & Controls
business to an affiliate of Bain Capital, LLC in 2006, we have agreed to
indemnify the former business, renamed Sensata Technologies, Inc., for
certain specified litigation matters, as well as other liabilities, including
environmental liabilities. Our indemnification obligations with
respect to breaches of representations and warranties and the specified
litigation matters are, generally, subject to a total deductible of $30 million
and our maximum potential exposure is limited to $300 million. As of June
30, 2008, there were no significant liabilities recorded under these
indemnification obligations.
9.
|
Segment
Data. We have two reportable operating
segments: Semiconductor and Education
Technology.
|
|
|
For
Three Months Ended June 30,
|
|
|
For
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$ |
3,175 |
|
|
$ |
3,257 |
|
|
$ |
6,365 |
|
|
$ |
6,372 |
|
Education
Technology
|
|
|
176 |
|
|
|
167 |
|
|
|
258 |
|
|
|
243 |
|
Total
revenue
|
|
$ |
3,351 |
|
|
$ |
3,424 |
|
|
$ |
6,623 |
|
|
$ |
6,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
Three Months Ended June 30,
|
|
|
For
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Operating Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$ |
886 |
|
|
$ |
905 |
|
|
$ |
1,813 |
|
|
$ |
1,735 |
|
Education
Technology
|
|
|
78 |
|
|
|
74 |
|
|
|
96 |
|
|
|
89 |
|
Corporate*
|
|
|
(131 |
) |
|
|
(170 |
) |
|
|
(269 |
) |
|
|
(335 |
) |
Operating
profit
|
|
$ |
833 |
|
|
$ |
809 |
|
|
$ |
1,640 |
|
|
$ |
1,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Corporate includes restructuring charges of $17 million for the three months
ended June 30, 2007, and $31 million for the six months ended June 30,
2007. Of the total restructuring charges, $11 million ($20 million
for the six months) is included in cost of revenue and $6 million ($11 million
for the six months) is included in research and development
expense.
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
following should be read in conjunction with the Financial Statements and the
related Notes that appear elsewhere in this document. All dollar
amounts in the tables in this discussion are stated in millions of U.S. dollars,
except per-share amounts. All amounts in this discussion reference
continuing operations unless otherwise noted.
Overview
At Texas
Instruments, we design and make high-technology components that we sell to
customers all over the world. We have two business segments:
Semiconductor and Education Technology. Semiconductor is by far the
larger of these segments, accounting for 96 percent of our revenue in
2007. This segment sells integrated circuits, or semiconductors, to
electronics designers and manufacturers. Our Education Technology
segment accounts for the remaining 4 percent of our revenue and sells
calculators and related technologies to consumers and
educators.
Beginning
with this quarterly report, we will describe Semiconductor revenue in four
product lines: Analog, Embedded Processing, Wireless and Remaining
Semiconductor. We expect that for our 2008 10-K, we will have
transitioned to four segments: Analog, Embedded Processing, Wireless
and Other. Our Other segment will consist of what is presently
Remaining Semiconductor and Education Technology. For a
complete description of these changes, please reference the materials from our
conference call and webcast, held on July 1, 2008, available at
www.ti.com/ir.
The details relevant to
each segment are discussed below.
Semiconductor
Background
Our
Semiconductor segment invents and produces a variety of semiconductors, commonly
called “chips.” These semiconductors are used to accomplish many
different things, such as converting and amplifying signals, interfacing with
input and output devices and other semiconductors, managing and distributing
power, processing data, canceling noise and improving signal
resolution. Our portfolio includes products that are central to
almost all electronic equipment.
Our
Semiconductor segment can be affected by cyclical upturns and downturns
characteristic of the markets for our products, which sometimes cause wide
swings in growth rates from quarter to quarter or year to
year. Prices and manufacturing costs of Semiconductor products tend
to decline over time.
Products
We have
three major semiconductor product lines: Analog, Embedded Processing
and Wireless. We expect Analog and Embedded Processing to be our
primary growth engines in the years ahead, and therefore we focus our resources
on these product lines.
Within
our semiconductor product lines, there are two general types of products, custom
and standard – terms that refer to whom and how the products are
sold. A custom product is designed for a specific customer for a
specific application and is generally sold directly to the
customer. A standard product is designed for use by many customers in
many applications and is generally sold through
distribution. Standard products include both commodity and
proprietary products.
Analog
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 so the signals can be processed by digital signal
processors (DSPs). Analog semiconductors are also used to manage
power distribution and consumption. Sales from our analog product
line accounted for about 35 percent of our revenue in 2007. The
worldwide market for analog semiconductors was about $36 billion in
2007. Our share in this very fragmented market is about 13 percent,
and we believe that we are well positioned to increase it over
time. We have two categories of analog
products: high-performance analog and high-volume analog &
logic.
High-performance
analog products: These include standard analog semiconductors (our
portfolio is about 17,000 products) that we market to many different customers
(nearly 80,000) who will use them in many different
products. These products generally have long life cycles, often
10 to 20 years.
High-volume
analog & logic products: These include two product
types. The first, high-volume analog, includes custom products
marketed for specific applications. The life cycles of our
high-volume analog products are generally shorter than our high-performance
analog products. End markets for high-volume analog products include
communications equipment, automobiles, computing equipment and many consumer
electronics products. The second type of products in this line,
standard logic, includes commodity products marketed to many different customers
for many different applications.
Embedded
Processing
Our
embedded processing products are DSPs and microcontrollers. DSPs
perform mathematical computations almost instantaneously to process and improve
digital data. Microcontrollers are microprocessors that are designed
to control a very specific task for electronic equipment. Sales of
embedded processing products accounted for about 12 percent of our revenue in
2007. The worldwide market for embedded processors was about $17
billion in 2007 and we have about 10 percent market share. A unique
characteristic of embedded processing products is that our customers often
invest their own research and development (R&D) to write software that
operates only with our products. We make and sell standard products
used in many different applications and custom products used in applications
that include communications infrastructure equipment and
automobiles.
Wireless
Cell
phones require a radio or “baseband” to connect to the wireless carrier’s
network. Today’s advanced cell phones also require an applications
processor to run the phone’s software and services, and semiconductors to enable
connectivity to Bluetooth® devices,
WiFi networks or GPS location services. We design, make and sell
products to satisfy each of these requirements, often in the same
chip. Wireless products are typically sold in high volumes and our
wireless portfolio includes both standard and custom products. Sales
of wireless products accounted for about 30 percent of our revenue in
2007.
Prompted
by increased consumer demand for “smart phones” (which contain email, media and
computing capability), major handset manufacturers are shifting their R&D
focus from baseband technology to software and services. As a result,
we believe customer demand for applications processors is increasing as handset
manufacturers integrate such processors to differentiate their
products. Our OMAPTM product
line has a leading position in the stand-alone applications processor market and
is used by most of the top handset manufacturers. Our wireless
product line has been shifting focus from baseband chips, a market with
shrinking competitive barriers, to applications processors.
In
addition to our three major semiconductor product lines, we offer the following
(Remaining Semiconductor): DLP® products
(which are used to create high-definition images for data projectors,
televisions and movie projectors), reduced-instruction set computing (RISC)
microprocessors (which are designed to provide very fast computing and are often
implemented in servers), application-specific integrated circuits (ASICs) (which
are custom chips), and radio-frequency identification (RFID) semiconductors
(which provide the technology used in, among other things, automatic
transportation payments and product tracking). An additional source
of semiconductor revenue is royalties received for our patented technology that
we license to other electronics companies.
Inventory
Our
inventory practices vary by product type. For standard products,
where the risk of obsolescence is low, we generally carry higher levels of
inventory. These products usually have many customers and long life
cycles, and are often ordered in small quantities. Standard product
inventory is sometimes held in unfinished form, giving us greater flexibility to
meet final package and test configurations.
For
custom products, where the risk of obsolescence is higher, we carry lower
levels of inventory when possible. These products usually have a
single customer, are sold in high volumes and have shorter life
cycles. Life cycles of these products are often determined by
end-equipment upgrade cycles and can be as short as 12 to 24
months.
As we’ve
become a stronger competitor in the market for high-performance analog products,
we’ve increased the inventory levels we carry for these products so that our
tens of thousands of customers have access to what they need when they need
it. Additionally, consignment programs with our largest customers and
the fact that distributors now carry less inventory contribute to the need for
us to carry higher levels of inventory.
Manufacturing
We own
and operate semiconductor manufacturing sites in North America, Asia and
Europe. These facilities include high-volume wafer fabrication plants
and assembly/test sites. Our facilities require substantial
investment to construct and are largely fixed-cost assets once in
operation. Because we own much of our manufacturing capacity, a
significant portion of our operating costs is fixed. In general,
these costs do not decline with reductions in customer demand or utilization of
capacity, potentially reducing our profit margins. Conversely, as
product demand rises and factory utilization increases, the fixed costs are
spread over increased output, potentially benefiting our profit
margins.
Our
analog semiconductors typically require a lower level of investment in
manufacturing processes and equipment than our other semiconductor products,
which are based on advanced logic manufacturing processes. While
analog chips benefit from unique, proprietary manufacturing processes, these
processes can be applied using older, less expensive equipment. In
addition, these processes and equipment remain usable for much longer than the
manufacturing processes and equipment required for advanced logic
manufacturing. Consequently, the level of capital spending needed to
support analog semiconductor manufacturing is considerably less than is needed
for an equivalent level of advanced logic semiconductor
manufacturing.
To
supplement our internal advanced logic wafer fabrication capacity, maximize our
responsiveness to customer demand and minimize our overall capital expenditures,
our manufacturing strategy utilizes the capacity of outside suppliers, commonly
known as foundries. Currently, external foundries provide about 50
percent of the fabricated wafers for our advanced logic products. We
expect the proportion of our advanced logic wafers provided by foundries will
increase over time. We expect to maintain sufficient internal wafer
fabrication capacity to meet substantially all our analog production
needs.
As our
internal manufacturing efforts shift to a higher percentage of analog products,
an increasing proportion of our capital expenditures is devoted to assembly/test
facilities and equipment. This is primarily due to the lower capital
needs of analog wafer manufacturing equipment. We also use
subcontractors to provide a small portion of our assembly and test needs, either
where a product requires unique assembly packaging but we do not sell sufficient
volume to justify purchasing the necessary equipment or where we have acquired
companies whose products are already assembled and tested by
subcontractors.
Another
element of our manufacturing strategy for advanced logic semiconductors involves
working collaboratively with our foundry suppliers to develop future generations
of wafer fabrication manufacturing processes, a model we transitioned to in
2007. Historically, we had developed these manufacturing processes
in-house. This strategic shift will allow us to better serve
customers with cost-effective manufacturing processes from our foundry
suppliers, while also increasing the efficiency of our own R&D and
capital. As we have decreased our R&D spending on advanced logic
manufacturing process development, we have increased R&D spending, albeit at
lesser amounts, on our analog manufacturing process development, where we remain
able to differentiate our products through process technologies.
Education
Technology
Our
Education Technology segment is the world’s leading supplier of handheld
graphing calculators. It also designs business and scientific
calculators, as well as a wide range of advanced classroom hardware and software
that help students and teachers explore math and science
interactively. Our products are sold primarily through retailers and
instructional dealers. Our Education Technology segment has an annual
pattern of revenue that is tied to the U.S. back-to-school season. As
a result, revenue is at its highest in the second and third
quarters. This segment represented 4 percent of our revenue in
2007. Prices of Education Technology products tend to be
stable.
Tax Considerations
We
operate in a number of tax jurisdictions and are subject to several types of
taxes including those based on income, capital, property and payroll, and sales
and other transactional taxes. The timing of the final determination
of our tax liabilities varies among the various jurisdictions and their taxing
authorities. As a result, during any particular reporting period, we
might reflect in our financial statements one or more tax refunds or
assessments, or changes to tax liabilities, involving one or more taxing
authorities.
Second-Quarter 2008
Results
Our
second-quarter revenue was $3.35 billion, our net income was $588 million and
our earnings per share were $0.44.
Our core
areas of Analog and Embedded Processing delivered solid revenue growth this
quarter. Each grew sequentially and increased 10 percent from a year
ago. These technologies are critical to thousands of different types
of electronic equipment, making them some of the most attractive markets in the
semiconductor industry. We believe our portfolio combined with our
passion to help customers solve critical problems will drive good long-term
growth.
In total,
our revenue in the second quarter was in the lower half of our range of
expectations, as were earnings per share. Demand slowed unexpectedly
in June primarily because distributors reduced inventory levels and did not
replenish them late in the quarter. Additionally, wireless revenue
declined in the quarter, continuing its first-quarter weakness.
We
believe this slower demand was due to a mix of reasons, including a weaker
economic environment and greater confidence in our ability to deliver products
within short lead times. Our orders were up in the quarter and
backlog grew, but we are cautious given the demand environment we just
experienced. If demand strengthens as quickly as it slowed, we are
well-positioned to meet it.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Income
(Millions
of dollars, except share and per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
3,351 |
|
|
$ |
3,424 |
|
|
$ |
3,272 |
|
Cost
of revenue
|
|
|
1,602 |
|
|
|
1,640 |
|
|
|
1,516 |
|
Gross
profit
|
|
|
1,749 |
|
|
|
1,784 |
|
|
|
1,756 |
|
Research
and development (R&D)
|
|
|
488 |
|
|
|
551 |
|
|
|
514 |
|
Selling,
general and administrative (SG&A)
|
|
|
428 |
|
|
|
424 |
|
|
|
435 |
|
Operating
profit
|
|
|
833 |
|
|
|
809 |
|
|
|
807 |
|
Other
income (expense) net
|
|
|
17 |
|
|
|
56 |
|
|
|
33 |
|
Income
from continuing operations before income taxes
|
|
|
850 |
|
|
|
865 |
|
|
|
840 |
|
Provision
for income taxes
|
|
|
262 |
|
|
|
251 |
|
|
|
178 |
|
Income
from continuing operations
|
|
|
588 |
|
|
|
614 |
|
|
|
662 |
|
Loss
from discontinued operations, net of taxes
|
|
|
-- |
|
|
|
(4 |
) |
|
|
-- |
|
Net
income
|
|
$ |
588 |
|
|
$ |
610 |
|
|
$ |
662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
.45 |
|
|
$ |
.43 |
|
|
$ |
.50 |
|
Net
income
|
|
$ |
.45 |
|
|
$ |
.42 |
|
|
$ |
.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
.44 |
|
|
$ |
.42 |
|
|
$ |
.49 |
|
Net
income
|
|
$ |
.44 |
|
|
$ |
.42 |
|
|
$ |
.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,320 |
|
|
|
1,437 |
|
|
|
1,327 |
|
Diluted
|
|
|
1,341 |
|
|
|
1,469 |
|
|
|
1,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share of common stock
|
|
$ |
.10 |
|
|
$ |
.08 |
|
|
$ |
.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
52.2 |
% |
|
|
52.1 |
% |
|
|
53.7 |
% |
R&D
|
|
|
14.6 |
% |
|
|
16.1 |
% |
|
|
15.7 |
% |
SG&A
|
|
|
12.8 |
% |
|
|
12.4 |
% |
|
|
13.3 |
% |
Operating
profit
|
|
|
24.9 |
% |
|
|
23.6 |
% |
|
|
24.7 |
% |
Details of Financial
Results
Revenue
for the second quarter of 2008 was $3.35 billion, down $73 million, or 2
percent, from the year-ago quarter, due to decreased shipments resulting from
lower demand for our Semiconductor products. (See detailed discussion
below.) Compared with the prior quarter, revenue increased $79 million, or
2 percent, due to increased shipments resulting from the seasonal increase in
demand for graphing calculator products in our Education Technology
segment.
Gross
profit for the second quarter of 2008 was $1.75 billion, or 52.2 percent of
revenue, down 2 percent from the $1.78 billion in the year-ago quarter due to
lower Semiconductor revenue. Gross profit was about even sequentially
despite higher revenue due to increased manufacturing costs. These
costs increased due to the combination of, in decreasing order, expenses
incurred as a result of lower utilization, converting one of our manufacturing
facilities from advanced logic manufacturing to analog manufacturing,
transferring equipment from a manufacturing facility we shuttered to other
facilities around the world, higher commodity prices (particularly for gold),
and the rate-of-exchange impact on expenses such as labor in regions where we
compensate in currencies other than the U.S. dollar.
Operating
expenses for the second quarter of 2008 were $488 million for R&D and $428
million for SG&A. R&D expense decreased $63 million, or 11
percent, from a year ago primarily due to the combination of the benefit from
our collaborative work with foundries on advanced logic manufacturing
technologies and, to a lesser extent, lower compensation-related
expenses. R&D expense decreased $26 million from the prior
quarter primarily due to lower compensation-related
expenses. SG&A expense was about even with the year-ago quarter
and decreased $7 million, or 2 percent, from the prior quarter.
Operating
profit for the second quarter of 2008 was $833 million, or 24.9 percent of
revenue, compared with $809 million, or 23.6 percent of revenue, in the year-ago
quarter and $807 million, or 24.7 percent of revenue, in the prior
quarter. The increases from each period were due to reductions in
R&D expense.
Other
income (expense) net for the second quarter of 2008 was $17 million, a decrease
of $39 million from the year-ago quarter and a decrease of $16 million from the
prior quarter. The decreases from each period were primarily due to
lower interest income and lower earnings on investments.
As of
June 30, 2008, the estimated annual effective tax rate for 2008 is expected to
be about 31 percent (see Note 7 to the Financial Statements for additional
information). The tax rate is based on current tax law and does not
assume reinstatement of the federal research tax credit, which expired at the
end of 2007.
Quarterly
income taxes are calculated using the estimated annual effective tax
rate.
The tax
provision for the second quarter of 2008 was $262 million, compared with $251
million in the year ago quarter. The increase was due to the
expiration of the federal research tax credit, which was partially offset by
lower income before income taxes. Our tax provision in the first
quarter of 2008 was $178 million, which included a discrete tax benefit of $81
million primarily resulting from our decision to indefinitely reinvest the
accumulated earnings of a non-U.S. subsidiary.
Income
from continuing operations was $588 million, a decrease of $26 million from the
year-ago quarter and a decrease of $74 million from the prior
quarter.
Earnings
per share (EPS) for the second quarter were $0.44 per share. Despite
lower net income, EPS increased $0.02 from the year-ago quarter due to the
effect of a lower number of average shares outstanding as a result of our stock
repurchase program. EPS decreased $0.05 compared with the prior quarter,
which included a discrete tax benefit of $0.06.
Orders in
the second quarter were $3.46 billion, which was even with the year-ago quarter
and up 4 percent from the prior quarter.
Semiconductor
Semiconductor
segment revenue was $3.17 billion, a decrease of 3 percent from the year-ago
quarter and about even sequentially.
Semiconductor
revenue by product line was as follows:
|
|
|
2Q08 |
|
|
|
2Q07 |
|
|
vs. 2Q07
|
|
|
|
1Q08 |
|
|
vs. 1Q08
|
|
Analog
|
|
$ |
1,292 |
|
|
$ |
1,170 |
|
|
|
10 |
% |
|
$ |
1,265 |
|
|
|
2 |
% |
Embedded
Processing
|
|
|
436 |
|
|
|
397 |
|
|
|
10 |
% |
|
|
418 |
|
|
|
4 |
% |
Wireless
|
|
|
903 |
|
|
|
1,024 |
|
|
|
-12 |
% |
|
|
922 |
|
|
|
-2 |
% |
Remaining
Semiconductor
|
|
|
544 |
|
|
|
666 |
|
|
|
-18 |
% |
|
|
586 |
|
|
|
-7 |
% |
Total
Semiconductor
|
|
$ |
3,175 |
|
|
$ |
3,257 |
|
|
|
-3 |
% |
|
$ |
3,191 |
|
|
|
-1 |
% |
Analog
revenue growth in both comparisons was due to increased shipments resulting from
stronger demand for high-performance analog products.
Embedded
processing revenue growth in both comparisons was primarily due to increased
shipments resulting from stronger demand for standard products as well as
communications infrastructure products.
Wireless
revenue declined from a year ago despite increased shipments, primarily due to a
higher proportion of shipments of lower-priced baseband products and, to a
lesser extent, normal price declines. Wireless revenue declined
sequentially due to decreased shipments resulting from lower demand for baseband
products and, to a lesser extent, normal price declines.
Remaining
semiconductor revenue declined from a year ago primarily as a result of the sale
of our digital subscriber line (DSL) customer-premises equipment product line in
the third quarter of 2007 and, to a lesser extent, lower shipments resulting
from decreased demand for RISC microprocessors. Compared with the
prior quarter, remaining semiconductor revenue declined due to lower shipments
resulting from decreased demand for RISC microprocessors.
Operating
profit for the second quarter was $886 million, or 27.9 percent of
revenue. This was a decrease of $19 million from the year-ago quarter
due to lower revenue, which was partially offset by lower R&D
expense. Operating profit decreased $41 million from the prior
quarter due to increased manufacturing costs, which were partially offset by
lower operating expenses.
Education
Technology
Education
Technology revenue for the second quarter of 2008 was $176
million. This was an increase of $9 million, or 5 percent, from the
year-ago quarter due to higher shipments resulting from increased demand for
graphing calculators. Compared with the prior quarter, revenue
increased $95 million due to higher shipments of calculators as a result of
seasonal demand in preparation for the back-to-school season.
Operating
profit for the second quarter was $78 million, or 44.1 percent of revenue, an
increase of $4 million from the year-ago quarter and an increase of $60 million
from the prior quarter due to higher revenue.
First Six Months of 2008
Results
For the
first six months of 2008, we report the following:
Revenue
of $6.62 billion was about the same as the year-ago period.
Gross
profit for the first six months of 2008 was $3.50 billion, an increase from
$3.42 billion in the year-ago period primarily due to a richer mix of more
profitable products. Gross profit margin was 52.9 percent of revenue
compared with 51.7 percent in the year-ago period.
R&D
expense for the first six months of 2008 of $1.00 billion decreased 9 percent
compared with the year-ago period primarily due to the benefit from our
collaborative work with foundries on advanced logic manufacturing technologies.
R&D expense as a percent of revenue was 15.1 percent, compared with
16.7 percent in the year-ago period.
SG&A
expense for the first six months of 2008 was $863 million, an increase of 4
percent from $828 million in the year-ago period, primarily due to higher
investments in field sales and customer support, especially for emerging regions
of the world. SG&A expense as a percent of revenue was 13.0
percent compared with 12.5 percent in the year-ago period.
Operating
profit for the first six months of 2008 was $1.64 billion, or 24.8 percent of
revenue, compared with $1.49 billion, or 22.5 percent of revenue, in the
year-ago period. The increase was due to a combination of lower
R&D expenses and, to a lesser extent, higher gross profit.
OI&E
for the first six months of 2008 was $49 million. Other income
decreased $46 million from the first six months of 2007, primarily due to lower
interest income.
The tax
provision for the first six months of 2008 was $438 million, compared with $454
million in the same period of 2007. The decrease was due to discrete
tax benefits, partially offset by higher income before income taxes and the
expiration of the federal research tax credit.
Income
from continuing operations for the first six months of 2008 was $1.25 billion
compared with $1.13 billion for 2007. Earnings per share from
continuing operations were $0.93 per share compared with $0.77 per share in the
year-ago period. As a result of our share repurchases, average
diluted shares outstanding decreased by 125 million shares from the prior
period, increasing earnings per share by $0.08.
Net
income for the first six months of 2008 was $1.25 billion compared with $1.13
billion in the year-ago period.
Orders of
$6.77 billion were up 2 percent from the year-ago period, reflecting higher
demand for Semiconductor products.
Semiconductor
Semiconductor
revenue in the first six months of 2008 was $6.37 billion, about even with the
year-ago period, as higher analog and embedded processing revenue was offset by
lower wireless and remaining semiconductor revenue.
Semiconductor
operating profit for the first six months of 2008 was $1.81 billion, or 28.5
percent of revenue, compared with $1.74 billion, or 27.2 percent of revenue, in
the year-ago period due to lower R&D expense. Higher gross profit
was offset by higher SG&A expense.
Education
Technology
Education
Technology revenue was $258 million for the first six months of 2008 compared
with $243 million in the year-ago period, as shipments increased because of
higher demand for graphing calculators.
Operating
profit for the first six months of 2008 was $96 million, or 37.1 percent of
revenue, compared with $89 million, or 36.7 percent of revenue in the year-ago
period, primarily due to higher revenue.
Financial
Condition
At the
end of the second quarter of 2008, total cash (cash and cash equivalents plus
short-term investments) was $1.65 billion. This was $1.28 billion
lower than the end of 2007, due to cash used for stock
repurchases. Additionally, we reclassified our remaining auction-rate
securities from short-term to long-term investments at the end of the first
quarter (see Note 4 to the Financial Statements). Accounts receivable
were $1.81 billion at the end of the quarter. This was
an increase of $69 million from the end of 2007. Days sales
outstanding were 49 at the end of the quarter compared with 44 at the end of
2007, primarily due to the seasonal increase in accounts receivable from sales
of Education Technology products.
Inventory
was $1.65 billion at the end of the quarter. This was $233 million
higher than the end of 2007. Days of inventory at the end of the
second quarter were 93, up 15 days from the end of 2007. The increase in
inventory from the end of 2007 was due to, in decreasing order, a
planned build, especially in high-performance analog, to better service our
customers, higher manufacturing costs, lower-than-expected revenue in the
quarter and a seasonal build of Education Technology inventory to support the
upcoming back-to-school season. Inventory increased to above our
desired levels, and we plan to reduce inventory in a measured manner over the
remainder of 2008.
Capital
spending in the first six months totaled $489 million. This was an
increase of $136 million from a year ago primarily due to higher expenditures
for semiconductor assembly/test equipment and facilities, and to a lesser
extent, higher expenditures for analog manufacturing
facilities. Depreciation in the first six months of 2008 was $487
million, down $21 million from a year ago.
Liquidity and Capital
Resources
Cash flow
from operations for the first six months of 2008 was $1.16 billion, a decrease
of $292 million from the year-ago period, due to the increase in cash used for
working capital purposes, particularly for inventories.
For the
first six months of 2008, net cash provided from investing activities was $210
million, compared with cash used of $171 million in the year-ago
period. During the first six months of 2008, we moved a portion of
our holdings of short-term investments to cash and cash
equivalents.
For the
first six months of 2008, net cash used in financing activities was $1.39
billion, compared with $1.20 billion in the year-ago period. We used
$1.31 billion of cash in the first six months of 2008 to repurchase 42.7 million
shares of our common stock and paid dividends of $265 million. In the
same period last year we used $1.60 billion of cash to repurchase 50 million
shares of common stock and paid $173 million in dividends. Dividends
were higher due to the increase in the quarterly dividend rate in the second and
fourth quarters of 2007. The exercise of stock options by employees
for shares of TI stock is also reflected in cash from financing
activities. For the first six months of 2008, such exercises provided
$165 million compared to $528 million for the same period a year ago. In
April 2007, we retired $43 million of outstanding 8.75% notes at
maturity.
In 2008,
we expect: an annual effective tax rate of about 31 percent, R&D expense of
$2.0 billion, capital expenditures of $0.9 billion and depreciation of $1.0
billion.
We
believe we have the necessary financial resources to fund our working capital
needs, capital expenditures, authorized stock repurchases, dividend payments and
other business requirements for at least the next 12 months.
Changes in Accounting
Standards
See Note
1 to the Financial Statements for detailed information regarding the status of
new accounting standards that are not yet effective for us.
ITEM
3. Quantitative and Qualitative Disclosures About Market Risk.
Information
concerning market risk is contained on pages 58-59 of Exhibit 13 to our Form
10-K for the year ended December 31, 2007, and is incorporated by reference to
such exhibit.
ITEM
4. 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 management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our 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 in providing reasonable assurance that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Commission’s rules and forms. In addition, 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 period covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
ITEM
1A. Risk Factors
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 in 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 companies like TI 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 financial results
and other factors, many of which are beyond our control.
Cyclicality in the
Semiconductor Market May Affect Our Performance.
Our
semiconductor business is our largest business segment and the principal source
of our revenue. The semiconductor market historically has been cyclical and
subject to significant and often rapid increases and decreases in product
demand. These changes could have adverse effects on our results of operations,
and on the market price of our securities. The results of our
operations may be adversely affected in the future if demand for our integrated
circuits decreases or if these markets or key end-equipment markets such as
communications, consumer electronics and computing grow at a significantly
slower pace than management expects.
Our Margins May Vary over
Time.
Our
profit margins may be adversely affected in the future by a number of factors,
including decreases in our shipment volume, reductions in, or obsolescence of
our inventory, and shifts in our product mix. In addition, the highly
competitive market environment in which we operate might adversely affect
pricing for our products. Because we own much of our manufacturing capacity, a
significant portion of our operating costs are fixed. In general, these costs do
not decline with reductions in customer demand or utilization of manufacturing
capacity, and can adversely affect profit margins as a result.
The Technology Industry Is
Characterized by Rapid Technological Change That Requires Us to Develop New
Technologies and Products.
Our
results of operations depend in part upon our ability to successfully develop,
manufacture and market innovative products in a rapidly changing technological
environment. We require significant capital to develop new technologies and
products to meet changing customer demands that, in turn, may result in
shortened product life cycles. Moreover, expenditures for technology and product
development are generally made before the commercial viability for such
developments can be assured. As a result, there can be no assurance that we will
successfully develop and market these new products. There also is no assurance
that the products we do develop and market will be well received by customers,
nor that we will realize a return on the capital expended to develop such
products.
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 the level of this competition will continue to increase from
large competitors and from smaller competitors serving niche markets. Certain of
our competitors possess sufficient financial, technical and management resources
to develop and market products that may compete favorably against 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.
Our Performance Depends in
Part upon Our Ability to Enforce Our Intellectual Property Rights and to Develop
and License New Intellectual Property.
Access to
worldwide markets depends in part on the continued strength of our intellectual
property portfolio. There can be no assurance that, as our business expands into
new areas, 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.
The lack of a necessary license could expose us to claims for damages and/or
injunction from third parties, as well as claims for indemnification by our
customers in instances where we have contractually agreed to indemnify them
against damages resulting from infringement claims.
With
regard to our own intellectual property, we actively enforce and protect our
rights. However, there can be no assurance that our efforts will be
adequate to prevent the misappropriation or improper use of our protected
technology.
We
benefit from royalty revenue generated from various patent license agreements.
The amount of such revenue depends in part on negotiations with new licensees,
and with existing licensees in connection with renewals of their licenses. There
is no guarantee that such negotiations will be successful. Future royalty
revenue also depends on the strength and enforceability of our patent portfolio
and our enforcement efforts, and on the sales and financial stability of our
licensees. Additionally, the consolidation of our licensees may negatively
affect our royalty revenue. Royalty revenue from licensees is not always uniform
or predictable, in part due to the performance of our licensees and in part due
to the timing of new license agreements or the expiration and renewal of
existing agreements.
A Decline in Demand in
Certain End-User Markets Could Have a Material Adverse Effect on the Demand for
Our Products and Results of Operations.
Our
customer base includes companies in a wide range of industries, but we generate
a significant amount of revenue from sales to customers in the communications-
and computer-related industries. Within these industries, a large portion of our
revenue is generated from sales to customers in the cell phone, personal
computer and communications infrastructure markets. Decline in one or several of
these end-user markets could have a material adverse effect on the demand for
our products and our results of operations and financial condition.
Our Global Manufacturing,
Design and Sales Activities Subject Us to Risks Associated with Legal,
Political, Economic or Other Changes.
We have
facilities in more than 25 countries worldwide, and in 2007 more than 80 percent
of our revenue came from sales to locations outside the United States. Operating
internationally exposes us to changes in export controls and other laws or
policies, as well as political and economic conditions, security risks, health
conditions and possible disruptions in transportation networks of the various
countries in which we operate. Any of these could result in an adverse effect on
our business operations and our financial results. Also, as discussed in more
detail on pages 58 and 59 of our 2007 annual report to stockholders, we use
forward currency exchange contracts to minimize the adverse earnings impact from
the effect of exchange rate fluctuations on our non-U.S. dollar net balance
sheet exposures. Nevertheless, in periods when the U.S. dollar significantly
fluctuates in relation to the non-U.S. currencies in which we transact business,
the re-measurement of non-U.S. dollar transactions can have an adverse effect on
our results of operations and financial condition.
Our Results of Operations
Could be Affected by Natural Events in the Locations in which We, Our Customers
or Suppliers Operate.
We have
manufacturing and other operations in locations subject to natural occurrences
such as severe weather and geological events that could disrupt operations. In
addition, our suppliers and customers also have operations in such locations. A
natural disaster that results in a prolonged disruption to our operations, or
the operations of our customers or suppliers, may adversely affect our results
and financial condition.
The Loss of or Significant
Curtailment of Purchases by Any of Our Largest Customers Could Adversely Affect
Our Results of Operations.
While we
generate revenue from thousands of customers worldwide, the loss of or
significant curtailment of purchases by one or more of our top 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.
Incorrect Forecasts of
Customer Demand Could Adversely Affect Our Results of
Operations.
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 Performance Depends on
the Availability and Cost of Raw Materials, Utilities, Critical Manufacturing
Equipment, Manufacturing Processes and Third-Party Manufacturing
Services.
Our
manufacturing processes and critical manufacturing equipment require that
certain key raw materials and utilities be available. Limited or delayed access
to and high costs of these items could adversely affect our results of
operations. Additionally, the 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 integrated circuits. We also depend on third parties
to provide advanced digital process technology development. We depend on a
limited number of third parties to perform these functions. We do not have
long-term contracts with all of these third parties. Reliance on these third
parties involves risks, including possible shortages of capacity in periods of
high demand, the third parties’ inability to develop and deliver advanced
digital process technology in a timely, cost effective and appropriate manner
and the possibility of third parties imposing increased costs on
us.
Our Results of Operations
Could be Affected by Changes in Taxation.
We have
facilities in more than 25 countries worldwide 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. Our results of operations could be affected
by market opportunities or decisions we make that cause us to increase or
decrease operations in one or more countries, or by changes in applicable tax
rates or audits by the taxing authorities in countries in which we
operate.
In
addition, we are subject to laws and regulations in various locations that
determine how much profit has been earned and when it is subject to taxation in
that jurisdiction. Changes in these laws and regulations could affect the
locations where we are deemed to earn income, which could in turn affect our
results of operations. We have deferred tax assets on our balance sheet. Changes
in applicable tax laws and regulations could affect our ability to realize those
deferred tax assets, which could also 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 Results of Operations
Could be Affected by Changes in the Financial Markets.
We
maintain bank accounts, multi-year revolving credit agreements, and a portfolio
of short-term investments to support the financing needs of the company. Our
ability to fund our daily operations, invest in our business, and make strategic
acquisitions requires continuous access to our bank and investment accounts, as
well as access to our bank credit lines, which 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. Similarly, such circumstances could also
restrict our ability to access the capital markets or redeem our
investments.
Our Results of Operations
Could be Affected by Warranty Claims, Product Recalls or Product
Liability.
We could
be subject to warranty or product liability claims or claims based on epidemic
or delivery failures that could lead to significant expenses as we defend such
claims or pay damage awards. The risk of a significant claim is generally
greater for products used in health and safety applications. In the event of a
warranty claim, we may also incur costs if we decide to compensate the affected
customer or end consumer. We do 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. In such instances, we may incur costs and
expenses relating to the recall. Costs or payments we may make in connection
with warranty, epidemic failure and delivery claims or product recalls may
adversely affect our results of operations and financial condition.
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 technical, marketing, management and staff
personnel. There can be no assurance that we will be able to
successfully retain and recruit the key personnel that we require.
ITEM
2. Unregistered Sales of Equity Securities and Use of Proceeds.
The
following table contains information regarding our purchases of our common stock
during the quarter:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price Paid
per
Share
|
|
|
Total Number
of Shares
Purchased
as
Part of
Publicly
Announced
Plans or
Programs(1)
|
|
|
|
Approximate
Dollar Value
of
Shares
that
May Yet Be
Purchased
Under the
Plans or
Programs(1)
|
|
April 1
through April 30, 2008
|
|
|
55,000
|
|
|
$ |
32.96
|
|
|
|
55,000
|
|
|
$ |
4,800
million
|
|
May
1 through May 31, 2008
|
|
|
7,055,000
|
|
|
$ |
30.93
|
|
|
|
7,055,000
|
|
|
$ |
4,580
million
|
|
June
1 through June 30, 2008
|
|
|
|
|
|
$ |
30.04
|
|
|
|
|
|
|
$ |
|
|
Total
|
|
|
|
|
|
$ |
30.44
|
|
|
|
15,994,200 |
(2)(3) |
|
$ |
4,310
million
|
(3) |
(1)
|
All
purchases during the quarter were made through open market purchases under
an authorization to purchase up to $5 billion of additional shares of TI
common stock announced on September 21, 2007. No expiration
date has been specified for this
authorization.
|
(2)
|
All
purchases were made through open-market purchases except for 55,000 shares
that were acquired in April and 25,000 shares that were acquired in May
through a privately negotiated forward purchase contract with a
non-affiliated financial institution. The forward purchase
contract was designed to minimize the adverse impact on our earnings from
the effect of stock market value fluctuations on the portion of our
deferred compensation obligations denominated in TI
stock.
|
(3)
|
Includes
the purchase of 1,890,000 shares for which trades were settled in the
first three business days of July 2008 for $54 million.
|
ITEM
4. Submission of Matters to a Vote of Security Holders.
At the
annual meeting of stockholders held on April 19, 2007, the stockholders elected
TI’s Board of Directors and voted upon one Board proposal and one stockholder
proposal contained within our Proxy Statement dated March 9, 2007.
The Board
nominees were elected with the following vote:
Nominee
|
For
|
Against
|
Abstentions
(Other
Than
Broker
Non-
Votes)
|
Broker-Non
Votes
|
|
|
|
|
|
James
R. Adams
|
1,120,318,911
|
13,477,284
|
10,233,388
|
--
|
David
L. Boren
|
1,096,120,995
|
36,978,379
|
10,234,744
|
--
|
Daniel
A. Carp
|
1,115,853,558
|
17,036,574
|
10,313,722
|
--
|
Carrie
S. Cox
|
1,128,863,488
|
4,533,322
|
10,185,008
|
--
|
David
R. Goode
|
1,116,884,391
|
16,291,396
|
10,315,454
|
--
|
Pamela
H. Patsley
|
1,128,486,520
|
4,671,546
|
10,203,103
|
--
|
Wayne
R. Sanders
|
1,121,505,372
|
11,772,644
|
10,312,866
|
--
|
Ruth
J. Simmons
|
1,126,945,187
|
5,328,058
|
10,201,927
|
--
|
Richard
K. Templeton
|
1,119,828,130
|
13,352,150
|
10,097,048
|
--
|
Christine
Todd Whitman
|
1,126,880,529
|
5,791,518
|
10,231,301
|
--
|
The Board
proposal was approved with the following vote:
Proposal
|
For
|
Against
|
Abstentions
(Other Than Broker Non-Votes)
|
Broker
Non-Votes
|
|
|
|
|
|
Board
proposal to ratify the appointment of Ernst & Young LLP as the
company's independent registered public accounting firm for
2008
|
1,123,948,308
|
12,191,735
|
9,960,582
|
--
|
|
The
stockholder proposal was rejected with the following
vote:
|
Proposal
|
For
|
Against
|
Abstentions
(Other Than Broker Non-Votes)
|
Broker
Non-Votes
|
|
|
|
|
|
Stockholder
proposal regarding qualifications for director nominees
|
22,728,779
|
907,771,121
|
13,435,911
|
202,164,814
|
|
|
Designation
of Exhibits in This Report
|
|
31.1
|
Certification
of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e)
or Rule 15d-15(e).
|
|
|
31.2
|
Certification
of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e)
or Rule 15d-15(e).
|
|
|
32.1
|
Certification
by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350.
|
|
|
32.2
|
Certification
by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350.
|
“Safe
Harbor” Statement under the Private Securities Litigation Reform Act of
1995:
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 our
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 its
management:
● Market demand for
semiconductors, particularly in key markets such as communications,
entertainment electronics and computing;
● TI’s
ability to maintain or improve profit margins, including its ability to utilize
its manufacturing facilities at sufficient levels to cover its fixed operating
costs, in an intensely competitive and cyclical industry;
● TI’s ability to
develop, manufacture and market innovative products in a rapidly changing
technological environment;