Form 10-Q for First Quarter 2007
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended March 31, 2007
¨ 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 or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer S |
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange
Act). |
Yes
¨
No
S
|
1,433,709,278
Number
of
shares of Registrant’s common stock outstanding as of
March
31,
2007
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 March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
3,191
|
|
$
|
3,334
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
Cost
of revenue
(COR)
|
|
|
1,554
|
|
|
1,662
|
|
Research
and development (R&D)
|
|
|
552
|
|
|
533
|
|
Selling,
general and administrative (SG&A)
|
|
|
405
|
|
|
421
|
|
Total
|
|
|
2,511
|
|
|
2,616
|
|
Profit
from operations
|
|
|
680
|
|
|
718
|
|
Other
income (expense) net
|
|
|
40
|
|
|
52
|
|
Interest
expense on loans
|
|
|
1
|
|
|
3
|
|
Income
from
continuing operations before income taxes
|
|
|
719
|
|
|
767
|
|
Provision
for income taxes
|
|
|
203
|
|
|
225
|
|
Income
from
continuing operations
|
|
|
516
|
|
|
542
|
|
Income
from
discontinued operations, net of income taxes
|
|
|
--
|
|
|
43
|
|
Net
income
|
|
$
|
516
|
|
$
|
585
|
|
|
|
|
|
|
|
|
|
Basic
earnings
per common share:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.36
|
|
$
|
.34
|
|
Net
income
|
|
$
|
.36
|
|
$
|
.37
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.35
|
|
$
|
.33
|
|
Net
income
|
|
$
|
.35
|
|
$
|
.36
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (millions):
|
|
|
|
|
|
|
|
Basic
|
|
|
1,442
|
|
|
1,585
|
|
Diluted
|
|
|
1,470
|
|
|
1,618
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share of common stock
|
|
$
|
.04
|
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income
(Millions
of dollars)
|
|
For
Three Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
516
|
|
$
|
542
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
Changes
in available-for-sale investments:
|
|
|
|
|
|
|
|
Adjustment,
net of tax benefit (expense) of ($1) and $0
|
|
|
1
|
|
|
(1
|
)
|
Unrealized
net actuarial loss of defined benefit plans:
|
|
|
|
|
|
|
|
Reclassification
of recognized transactions, net of tax expense of ($4)
|
|
|
7
|
|
|
--
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8
|
|
|
(1
|
)
|
Total
from continuing operations
|
|
|
524
|
|
|
541
|
|
|
|
|
|
|
|
|
|
Net
income from discontinued operations
|
|
|
--
|
|
|
43
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
524
|
|
$
|
584
|
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Balance Sheets
(Millions
of dollars, except share amounts)
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
965
|
|
$
|
1,183
|
|
Short-term
investments
|
|
|
2,371
|
|
|
2,534
|
|
Accounts
receivable, net of allowances of ($25) and ($26)
|
|
|
1,756
|
|
|
1,774
|
|
Raw
materials
|
|
|
114
|
|
|
105
|
|
Work
in process
|
|
|
879
|
|
|
930
|
|
Finished
goods
|
|
|
416
|
|
|
402
|
|
Inventories
|
|
|
1,409
|
|
|
1,437
|
|
Deferred
income taxes
|
|
|
1,071
|
|
|
741
|
|
Prepaid
expenses and other current assets
|
|
|
257
|
|
|
181
|
|
Assets
of discontinued operations
|
|
|
4
|
|
|
4
|
|
Total
current assets
|
|
|
7,833
|
|
|
7,854
|
|
Property,
plant and equipment at cost
|
|
|
7,715
|
|
|
7,751
|
|
Less
accumulated depreciation
|
|
|
(3,835
|
)
|
|
(3,801
|
)
|
Property,
plant and equipment, net
|
|
|
3,880
|
|
|
3,950
|
|
Equity
and other long-term investments
|
|
|
250
|
|
|
287
|
|
Goodwill
|
|
|
792
|
|
|
792
|
|
Acquisition-related
intangibles
|
|
|
131
|
|
|
118
|
|
Deferred
income taxes
|
|
|
436
|
|
|
601
|
|
Capitalized
software licenses, net
|
|
|
280
|
|
|
188
|
|
Overfunded
retirement plans
|
|
|
54
|
|
|
58
|
|
Other
assets
|
|
|
94
|
|
|
82
|
|
Total
assets
|
|
$
|
13,750
|
|
$
|
13,930
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Loans
payable and current portion of long-term debt
|
|
$
|
43
|
|
$
|
43
|
|
Accounts
payable
|
|
|
550
|
|
|
560
|
|
Accrued
expenses and other liabilities
|
|
|
877
|
|
|
1,029
|
|
Income
taxes payable
|
|
|
286
|
|
|
284
|
|
Accrued
profit sharing and retirement
|
|
|
51
|
|
|
162
|
|
Total
current liabilities
|
|
|
1,807
|
|
|
2,078
|
|
Underfunded
retirement plans
|
|
|
197
|
|
|
208
|
|
Deferred
income taxes
|
|
|
10
|
|
|
23
|
|
Deferred
credits and other liabilities
|
|
|
453
|
|
|
261
|
|
Total
liabilities
|
|
|
2,467
|
|
|
2,570
|
|
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: March 31, 2007 - 1,739,211,844; December
31, 2006 - 1,739,108,694
|
|
|
1,739
|
|
|
1,739
|
|
Paid-in
capital
|
|
|
822
|
|
|
885
|
|
Retained
earnings
|
|
|
18,017
|
|
|
17,529
|
|
Less
treasury common stock at cost:
Shares:
March 31, 2007 - 305,502,566; December
31, 2006 - 289,078,450
|
|
|
(8,940
|
)
|
|
(8,430
|
)
|
Accumulated
other comprehensive income (loss), net of tax
|
|
|
(355
|
)
|
|
(363
|
)
|
Total
stockholders’ equity
|
|
|
11,283
|
|
|
11,360
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
13,750
|
|
$
|
13,930
|
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Millions
of dollars)
|
|
For
Three Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
516
|
|
$
|
585
|
|
Adjustments
to reconcile net income to cash provided by operating activities
of
continuing operations:
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
--
|
|
|
(43
|
)
|
Depreciation
|
|
|
252
|
|
|
270
|
|
Stock-based
compensation
|
|
|
78
|
|
|
91
|
|
Amortization
of capitalized software
|
|
|
25
|
|
|
30
|
|
Amortization
of acquisition-related intangibles
|
|
|
14
|
|
|
16
|
|
Deferred
income taxes
|
|
|
(3
|
)
|
|
(36
|
)
|
Increase
(decrease) from changes in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
17
|
|
|
(144
|
)
|
Inventories
|
|
|
28
|
|
|
(57
|
)
|
Prepaid
expenses and other current assets
|
|
|
(79
|
)
|
|
(111
|
)
|
Accounts
payable and accrued expenses
|
|
|
(167
|
)
|
|
(106
|
)
|
Income
taxes payable
|
|
|
(1
|
)
|
|
151
|
|
Accrued
profit sharing and retirement
|
|
|
(111
|
)
|
|
(99
|
)
|
Change
in funded status of retirement plans and accrued retirement costs
|
|
|
1
|
|
|
17
|
|
Other
|
|
|
(16
|
)
|
|
(42
|
)
|
Net
cash provided by operating activities of continuing operations
|
|
|
554
|
|
|
522
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(179
|
)
|
|
(408
|
)
|
Proceeds
from sales of assets
|
|
|
--
|
|
|
4
|
|
Purchases
of cash investments
|
|
|
(846
|
)
|
|
(1,153
|
)
|
Sales
and maturities of cash investments
|
|
|
1,011
|
|
|
2,341
|
|
Purchases
of equity investments
|
|
|
(5
|
)
|
|
(5
|
)
|
Sales
of equity and other long-term investments
|
|
|
2
|
|
|
7
|
|
Acquisitions,
net of cash acquired
|
|
|
(27
|
)
|
|
(177
|
)
|
Net
cash provided by (used in) investing activities of continuing operations
|
|
|
(44
|
)
|
|
609
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Payments
on loans and long-term debt
|
|
|
--
|
|
|
(311
|
)
|
Dividends
paid on common stock
|
|
|
(58
|
)
|
|
(48
|
)
|
Sales
and other common stock transactions
|
|
|
154
|
|
|
142
|
|
Excess
tax benefit from stock option exercises
|
|
|
34
|
|
|
7
|
|
Stock
repurchases
|
|
|
(857
|
)
|
|
(1,440
|
)
|
Net
cash used in financing activities of continuing operations
|
|
|
(727
|
)
|
|
(1,650
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
--
|
|
|
35
|
|
Investing
activities
|
|
|
--
|
|
|
(10
|
)
|
Net
cash provided by discontinued operations
|
|
|
--
|
|
|
25
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(1
|
)
|
|
2
|
|
Net
decrease in cash and cash equivalents
|
|
|
(218
|
)
|
|
(492
|
)
|
Cash
and cash equivalents , January 1
|
|
|
1,183
|
|
|
1,214
|
|
Cash
and cash equivalents, March 31
|
|
$
|
965
|
|
$
|
722
|
|
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 or the Company) makes,
markets and sells high-technology components; more than 50,000 customers
all over the world buy TI products.
|
Acquisitions
- In
January 2006, we acquired 100 percent of the equity of Chipcon Group ASA
(Chipcon), a leading company in the design of short-range, low-power wireless
radio frequency semiconductors, based in Oslo, Norway, for $177 million in
cash,
net of cash acquired. The acquisition was accounted for as a purchase business
combination and the results of operations of this business have been included
in
the Semiconductor segment of our consolidated statements of income from the
date
of acquisition.
In
the
first quarter of 2007 we also made an asset acquisition, which was not material,
that was integrated into the Semiconductor business segment.
Dispositions
- In
January 2006, we entered into a definitive agreement to sell substantially
all
of the Sensors & Controls segment to an affiliate of Bain Capital, LLC, a
leading global private equity investment firm, for $3 billion in cash. The
sale
was completed on April 27, 2006. The operations and cash flows of the former
Sensors & Controls business have been eliminated from the ongoing operations
of TI, and we have no significant continuing involvement in the operations
of
the sold business. Beginning in the first quarter of 2006, the former Sensors
& Controls business was presented as a discontinued operation (see Note 2
for detailed information on discontinued operations).
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, except
for
the adoption of a change in accounting for income tax uncertainties, on the
same
basis as the audited financial statements included in our annual report on
Form
10-K for the year ended December 31, 2006. The consolidated statements of
income, statements of comprehensive income and statements of cash flows for
the
periods ended March 31, 2007 and 2006, and the balance sheet as of March 31,
2007, 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, 2006, 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 (SEC). 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,
2006.
The results for the three-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 July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) No. 48, “Accounting
for Uncertainty in Income Taxes—An Interpretation of FASB Statement No.
109.”
TI
adopted the provisions of FIN 48 effective January 1, 2007.
Through
December 31, 2006, in accordance with prior standards, we assessed the ultimate
resolution of uncertain tax matters as they arose and established reserves
for
tax contingencies when we believed an unfavorable outcome was probable and
the
liability could be reasonably estimated.
As
of
December 31, 2006, TI had tax reserves of $178 million and offsets of $76
million to certain of these tax reserves. These offsets were expected to be
realized primarily through procedures for relief from double taxation under
applicable tax treaties with foreign tax jurisdictions or through the reduction
of future tax liabilities. The net amount of the reserves and offsets was
recorded primarily as a reduction of non-current deferred tax assets.
FIN
48
differs from the prior standards in that it requires companies to determine
that
it is “more likely than not” that a tax position will be sustained by the
appropriate taxing authorities before any benefit can be recorded in the
financial statements. As a result, TI reduced the tax reserves by $20
million, from $178 million to $158 million. In addition, FIN 48 requires that
liabilities for uncertain tax positions be recorded as a separate liability.
Therefore, TI reclassified the resulting $158 million liability for uncertain
tax positions from deferred tax assets to deferred credits and other
liabilities.
As
a
result of the reduction in the liability for uncertain tax positions, we
recorded a $9 million decrease in the amount of accrued interest expense. Our
policy continues to be to recognize accrued interest related to uncertain tax
positions and penalties as components of other income (expense) net.
The
decrease in tax reserves and the decrease in accrued interest expense both
resulted in an increase to the January 1, 2007, balance of retained earnings,
as
required by the adoption of FIN 48.
Of
the
$158 million liability for uncertain tax positions as of January 1, 2007, $139
million represents tax positions that, if recognized, would impact the effective
tax rate. If these tax positions were recognized, $58 million of the $76 million
deferred tax assets primarily relating to the procedures for relief from double
taxation (as described above) would also be recognized.
The
statute of limitations remains open for U.S. Federal tax returns for 1999 and
following years. Our returns for the years 2000 through 2002 are the subject
of
an appeals proceeding and our returns for the years 2003 through 2004 are
currently under audit. It is likely that both the appeals proceeding and the
audit will be completed within the next twelve months. Although we are unable
to
estimate the range of any reasonably possible increase or decrease in uncertain
tax positions from the eventual outcome of these matters, we do not anticipate
it will result in a material change to our financial position or results of
operations.
In
foreign jurisdictions, the years open to audit represent the years still subject
to the statute of limitations. Years still open to audit by foreign tax
authorities in major jurisdictions include Germany (2001 onward), France (2003
onward), Japan (2000 onward) and Taiwan (2001 onward).
During
the three months ended March 31, 2007, there have been no material changes
in
the liability for uncertain tax positions.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115.” SFAS
159
permits companies to choose to measure at fair value many financial instruments
and certain other items that are not currently required to be measured at fair
value. Entities choosing the fair value option would be required to recognize
subsequent changes in the fair value of those instruments and other items
directly in earnings. This standard also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 is effective beginning the first fiscal year that begins after November
15, 2007. We have evaluated the potential impact of this standard and anticipate
it will have no material impact on our financial position and results of
operations.
2. |
Discontinued
Operations.
On January 9, 2006, we announced a definitive agreement to sell
substantially all of the Sensors & Controls segment to an affiliate of
Bain Capital, LLC for $3 billion in cash. The sale was completed
on April
27, 2006. The former Sensors & Controls business acquired by Bain
Capital, LLC was renamed Sensata Technologies, Inc.
(Sensata).
|
The
results of operations of the former Sensors & Controls business are
presented as discontinued operations. The following summarizes results from
the
discontinued operations of the former Sensors & Controls business for the
periods ended March 31, 2007 and 2006, included in the consolidated statements
of income.
|
|
For
Three Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
--
|
|
$
|
294
|
|
Operating
costs and expenses
|
|
|
--
|
|
|
229
|
|
Income
before income taxes
|
|
|
--
|
|
|
65
|
|
Provision
for income taxes
|
|
|
--
|
|
|
22
|
|
Income
from discontinued operations
|
|
$
|
--
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
--
|
|
$
|
.03
|
|
Diluted
|
|
$
|
--
|
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
As
of
March 31, 2007, the remaining assets of the former Sensors & Controls
business, included in assets of discontinued operations, are attributable to
pension obligations in our Japan subsidiary that will be settled in
2007.
Continuing
Involvement
-
Upon
closing of the sales transaction, we entered into a Transition Services
Agreement (TSA) with Sensata to provide various temporary support services
that are reasonably necessary to facilitate the continuation of the normal
conduct of business of the former Sensors & Controls business such as
finance and accounting, human resources, information technology, warehousing
and
logistics, and records retention and storage. Such services are expected to
be
provided for up to twelve months from the closing date, although certain
information technology-related services may be provided for up to two years.
The
fees for these services are generally equivalent to our cost. In addition,
we
entered into certain cross-license agreements to allow each party to continue
to
use the associated technology and intellectual property in the conduct of their
respective business. However, these cross-license agreements generally do not
involve the receipt or payment of any royalties and, therefore, are not
considered to be a component of continuing involvement.
Although
the services provided under the TSA generate continuing cash flows between us
and Sensata, the amounts are not considered to be significant to the ongoing
operations of either entity. In addition, we have no contractual ability through
the TSA or any other agreement to significantly influence the operating or
financial policies of Sensata. Under the provisions of EITF Issue No. 03-13,
“Applying
the Conditions of Paragraph 42 of FASB Statement No. 144 in Determining Whether
to Report Discontinued Operations,”
we have
no significant continuing involvement in the operations of the former Sensors
& Controls business and have classified the historical results of that
business as discontinued operations.
3. |
Earnings
per Share.
Computation of earnings per common share (EPS) for income from
continuing
operations, and a reconciliation between the basic and diluted
basis, for
the periods ending March 31, are as
follows:
|
|
|
|
For
Three Months Ended
March
31, 2007
|
|
For
Three Months Ended
March
31, 2006
|
|
|
|
|
Income
|
|
Shares
|
|
EPS
|
|
Income
|
|
Shares
|
|
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
516
|
|
|
1,442
|
|
$
|
.36
|
|
$
|
542
|
|
|
1,585
|
|
$
|
.34
|
|
|
Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
|
-- |
|
|
28 |
|
|
|
|
|
-- |
|
|
33 |
|
|
|
|
|
Diluted
EPS
|
|
$
|
516
|
|
|
1,470
|
|
$
|
.35
|
|
$
|
542
|
|
|
1,618
|
|
$
|
.33
|
|
4. |
Stock-based
Compensation.
We have several stock-based employee compensation plans,
which are more
fully described in Note 9 of our 2006 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 March 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense recognized:
|
|
|
|
|
|
|
|
|
COR
|
|
$
|
15
|
|
$
|
18
|
|
|
R&D
|
|
|
23
|
|
|
28
|
|
|
SG&A
|
|
|
40
|
|
|
45
|
|
|
Total
|
|
$
|
78
|
|
$
|
91
|
|
The
amounts above include the impact of recognizing compensation expense related
to
restricted stock units (RSUs), nonqualified stock options and stock options
offered under the employee stock purchase plan. Stock-based compensation expense
has not been allocated to the various segments, but is reflected in
Corporate.
5. |
Postretirement
Benefit Plans.
Components of net periodic employee benefit cost is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Defined
Benefit
|
|
U.S.
Retiree
Health Care
|
|
Non-U.S.
Defined
Benefit
|
|
|
For
Three Months Ended Mar. 31,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
6
|
|
$
|
7
|
|
$
|
1
|
|
$
|
1
|
|
$
|
10
|
|
$
|
10
|
|
|
Interest
cost
|
|
|
11
|
|
|
10
|
|
|
6
|
|
|
6
|
|
|
13
|
|
|
11
|
|
|
Expected
return on plan assets
|
|
|
(12
|
)
|
|
(12
|
)
|
|
(7
|
)
|
|
(5
|
)
|
|
(18
|
)
|
|
(16
|
)
|
|
Amortization
of prior service cost
|
|
|
--
|
|
|
--
|
|
|
1
|
|
|
1
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Recognized
net actuarial loss
|
|
|
6
|
|
|
5
|
|
|
2
|
|
|
1
|
|
|
3
|
|
|
4
|
|
|
Net
periodic benefit cost
|
|
$
|
11
|
|
$
|
10
|
|
$
|
3
|
|
$
|
4
|
|
$
|
7
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. |
Segment
Data.
We have two reportable operating segments: Semiconductor and
Education
Technology.
|
Segment
information for continuing operations follows:
|
|
|
For Three Months Ended
March
31,
|
|
|
Segment
Net Revenue
|
|
2007
|
|
2006
|
|
|
Semiconductor
|
|
$
|
3,115
|
|
$
|
3,260
|
|
|
Education
Technology
|
|
|
76
|
|
|
74
|
|
|
Total
net revenue
|
|
$
|
3,191
|
|
$
|
3,334
|
|
|
|
|
For Three Months Ended
March
31,
|
|
|
Segment
Profit (Loss)
|
|
2007
|
|
2006
|
|
|
Semiconductor
|
|
$
|
831
|
|
$
|
883
|
|
|
Education
Technology
|
|
|
16
|
|
|
13
|
|
|
Corporate
|
|
|
(167
|
)
|
|
(178
|
)
|
|
Profit
from operations
|
|
$
|
680
|
|
$
|
718
|
|
7. |
Restructuring
Actions.
On January 22, 2007, we announced a plan to change the way we
develop
advanced digital manufacturing process technology. Instead of
separately
creating our own core process technology, we will work collaboratively
with our foundry partners to specify and drive the next generations
of
digital process technology. Additionally, we will stop production
at an
older digital factory and move its manufacturing equipment into
several of
our analog factories to support greater analog output. Income
from
continuing operations for the first quarter of 2007 includes
a charge of
$14 million related to these actions, and is due primarily to
termination
benefit costs of $10 million and acceleration of depreciation
on the
facilities assets over the remaining service lives of $4 million.
Of the
total restructuring costs, $9 million is included in cost of
revenue and
$5 million in research and development expense, and has been
reflected in
Corporate. As of March 31, 2007, no severance and benefit payments
have
been made from this reserve. These actions will take place throughout
2007, and when complete are expected to reduce annualized costs
by about
$200 million. About 500 jobs are expected to be reduced by year
end. In
total, we will take restructuring charges of approximately $55
million,
including about $40 million for termination benefits and about
$15 million
for accelerated
depreciation.
|
8. |
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 rate. As of March 31, 2007, the estimated annual effective
tax rate
for 2007 is about 28 percent. The effective annual tax rate for
2007
differs from the 35 percent statutory corporate tax rate due
to the
effects of non-U.S. tax rates, the federal research tax credit
and the
deduction for U.S.
manufacturing.
|
9. |
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, 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
Operation Indemnity - In
connection with the sale of the former Sensors & Controls business, we have
agreed to indemnify Sensata 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
March 31, 2007, there were no significant liabilities recorded under these
indemnification obligations.
10. |
Subsequent
Event.
On April 18, 2007, we declared a 100 percent increase in our
regular
quarterly cash dividend on common stock, payable May 21, 2007,
to
stockholders of record on April 30, 2007. The new quarterly dividend
rate
will be $0.08 per quarter, resulting in annual dividend payments
of $0.32
per
share.
|
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
Texas
Instruments makes, markets and sells high-technology components; more than
50,000 customers all over the world buy our products. We have two separate
segments: Semiconductor and Education Technology. Semiconductor is by far the
larger of these segments. It accounted for 96 percent of our revenue in 2006,
and historically it averages a higher growth rate than Education Technology,
although the semiconductor market is characterized by wide swings in growth
rates from year to year. We were the world’s third-largest semiconductor company
in 2006 as measured by revenue, according to iSuppli Corporation, an industry
analyst.
In
our
Semiconductor segment, we focus primarily on technologies that make it possible
for a variety of consumer and industrial electronic equipment to process both
analog and digital signals in real time. These technologies are known as analog
semiconductors and digital signal processors, or DSPs, and together they account
for about three-fourths of our Semiconductor revenue. Almost all of today’s
digital electronic equipment requires some form of analog or digital signal
processing.
Analog
semiconductors process “real world” inputs, such as sound, temperature, pressure
and visual images, conditioning them, amplifying them and converting them into
digital signals. They also assist in the management of power distribution and
consumption, aspects critical to today’s portable electronic devices. Generally,
analog products require less capital-intensive factories to manufacture than
digital products.
Our
analog semiconductors consist of custom products and standard products. Custom
products are designed for specific applications for specific customers. Standard
products include application-specific standard products (designed for a specific
application and usable by multiple customers) and high-performance standard
catalog products (usable in multiple applications by multiple customers). These
standard products are characterized by differentiated features and
specifications, as well as relatively high gross margins. Standard analog
products tend to have long life spans. Many custom and standard products are
proprietary and difficult for competitors to imitate. Analog products also
include commodity products, which are sold in high volume and into a broad
range
of applications, and generally are differentiated by price and availability.
We
are the world’s largest supplier of analog semiconductors.
DSPs
use
complex algorithms and compression techniques to alter and improve a data
stream. These products are ideal for applications that require precise,
real-time processing of real-world signals that have been converted into digital
form. Their power efficiency is important for battery-powered
devices.
Our
DSP
portfolio includes custom, application-specific and standard products. Custom
products are designed for specific customers with very high volumes in
established markets. Application-specific products are implementations crafted
for specific applications like wireless infrastructure, VoIP (Voice over
Internet Protocol) gateways, digital still cameras and residential gateways,
to
name a few. Our standard DSP products are sold into a broad range of
applications and seed the next generation of signal-processing innovation.
We
are the world’s largest supplier of DSPs.
We
expect
that our inventory levels generally will increase from historical levels in
order to meet the requirements of our customers. For example, the analog market
consists of a very broad base of customers that order relatively small
quantities of many different analog products. These customers typically expect
very short order lead times, requiring us to maintain more on-hand inventory.
Also, analog suppliers typically hold a broader range of inventory in order
to
serve their customers, while manufacturing in efficient quantities. Analog
products will be a growing portion of our inventory as our analog business
continues to grow and broaden its product portfolio. Additionally, our large
customers are moving increasingly toward a business model that requires us
to
maintain inventory on a consignment basis on their behalf.
We
own
and operate semiconductor manufacturing sites in the Americas, Japan, Europe
and
Asia. Our facilities require substantial investment to construct and are largely
fixed-cost assets once in operation. Because we own most 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 our utilization
of our manufacturing capacity, and can adversely affect profit margins as a
result. Conversely, as product demand rises and factory utilization increases,
the fixed costs are spread over increased output, which should improve profit
margins.
We
manufacture most of our analog products in our own factories. To supplement
our
manufacturing capacity, especially for digital products, we outsource a portion
of our product manufacturing to outside suppliers (foundries and assembly/test
subcontractors), which reduces both the amount of capital expenditures and
subsequent depreciation required to meet customer demands and fluctuations
in
profit margins. Outside foundries provided about 50 percent of our total wafers
for advanced digital products in 2006. (A wafer is a thin slice of silicon
on
which an array of semiconductor devices has been fabricated.)
The
semiconductor market is characterized by constant and typically incremental
innovation in product design and manufacturing technologies. We make significant
investments in research and development (R&D). Typically, products resulting
from our R&D investments in the current period do not contribute materially
to revenue in that period, but should benefit us in future years. In general,
new semiconductor products are shipped in limited quantities initially and
will
then ramp into high volumes over time. Prices and manufacturing costs tend
to
decline over time.
We
strive
to keep improving performance. One way will be by changing how we develop
advanced digital manufacturing process technology. Instead of separately
creating our own process technology, we will work collaboratively with our
foundry suppliers to specify and drive the next generations of digital process
technology, and we will continue making products on these processes in our
world-class factories. We expect that our 32-nanometer manufacturing process
will be the first process technology developed entirely through this new
collaboration. This is a natural extension of our existing relationships with
foundries that will increase our R&D efficiency and our capital efficiency
while maintaining our responsiveness to customers. Additionally, we will stop
production at an older digital factory and move its manufacturing equipment
into
several of our analog factories to support greater analog output.
These
changes will be made throughout 2007 and, when complete, are expected to reduce
costs by about $200 million annually. As a result of these actions, about 500
jobs are expected to be reduced by year end. In total, we expect to incur
restructuring charges of approximately $55 million. For the first quarter of
2007, these restructuring charges were $14 million.
Our
Education Technology segment is a leading supplier of graphing handheld
calculators. It also provides our customers with business and scientific
calculators and a wide range of advanced classroom tools and professional
development that enables students and teachers to explore math and science
interactively. Our products are marketed primarily through retailers and to
schools through instructional dealers. This business segment represented 4
percent of our revenue in 2006. Prices of Education Technology products tend
to
be stable.
We
operate in a number of tax jurisdictions and are subject to several types of
taxes including taxes 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 these jurisdictions and their taxing authorities.
As a
result, during any particular reporting period, we might reflect (in either
income before income taxes, the provision for income taxes, or both) one or
more
tax refunds or assessments, or changes to tax liabilities, involving one or
more
taxing authorities (see Note 1 to the Financial Statements for a discussion
of
the effects of adopting Financial Accounting Standards Board (FASB)
Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109”).
Discontinued
Operations
In
January 2006, we entered into a definitive agreement to sell substantially
all
of the former Sensors & Controls segment to an affiliate of Bain Capital,
LLC for $3 billion in cash (see Note 2 to the Financial Statements for
additional information). The sale was completed on April 27, 2006. The former
Sensors & Controls business acquired by Bain Capital, LLC was renamed
Sensata Technologies, Inc. (Sensata).
First-Quarter
2007 Results
Our
revenue was $3.19 billion in the first quarter of 2007. Revenue declined 8
percent compared with the prior quarter and 4 percent compared with the year-ago
quarter. Revenue was impacted by customer reductions of inventory levels in
the
semiconductor market, which resulted in lower demand for our products.
Earnings
per share (EPS) from continuing operations were $0.35, a decline of $0.10 from
the prior quarter. The fourth quarter of 2006 included a benefit of $0.05 from
the reinstatement of the federal research tax credit and a benefit of $0.01
from
catch-up payments associated with new patent license agreements.
We
believe the inventory correction that began in the second half of last year
largely ended in the first quarter. Orders are beginning to rebound, and we
expect sequential growth to resume in the second quarter.
Our
performance in the first quarter was confirmation of fundamental and sustainable
long-term changes we have made in the company. Even with an 8 percent decline
in
sequential revenue, gross margin remained above 50 percent and operating margin
remained above 20 percent. We performed considerably better than in prior
cyclical troughs because of a more resilient manufacturing strategy and a
stronger portfolio of analog products.
Analog
will continue to play an increasing role for us. Even though we are the world’s
leading supplier, our share is low in this large but fragmented market. The
opportunity for share gains combined with the attractive financial
characteristics of the analog market is appealing. This represents a unique
opportunity, especially alongside our strong position in DSP, which provides
early entry into important new markets. We continue to keep customers at the
core of our strategy, recognizing that we are successful only to the extent
we
help make them successful.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Statements
of Income - Selected Items
(In
millions, except per-share amounts)
|
|
For
Three Months Ended
|
|
|
|
Mar.
31,
2007
|
|
Dec.
31,
2006
|
|
Mar.
31,
2006
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
3,191
|
|
$
|
3,463
|
|
$
|
3,334
|
|
Cost
of revenue (COR)
|
|
|
1,554
|
|
|
1,715
|
|
|
1,662
|
|
Gross
profit
|
|
|
1,637
|
|
|
1,748
|
|
|
1,672
|
|
Research
and development (R&D)
|
|
|
552
|
|
|
556
|
|
|
533
|
|
Selling,
general and administrative (SG&A)
|
|
|
405
|
|
|
425
|
|
|
421
|
|
Total
operating costs and expenses
|
|
|
2,511
|
|
|
2,696
|
|
|
2,616
|
|
Profit
from operations
|
|
|
680
|
|
|
767
|
|
|
718
|
|
Other
income (expense) net
|
|
|
40
|
|
|
70
|
|
|
52
|
|
Interest
expense on loans
|
|
|
1
|
|
|
1
|
|
|
3
|
|
Income
from
continuing operations before income taxes
|
|
|
719
|
|
|
836
|
|
|
767
|
|
Provision
for income taxes
|
|
|
203
|
|
|
165
|
|
|
225
|
|
Income
from
continuing operations
|
|
|
516
|
|
|
671
|
|
|
542
|
|
Income
(loss)
from discontinued operations, net of income taxes
|
|
|
--
|
|
|
(3
|
)
|
|
43
|
|
Net
income
|
|
$
|
516
|
|
$
|
668
|
|
$
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.36
|
|
$
|
.46
|
|
$
|
.34
|
|
Net
income
|
|
$
|
.36
|
|
$
|
.45
|
|
$
|
.37
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.35
|
|
$
|
.45
|
|
$
|
.33
|
|
Net
income
|
|
$
|
.35
|
|
$
|
.45
|
|
$
|
.36
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,442
|
|
|
1,469
|
|
|
1,585
|
|
Diluted
|
|
|
1,470
|
|
|
1,499
|
|
|
1,618
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share of common stock
|
|
$
|
.04
|
|
$
|
.04
|
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
51.3
|
%
|
|
50.5
|
%
|
|
50.1
|
%
|
R&D
|
|
|
17.3
|
%
|
|
16.0
|
%
|
|
16.0
|
%
|
SG&A
|
|
|
12.7
|
%
|
|
12.3
|
%
|
|
12.6
|
%
|
Operating
profit
|
|
|
21.3
|
%
|
|
22.1
|
%
|
|
21.5
|
%
|
Details
of Financial Results
Gross
profit for the first quarter of 2007 was $1.64 billion. This was down $111
million from the prior quarter and down $35 million from the year-ago quarter
due to lower revenue.
R&D
expense for the first quarter was $552 million. This was about even with the
prior quarter, as cost-saving actions offset seasonally higher pay and benefits.
R&D expense increased $19 million, or 4 percent, from the year-ago quarter
due to higher product development costs in our Semiconductor segment,
particularly for wireless applications.
SG&A
expense for the first quarter was $405 million. This was a decrease of $20
million, or 5 percent, from the prior quarter due to lower marketing expense,
including seasonally lower advertising for products for the DLP®
high-definition television market. SG&A expense declined $16 million, or 4
percent, from the year-ago quarter due to cost-saving actions.
Operating
profit for the first quarter was $680 million. This was a decrease of $87
million from the prior quarter and $38 million from the year-ago quarter
primarily due to lower gross profit in our Semiconductor segment (see Notes
4
and 7 to the Financial Statements for additional information relating to
Corporate items).
Other
income (expense) net (OI&E) for the first quarter was $40 million. This was
a decrease of $30 million from the prior quarter, which included a favorable
settlement of all remaining matters related to grants from the Italian
government regarding our former memory operations.
As
of
March 31, 2007, the effective annual tax rate for continuing operations in
2007
is expected to be about 28 percent (see Note 8 to the Financial Statements
for
additional information).
Quarterly
income taxes are calculated using an estimate of the effective tax rate for
the
full year.
The
tax
provision for continuing operations for the quarter was $203 million, compared
with $165 million in the previous quarter. The increase in the tax provision
for
the quarter is due to a cumulative adjustment in the previous quarter for the
reinstatement of the federal research tax credit and, to a lesser extent, the
expiration of the deduction for export sales, which were partially offset by
a
decrease in income before income taxes.
Compared
with the year-ago quarter, the tax provision decreased by $22 million, due
to
lower income before income taxes and, to a lesser extent, the effect of the
federal research tax credit. These were partially offset by the expiration
of
the deduction for export sales.
Income
from continuing operations for the first quarter was $516 million, or $0.35
per
share, compared with $671 million, or $0.45 per share, for the prior quarter
and
$542 million, or $0.33 per share, for the year-ago quarter. Although income
from
continuing operations declined 5 percent from a year ago, on a per-share basis
these earnings increased 6 percent reflecting the impact of our share
repurchases over the past year.
Orders
for the first quarter were $3.20 billion. This was an increase of $128 million
from the prior quarter due to higher demand for products in Semiconductor and,
to a lesser extent, Education Technology. Orders declined $399 million from
the
year-ago quarter due to lower demand in both segments.
Semiconductor
Semiconductor
revenue in the first quarter of 2007 was $3.12 billion. This was a decrease
of 8
percent from the prior quarter due to lower shipments resulting from a
broad-based decline in demand in the semiconductor market. Compared with a
year
ago, revenue decreased 4 percent primarily due to lower shipments resulting
from
lower demand for DSP products that more than offset increased shipments
resulting from higher demand for analog products.
Analog
product revenue for the first quarter was $1.25 billion, down 5 percent from
the
prior quarter due to the broad-based decline in demand. Compared with the
year-ago quarter, analog revenue increased 2 percent as a decline in demand
for
analog products for wireless applications was more than offset by an increase
in
demand for a broad range of other analog products, especially high-performance
analog. Revenue from high-performance analog products declined 5 percent from
the prior quarter and increased 8 percent from a year ago.
DSP
product revenue for the first quarter of $1.16 billion was down 5 percent from
the prior quarter and down 10 percent from a year ago due to the broad-based
decline in demand.
Our
remaining Semiconductor product revenue of $713 million for the first quarter
was 17 percent lower than the prior quarter due to declines in, in decreasing
order, DLP products, royalties, microprocessors and standard logic. These
declines offset increases in shipments due to growth in demand for
microcontrollers. Royalties declined because new patent license agreements
that
were signed in the prior quarter included non-recurring catch-up payments.
From
a year ago, our remaining Semiconductor revenue decreased 5 percent in the
first quarter as declines in shipments resulting from reduced demand for, in
decreasing order, microprocessors, DLP products and standard logic more than
offset growth in royalties and higher shipments from increased demand in
microcontrollers.
On
an
end-equipment basis, revenue from analog and DSP products for wireless
applications declined 7 percent sequentially and was down 9 percent from a
year
ago as customers reduced their inventories. Revenue from products for 3G cell
phones grew sequentially as we believe the excess inventory in this portion
of
the market was mostly cleared in the second half of last year. Revenue from
products for mid-range and low-end cell phones declined as inventory was reduced
in the market. Compared with a year ago, revenue from products for 3G cell
phones was about even, while mid-range and low-end product revenue also declined
due to the reduction of inventory in the market. Revenue from products for
wireless infrastructure applications declined sequentially on lower shipments,
although it was up strongly from a year ago due to higher shipments resulting
from increased demand.
In
DLP
products, first-quarter revenue declined 30 percent sequentially and 15 percent
from a year ago, primarily due to decreased shipments resulting from lower
demand for products for front projectors as customers reduced their inventories.
Gross
profit for the first quarter was $1.63 billion, or 52.3 percent of revenue.
This
was a decrease of $103 million from the prior quarter and a decrease of $30
million from the year-ago quarter due to lower revenue.
Operating
profit for the first quarter was $831 million, or 26.7 percent of revenue.
This
was a decline of $77 million from the prior quarter and a decline of $52 million
from the year-ago quarter primarily due to lower gross profit.
Semiconductor
orders in the first quarter were $3.08 billion. This was an increase of 3
percent from the prior quarter due to higher demand for DSP products and a
decrease of 10 percent from the year-ago quarter due to broadly lower
demand.
Education
Technology
Education
Technology revenue for the first quarter of 2007 was $76 million. This was
a
decrease of $2 million from the prior quarter and an increase of $2 million
from
the year-ago quarter.
Gross
profit for the first quarter was $45 million, or 59.0 percent of revenue. Gross
profit was even with the prior quarter and increased $4 million from the
year-ago quarter due to a combination of higher revenue and, to a lesser
extent, product cost reductions.
Operating
profit for the first quarter was $16 million, or 20.6 percent of revenue. This
was a decrease of $3 million compared with the prior quarter due to higher
SG&A expense. It was an increase of $3 million from the year-ago quarter due
to higher gross profit.
Financial
Condition
At
the
end of the first quarter of 2007, total cash (cash and cash equivalents plus
short-term investments) was $3.34 billion. This was a decrease of $381 million
from the end of the prior quarter.
Accounts
receivable were $1.76 billion at the end of the first quarter. This was about
even with the end of 2006. Days sales outstanding were 50 at the end of the
first quarter compared with 46 at the end of 2006.
Inventory
was $1.41 billion at the end of the first quarter. This was a decrease of $28
million from the end of 2006 as we reduced inventory, especially of DSP products
used in wireless applications, in response to lower demand. This was partially
offset by planned replenishment of long-lived, high-performance analog product
inventory. Days of inventory at the end of the first quarter were 82 compared
with 75 at the end of 2006 as inventory decreased at a slower rate than cost
of
revenue. Additionally, compared with a year ago, inventory increased $163
million primarily due to replenishment of high-performance analog product
inventory from less-than-desirable levels. Days of inventory were 67 at the
end
of the year-ago quarter.
Capital
expenditures in the first three months of 2007 were $179 million. This was
a
decrease of $229 million from a year ago due to lower expenditures for
semiconductor manufacturing equipment. Our capital expenditures in the first
three months of 2007 were primarily for equipment used in the assembly and
test
of semiconductors, and wafer fabrication equipment used to manufacture analog
semiconductors.
Depreciation
in the first three months of 2007 was $252 million. This was a decrease of
$18
million from a year ago.
Even
with
declining revenue in the first three months of 2007, depreciation was only
8
percent of revenue and capital expenditures were 6 percent of revenue,
reflecting the increasing focus of our capital expenditures on analog products
and our strategy of outsourcing much of our advanced digital
production.
Liquidity
and Capital Resources
Cash
flow
from operations for the first quarter of 2007 was $554 million. This was an
increase of $32 million from the year-ago quarter, as the decline in net income
was more than offset by a reduction in cash needed for working capital
requirements.
Net
cash
used in investing activities for the first quarter of 2007 was $44 million
compared with net cash provided by investing activities of $609 million for
the
same period a year ago. We received cash of $165 million in the first quarter
of
2007 from the sale of cash investments, net of purchases, and used $179 million
for capital expenditures and $27 million in an asset acquisition. In the
year-ago quarter, we received cash of $1.19 billion from the sale of cash
investments, net of purchases, and used $408 million for capital expenditures
and $177 million, net of cash, to acquire Chipcon.
In
the
first quarter of 2007, net cash used in financing activities was $727 million
compared with $1.65 billion for the same period a year ago. In the first
quarter, we used $857 million of cash to repurchase 28 million shares of common
stock compared with $1.44 billion used in the year-ago quarter to repurchase
47
million shares of common stock. In addition, in the first quarter of last year,
we used $311 million to retire debt.
At
March
31, 2007, we had $43 million of 8.75% notes due 2007 outstanding. On April
2,
2007, we repaid the outstanding balance on this debt.
On
April
18, 2007, the Board of Directors declared a 100 percent increase in our regular
quarterly cash dividend on common stock, payable May 21, 2007, to stockholders
of record on April 30, 2007. The new quarterly dividend rate will be $0.08
per
quarter, resulting in annual dividend payments of $0.32 per share.
In
2007,
we expect: an annual effective tax rate of about 28 percent; capital
expenditures of about $0.9 billion and depreciation of about $1.0 billion;
and
R&D expense of about $2.2 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.
Long-term
Contractual Obligations
As
a
result of the adoption of FIN 48, we have recorded a $158 million liability
for
uncertain tax positions. We are not updating the disclosures in our long-term
contractual obligations table presented in our 2006 Form 10-K because of the
difficulty in making reasonably reliable estimates of the timing of cash
settlements with the respective taxing authorities (see Note 1 to the Financial
Statements for additional discussion).
ITEM
3. Quantitative and Qualitative Disclosures About Market Risk.
Information
concerning market risk is contained on page 55 of Exhibit 13 to our Form 10-K
for the year ended December 31, 2006, 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
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
Period
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price Paid
per
Share
|
|
Total Number
of
Shares
Purchased
as
Part
of
Publicly
Announced
Plans
or
Programs
|
|
Approximate
Dollar Value of Shares that
May
Yet Be
Purchased
Under
the
Plans
or
Programs(1)
|
|
January
1 through January 31, 2007
|
|
|
12,728,500
|
|
$
|
29.24
|
|
|
12,728,500
|
|
$
|
5,122,449,933
|
|
February
1 through February 28, 2007
|
|
|
6,675,000
|
|
$
|
31.18
|
|
|
6,675,000
|
|
$
|
4,914,314,056
|
|
March
1 through March 31, 2007
|
|
|
7,760,000
|
|
$
|
31.33
|
|
|
7,760,000
|
|
$
|
4,671,226,381
|
|
Total
|
|
|
27,163,500
|
|
$
|
30.31
|
|
|
27,163,500
|
|
$
|
4,671,226,381
|
|
(1) |
All
purchases during the quarter were made under one of the following
two
authorizations from our Board of Directors: (a) authorization to
purchase
up to $5 billion of additional shares of TI common stock (announced
on January 23, 2006) and (b) authorization to purchase up to $5 billion
of
additional shares of TI common stock (announced on September 21,
2006). No expiration date has been specified for these
authorizations.
|
(2) |
All
purchases were made through open-market purchases except for 130,000
shares that were acquired during the quarter 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
that
are denominated in TI stock.
|
(3) |
Includes
the purchase of 1,050,000 shares for which trades were settled in
the
first three business days of April 2007 for $32 million. The table
does
not include the purchase of 2,250,000 shares pursuant to orders placed
in
the fourth quarter of 2006, for which trades were settled in the
first
three business days of the first quarter for $65 million. The purchase
of
these shares was reflected in this item in our report on Form 10-K
for the
year ended December 31, 2006.
|
ITEM
6. Exhibits.
|
|
Designation
of Exhibits in This Report
|
Description
of Exhibit
|
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 for analog chips and digital
signal processors 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;
|
· |
TI’s
ability to compete in products and prices in an intensely competitive
industry;
|
· |
TI’s
ability to maintain and enforce a strong intellectual property portfolio
and obtain needed licenses from third parties;
|
· |
Expiration
of license agreements between TI and its patent licensees, and market
conditions reducing royalty payments to TI;
|
· |
Economic,
social and political conditions in the countries in which TI, its
customers or its suppliers operate, including security risks, health
conditions, possible disruptions in transportation networks and
fluctuations in foreign currency exchange rates;
|
· |
Natural
events such as severe weather and earthquakes in the locations in
which
TI, its customers or its suppliers operate;
|
· |
Availability
and cost of raw materials, utilities, manufacturing equipment, third-party
manufacturing services and manufacturing technology;
|
· |
Changes
in the tax rate applicable to TI as the result of changes in tax
law, the
jurisdictions in which profits are determined to be earned and taxed,
the
outcome of tax audits and the ability to realize deferred tax assets;
|
· |
Losses
or curtailments of purchases from key customers and the timing and
amount
of distributor and other customer inventory adjustments;
|
· |
Customer
demand that differs from our forecasts;
|
· |
The
financial impact of inadequate or excess TI inventories to meet demand
that differs from projections;
|
· |
Product
liability or warranty claims, or recalls by TI customers for a product
containing a TI part;
|
· |
TI’s
ability to recruit and retain skilled personnel; and
|
· |
Timely
implementation of new manufacturing technologies, installation of
manufacturing equipment and the ability to obtain needed third-party
foundry and assembly/test subcontract
services.
|
For
a
more detailed discussion of these factors, see the Risk Factors discussion
in
Item 1A of our most recent Form 10-K. The forward-looking statements included
in
this quarterly report on Form 10-Q are made only as of the date of this report,
and we undertake no obligation to update the forward-looking statements to
reflect subsequent events or circumstances.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TEXAS
INSTRUMENTS INCORPORATED |
|
BY:
/s/ Kevin P.
March
|
Kevin
P. March
|
Senior
Vice President and
|
Chief
Financial Officer
|
Date:
May
3, 2007