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 September 30, 2008
o 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 o
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 o
|
Non-accelerated
filer o
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No S
1,296,424,945
Number of
shares of Registrant’s common stock outstanding as of
September
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 Sept. 30,
|
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
3,387 |
|
|
$ |
3,663 |
|
|
$ |
10,010 |
|
|
$ |
10,279 |
|
Cost
of revenue
(COR)
|
|
|
1,744 |
|
|
|
1,679 |
|
|
|
4,862 |
|
|
|
4,873 |
|
Gross
profit
|
|
|
1,643 |
|
|
|
1,984 |
|
|
|
5,148 |
|
|
|
5,406 |
|
Research
and development (R&D)
|
|
|
507 |
|
|
|
542 |
|
|
|
1,509 |
|
|
|
1,646 |
|
Selling,
general and administrative (SG&A)
|
|
|
390 |
|
|
|
429 |
|
|
|
1,252 |
|
|
|
1,259 |
|
Operating
profit
|
|
|
746 |
|
|
|
1,013 |
|
|
|
2,387 |
|
|
|
2,501 |
|
Other
income (expense)
net
|
|
|
10 |
|
|
|
53 |
|
|
|
58 |
|
|
|
149 |
|
Income
from continuing operations before income taxes
|
|
|
756 |
|
|
|
1,066 |
|
|
|
2,445 |
|
|
|
2,650 |
|
Provision
for income
taxes
|
|
|
193 |
|
|
|
308 |
|
|
|
632 |
|
|
|
762 |
|
Income
from continuing
operations
|
|
|
563 |
|
|
|
758 |
|
|
|
1,813 |
|
|
|
1,888 |
|
Income
from discontinued operations, net of taxes
|
|
|
-- |
|
|
|
18 |
|
|
|
-- |
|
|
|
14 |
|
Net
income
|
|
$ |
563 |
|
|
$ |
776 |
|
|
$ |
1,813 |
|
|
$ |
1,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
.43 |
|
|
$ |
.54 |
|
|
$ |
1.38 |
|
|
$ |
1.32 |
|
Net
income
|
|
$ |
.43 |
|
|
$ |
.55 |
|
|
$ |
1.38 |
|
|
$ |
1.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
.43 |
|
|
$ |
.52 |
|
|
$ |
1.36 |
|
|
$ |
1.29 |
|
Net
income
|
|
$ |
.43 |
|
|
$ |
.54 |
|
|
$ |
1.36 |
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,304 |
|
|
|
1,417 |
|
|
|
1,317 |
|
|
|
1,432 |
|
Diluted
|
|
|
1,318 |
|
|
|
1,448 |
|
|
|
1,335 |
|
|
|
1,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share of common stock
|
|
$ |
.10 |
|
|
$ |
.08 |
|
|
$ |
.30 |
|
|
$ |
.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income
(Millions
of dollars)
|
|
For
Three Months Ended Sept. 30,
|
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
563 |
|
|
$ |
758 |
|
|
$ |
1,813 |
|
|
$ |
1,888 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment,
net of
taxes
|
|
|
(19 |
) |
|
|
2 |
|
|
|
(28 |
) |
|
|
2 |
|
Reclassification
of recognized transactions, net of taxes
|
|
|
-- |
|
|
|
-- |
|
|
|
(3 |
) |
|
|
(1 |
) |
Unrecognized
net actuarial loss of defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment,
net of
taxes
|
|
|
2 |
|
|
|
(10 |
) |
|
|
(8 |
) |
|
|
58 |
|
Reclassification
of recognized transactions, net of taxes
|
|
|
5 |
|
|
|
5 |
|
|
|
17 |
|
|
|
18 |
|
Unrecognized
prior service cost of defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment,
net of
taxes
|
|
|
1 |
|
|
|
3 |
|
|
|
4 |
|
|
|
2 |
|
Total
|
|
|
(11 |
) |
|
|
-- |
|
|
|
(18 |
) |
|
|
79 |
|
Total
from continuing
operations
|
|
|
552 |
|
|
|
758 |
|
|
|
1,795 |
|
|
|
1,967 |
|
Income
from discontinued operations, net of taxes
|
|
|
-- |
|
|
|
18 |
|
|
|
-- |
|
|
|
14 |
|
Total
comprehensive
income
|
|
$ |
552 |
|
|
$ |
776 |
|
|
$ |
1,795 |
|
|
$ |
1,981 |
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Balance Sheets
(Millions of
dollars, except share amounts)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,715 |
|
|
$ |
1,328 |
|
Short-term
investments
|
|
|
278 |
|
|
|
1,596 |
|
Accounts
receivable, net of allowances of ($28) and
($26)
|
|
|
1,774 |
|
|
|
1,742 |
|
Raw
materials
|
|
|
103 |
|
|
|
105 |
|
Work
in process
|
|
|
982 |
|
|
|
876 |
|
Finished
goods
|
|
|
490 |
|
|
|
437 |
|
Inventories
|
|
|
1,575 |
|
|
|
1,418 |
|
Deferred
income taxes
|
|
|
679 |
|
|
|
654 |
|
Prepaid
expenses and other current assets
|
|
|
191 |
|
|
|
180 |
|
Total
current assets
|
|
|
6,212 |
|
|
|
6,918 |
|
Property,
plant and equipment at cost
|
|
|
7,499 |
|
|
|
7,568 |
|
Less
accumulated depreciation
|
|
|
(3,982 |
) |
|
|
(3,959 |
) |
Property,
plant and equipment, net
|
|
|
3,517 |
|
|
|
3,609 |
|
Long-term investments
|
|
|
717 |
|
|
|
267 |
|
Goodwill
|
|
|
840 |
|
|
|
838 |
|
Acquisition-related
intangibles
|
|
|
99 |
|
|
|
115 |
|
Deferred
income taxes
|
|
|
688 |
|
|
|
510 |
|
Capitalized
software licenses, net
|
|
|
202 |
|
|
|
227 |
|
Overfunded
retirement plans
|
|
|
137 |
|
|
|
105 |
|
Other
assets
|
|
|
54 |
|
|
|
78 |
|
Total
assets
|
|
$ |
12,466 |
|
|
$ |
12,667 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
601 |
|
|
$ |
657 |
|
Accrued
expenses and other liabilities
|
|
|
976 |
|
|
|
1,117 |
|
Income
taxes payable
|
|
|
35 |
|
|
|
53 |
|
Accrued
profit sharing and retirement
|
|
|
126 |
|
|
|
198 |
|
Total
current liabilities
|
|
|
1,738 |
|
|
|
2,025 |
|
Underfunded
retirement plans
|
|
|
186 |
|
|
|
184 |
|
Deferred
income taxes
|
|
|
52 |
|
|
|
49 |
|
Deferred
credits and other liabilities
|
|
|
396 |
|
|
|
434 |
|
Total
liabilities
|
|
|
2,372 |
|
|
|
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: September
30, 2008 – 1,739,717,573; December
31, 2007 – 1,739,632,601
|
|
|
1,740 |
|
|
|
1,740 |
|
Paid-in
capital
|
|
|
973 |
|
|
|
931 |
|
Retained
earnings
|
|
|
21,204 |
|
|
|
19,788 |
|
Less
treasury common stock at cost:
Shares: September
30, 2008 – 443,292,628; December 31, 2007 – 396,421,798
|
|
|
(13,481 |
) |
|
|
(12,160 |
) |
Accumulated
other comprehensive income (loss),
net of taxes
|
|
|
(342 |
) |
|
|
(324 |
) |
Total
stockholders’ equity
|
|
|
10,094 |
|
|
|
9,975 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
12,466 |
|
|
$ |
12,667 |
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Millions of
dollars)
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,813 |
|
|
$ |
1,902 |
|
Adjustments
to net income:
|
|
|
|
|
|
|
|
|
Income
from discontinued
operations
|
|
|
-- |
|
|
|
(14 |
) |
Depreciation
|
|
|
738 |
|
|
|
770 |
|
Stock-based
compensation
|
|
|
162 |
|
|
|
212 |
|
Amortization
of acquisition-related
intangibles
|
|
|
28 |
|
|
|
38 |
|
Loss
(gain) on sale of
assets
|
|
|
6 |
|
|
|
(39 |
) |
Deferred
income
taxes
|
|
|
(159 |
) |
|
|
30 |
|
Increase
(decrease) from changes in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(24 |
) |
|
|
(244 |
) |
Inventories
|
|
|
(157 |
) |
|
|
(21 |
) |
Prepaid
expenses and other current
assets
|
|
|
(25 |
) |
|
|
(13 |
) |
Accounts
payable and accrued
expenses
|
|
|
(171 |
) |
|
|
97 |
|
Income
taxes
payable
|
|
|
25 |
|
|
|
351 |
|
Accrued
profit sharing and
retirement
|
|
|
(74 |
) |
|
|
(19 |
) |
Other
|
|
|
50 |
|
|
|
(67 |
) |
Net
cash provided by operating activities of continuing
operations
|
|
|
2,212 |
|
|
|
2,983 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and
equipment
|
|
|
(686 |
) |
|
|
(505 |
) |
Proceeds
from sales of
assets
|
|
|
-- |
|
|
|
61 |
|
Purchases
of short-term
investments
|
|
|
(362 |
) |
|
|
(4,241 |
) |
Sales
and maturities of short-term
investments
|
|
|
1,118 |
|
|
|
3,914 |
|
Purchases
of long-term
investments
|
|
|
(8 |
) |
|
|
(26 |
) |
Sales
of long-term
investments
|
|
|
48 |
|
|
|
9 |
|
Acquisitions,
net of cash
acquired
|
|
|
(19 |
) |
|
|
(31 |
) |
Net
cash provided by (used in) investing activities of continuing
operations
|
|
|
91 |
|
|
|
(819 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Payments
on long-term
debt
|
|
|
-- |
|
|
|
(43 |
) |
Dividends
paid
|
|
|
(396 |
) |
|
|
(287 |
) |
Sales
and other common stock
transactions
|
|
|
195 |
|
|
|
694 |
|
Excess
tax benefit from share-based
payments
|
|
|
17 |
|
|
|
106 |
|
Stock
repurchases
|
|
|
(1,736 |
) |
|
|
(3,008 |
) |
Net
cash used in financing activities of continuing operations
|
|
|
(1,920 |
) |
|
|
(2,538 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on
cash
|
|
|
4 |
|
|
|
(2 |
) |
Net
increase (decrease) in cash and cash
equivalents
|
|
|
387 |
|
|
|
(376 |
) |
Cash
and cash equivalents, beginning of
period
|
|
|
1,328 |
|
|
|
1,183 |
|
Cash
and cash equivalents, end of
period
|
|
$ |
1,715 |
|
|
$ |
807 |
|
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 and third quarters of 2007, we
also made acquisitions, including an asset acquisition, that were integrated
into the Semiconductor segment.
Disposition – In the third
quarter of 2007, we completed the sale of our broadband digital subscriber line
(DSL) customer-premises equipment semiconductor product line to Infineon
Technologies AG (Infineon) for $61 million and recognized in cost of revenue an
initial gain of $39 million. Based on the levels of revenue generated
by this product line for Infineon subsequent to the closing date, we may be
required to refund up to $16 million, which has been previously
accrued.
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, except for the adoption of Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” as
of January 1, 2008. The consolidated statements of income, statements
of comprehensive income and statements of cash flows for the periods ended
September 30, 2008 and 2007, and the balance sheet as of September 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
nine-month period are not necessarily indicative of a full year's
results.
As
disclosed in our 2007 annual report on Form 10-K, SFAS 158 “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106 and 132(R)” requires us to recognize the funded status
(i.e. the difference between the fair value of plan assets and the projected
benefit obligations) of our defined benefit pension and other postretirement
benefit plans on our balance sheets. The funded status is required to
be measured annually on December 31 in accordance with SFAS 158, and as a
result, the funded status of our plans as of September 30, 2008, does not
reflect changes that have occurred during 2008 in certain actuarial assumptions,
such as the assumed discount rates used for measuring our pension
obligations, nor does it reflect changes in the fair value of plan assets since
December 31, 2007. While we expect that changes in general market
conditions, such as the recent decline experienced in global equity markets,
will adversely affect the funded status of our various plans at the December 31
measurement date, we do not anticipate these changes will significantly
impact our liquidity or our overall financial condition. Please refer to
Note 10 in our 2007 annual report on Form 10-K for a full description of our
postretirement benefit plans.
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 SFAS 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 to our financial position or results of operations.
In March
2008, the FASB issued SFAS 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.
On
October 10, 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies how
companies should apply the fair value measurement methodologies of SFAS 157
to financial assets when markets they are traded in are illiquid or inactive.
Under the provisions of this FSP, companies may use their own assumptions about
future cash flows and appropriately risk-adjusted discount rates when relevant
observable inputs are either not available or are based solely on transaction
prices that reflect forced liquidations or distressed sales. This FSP is
effective as of September 30, 2008. There was no impact to our
financial position or results of operations from the adoption of this
FSP.
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
|
|
$ |
563 |
|
|
|
1,304 |
|
|
$ |
.43 |
|
|
$ |
758 |
|
|
|
1,417 |
|
|
$ |
.54 |
|
Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
plans
|
|
|
-- |
|
|
|
14 |
|
|
|
|
|
|
|
-- |
|
|
|
31 |
|
|
|
|
|
Diluted
EPS
|
|
$ |
563 |
|
|
|
1,318 |
|
|
$ |
.43 |
|
|
$ |
758 |
|
|
|
1,448 |
|
|
$ |
.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
Nine Months Ended
|
|
|
For
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$ |
1,813 |
|
|
|
1,317 |
|
|
$ |
1.38 |
|
|
$ |
1,888 |
|
|
|
1,432 |
|
|
$ |
1.32 |
|
Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
plans
|
|
|
-- |
|
|
|
18 |
|
|
|
|
|
|
|
-- |
|
|
|
30 |
|
|
|
|
|
Diluted
EPS
|
|
$ |
1,813 |
|
|
|
1,335 |
|
|
$ |
1.36 |
|
|
$ |
1,888 |
|
|
|
1,462 |
|
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Sept. 30,
|
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COR
|
|
$ |
10 |
|
|
$ |
12 |
|
|
$ |
32 |
|
|
$ |
40 |
|
R&D
|
|
|
15 |
|
|
|
20 |
|
|
|
47 |
|
|
|
63 |
|
SG&A
|
|
|
28 |
|
|
|
34 |
|
|
|
83 |
|
|
|
109 |
|
Total
|
|
$ |
53 |
|
|
$ |
66 |
|
|
$ |
162 |
|
|
$ |
212 |
|
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 September 30, 2008, we
held $511 million ($542 million par value) of auction-rate securities,
which are debt instruments with variable interest rates that historically
would periodically reset through an auction process. The $31
million difference between fair value and par value is considered
temporary and is recorded as an unrealized loss, net of taxes, in
accumulated other comprehensive income (AOCI) on our balance
sheets.
|
Since
mid-February 2008, conditions in global credit markets have resulted in the
failure of auctions for most auction-rate securities, including those we hold,
because the amount of securities submitted for sale in those auctions exceeded
the amount of bids. A failed auction does not represent a default by the
issuer of the underlying security. When auctions are not successful,
the interest rate moves to a maximum rate defined for each security, and is
generally reset periodically at a level higher than defined short-term interest
benchmarks. To date, we have collected all interest 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 resume, a buyer is found outside of the
auction process, or issuers use a different form of financing to replace these
securities. In the meantime, issuers continue to repay principal over
time from cash flows prior to final maturity, or make final payments when they
come due according to contractual maturities ranging from 14 to 39
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 our 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.
During
the quarter and since the failure of the auctions in February 2008, $26 million
and $29 million of our auction-rate securities were redeemed by the issuers at
par. Of the $29 million of redemptions, $15 million involved
securities classified as Level 2 for purposes of determining fair value (see
Note 5).
As of
September 30, 2008, $507 million par value of our auction-rate securities 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 September 30, 2008, these securities
were all rated AAA/Aaa by the major credit rating agencies. The
remaining $35 million par value of our auction-rate securities are covered by
bond insurance and were rated Aa3 by Moody’s as of September 30,
2008.
While our
ability to liquidate auction-rate investments is likely to be limited for some
period of time, we do not believe this 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 the
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 each quarter end for 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 September 30, 2008. The table does
not include cash on hand and also does not include assets and liabilities that
are measured at historical cost or any basis other than fair value.
|
|
Portion
of Carrying Value Measured
at
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept.
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
Items
measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
obligations
|
|
$ |
29 |
|
|
$ |
-- |
|
|
$ |
29 |
|
|
$ |
-- |
|
U.S. Government agency and
Treasury securities
|
|
|
897 |
|
|
|
897 |
|
|
|
-- |
|
|
|
-- |
|
Money market
funds
|
|
|
605 |
|
|
|
605 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities –
Government Sponsored Enterprise
(GSE)
guaranteed
|
|
|
134 |
|
|
|
-- |
|
|
|
134 |
|
|
|
-- |
|
Mortgage-backed securities –
senior bonds
|
|
|
136 |
|
|
|
-- |
|
|
|
136 |
|
|
|
-- |
|
Other
|
|
|
8 |
|
|
|
2 |
|
|
|
6 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction-rate
securities
|
|
|
511 |
|
|
|
-- |
|
|
|
-- |
|
|
|
511 |
|
Mutual
funds
|
|
|
122 |
|
|
|
122 |
|
|
|
-- |
|
|
|
-- |
|
Total
|
|
$ |
2,442 |
|
|
$ |
1,626 |
|
|
$ |
305 |
|
|
$ |
511 |
|
Deferred
compensation liabilities
|
|
$ |
168 |
|
|
$ |
168 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in fair value during the period (pre-tax):
|
|
|
|
|
|
|
|
Balance, December 31,
2007
|
|
$ |
-- |
|
Transfers into Level
3
|
|
|
556 |
|
Unrealized loss – included in
AOCI
|
|
|
(20 |
) |
Balance, March 31,
2008
|
|
$ |
536 |
|
Decrease in unrealized loss
from prior quarter – included in AOCI
|
|
|
14 |
|
Redemption at
par
|
|
|
(3 |
) |
Balance, June 30,
2008
|
|
$ |
547 |
|
Increase in unrealized loss
from prior quarter – included in AOCI
|
|
|
(25 |
) |
Redemption at
par
|
|
|
(11 |
) |
Balance, September 30,
2008
|
|
$ |
511 |
|
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 SG&A
expense.
6.
|
Post-employment
Benefit Plans. Components of net periodic employee
benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
three months ended Sept. 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
10 |
|
Interest
cost
|
|
|
12 |
|
|
|
11 |
|
|
|
7 |
|
|
|
6 |
|
|
|
15 |
|
|
|
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 |
|
|
|
4 |
|
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Net
periodic benefit cost
|
|
$ |
11 |
|
|
$ |
9 |
|
|
$ |
4 |
|
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
nine months ended Sept. 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
18 |
|
|
$ |
18 |
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
33 |
|
|
$ |
30 |
|
Interest
cost
|
|
|
37 |
|
|
|
32 |
|
|
|
20 |
|
|
|
19 |
|
|
|
46 |
|
|
|
38 |
|
Expected
return on plan assets
|
|
|
(34 |
) |
|
|
(35 |
) |
|
|
(20 |
) |
|
|
(20 |
) |
|
|
(63 |
) |
|
|
(54 |
) |
Amortization
of prior service cost
|
|
|
1 |
|
|
|
-- |
|
|
|
2 |
|
|
|
2 |
|
|
|
(3 |
) |
|
|
(2 |
) |
Recognized
net actuarial loss
|
|
|
12 |
|
|
|
16 |
|
|
|
6 |
|
|
|
5 |
|
|
|
4 |
|
|
|
7 |
|
Net
periodic benefit cost
|
|
$ |
34 |
|
|
$ |
31 |
|
|
$ |
11 |
|
|
$ |
9 |
|
|
$ |
17 |
|
|
$ |
19 |
|
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 September
30, 2008, the estimated annual effective tax rate for 2008 was about 30
percent, which differs from the 35 percent statutory corporate tax rate
due to the effects of non-U.S. tax rates. This estimated annual
effective tax rate is based on tax law in effect on that date, which does
not include reinstatement of the federal research tax
credit. On October 3, 2008, the President signed into law the
Emergency Economic Stabilization Act of 2008, which reinstated the federal
research tax credit and is effective retroactively to January 1,
2008. The effect of the reinstatement of this tax credit will be
recorded in the fourth quarter of 2008 and is estimated to reduce the
annual effective tax rate for 2008 to about 28
percent.
|
During
the third quarter of 2008, we recorded a discrete tax benefit of $34 million
primarily due to adjustments identified through the completion of tax returns
for prior years. 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
September 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 Sept. 30,
|
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$ |
3,205 |
|
|
$ |
3,461 |
|
|
$ |
9,571 |
|
|
$ |
9,833 |
|
Education
Technology
|
|
|
182 |
|
|
|
202 |
|
|
|
439 |
|
|
|
446 |
|
Total
revenue
|
|
$ |
3,387 |
|
|
$ |
3,663 |
|
|
$ |
10,010 |
|
|
$ |
10,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
Three Months Ended Sept. 30,
|
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Operating Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor*
|
|
$ |
766 |
|
|
$ |
1,031 |
|
|
$ |
2,579 |
|
|
$ |
2,766 |
|
Education
Technology
|
|
|
92 |
|
|
|
99 |
|
|
|
187 |
|
|
|
188 |
|
Corporate**
|
|
|
(112 |
) |
|
|
(117 |
) |
|
|
(379 |
) |
|
|
(453 |
) |
Operating
profit
|
|
$ |
746 |
|
|
$ |
1,013 |
|
|
$ |
2,387 |
|
|
$ |
2,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Semiconductor
results for the three and nine months ended September 30, 2008, include
charges of $44 million associated with impairments of long-lived assets
and site consolidations. These charges consist of $36 million for
impairments of long-lived assets, considered to be held for sale, to
reduce the carrying value of facilities and equipment in several locations
to their fair value less cost to sell. Additionally, voluntary
termination benefits of $8 million were recognized in association with
site consolidations. These costs are reflected in operating
profit as follows: $17 million in cost of revenue, $23 million in R&D
and $4 million in SG&A.
|
**
|
Corporate
includes restructuring charges of $15 million for the three months ended
September 30, 2007, and $46 million for the nine months ended September
30, 2007. These restructuring charges consist of severance and
benefit costs of $7 million ($27 million for the nine months) and
acceleration of depreciation of $8 million ($19 million for the nine
months). Of the total restructuring charges, $13 million ($32 million for
the nine months) is included in cost of revenue, $2 million ($13 million
for the nine months) is included in R&D, and $1 million for the nine
months is included in SG&A. Corporate also
includes a gain of $39 million for the three and nine months ended
September 30, 2007, from the sale of our semiconductor product line for
broadband DSL customer-premises equipment; this gain is included in cost
of revenue.
|
10.
|
Subsequent
Events. On October 16, 2008, we declared an $0.11
quarterly cash dividend on common stock, payable November 17, 2008, to
stockholders of record on October 31, 2008. This dividend rate
represents a ten percent increase from our prior rate and results in
annual dividend payments of $0.44 per
share.
|
On
October 20, 2008, we announced actions that when complete, are expected to
reduce expenses by more than $200 million annualized in our Wireless operations,
especially our cellular baseband operation. We are also actively
pursuing the sale of the merchant portion of the baseband operation, which
includes our standard Wireless baseband products, and are in discussions with
potential buyers. Reductions in cellular baseband operations will
begin immediately and are expected to be complete by June 2009. We
expect to take restructuring charges of approximately $110 million across the
next three quarters.
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.
With
our quarterly report on Form 10-Q for the quarter ended June 30, 2008, we began
describing Semiconductor revenue in four product categories: 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 Enhanced Financial Reporting Structure
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.
Although
we regularly introduce new products, they are typically shipped in limited
quantities initially and ramp into higher volume over
time. Consequently, new products tend not to have a significant
impact on Semiconductor revenue in the quarter in which they are
introduced. In the discussion below, changes in our Semiconductor
shipments are attributable to changing demand for our products, unless otherwise
noted.
Products
We have
three major semiconductor product categories: 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 categories.
Within
our semiconductor product categories, there are two general types of products,
custom and standard – terms that refer to how and to whom the products are
sold. A custom product is designed for a specific customer for a
specific application, is sold only to that customer and is typically
sold directly to the customer. A standard product is designed for use
by many customers and/or many applications and is generally sold through both
distribution and direct channels. 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
category 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. Wireless products are
typically sold in high volumes and our wireless portfolio includes both standard
(or merchant) products and custom products. Sales of wireless
products accounted for about 30 percent of our revenue in 2007.
As
wireless communications have proliferated, consumers are demanding capabilities
beyond voice. Smartphones (phones that contain email, media, games
and computing capability) represent one of the fastest growing wireless
markets. These phones tend to include many semiconductor
products. Major handset manufacturers are actively pursuing the
smartphone market and increasingly focusing their R&D on applications and
services. As a result, we believe customer demand for applications
processors will continue to increase as handset manufacturers seek to
differentiate their products by providing software and a unique user
experience. Our OMAPTM product
line has a leading position in the applications processor market and is used by
most of the top handset manufacturers.
Our
Wireless product category has been shifting focus from baseband chips, a market
with shrinking competitive barriers, to applications
processors. Consistent with this shift in focus, we are actively
pursuing the sale of our merchant baseband chipset product lines and will
concentrate our remaining investments on our application processors and
connectivity products. For additional detail, see the discussion
under the heading “Third-Quarter 2008 Results.”
In
addition to our three major semiconductor product categories, we offer the
following (referred to as 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. 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 allows 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.
Third-Quarter 2008
Results
Our
third-quarter revenue was $3.39 billion, net income was $563 million and
earnings per share were $0.43. Income included a $34 million discrete
tax benefit primarily due to adjustments identified through the completion of
tax returns for prior years. This benefit was largely offset by $44
million of pre-tax charges associated with impairments of long-lived assets and
with site consolidations, $17 million of which is in cost of revenue, $23
million in R&D and $4 million in selling, general & administrative
(SG&A).
We
entered the third quarter with a cautious view of the economy and its impact on
our markets. Revenue was weak, as expected, because consumers and
corporations reduced their spending in this uncertain economy. Even
so, the soundness of our strategic direction was underscored by results from our
core product categories. Revenue for our Analog product category was
steady and revenue for our Embedded Processing product category grew 9 percent
compared with a year ago. Although not immune to near-term economic
pressures, these are two of the best long-term opportunities in our
industry. We are a leader in each and expect to strengthen our
position even in this period of economic weakness.
Our
outlook for the fourth quarter is for revenue to decline substantially based on
weak order trends over the past few months, and our operating plan assumes a
further decline in the first quarter of 2009. In anticipation of
declining demand, we reduced our own inventory aggressively in the third
quarter, which brought factory utilization down and put additional pressure on
our profitability. We also worked closely with our distributors to
reduce their inventory. We will accelerate our inventory reduction in
the fourth quarter. We also will continue to reduce expenses and
capital spending. At the same time, we will continue to invest in
opportunities to strengthen our positions in Analog and Embedded
Processing.
Subsequent
to the end of the third quarter, we announced we are taking actions that, when
complete, are expected to reduce expenses more than $200 million
annualized in our Wireless operations, especially in our cellular baseband
operation. About 85 percent of these savings will be in R&D, 10
percent in cost of revenue and 5 percent in SG&A. We are also
actively pursuing the sale of the merchant portion of this operation and are in
discussions with potential buyers. Revenue from this merchant
operation is expected to be about $350-400 million in 2008. If a sale
of this product line cannot be arranged, we will take action to eliminate the
majority of the operating expenses required to support this product
line. Reductions in the remaining cellular baseband operations
will begin immediately and are expected to be complete by June
2009. We expect to take restructuring charges of approximately $110
million across the next three quarters.
We will
continue to support select programs in the custom portion of our baseband
operation, which is expected to have revenue of about $2.3 billion this
year. We expect revenue from our custom baseband operation to decline
over time as programs with Ericsson Mobile Platforms continue to wind down and
as our largest customer implements its multi-supplier strategy.
We will
focus our remaining Wireless investments in OMAP applications processors, which
are at the heart of many smartphone products.
The
market for smartphones is growing rapidly and our handset customers are
differentiating their product lines through applications and user
interfaces. We anticipated this opportunity and have been investing
in it for more than a decade. As a result, our OMAP applications
processors lead the market, and we will concentrate on extending this
lead.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Income
(Millions
of dollars, except share and per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
3,387 |
|
|
$ |
3,663 |
|
|
$ |
3,351 |
|
Cost
of revenue
|
|
|
1,744 |
|
|
|
1,679 |
|
|
|
1,602 |
|
Gross
profit
|
|
|
1,643 |
|
|
|
1,984 |
|
|
|
1,749 |
|
R&D
|
|
|
507 |
|
|
|
542 |
|
|
|
488 |
|
SG&A
|
|
|
390 |
|
|
|
429 |
|
|
|
428 |
|
Operating
profit
|
|
|
746 |
|
|
|
1,013 |
|
|
|
833 |
|
Other
income (expense) net
|
|
|
10 |
|
|
|
53 |
|
|
|
17 |
|
Income
from continuing operations before income taxes
|
|
|
756 |
|
|
|
1,066 |
|
|
|
850 |
|
Provision
for income taxes
|
|
|
193 |
|
|
|
308 |
|
|
|
262 |
|
Income
from continuing operations
|
|
|
563 |
|
|
|
758 |
|
|
|
588 |
|
Income
from discontinued operations, net of taxes
|
|
|
-- |
|
|
|
18 |
|
|
|
-- |
|
Net
income
|
|
$ |
563 |
|
|
$ |
776 |
|
|
$ |
588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
.43 |
|
|
$ |
.54 |
|
|
$ |
.45 |
|
Net
income
|
|
$ |
.43 |
|
|
$ |
.55 |
|
|
$ |
.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
.43 |
|
|
$ |
.52 |
|
|
$ |
.44 |
|
Net
income
|
|
$ |
.43 |
|
|
$ |
.54 |
|
|
$ |
.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,304 |
|
|
|
1,417 |
|
|
|
1,320 |
|
Diluted
|
|
|
1,318 |
|
|
|
1,448 |
|
|
|
1,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share of common stock
|
|
$ |
.10 |
|
|
$ |
.08 |
|
|
$ |
.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
48.5 |
% |
|
|
54.2 |
% |
|
|
52.2 |
% |
R&D
|
|
|
15.0 |
% |
|
|
14.8 |
% |
|
|
14.6 |
% |
SG&A
|
|
|
11.5 |
% |
|
|
11.7 |
% |
|
|
12.8 |
% |
Operating
profit
|
|
|
22.0 |
% |
|
|
27.6 |
% |
|
|
24.9 |
% |
Details of Financial
Results
Revenue
for the third quarter of 2008 was $3.39 billion, down $276 million, or 8
percent, from the year-ago quarter, due to lower revenue from the Semiconductor
segment as growth in revenue from Embedded Processing products was more than
offset by declines in revenue from Wireless and remaining semiconductor
products. Compared with the prior quarter, revenue increased $36
million, or 1 percent.
Gross
profit for the third quarter of 2008 was $1.64 billion, or 48.5 percent of
revenue, down 17 percent from $1.98 billion in the year-ago
quarter. The decline in gross profit from last year was due to a
combination of, in decreasing order, lower revenue, higher manufacturing
costs and the impact of lower factory utilization resulting from our
efforts to reduce inventory. Manufacturing costs were adversely
affected by the following items: transferring equipment from a
manufacturing facility we shuttered to other facilities around the world; higher
commodity prices (particularly for gold); rate-of-exchange impact on expenses
such as labor in regions where we compensate in currencies other than the U.S.
dollar; and, higher utility costs. Last year’s gross profit included
a $39 million gain on the sale of our broadband digital subscriber line (DSL)
customer-premises equipment product line.
Compared
with the prior quarter, gross profit was down 6 percent despite higher
revenue. The sequential decline in gross profit was primarily due to
the impact of lower factory utilization resulting from our efforts to reduce
inventory. As a consequence, the cost of underutilized capacity was
expensed in the current quarter. Gross profit was also
negatively affected by lower royalties and impairments of certain
long-lived assets.
Operating
expenses for the third quarter of 2008 were $507 million for R&D and $390
million for SG&A. R&D expense decreased $35 million, or 6
percent, from a year ago primarily due to lower Wireless R&D expense, and to
a lesser extent, the benefit from our collaborative work with foundries on
advanced logic manufacturing technologies. These reductions were
partially offset by impairments of long-lived assets in the third quarter of
2008. R&D expense increased $19 million from the prior quarter
primarily due to impairments of long-lived assets. SG&A expense
decreased $39 million from the year-ago quarter due to lower
compensation-related expenses. SG&A decreased $38 million
sequentially due to a combination of lower compensation-related expenses and, to
a lesser extent, various cost-cutting measures.
Operating
profit for the third quarter of 2008 was $746 million, or 22.0 percent of
revenue, compared with $1.01 billion, or 27.6 percent of revenue, in the
year-ago quarter and $833 million, or 24.9 percent of revenue, in the prior
quarter. The decreases were due to lower gross profit.
Other
income (expense) net (OI&E) for the third quarter of 2008 was $10 million, a
decrease of $43 million from the year-ago quarter primarily due to lower
interest income, and to a lesser extent, reduced interest related to tax
refunds. The decrease in interest income from a year ago was
primarily due to lower average invested cash balances, and to a lesser extent,
lower average interest rates. OI&E decreased $7 million from the
prior quarter due to lower interest income and lower earnings on
investments.
As of
September 30, 2008, the estimated annual effective tax rate for 2008 was about
30 percent (see Note 7 to the Financial Statements for additional
information). This tax rate was based on tax law in effect on that
date, which does not include reinstatement of the federal research tax
credit. On October 3, 2008, the President signed into law the Emergency
Economic Stabilization Act of 2008, which reinstated the federal research tax
credit and is effective retroactively to January 1, 2008. The effect
of the reinstatement of this tax credit will be recorded in the fourth quarter
of 2008 and is estimated to reduce the annual effective tax rate for 2008 to
about 28 percent.
Quarterly
income taxes are calculated using the estimated annual effective tax
rate.
The tax
provision for the third quarter of 2008 was $193 million, compared with $308
million in the year-ago quarter. Included in the third-quarter 2008
tax provision was $34 million of discrete tax benefits resulting primarily from
adjustments identified through the completion of tax returns for prior
years. The decline in the tax provision from the year-ago quarter was
due to lower income before income taxes. Compared with the second
quarter, our tax provision declined due about equally to an increase in discrete
tax benefits and the effect of lower income before income taxes.
Income
from continuing operations was $563 million, a decrease of $195 million from the
year-ago quarter and a decrease of $25 million from the prior
quarter.
Earnings
per share (EPS) for the third quarter were $0.43 per share, compared with $0.52
per share for the year-ago quarter and $0.44 for the prior
quarter. EPS benefited $0.04 from the year-ago quarter and $0.01
sequentially from a lower number of average shares outstanding as a result of
our stock repurchase program. EPS in the third quarter of 2007 also
included a gain of $0.02 from the sale of our semiconductor product line for
broadband DSL customer-premises equipment.
Orders in
the third quarter were $3.23 billion, which was 9 percent lower than the
year-ago quarter and 7 percent lower than the prior quarter, reflecting lower
demand for Semiconductor products.
Semiconductor
Semiconductor
segment revenue was $3.21 billion, a decrease of $256 million, or 7 percent,
from the year-ago quarter and an increase of $30 million, or 1 percent, from the
prior quarter.
Semiconductor
revenue by product category was as follows:
|
|
|
3Q08 |
|
|
|
3Q07 |
|
|
vs. 3Q07
|
|
|
|
2Q08 |
* |
|
vs. 2Q08
|
|
Analog
|
|
$ |
1,289 |
|
|
$ |
1,308 |
|
|
|
-1 |
% |
|
$ |
1,287 |
|
|
|
-- |
% |
Embedded
Processing
|
|
|
427 |
|
|
|
390 |
|
|
|
9 |
% |
|
|
439 |
|
|
|
-3 |
% |
Wireless
|
|
|
915 |
|
|
|
1,094 |
|
|
|
-16 |
% |
|
|
902 |
|
|
|
1 |
% |
Remaining
Semiconductor
|
|
|
574 |
|
|
|
669 |
|
|
|
-14 |
% |
|
|
547 |
|
|
|
5 |
% |
Total
Semiconductor
|
|
$ |
3,205 |
|
|
$ |
3,461 |
|
|
|
-7 |
% |
|
$ |
3,175 |
|
|
|
1 |
% |
* Revenue
by product category for historical periods reflects minor reclassifications to
previously reported amounts.
Analog
revenue was about even with the year-ago period as higher revenue from increased
shipments of high-performance analog products was insufficient to offset lower
revenue from shipments of high-volume analog and logic
products. Compared to the prior quarter, analog revenue was about
even.
Embedded
Processing revenue grew 9 percent compared with the year-ago quarter due to a
greater proportion of shipments of higher-priced communications infrastructure
products, and to a lesser extent, increased shipments of standard
products. These increases more than offset lower automotive product
revenue resulting from decreased shipments. Revenue decreased 3
percent sequentially as higher shipments of communications infrastructure
products failed to offset a greater proportion of shipments of lower-priced
standard products, and to a lesser extent, a decline in shipments of automotive
products.
Wireless
revenue declined 16 percent from the year-ago quarter primarily due to lower
shipments of baseband products to Ericsson Mobile Platforms. Compared
with the prior quarter, Wireless revenue was about even.
Remaining
semiconductor revenue declined 14 percent from the year-ago quarter due to the
combination of, in decreasing order, lower shipments of RISC microprocessors,
the sale of our DSL customer-premises equipment product line in 2007 and
lower royalties. Compared with the prior quarter, remaining
semiconductor revenue increased 5 percent due to higher shipments of DLP
products, partially offset by lower royalties. In both comparisons,
revenue from our ASIC products increased due to higher shipments.
Operating
profit for the third quarter was $766 million, or 23.9 percent of
revenue. This was a decrease of $265 million from the year-ago
quarter due to lower gross profit, which was partially offset by lower operating
expenses. Operating profit decreased $120 million from the prior
quarter due to lower gross profit.
Education
Technology
Education
Technology revenue for the third quarter of 2008 was $182
million. This was a decrease of $20 million, or 10 percent, from the
year-ago quarter due to lower shipments of graphing
calculators. Compared with the prior quarter, revenue increased $6
million due to higher shipments of calculators in preparation for the
back-to-school season.
Operating
profit for the third quarter was $92 million, or 50.5 percent of revenue, a
decrease of $7 million from the year-ago quarter due to lower
revenue. Compared with the prior quarter, operating profit increased
$14 million due about equally to lower operating expenses and higher
revenue.
First Nine Months of 2008
Results
For the
first nine months of 2008, we report the following:
Revenue
of $10.01 billion was $269 million, or 3 percent, lower than the year-ago period
due to lower revenue from the Semiconductor segment.
Gross
profit for the first nine months of 2008 was $5.15 billion, a decrease of $258
million, or 5 percent, from $5.41 billion in the year-ago period, primarily due
to lower revenue and, to a lesser extent, increased manufacturing
costs. Gross profit margin was 51.4 percent of revenue compared with
52.6 percent in the year-ago period.
R&D
expense for the first nine months of 2008 of $1.51 billion decreased $137
million, or 8 percent compared with the year-ago period primarily due to the
benefit from our collaborative work with foundries on advanced logic
manufacturing technologies and, to a lesser extent, lower Wireless product
development costs. R&D expense as a percent of revenue was 15.1
percent, compared with 16.0 percent in the year-ago period.
SG&A
expense for the first nine months of 2008 was $1.25 billion, about the same as
the year-ago period. SG&A expense as a percent of revenue was
12.5 percent, compared with 12.2 percent in the year-ago period.
Operating
profit for the first nine months of 2008 was $2.39 billion, or 23.8 percent of
revenue, compared with $2.50 billion, or 24.3 percent of revenue, in the
year-ago period. The decrease was due to lower gross profit partially
offset by lower R&D expense.
OI&E
for the first nine months of 2008 was $58 million. Other income
decreased $91 million from the first nine months of 2007, primarily due to lower
interest income, and to a lesser extent, reduced interest on tax
refunds.
The tax
provision for the first nine months of 2008 was $632 million, compared with $762
million in the same period of 2007. The decrease was primarily due to
an increase in discrete tax benefits, and to a lesser extent, lower income
before income taxes. This decrease was partially offset by the
expiration of the federal research tax credit.
Income
from continuing operations for the first nine months of 2008 was $1.81 billion
compared with $1.89 billion for 2007. Earnings per share were $1.36
per share compared with $1.29 per share in the year-ago period. As a
result of our share repurchases, average diluted shares outstanding decreased by
127 million shares from the year-ago period, benefiting earnings per share by
$0.12.
Net
income for the first nine months of 2008 was $1.81 billion, compared with $1.90
billion in the year-ago period.
Orders of
$10.00 billion were down 2 percent from the year-ago period, reflecting lower
demand for Semiconductor products.
Semiconductor
Semiconductor
revenue in the first nine months of 2008 was $9.57 billion, a decrease of $262
million, or 3 percent, from the year-ago period, as increased revenue from
higher shipments of Analog and Embedded Processing products was insufficient to
offset decreased revenue from lower shipments of Wireless and remaining
semiconductor products.
Semiconductor
operating profit for the first nine months of 2008 was $2.58 billion, or 26.9
percent of revenue, compared with $2.77 billion, or 28.1 percent of revenue, in
the year-ago period due to lower gross profit partially offset by lower R&D
expense.
Education
Technology
Education
Technology revenue was $439 million for the first nine months of 2008 compared
with $446 million in the year-ago period, as shipments decreased.
Operating
profit for the first nine months of 2008 was $187 million, or 42.6 percent of
revenue, compared with $188 million, or 42.3 percent of revenue in the year-ago
period.
Financial
Condition
At the
end of the third quarter of 2008, total cash (cash and cash equivalents plus
short-term investments) was $1.99 billion. This was $931 million
lower than at the end of 2007, primarily due to the reclassification of 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 $1.77 billion at the end of the quarter. This was an
increase of $32 million from the end of 2007. Days sales outstanding
were 47 at the end of the quarter compared with 44 at the end of 2007, due to
the seasonal increase in accounts receivable from sales of Education Technology
products that more than offset the reduction in Semiconductor
receivables.
Inventory
was $1.58 billion at the end of the quarter. This was $157 million
higher than at the end of 2007. Days of inventory at the end of the
third quarter were 81, compared with 78 days at the end of 2007. The
increase in inventory was due to, in decreasing order, a planned build earlier
in the year, especially in high-performance analog, to better service our
customers and higher manufacturing costs. In the third quarter, we
reduced our inventory level by $76 million. With our current demand
outlook, inventory still remains above our desired levels. As a
result, we continue to aggressively reduce inventory in the fourth
quarter.
Capital
spending in the first nine months of 2008 totaled $686 million. This
was an increase of $181 million from a year ago primarily due to higher
expenditures for semiconductor assembly/test facilities and equipment, and to a
lesser extent, higher expenditures for analog manufacturing
equipment. Depreciation in the first nine months of 2008 was $738
million, down $32 million from a year ago.
Liquidity and Capital
Resources
Our
sources of liquidity are our operating cash flows, existing balances of cash and
cash equivalents, short-term investments and revolving credit
facilities. Operating cash flows represent net income adjusted for
certain non-cash items and changes in current operating assets and
liabilities. Cash provided by operations for the first nine months of
2008 was $2.21 billion, a decrease of $771 million from the year-ago
period. This decrease was primarily due to the decrease in cash
provided from changes in working capital. Working capital in the
year-ago period benefited from the receipt of an income tax refund, while in
2008, it decreased due to increased inventory spending. Contributing
to a lesser extent to the decrease in cash provided by operations from the
year-ago period was the impact of lower net income and related non-cash
adjustments.
Investing
cash flows consist of capital expenditures; sales, purchases and maturities of
investments; acquisitions; and proceeds from the sales of assets. For
the first nine months of 2008, net cash provided from investing activities was
$91 million, compared with cash used of $819 million in the year-ago
period. During the first nine months of 2008, we reduced purchases of
short-term investments and increased investments in cash equivalents in response
to disruptions in global credit markets.
For the
first nine months of 2008, net cash used in financing activities was $1.92
billion, compared with $2.54 billion in the year-ago period. We used
$1.74 billion of cash in the first nine months of 2008 to repurchase 60 million
shares of our common stock and paid dividends of $396 million. In the
same period last year we used $3.01 billion of cash to repurchase 90 million
shares of common stock and paid $287 million in dividends. Dividends
were higher due to the increase in the quarterly dividend rate in the second and
fourth quarters of 2007. Employee exercises of stock options for
shares of TI stock are also reflected in cash from financing
activities. In the first nine months of 2008, such exercises provided
$195 million compared with $694 million for the same period a year
ago. Excess tax benefits also fluctuate with the level of stock
option exercises. In April 2007, we retired $43 million of
outstanding 8.75% notes at maturity.
In
September 2008, we announced a 10 percent increase in our quarterly cash
dividend to $0.11 per share, resulting in annual dividend payments of $0.44 per
share. The new quarterly dividend will be payable November 17, 2008,
to stockholders of record on October 31, 2008. This marks
the fifth consecutive year we have increased our dividend rate.
In 2008,
we expect: an annual effective tax rate of about 28 percent reflecting the
reinstatement of the federal research tax credit, which will be recorded in the
fourth quarter of 2008; R&D expense of $2.0 billion; capital expenditures of
$0.8 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, computing and industrial 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 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)
|
|
July
1 through July 31, 2008
|
|
|
|
|
|
$ |
26.34
|
|
|
|
4,587,400
|
|
|
$ |
4,192
million
|
|
August
1 through August 31, 2008
|
|
|
|
|
|
$ |
25.02
|
|
|
|
5,483,800
|
|
|
$ |
4,055
million
|
|
September
1 through September 30, 2008
|
|
|
|
|
|
$ |
22.49
|
|
|
|
|
|
|
$ |
|
|
Total
|
|
|
|
|
|
$ |
24.45
|
|
|
|
16,123,579 |
(2)(3) |
|
$ |
3,919
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 25,000 shares
that were acquired in August 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 879,644 shares for which trades were settled in the first
three business days of October 2008 for $20 million. The table
does not include the purchase of 1,890,000 shares pursuant to orders
placed in the second quarter, for which trades were settled in the first
three business days of the third quarter for $54 million. The
purchase of these shares was reflected in this item in our report on Form
10-Q for the quarter ended June 30,
2008.
|
|
|
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;
|
•
|
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 inventory that results from
demand that differs from
projections;
|
•
|
TI's
ability to access its bank accounts and lines of credit or otherwise
access the capital markets;
|
•
|
Product
liability or warranty claims, claims based on epidemic or delivery failure
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 Part II, Item 1A of this report. 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.
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:
October 30, 2008