SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999 Commission File Number 1-3761
TEXAS INSTRUMENTS INCORPORATED
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 75-0289970
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
8505 Forest Lane, P.O. Box 660199, Dallas, Texas 75266-0199
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 972-995-3773
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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 X No
---- ----
792,411,479
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Number of shares of Registrant's common stock outstanding as of
September 30, 1999
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
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<TABLE>
<CAPTION>
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(In millions of dollars, except per-share amounts.)
For Three Months Ended For Nine Months Ended
---------------------- ---------------------
Sept 30 Sept 30 Sept 30 Sept 30
Income 1999 1998 1999 1998
- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues............................................... $ 2,385 $ 2,113 $ 6,770 $ 6,467
Operating costs and expenses:
Cost of revenues......................................... 1,247 1,322 3,555 4,281
Research and development................................. 330 291 996 925
Marketing, general and administrative.................... 372 311 1,030 1,133
------- ------- ------- -------
Total.................................................. 1,949 1,924 5,581 6,339
------- ------- ------- -------
Profit from operations..................................... 436 189 1,189 128
Other income (expense) net................................. 153 65 295 258
Interest on loans.......................................... 18 19 55 55
------- ------- ------- -------
Income before provision for income taxes................... 571 235 1,429 331
Provision for income taxes................................. 188 80 479 113
------- ------- ------- -------
Net income................................................. $ 383 $ 155 $ 950 $ 218
======= ======= ======= =======
Diluted earnings per common share.......................... $ 0.47 $ 0.19 $ 1.17 $ 0.27
======= ======= ======= =======
Basic earnings per common share............................ $ 0.49 $ 0.20 $ 1.21 $ 0.28
======= ======= ======= =======
Cash dividends declared per share of common stock.......... $ .043 $ .043 $ .128 $ .085
Cash Flows
- ----------
Net cash provided by operating activities.............................................. $ 1,056 $ 827
Cash flows from investing activities:
Additions to property, plant and equipment........................................... (855) (898)
Purchases of short-term investments.................................................. (1,712) (1,096)
Sales and maturities of short-term investments....................................... 1,688 2,027
Sales of noncurrent investments ..................................................... 189 -
Acquisition of businesses, net of cash acquired...................................... (469) (152)
Payments in connection with sale of memory business.................................. - (550)
Proceeds from sale of other businesses............................................... - 120
------- -------
Net cash used in investing activities.................................................. (1,159) (549)
Cash flows from financing activities:
Payments on loans payable............................................................ - (4)
Additions to long-term debt.......................................................... 400 -
Payments on long-term debt........................................................... (253) (55)
Dividends paid on common stock....................................................... (100) (100)
Sales and other common stock transactions............................................ 274 99
Common stock repurchase program...................................................... (411) (167)
------- -------
Net cash used in financing activities.................................................. (90) (227)
Effect of exchange rate changes on cash................................................ (56) 14
------- -------
Net increase (decrease) in cash and cash equivalents................................... (249) 65
Cash and cash equivalents, January 1................................................... 540 1,015
------- -------
Cash and cash equivalents, September 30................................................ $ 291 $ 1,080
======= =======
</TABLE>
2
<TABLE>
<CAPTION>
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(In millions of dollars, except per-share amounts.)
Sept 30 Dec. 31
Balance Sheet 1999 1998
- ------------- ------- -------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................................... $ 291 $ 540
Short-term investments............................................. 1,724 1,709
Accounts receivable, less allowance for losses of
$70 million in 1999 and $70 million in 1998...................... 2,030 1,343
Inventories:
Raw materials.................................................... 118 77
Work in process.................................................. 411 354
Finished goods................................................... 224 165
------- -------
Inventories.................................................... 753 596
------- -------
Prepaid expenses................................................... 99 75
Deferred income taxes.............................................. 591 583
------- -------
Total current assets............................................. 5,488 4,846
------- -------
Property, plant and equipment at cost................................ 6,747 6,379
Less accumulated depreciation...................................... (3,228) (3,006)
------- -------
Property, plant and equipment (net).............................. 3,519 3,373
------- -------
Investments.......................................................... 3,285 2,564
Deferred income taxes................................................ 33 23
Other assets......................................................... 873 444
------- -------
Total assets......................................................... $13,198 $11,250
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Loans payable and current portion long-term debt................... $ 264 $ 267
Accounts payable................................................... 624 510
Accrued and other current liabilities.............................. 1,550 1,419
------- -------
Total current liabilities........................................ 2,438 2,196
------- -------
Long-term debt....................................................... 1,159 1,027
Accrued retirement costs............................................. 764 895
Deferred income taxes................................................ 665 381
Deferred credits and other liabilities............................... 249 224
Stockholders' equity:
Preferred stock, $25 par value. Authorized - 10,000,000 shares.
Participating cumulative preferred. None issued.................. -- --
Common stock, $1 par value. Authorized - 1,200,000,000 shares.
Shares issued: 1999 - 793,506,626; 1998 - 392,395,997............ 794 392
Paid-in capital.................................................... 657 1,178
Retained earnings.................................................. 5,633 4,795
Less treasury common stock at cost.
Shares: 1999 - 1,095,147; 1998 - 1,716,038....................... (119) (134)
Accumulated other comprehensive income............................. 958 296
------- -------
Total stockholders' equity....................................... 7,923 6,527
------- -------
Total liabilities and stockholders' equity........................... $13,198 $11,250
======= =======
</TABLE>
3
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Notes to Financial Statements
1. Diluted earnings per common share are based on average common and dilutive
potential common shares outstanding (819.6 and 800.1 million shares for the
third quarters of 1999 and 1998, and 814.8 and 800.6 million shares for the
nine months ended September 30, 1999 and 1998). Share amounts have been
retroactively adjusted for the 1999 two-for-one stock split which was
effective August 16, 1999.
2. On September 29, 1999, TI entered into an agreement to acquire Power
Trends, Inc., in a stock-for-stock transaction pursuant to which TI will issue
approximately 1.68 million shares of common stock.
3. On August 31, 1999, TI acquired Telogy Networks, Inc. (Telogy) in a stock-
for-stock pooling transaction in which TI issued approximately 6.3 million
shares of common stock and 1.9 million substitute employee stock options.
Acquisition-related transaction costs incurred were $15 million, which were
expensed and included in marketing, general and administrative expense in the
third quarter of 1999. TI operating results prior to the acquisition date
have not been restated to include Telogy results due to their immateriality.
4. On October 15, 1999, TI completed its previously announced acquisition of
Unitrode Corporation, in a stock-for-stock transaction pursuant to which TI
issued approximately 16.7 million shares of common stock.
5. In connection with TI's acquisition of Integrated Sensor Solutions, Inc.
(ISS) for approximately $67 million in the third quarter of 1999, TI recorded
a charge of $16 million for the value of in-process R&D (purchased R&D) at the
acquisition date, based upon the appraised value of the related developmental
projects. The purchased R&D projects were assessed, analyzed and valued
within the context and framework articulated by the Securities and Exchange
Commission.
ISS's research and development relates to high performance intelligent sensor
products that are used in electronic control systems in the automotive and
industrial markets.
Significant assumptions used in determining the value of purchased R&D for ISS
included projected operating cash flows and the discount rate. Projected
operating cash flows were expected to begin in 2000. The discount rate
selected for ISS's in-process technologies was 25%.
At the time of the acquisition, August 16, 1999, ISS management estimated the
remaining cost and time to complete the purchased R&D projects was $4 million
and 233 engineer-months. The term "engineer-month" refers to the average
amount of research work expected to be performed by an engineer in a month.
TI expects to essentially meet its original return expectations.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and
uncertain assumptions utilized in the valuation analysis of the in-process
research and development. Such uncertainties could give rise to unforeseen
budget over-runs and/or revenue shortfalls in the event that TI is unable to
successfully complete and commercialize the projects. TI management is
primarily responsible for estimating the value of the purchased R&D in all
acquisitions accounted for under the purchase method.
4
6. In the third quarter of 1999, the company sold several non-current stock
investments in return for either shares in the publicly-traded acquiring
company or cash. These transactions resulted in a pre-tax gain of
$87 million, which was included in other income.
7. In the third quarter of 1999, severance actions were taken by TI's
semiconductor operations in the U.S. These actions, taken in response to the
continuing downturn in the hard disk drive market place, affected 206 jobs.
As a result, TI took a pretax charge of $12 million in the third quarter, of
which $10 million was included in cost of revenues and $2 million in
marketing, general and administrative expense. Of the $12 million charge,
$9 million was for severance, $2 million was for fixed asset write-downs for
assets held for disposal, and $1 million was for vendor obligations. These
fixed assets were to be sold for scrap value and were therefore written down
to zero, their sales value. Essentially all of the employees will leave by
the end of the year. At September 30, 1999, the pay-out of the severance
obligation had not yet begun.
8. In the third quarter of 1999, additional severance actions were taken for
the Japan manufacturing efficiency program discussed in Note 12 following.
This resulted in a pretax charge of $7 million in the third quarter for the
elimination of an additional 105 jobs in Hatogaya, Japan. At September 30,
1999, the pay-out of the severance obligation had not yet begun. The
$7 million charge was included in cost of revenues.
9. In the third quarter of 1999, the company issued $400 million of 7.0%
notes due August 14, 2004.
10. In connection with TI's acquisition of Libit Signal Processing Ltd.
(Libit) for approximately $365 million in the second quarter of 1999, TI
recorded a charge of $52 million for the value of purchased in-process R&D
(purchased R&D) at the acquisition date, based upon the appraised value of the
related developmental projects. The purchased R&D projects were assessed,
analyzed and valued within the context and framework recently articulated by
the Securities and Exchange Commission.
Libit's research and development relates to silicon solutions and complex
system level internet telephony software used in cable modems, cable set-top
boxes, cable head-ends and digital television products, which empower
high-speed internet access.
Significant assumptions used in determining the value of purchased R&D for
Libit included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in 2000. The discount
rate selected for Libit's in-process technologies was 22%.
At the time of the acquisition, Libit management estimated the remaining cost
and time to complete the purchased R&D projects was $5 million and 492
engineer-months. The term "engineer-month" refers to the average amount of
research work expected to be performed by an engineer in a month. At
September 30, 1999, based on the latest available information, the estimated
remaining cost and time to complete the in-process projects was approximately
$5 million and 450 engineer-months. TI expects to essentially meet its
original return expectations.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and
uncertain assumptions utilized in the valuation analysis of the in-process
5
research and development. Such uncertainties could give rise to unforeseen
budget over-runs and/or revenue shortfalls in the event that TI is unable to
successfully complete and commercialize the projects. TI management is
primarily responsible for estimating the value of the purchased R&D in all
acquisitions accounted for under the purchase method.
11. In the second quarter of 1999, the FASB issued SFAS No. 137 which
deferred the effective date of SFAS No. 133 (accounting for derivatives) from
2000 to 2001. In addition, No. 137 rolled forward the transition date for the
required separation for accounting purposes of an embedded derivative from its
host instrument. The previous transition date was for host instruments
acquired after year-end 1997. The new transition date is for host instruments
acquired after year-end 1998. As a result of these changes, TI expects to
adopt No. 133 in the first quarter of 2001 on a cumulative basis. TI's
significant embedded derivative, the embedded call option on Micron
Technology, Inc. (Micron) common shares contained in the company's Micron
convertible note investment, will not be separated from the convertible note
because the note was acquired prior to year-end 1998.
12. In the first quarter of 1999, the company announced a consolidation of
semiconductor manufacturing operations in Japan to improve manufacturing
efficiencies and reduce costs. This action resulted in a pretax charge of
$14 million in the first quarter, of which $13 million was for severance for
the elimination of 153 jobs in Hatogaya, Japan, and $1 million for other
related costs. At September 30, 1999, the pay-out of the severance cost
obligation had not yet begun. Of the $14 million charge, $11 million was
included in cost of revenues and $3 million in marketing, general and
administrative expense.
13. In the first quarter of 1999, sale of the Micron subordinated note and
other securities generated $172 million in cash.
14. In connection with TI's acquisition of Butterfly VLSI, Ltd. (Butterfly)
in the first quarter of 1999, TI recorded a charge of $10 million for the
value of purchased in-process R&D (purchased R&D) at the acquisition date,
based upon the appraised fair value of the related developmental projects.
The purchased R&D projects were assessed, analyzed and valued within the
context and framework recently articulated by the Securities and Exchange
Commission.
Butterfly's research and development relates to short distance wireless
semiconductor and systems technology. This technology is used to achieve
higher data rates at 2.4 GHz and above frequencies for use in voice-plus-data
transmission products.
Significant assumptions used in determining the value of purchased R&D for
Butterfly included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in 2000. The discount
rate selected for Butterfly's in-process technologies was 25%.
At the time of the acquisition, Butterfly management estimated the remaining
cost and time to complete the purchased R&D projects to be $5 million and 264
engineer-months. The term "engineer-month" refers to the average amount of
research work expected to be performed by an engineer in a month. At
September 30, 1999, based on the latest available information, the estimated
remaining cost and time to complete the in-process projects was approximately
$3 million and 205 engineer-months. TI expects to essentially meet its
original return expectations.
6
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and
uncertain assumptions utilized in the valuation analysis of the in-process
research and development. Such uncertainties could give rise to unforeseen
budget over-runs and/or revenue shortfalls in the event that TI is unable to
successfully complete and commercialize the projects. TI management is
primarily responsible for estimating the fair value of the purchased R&D in
all acquisitions accounted for under the purchase method.
15. In the third quarter of 1998, the company took a pre-tax charge of
$14 million for accelerated depreciation for fixed assets removed from service
in Singapore under the worldwide restructuring program discussed in Note 16
following.
16. In the second quarter of 1998, the company announced that, as a result of
the various business divestitures over the past several years, the pending
sale of its memory business (subsequently completed in September 1998), and
weakness at that time in the semiconductor market environment, it was
implementing a severance/manufacturing efficiency program in order to more
closely match the size and cost of its support functions with the company's
overall size and to further combine manufacturing resources for more efficient
operations. The plan, which primarily affected the company's corporate
activities and semiconductor businesses, included the elimination of 3,441
jobs around the world through voluntary programs, attrition, outsourcing and
layoffs, as well as the closing of several facilities. As a result, the
company took a pretax charge of $219 million in the second quarter of 1998, of
which $126 million was included in marketing, general and administrative
expense and $93 million in cost of revenues. Of the $219 million charge,
$161 million was for severance, $41 million for asset write-downs and
$17 million for vendor cancellation and lease charges.
Of the $41 million for asset write-downs, $25 million was for U.S.
semiconductor inventories and $16 million was for fixed assets, primarily
accelerated depreciation on assets phased out during 1998 in connection with
the winding down of production at a semiconductor manufacturing facility
located in Singapore.
Of the $17 million for vendor cancellation and lease charges, $15 million was
for required vendor fees for cancellation of purchase contracts for chemicals,
supplies and equipment as a result of an U.S. facility shutdown.
At September 30, 1999, the program had essentially been completed, with most
severance costs paid except for $20 million, which will primarily be paid by
the end of 1999. Of the 3,441 jobs, 3,401 had been eliminated, and 40 will be
eliminated in the year 2000.
17. In the second quarter of 1998, the company sold its shares in the TI-Acer
DRAM semiconductor manufacturing joint venture to Acer Corporation for
$120 million in cash. This sale resulted in a pre-tax gain of $83 million,
included in other income
18. In the first quarter of 1998, the company's U.S. DRAM semiconductor
manufacturing joint venture with Hitachi, Ltd. was discontinued as a result of
a combination of severe price declines and overcapacity in the DRAM market.
As a part of this first quarter discontinuance, TI purchased the assets of the
venture for approximately $98 million. Also as part of this first quarter
discontinuance, TI and Hitachi decided to assume and share equally in the
payment of the venture's obligations. TI's share of those payments was $219
million, which was paid and charged to cost of revenues in the first quarter.
7
19. In connection with TI's acquisitions of GO DSP and Spectron, both of
which occurred in the first quarter of 1998, TI recorded charges of $10
million and $15 million, for purchased in-process R&D (purchased R&D), based
upon the appraised fair value of the related developmental projects. The
Income Approach, which included an analysis of the markets, cash flows, and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing each purchased R&D project.
GO DSP's and Spectron's research and development related to DSP software
tools. These software tools, which include real-time operating systems
(RTOS), allow DSP systems developers to improve productivity and reduce time-
to-market. TI's goal in these acquisitions was to extend its leadership in
digital signal processing solutions by offering a complete development
environment, simplifying DSP development, and making TI DSP solutions more
attractive for a broad range of fast-growing markets.
Significant assumptions used in determining the value of purchased R&D for GO
DSP and Spectron included projected operating cash flows and the discount
rate. Projected operating cash flows were expected to begin in late 1998.
The discount rate selected for GO DSP's and Spectron's in-process technologies
was 30%.
At the time of the acquisitions, GO DSP and Spectron management estimated the
remaining cost and time to complete the purchased R&D projects was
approximately $7 million and 540 engineer-months. The term "engineer-month"
refers to the average amount of research work expected to be performed by an
engineer in a month. All the in-process projects were essentially completed
on schedule. TI expects to essentially meet its original return expectations.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and
uncertain assumptions utilized in the valuation analysis of the in-process
research and development. Uncertainties regarding projected operating cash
flows could give rise to unforeseen budget over-runs and/or revenue shortfalls
in the event that TI is unable to successfully commercialize the projects. TI
management is primarily responsible for estimating the fair value of the
purchased R&D in all acquisitions accounted for under the purchase method.
20. Total comprehensive income, i.e., net income plus investment and pension
liability adjustments to stockholders' equity, for the third quarters of 1999
and 1998 was $1,211 million and $122 million. For the nine months ended
September 30, 1999, and 1998 it was $1,612 million and $193 million.
21. There has been no significant change in the status of the audit and
investigation concerning grants from the Italian government.
The amount of borrowings by TECH Semiconductor Singapore under its $450
million principal amount credit facility, of which TI is a guarantor, was $415
million at September 30, 1999, compared to $240 million at year-end 1998.
22. Certain amounts in the prior period's financial statements have been
reclassified to conform to the 1999 presentation.
23. The statements of income, statements of cash flows and balance sheet at
September 30, 1999, are not audited but reflect all adjustments which are of a
normal recurring nature and are, in the opinion of management, necessary to a
fair statement of the results of the periods shown.
8
24. Business segment information is as follows:
<TABLE>
For Three Months Ended For Nine Months Ended
---------------------- ---------------------
Sept 30 Sept 30 Sept 30 Sept 30
Business Segment Net Revenues 1999 1998 1999 1998
(millions of dollars) ------- ------- ------- -------
- -----------------------------
<S> <C> <C> <C> <C>
Semiconductor
Trade.................................... $ 1,919 $ 1,523 $ 5,463 $ 4,646
Intersegment............................. 4 7 16 16
------- ------- ------- -------
1,923 1,530 5,479 4,662
------- ------- ------- -------
Materials & Controls
Trade.................................... 252 226 753 713
Intersegment............................. -- 1 1 1
------- ------- ------- -------
252 227 754 714
------- ------- ------- -------
Educational & Productivity Solutions
Trade.................................... 160 133 394 374
Corporate activities....................... 43 21 105 115
Divested activities........................ 7 202 38 602
------- ------- ------- -------
Total...................................... $ 2,385 $ 2,113 $ 6,770 $ 6,467
======= ======= ======= =======
Business Segment Profit (Loss)
(millions of dollars)
- ------------------------------
Semiconductor.............................. $ 473 $ 363 $ 1,297 $ 1,102
Materials & Controls....................... 41 33 123 106
Educational & Productivity Solutions....... 47 32 100 70
Corporate activities....................... (96) (70) (252) (166)
Special charges and gains,
net of applicable profit sharing......... (40) (14) (110) (394)
Interest on loans/other income,
excluding a second quarter 1998 gain of
$83 million included above............... 135 46 241 119
Divested activities........................ 11 (155) 30 (506)
------- ------- ------- -------
Income before provision for income taxes... $ 571 $ 235 $ 1,429 $ 331
======= ======= ======= =======
</TABLE>
9
25. The following is a detailed reconciliation of individual restructuring
accruals (in millions of dollars).
<TABLE>
YEAR OF CHARGE
1997 1998 1999
--------------------------------------- --------------------- -----------------------
Divestiture Reserves SC SC
of MCB/ M&C cost against operation SC cost
termina- reduc- gains on SC and closing & operation reduction
tion tion business Corp. M&C sale of closing in action
Description* Total of DIPD action sales actions operation Japan in U.S.
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1998 $ 163 $ 16 $ 21 $ 24 $ 49 $ 53
CHARGES:
Severance 13 $ 13
Vendor and warranty
obligations 1 1
DISPOSITIONS:
Severance payments (41) (4) (1) (16) (20)
Vendor and warranty
obligation payments (1) (1)
Adjustments - net
reversal to income (3) (3)
----- ---- ---- ---- ---- ---- ----
BALANCE,
MARCH 31,1999 132 15 17 23 30 33 14
DISPOSITIONS:
Severance payments (9) (3) (5) (1)
Various payments (8) (8)
Adjustments - net
reversal to income (5) (2) (3)
----- ---- ---- ---- ---- ---- ----
BALANCE,
JUNE 30, 1999 110 15 12 23 22 24 14
CHARGES:
Severance 16 7 $ 9
Asset writedowns 2 2
Vendor and warranty
obligations 1 1
DISPOSITIONS:
Severance payments (4) (1) (1) (2)
Asset writedowns (2) (2)
----- ---- ---- ---- ---- ---- ---- ----
BALANCE,
SEPT. 30, 1999 $ 123 $ 14 $ 11 $ 23 $ 20 $ 24 $ 21 $ 10
----- ---- ---- ---- ---- ---- ---- ----
----- ---- ---- ---- ---- ---- ---- ----
*Abbreviations
SC = Semiconductor Business
MCB = Mobile Computing Business
DIPD = Digital Imaging Printing Development Program
Corp. = Corporate Division
</TABLE>
10
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Registrant (the "company" or "TI") announced third quarter 1999 financial
results that reflect continuing growth in the company's core businesses and
continuing improvement in margins. Results as compared to the same period
last year include the following:
o Orders grew 18 percent to $2382 million. Excluding the divested memory
business, orders grew 30 percent.
o Revenue grew 13 percent to $2385 million. Excluding the divested memory
business, revenue grew 25 percent.
o Gross profit margins improved 10.3 percentage points to 47.7 percent.
o Operating margin improved 9.3 percentage points to 18.3 percent.
o Net income grew 147 percent to $383 million.
o Diluted earnings per share grew 147 percent to $0.47.
o Semiconductor revenue grew 26 percent to $1923 million.
Additionally, TI's core semiconductor product areas of digital signal
processor (DSP) and analog grew substantially versus the year-ago quarter.
DSP revenue was up 25 percent and analog revenue was up 24 percent, both due
primarily to continued strength in wireless and increased sales of catalog
products into the mass market. Of particular note is the strength in analog
catalog revenue, up 38 percent from a year ago and 19 percent sequentially, as
a result of strategic investment in the company's product portfolio. The
recently announced acquisitions of Unitrode Corporation and Power Trends, Inc.
further extend TI's leadership in the analog catalog area.
TI's results in the third quarter include $0.07 of EPS from investments in
several DSP-related companies, primarily through TI's venture capital fund.
This fund was formed two years ago to accelerate development of emerging DSP
markets and to invest in early-stage companies. The strategic value of these
investments to TI is early insight into new DSP applications and other related
markets.
Note: All of the share and per-share amounts in this release have been
adjusted to reflect the two-for-one stock split effective August 16, 1999.
FINANCIAL SUMMARY
TI revenue for the third quarter of 1999 increased to $2385 million from $2113
million in the year-ago quarter, as growth in semiconductor more than offset
the loss of revenue from the divested memory business. Revenues were up 2
percent from the second quarter of 1999. Excluding the catch-up royalties of
$85 million from Hyundai Electronics Industries Co. in the second quarter,
revenue was up 5 percent sequentially due to increased semiconductor
shipments.
Operating margin for the quarter was 18.3 percent up 9.3 percentage points
from the year-ago quarter, primarily due to the absence of losses from the
divested memory business, and to a lesser extent, increased profits in
semiconductor. Operating margin was down 1.1 percentage points from the
second quarter of 1999, primarily due to the catch-up royalties from Hyundai
in the second quarter.
Net income for the quarter was $383 million, up from the $155 million in the
year-ago quarter, primarily due to the absence of losses in the memory
business and increased semiconductor profits. Net income increased by $60
11
million, or 18 percent, from the second quarter of 1999, as gains in
investment income and increased semiconductor shipments significantly exceeded
the second quarter Hyundai catch-up royalties.
EPS of $0.47 rose 147 percent from the third quarter of 1998, and was up $0.07
from the second quarter of 1999.
TI orders in the third quarter were $2377 million, up 18 percent from the
year-ago quarter, as increased demand for semiconductor products significantly
more than offset the absence of orders from the divested memory business.
Orders declined by $129 million from the second quarter of 1999, as the
absence of the Hyundai catch-up royalties, combined with a seasonal decline in
orders in Educational & Productivity Solutions (E&PS), more than offset
increased demand for semiconductor products.
Results for the quarter include special charges of $50 million, primarily for
in-process R&D costs associated with TI's acquisition of Integrated Sensor
Solutions, Inc. and costs associated with the pooling acquisition of Telogy
Networks, Inc. In the third quarter of 1998, there was a special charge of
$14 million related to the winding down of a manufacturing facility in
Singapore.
Excluding special charges: Operating margin was 19.9 percent, compared with
9.6 percent in the year-ago quarter; net income was $420 million, compared
with $164 million; and EPS was $0.51, compared with $0.21. The company
believes that, for analytical purposes, the effect of these items should be
excluded from operating results because they are not indicative of future
operating results or of future financial condition. Additional information
relating to these items appears below under the heading "Special Charges and
Gains."
OUTLOOK
TI expects steady sequential growth in its semiconductor business in the
fourth quarter, primarily driven by continuing strong demand for DSP and
analog products in the wireless and mass markets. Reflecting strength in
wireless, TI has raised its estimate for industry production of digital
cellular phones in 1999 from 245 million to 260 million, up 70 percent from
1998.
The hard disk drive market is expected to remain weak, as drive manufacturers
work through inventories and component pricing continues to be under pressure.
TI remains strategically focused on high-performance channel products and
system-level integration.
TI expects to take a special charge in the fourth quarter of 1999 associated
with the acquisitions of Unitrode Corporation, which closed on October 15,
1999, and Power Trends, Inc. which is expected to be completed by the end of
the year.
Looking toward 2000, TI expects continuing strong demand from multiple end-
equipment markets for DSP and analog. These include large markets such as
wireless and the mass market, as well as smaller but accelerating markets for
ADSL (Asymmetric Digital Subscriber Line), Voice-over-Internet Protocol (VoIP)
and cable modem.
12
SEMICONDUCTOR
Semiconductor revenue of $1923 million was up 26 percent from the third
quarter of 1998, primarily due to gains in analog and DSP. Revenue was up
2 percent from the second quarter of 1999. Excluding the catch-up royalties
from Hyundai in the second quarter, semiconductor revenue was up 7 percent,
primarily due to increased analog and DSP shipments.
DSP revenue was up 25 percent and analog revenue was up 24 percent, both due
primarily to continued strength in wireless and increased sales of catalog
products into the mass market. Sequentially, DSP revenue was up 6 percent,
primarily due to wireless, and to a lesser extent, sales of catalog products;
analog was up 7 percent, primarily due to strength across a breadth of
products.
TI saw a strong increase in demand for its differentiated catalog products, as
new customer designs transition into production. DSP catalog revenue was up
76 percent from a year ago, and 15 percent sequentially. Analog catalog
revenue was up 38 percent from a year ago, and 19 percent sequentially.
Revenues for TI's remaining semiconductor products increased from both the
year-ago quarter and the second quarter.
Semiconductor operating margin of 24.6 percent was up from 23.7 percent in the
year-ago quarter, due to increased product shipments. Operating margin was
down 1.1 percentage points from the second quarter of 1999, due to absence of
the Hyundai catch-up royalties. Excluding the catch-up royalties in the
second quarter, semiconductor operating margin was up 1.6 percentage points.
Semiconductor orders increased 33 percent from the year-ago quarter, primarily
due to increased demand for analog and DSP products. Orders were about
unchanged sequentially, as increased demand across the breadth of
semiconductor products nearly offset the absence of the Hyundai catch-up
royalties.
During the quarter, TI continued to strengthen its position in new and
emerging markets. In broadband, TI announced a number of new customers for
its DSP-based ADSL modem technology, including IBM for desktop PCs; Samsung
and Hyundai for products targeting the Korean market; and the Legend Group,
the largest PC brand in China. Furthering TI's strong position in the VoIP
market, TI announced a new VoIP cable modem reference design, which combines
the hardware and software technologies of TI's recent acquisitions, Telogy
Networks and Libit Signal Processing Ltd.
TI also introduced eXpressDSP(TM) Real-Time Software Technology, a complete,
open software environment that significantly streamlines and simplifies the
product development process for DSP applications.
MATERIALS & CONTROLS (M&C)
Revenue for the M&C business was $252 million, up 11 percent from the third
quarter of 1998, primarily due to strength in automotive. Third quarter
operating margin was 16.2 percent, up from 14.5 percent for the year-ago
quarter, primarily due to the emphasis on a best-cost producer strategy.
During the quarter, TI completed the previously announced acquisition of
Integrated Sensor Solutions. The acquisition strengthens M&C's leading
position in pressure sensors with complementary product lines.
13
EDUCATIONAL & PRODUCTIVITY SOLUTIONS (E&PS)
Revenue for E&PS was $160 million, up 20 percent from the third quarter of
1998, primarily due to strong sales of graphing calculators. Operating margin
was a record 29.4 percent, up 5.5 percentage points from the year-ago quarter,
primarily due to strong sales of graphing calculators.
E&PS is a seasonal business, with revenues and earnings being significantly
higher in second and third quarter. The business achieved its highest level
of shipments for a third quarter, contributing to a record back-to-school
season for the business.
E&PS also acquired Soft Warehouse, Inc, a maker of mathematical software for
educational and professional use. E&PS will use the acquisition to expand its
presence in the educational technology market.
DIGITAL IMAGING
Revenue in digital imaging increased almost 60 percent from the year-ago
quarter, due to growth in portable business projectors that use TI's Digital
Light Processing(TM) technology. Digital imaging continued to operate at a
loss, while working toward improvements in manufacturing yields.
ADDITIONAL FINANCIAL INFORMATION
For the first nine months of 1999, TI revenues were $6770 million, up from the
$6467 million in the first nine months of 1998, as gains in semiconductor
significantly offset the loss of revenue from the divested memory business.
The increase in semiconductor revenues for the first nine months of 1999 was
primarily due to strength across a broad range of products. The increase in
M&C was due primarily to strength in automotive, and the increase in E&PS was
due primarily to increased demand for graphing calculators.
For the first nine months of 1999, TI operating margin was 17.6 percent, up
15.6 percentage points from the same period a year ago, primarily due to the
absence of losses from the divested memory business. Semiconductor operating
margin was unchanged. The improvement in M&C was due to increased product
shipments, and the increase in E&PS was primarily due to product cost
reductions.
Net income for the first nine months of 1999 was $950 million, compared with
$218 million in the year-ago period due to the absence of losses from the
divested memory business, and to a lesser extent, about equally due to the
non-recurrence of costs associated with a worldwide restructuring and with the
dissolution of the company's dynamic random access memory (DRAM) joint venture
with Hitachi, Ltd. Diluted earnings per share were $1.17, compared with
$0.27.
For the first nine months of 1999, TI orders were $7114 million, compared with
$6091 million from the same period a year ago, primarily due to increased
demand for semiconductor products. Semiconductor orders for the first nine
months were up, primarily due to increased demand in analog and DSP. M&C
orders were up, primarily due to strength in automotive. E&PS orders were up,
primarily due to strength in graphing calculators.
Results for the first quarter of 1999 included special charges of $25 million,
primarily for consolidation of semiconductor manufacturing operations in
Japan. In the first quarter of 1998, there was a special charge of $244
14
million, primarily for discontinuing a DRAM manufacturing joint venture with
Hitachi. The second quarter of 1999 included a special charge of $52 million
for in-process R&D associated with the acquisition of Libit Signal Processing.
In the second quarter of 1998, there was a special charge of $219 million for
a worldwide restructuring of support functions and consolidation of
manufacturing operations, as well as an $83 million gain in the quarter on the
sale of TI's shares in the TI-Acer joint venture to Acer Corporation. Results
from the third quarter of 1999 include special charges of $50 million,
primarily for in-process R&D costs associated with TI's acquisition of
Integrated Sensor Solutions and costs associated with the pooling acquisition
of Telogy Networks. In the third quarter of 1998, there was a special charge
of $14 million related to the winding down of a manufacturing facility in
Singapore.
Excluding special charges, TI operating margin for the first nine months of
1999 was 19.2 percent, up from 9.4 percent in the first nine months of 1998,
primarily due to the absence of losses from the divested memory business.
Excluding special charges, net income for the first nine months of 1999 was
$1051 million, compared with $482 million in the year-ago period, and diluted
earnings per share were $1.29, compared with $0.60, primarily due to the
absence of losses from the divested memory business.
During the first nine months of 1999, cash and cash equivalents plus short-
term investments decreased by $234 million to $2015 million. The acquisitions
of Butterfly VLSI, Ltd., Libit Signal Processing, Integrated Sensor Solutions,
and ATL Research required approximately $469 million of cash in the first
three-quarters of 1999. The sale of the Micron subordinated note and other
securities generated $189 million of cash. In the third quarter, TI issued
$400 million of new debt maturing on August 15, 2004, with a 7.0 percent
coupon interest rate. The new issuance will be used for general corporate
purposes including the refinancing of existing TI debt. TI retired $200
million of debt maturing July 15,1999, with a 6.75 percent coupon interest
rate.
Cash flow from operating activities was $1056 million in the first three
quarters of 1999. Capital expenditures totaled $855 million in the first nine
months of 1999, compared to $898 million in the first three quarters of 1998,
which included the divested memory business. Capital expenditures totaled
$350 million in the third quarter of 1999 versus $200 million in the year-ago
quarter. Capital expenditures continue to be projected at about $1.3 billion
for the year. Including in-process R&D from acquisitions, R&D totaled $996
million in the first nine months of 1999, compared to $925 million in the
first nine months of 1998. R&D totaled $330 million in the third quarter,
versus $291 million in the year-ago quarter. R&D continues to be projected at
about $1.3 billion for the year.
Depreciation for the first three quarters of 1999 was $710 million, compared
to $903 million in the same time period a year ago. Depreciation for the
third quarter of 1999 was $248 million, versus $319 million in the year-ago
quarter. Depreciation for 1999 continues to be projected at about $1.0
billion.
During the first three quarters of 1999, TI continued to purchase shares of
common stock as part of its program to reduce the potential dilutive effect of
shares to be issued under employee stock options. On August 24, 1999, TI
rescinded the share repurchase program associated with long-term incentive
15
options as part of the process for the pooling acquisition of Telogy Networks.
During the first three quarters, TI spent $137 million of cash for share
purchases net of proceeds from sales and other common stock transactions.
The income tax rate, excluding the effect of the third quarter 1999 non-
deductible acquisition-related R&D charge, was 32 percent.
At the end of the third quarter, the debt-to-total capital ratio was .15
versus .17 at the end of 1998.
SPECIAL CHARGES AND GAINS
Third Quarter of 1999
In connection with TI's acquisition of Integrated Solutions, Inc. (ISS) for
approximately $67 million in the third quarter of 1999, TI recorded a charge
of $16 million for the value of in-process R&D (purchased R&D) at the
acquisition date, based upon the appraised value of the related developmental
projects. The purchased R&D projects were assessed, analyzed and valued
within the context and framework articulated by the Securities and Exchange
Commission.
ISS's research and development relates to high performance intelligent sensor
products that are used in electronic control systems in the automotive and
industrial markets.
Significant assumptions used in determining the value of purchased R&D for ISS
included projected operating cash flows and the discount rate. Projected
operating cash flows were expected to begin in 2000. The discount rate
selected for ISS's in-process technologies was 25%.
At the time of the acquisition, August 16, 1999, ISS management estimated the
remaining cost and time to complete the purchased R&D projects was $4 million
and 233 engineer-months. The term "engineer-month" refers to the average
amount of research work expected to be performed by an engineer in a month. TI
expects to essentially meet its original return expectations.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and
uncertain assumptions utilized in the valuation analysis of the in-process
research and development. Such uncertainties could give rise to unforeseen
budget over-runs and/or revenue shortfalls in the event that TI is unable to
successfully complete and commercialize the projects. TI management is
primarily responsible for estimating the value of the purchased R&D in all
acquisitions accounted for under the purchase method.
In the third quarter of 1999, severance actions were taken by TI's
semiconductor operations in the U.S. These actions, taken in response to the
continuing downturn in the hard disk drive market, affected 206 jobs. As a
result, the TI took a pretax charge of $12 million in the third quarter, of
which $10 million was included in cost of revenues and $2 million in
marketing, general and administrative expense. Of the $12 million charge, $9
million was for severance, $2 million was for fixed asset write-downs for
assets held for disposal, and $1 million was for vendor obligations. These
fixed assets were to be sold for scrap value and were therefore written down
to zero, their sales value. Essentially all of the employees will leave by
the end of the year. At September 30, 1999, the pay-out of the severance
16
obligation had not yet begun. The primary benefit from this action is reduced
people costs, which are estimated to reach $22 million annually. The benefit
is expected to begin in the fourth quarter of 1999.
In the third quarter of 1999, additional severance actions were taken for the
Japan manufacturing efficiency program announced during the first quarter of
1999 (program is more fully discussed below under First Quarter of 1999).
This resulted in a pretax charge of $7 million in the third quarter for the
elimination of an additional 105 jobs in Hatogaya, Japan. At September 30,
1999, the pay-out of the severance obligation had not yet begun. The
$7 million charge was included in cost of revenues.
Second Quarter of 1999
In connection with TI's acquisition of Libit Signal Processing Ltd. (Libit)
for approximately $365 million in the second quarter of 1999, TI recorded a
charge of $52 million for the value of purchased in-process R&D (purchased
R&D) at the acquisition date, based upon the appraised value of the related
developmental projects. The purchased R&D projects were assessed, analyzed
and valued within the context and framework articulated by the Securities and
Exchange Commission.
Libit's research and development relates to silicon solutions and complex
system level internet telephony software used in cable modems, cable set-top
boxes, cable head-ends and digital television products, which empower high-
speed internet access.
Significant assumptions used in determining the value of purchased R&D for
Libit included projected operating cash flows and the discount rate. Projected
operating cash flows were expected to begin in 2000. The discount rate
selected for Libit's in-process technologies was 22 percent.
At the time of the acquisition, Libit management estimated the remaining cost
and time to complete the purchased R&D projects was $5 million and 492
engineer-months. The term "engineer-month" refers to the average amount of
research work expected to be performed by an engineer in a month. At
September 30, 1999, based on the latest available information, the estimated
remaining cost and time to complete the in-process projects was approximately
$5 million and 450 engineer months. TI expects to essentially meet its
original return expectations.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and
uncertain assumptions utilized in the valuation analysis of the in-process
research and development. Such uncertainties could give rise to unforeseen
budget over-runs and/or revenue shortfalls in the event that TI is unable to
successfully complete and commercialize the projects. TI management is
primarily responsible for estimating the value of the purchased R&D in all
acquisitions accounted for under the purchase method.
First Quarter of 1999
In the first quarter of 1999, the company announced a consolidation of
semiconductor manufacturing operations in Japan to improve manufacturing
efficiencies and reduce costs. This action resulted in a pretax charge of $14
million in the first quarter, of which $13 million was for severance for the
elimination of 153 jobs in Hatogaya, Japan, and $1 million for other related
17
costs. At September 30, 1999, the pay-out of the severance cost obligation
had not yet begun. Of the $14 million charge, $11 million was included in cost
of revenues and $3 million in marketing, general and administrative expense.
The primary benefit from this consolidation action was reduced people costs,
which were estimated to reach $11 million annually. The benefit was expected
to begin in the fourth quarter of 1999.
In connection with TI's acquisition of Butterfly VLSI, Ltd. (Butterfly) in the
first quarter of 1999, TI recorded a charge of $10 million for the value of
purchased in-process R&D (purchased R&D) at the acquisition date, based upon
the appraised value of the related developmental projects. The purchased R&D
projects were assessed, analyzed and valued within the context and framework
articulated by the Securities and Exchange Commission.
Butterfly's research and development relates to short distance wireless
semiconductor and systems technology. This technology is used to achieve
higher data rates at 2.4 GHz and above frequencies for use in voice-plus-data
transmission products.
Significant assumptions used in determining the value of purchased R&D for
Butterfly included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in 2000. The discount
rate selected for Butterfly's in-process technologies was 25%.
At the time of the acquisition, Butterfly management estimated the remaining
cost and time to complete the purchased R&D projects to be $5 million and 264
engineer-months. The term "engineer-month" refers to the average amount of
research work expected to be performed by an engineer in a month. At
September 30, 1999, based on the latest available information, the estimated
remaining cost and time to complete the in-process projects was approximately
$3 million and 205 engineer-months. TI expects to essentially meet its
original return expectations.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and
uncertain assumptions utilized in the valuation analysis of the in-process
research and development. Such uncertainties could give rise to unforeseen
budget over-runs and/or revenue shortfalls in the event that TI is unable to
successfully complete and commercialize the projects. TI management is
primarily responsible for estimating the value of the purchased R&D in all
acquisitions accounted for under the purchase method.
Third Quarter of 1998
In the third quarter of 1998, the company recorded a $14 million charge for
accelerated depreciation on fixed assets primarily located in a semiconductor
manufacturing facility in Singapore. This action was taken in connection with
the severance/manufacturing efficiency program announced during the second
quarter of 1998 (which program is more fully described below under the heading
Second Quarter of 1998). This asset write-down charge was included in cost of
revenues.
Second Quarter of 1998
In the second quarter of 1998, the company announced that, as a result of the
various business divestitures over the past several years, the pending sale of
its memory business (subsequently completed in September 1998), and weakness
18
at that time in the semiconductor market environment, it was implementing a
severance/manufacturing efficiency program in order to more closely match the
size and cost of its support functions with the company's overall size and to
further combine manufacturing resources for more efficient operations. The
primary benefit from this severance/manufacturing efficiency program was
reduced people costs; total benefits were estimated to reach $270 million
annually. The benefit was expected to begin in the third quarter of 1998.
The program, which primarily affected the company's corporate activities and
semiconductor business, included the elimination of 3,441 jobs around the
world through voluntary programs, attrition, outsourcing and layoffs, as well
as the closing of several facilities. As a result, the company took a pretax
charge of $219 million in the second quarter of 1998, of which $126 million
was included in marketing, general and administrative expense and $93 million
in cost of revenues. Of the $219 million charge, $161 million was for
severance, $41 million for asset write-downs and $17 million for vendor
cancellation and lease charges.
Of the $41 million for asset write-downs, $25 million was for U.S.
semiconductor inventories and $16 million was for fixed assets, primarily
accelerated depreciation on assets phased out during 1998 in connection with
the winding down of production at a semiconductor manufacturing facility
located in Singapore. The primary benefits from this consolidation action
were increased efficiencies and reduced manufacturing costs. Estimated
savings from such actions were approximately $9 million annually. The benefit
was expected to begin in the fourth quarter of 1998.
Of the $17 million for vendor cancellation and lease charges, $15 million was
for required vendor fees for cancellation of purchase contracts for chemicals,
supplies and equipment as a result of a U.S. facility shutdown.
At September 30, 1999, the program had essentially been completed, with most
severance costs paid except for $20 million, which will primarily be paid by
the end of 1999. Of the 3,441 jobs, 3,401 had been eliminated, and 40 will be
eliminated in the year 2000.
In the second quarter of 1998, the company sold its shares in the TI-Acer DRAM
semiconductor manufacturing joint venture to Acer Corporation for $120 million
in cash. This sale resulted in a pretax gain of $83 million, included in
other income.
First Quarter of 1998
In the first quarter of 1998, the company's U.S. DRAM semiconductor
manufacturing joint venture with Hitachi, Ltd. was discontinued as a result of
a combination of severe price declines and overcapacity in the DRAM market.
As a part of this first quarter discontinuance, TI purchased the assets of the
venture for approximately $98 million. Also as part of this first quarter
discontinuance, TI and Hitachi decided to assume and share equally in the
payment of the venture's obligations. TI's share of those payments was $219
million, which was paid and charged to cost of revenues in the first quarter.
In connection with TI's acquisitions of GO DSP and Spectron, both of which
occurred in the first quarter of 1998, TI recorded charges of $10 million and
$15 million for purchased in-process R&D (purchased R&D), based upon the
appraised value of the related developmental projects. The Income Approach,
which included an analysis of the markets, cash flows, and risks associated
with achieving such cash flows, was the primary technique utilized in valuing
each purchased R&D project.
19
GO DSP's and Spectron's research and development related to DSP software
tools. These software tools, which include real-time operating systems
(RTOS), allow DSP systems developers to improve productivity and reduce time-
to-market. TI's goal in these acquisitions was to extend its leadership in
digital signal processing solutions by offering a complete development
environment, simplifying DSP development, and making TI DSP solutions even
more attractive for a broad range of fast-growing markets. Significant
assumptions used in determining the value of purchased R&D for GO DSP and
Spectron included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in late 1998. The
discount rate selected for GO DSP's and Spectron's in-process technologies
was 30%.
At the time of the acquisitions, GO DSP and Spectron management estimated the
remaining cost and time to complete the purchased R&D projects was
approximately $7 million and 540 engineer-months. The term "engineer-month"
refers to the average amount of research work expected to be performed by an
engineer in a month. All the in-process projects were essentially completed on
schedule. TI expects to essentially meet its original return expectations.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and
uncertain assumptions utilized in the valuation analysis of the in-process
research and development. Uncertainties regarding projected operating cash
flows could give rise to unforeseen budget over-runs and/or revenue shortfalls
in the event that TI is unable to successfully commercialize the projects. TI
management is primarily responsible for estimating the value of the purchased
R&D in all acquisitions accounted for under the purchase method.
YEAR 2000
Since 1995, TI has been actively engaged in addressing Year 2000 (Y2K) issues.
These result from the use of two-digit, rather than four-digit, year dates in
software, a practice which could cause date-sensitive systems to malfunction
or fail because they may not recognize or process date information correctly.
State of Readiness: To manage its Y2K program, TI has divided its efforts
into four program areas:
Information Technology (computer hardware, software and electronic data
interchange (EDI) interfaces);
Physical Plant (manufacturing equipment and facilities);
Products (including product development); and
Extended Enterprise (suppliers and customers).
For each of these program areas, TI has used a four-step approach:
Ownership (creating awareness, assigning tasks);
Inventory (listing items to be assessed for Y2K readiness);
Assessment (prioritizing the inventoried items, assessing their Y2K readiness,
planning corrective actions, making initial contingency plans); and
Corrective Action Deployment (implementing corrective actions, verifying
implementation, finalizing contingency plans).
At September 30, 1999, the Ownership, Inventory, Assessment and Corrective
Action Deployment steps were essentially complete for priority items in each
of the four program areas. TI considers priority items to be those that could
significantly disrupt TI's business operations.
20
Discussion of the status as of September 30, 1999, for each program area
follows:
Information Technology: Corrective actions have been deployed for
substantially all of TI's legacy business strategic information systems
(manufacturing, marketing, financial and human resources). In the ordinary
course of business, TI continues to install new business systems as
appropriate. Verification of Y2K readiness is incorporated into the process
of implementing these new systems. Corrective action deployment of
infrastructure hardware and software that support TI's enterprise-wide
networks and servers is essentially complete. TI has also deployed an
assessment tool and corrective action process for desktop computers. TI's EDI
interfaces have been tested with major customers and suppliers, and TI
believes that those interfaces are Y2K ready.
Physical Plant: Corrective action deployment for manufacturing equipment and
facilities is essentially complete.
Products: TI has completed its Y2K readiness assessment of its products and
continues to provide product status information on its company web site.
Divested product lines were not part of this assessment. The effort has
included semiconductor devices sold within the past five years. TI's
assessment indicates that the majority of semiconductor products either have
no date logic or are programmable devices that require customer assessment of
any software and firmware or other elements added by or at the request of TI's
customers. The likelihood and extent of Y2K problems relating to devices that
require customer assessment are unknown. TI has identified date-related
issues with certain of TI's semiconductor application software development
tools and continues to provide corrective software patches. The company
believes these development tool issues are unlikely to cause significant
problems for TI customers. Assessment of products of the Materials &
Controls, Educational & Productivity Solutions, and Digital Light Processing
businesses indicated they are either Y2K ready or have no date logic.
Extended Enterprise: TI's Y2K supplier program has attempted to assess the
readiness of TI suppliers, focusing on those that could significantly disrupt
TI's business operations. TI began contacting its suppliers in 1997 to assess
their readiness. This effort has included sending Y2K surveys and conducting
onsite Y2K reviews with selected suppliers. TI's assessment of its critical
suppliers is essentially complete, and contingency plans have been developed
for those suppliers that were not assessed Y2K ready by June 30. TI continues
to monitor the readiness status of those suppliers and refine those
contingency plans. TI will implement the plans as needed in response to
further information gathered through the end of this year. TI also has
discussed Y2K status with selected strategic customers.
Other Activities: TI continues to review Y2K issues relating to its
information technology, physical plant, products, suppliers and customers. TI
developed a set of contingency plans on the basis of information available as
of June 30, 1999. It continues to refine those plans and will implement them
as needed in response to further information gathered through the end of the
year. In addition, TI has been taking and will continue to take actions to
verify and maintain its Y2K readiness and finalize its year-end operating plan
(for example, its plan for staffing to address Y2K issues that arise during
the transition to 2000).
21
Costs to Address Y2K Issues: TI's estimated aggregate costs for its Y2K
activities from 1995 through 2000 are expected to range from $65 million to
$75 million. Through September 30, 1999, TI has spent approximately $63
million.
Risks of Y2K Issues and Contingency Plans: TI's contingency planning process
is intended to mitigate worst-case business disruptions. TI believes that its
most reasonably likely worst-case Y2K scenario would relate to disruption of
supply from third parties as a result of Y2K problems experienced by those
parties or their suppliers. TI's manufacturing, sales and service operations
are dependent on an ongoing supply of infrastructure services (such as
electricity, water and telecommunication services), materials and equipment
spare parts from third parties as well as third-party transportation services.
In many cases, TI depends on a limited number of suppliers for those services
and materials. A disruption in supply could interrupt manufacturing
operations and result in damage to work in process as well as delays in
product deliveries to customers. These results could affect TI revenues and
lead to claims by customers against the company. As part of contingency
planning to address these risks, TI has identified alternative suppliers where
available.
TI customers may experience Y2K disruptions that affect the quantity or timing
of their orders to TI or their ability to make timely payment. If these
disruptions occur, TI revenues and cash flow may be affected. TI cannot
predict the likelihood of these disruptions or the extent of their impact on
TI. It is unknown whether customers will change their spending patterns in
preparation for the Year 2000 (for example, by accelerating or delaying
orders).
As part of its Y2K program, TI is evaluating the Y2K status of recently
acquired businesses. TI does not expect that any of the acquired businesses
present Y2K issues that will have a material impact on TI's results of
operations.
Certain discontinued products and divested product lines present Y2K issues.
In the event of product failure, these issues could expose TI to product
liability or other types of claims. It is difficult to predict the extent of
potential liability. However, for several reasons, TI does not expect these
issues to result in any claim that will have a material effect on its results
of operations. The reasons include the age of the products (resulting in many
being retired from service or upgraded before the Year 2000), expiration of
applicable warranty periods, widespread customer awareness of Y2K risks, and
the efforts of TI and the acquirers of its divested product lines to alert
customers to Y2K issues affecting the products.
The preceding Year 2000 disclosure is designated a "Year 2000 Readiness
Disclosure" under the Year 2000 Information and Readiness Disclosure Act.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Information concerning market risk is contained on pages 38 and 39 of the
Registrant's 1998 annual report to stockholders and is incorporated by
reference to such annual report.
22
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Designation of
Exhibits in
this Report Description of Exhibit
-------------- -----------------------------
<S> <C> <C>
11 Computation of Basic and Diluted
Earnings Per Common and Dilutive Potential
Common Share
12 Computation of Ratio of Earnings to Fixed
Charges
27 Financial Data Schedule
</TABLE>
(b) Report on Form 8-K
None.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995:
This Form 10-Q 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, such statements herein that describe the
company's 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 the company
or its management:
o Market demand for semiconductors, particularly for digital signal
processors and analog chips in key markets, such as telecommunications and
computers;
o TI's ability to develop, manufacture and market innovative products in a
rapidly changing technological environment;
o TI's ability to compete in products and prices in an intensely competitive
industry;
o TI's ability to maintain and enforce a strong intellectual property
portfolio and obtain needed licenses from third parties;
o Timely completion by customers and suppliers of their Year 2000 programs,
accurate assessment of TI's Year 2000 readiness and of risks associated
with its current and past products, and effective implementation of
contingency plans and corrective actions;
o Timely completion of announced acquisitions;
23
o Global economic, social and political conditions in the countries in which
TI and its customers and suppliers operate, including fluctuations in
foreign currency exchange rates;
o Losses or curtailments of purchases from key customers;
o TI's ability to recruit and retain skilled personnel;
o Availability of raw materials and critical manufacturing equipment;
o Realization of savings from announced restructuring efforts and
consolidation of manufacturing operations.
For a more detailed discussion of these factors, see the text under the
heading "Cautionary Statements Regarding Future Operations" in Item 1 of the
company's Form 10-K for 1998. The forward-looking statements included in this
Form 10-Q are made only as of the date of this Form 10-Q and the company
undertakes no obligation to publicly update the forward-looking statements to
reflect subsequent events or circumstances.
Trademark: eXpressDSP is a registered trademark of Texas Instruments
Incorporated.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXAS INSTRUMENTS INCORPORATED
BY:/s/ WILLIAM A. AYLESWORTH
-------------------------
William A. Aylesworth
Senior Vice President, Treasurer
and Chief Financial Officer
Date: November 5, 1999
24
<TABLE>
<CAPTION>
Exhibit Index
Designation of Paper (P)
Exhibits in or
this Report Description of Exhibit Electronic (E)
- ---------------- ----------------------- --------------
<S> <C> <C>
11 Computation of Basic and Diluted E
Earnings Per Common and Dilutive
Potential Common Share
12 Computation of Ratio of Earnings E
to Fixed Charges
27 Financial Data Schedule E
</TABLE>
[TYPE] EX-11
[DESCRIPTION] EXHIBIT 11
<TABLE>
EXHIBIT 11
----------
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
EARNINGS PER COMMON AND DILUTIVE POTENTIAL COMMON SHARE
For Three Months Ended For Nine Months Ended
---------------------- ---------------------
Sept 30 Sept 30 Sept 30 Sept 30
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (in millions)....................................... $ 383 $ 155 $ 950 $ 218
======== ======== ======== ========
Diluted earnings per common and dilutive potential common share:
Weighted average common shares outstanding (in thousands)...... 787,947 780,594 785,493 780,729
Weighted average dilutive potential common shares:
Stock option and compensation plans........................ 31,691 19,519 29,269 19,852
------- ------- ------- -------
Weighted average common and dilutive potential common shares... 819,638 800,113 814,762 800,581
======= ======= ======= =======
Diluted earnings per common share.............................. $ 0.47 $ 0.19 $ 1.17 $ 0.27
======== ======== ======== ========
Basic earnings per common share:
Weighted average common shares outstanding (in thousands)...... 787,947 780,594 785,493 780,729
======= ======= ======= =======
Basic earnings per common share................................ $ 0.49 $ 0.20 $ 1.21 $ 0.28
======== ======== ======== ========
</TABLE>
[TYPE] EX-12
[DESCRIPTION] EXHIBIT 12
<TABLE>
EXHIBIT 12
----------
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
For Nine Months
Ended Sept 30
---------------
1994 1995 1996 1997 1998 1998 1999
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations before
income taxes and fixed charges:
Income before extraordinary item and
interest expense on loans,
capitalized interest amortized,
and provision for income taxes..... $ 943 $1,530 $ 65 $ 825 $ 710 $ 399 $1,496
Add interest attributable to
rental and lease expense........... 40 41 44 44 41 30 29
----- ------ ----- ----- ----- ----- ------
$ 983 $1,571 $ 109 $ 869 $ 751 $ 429 $1,525
===== ====== ===== ===== ===== ===== ======
Fixed charges:
Total interest on loans (expensed
and capitalized)..................... $ 58 $ 69 $ 108 $ 114 $ 85 $ 64 $ 60
Interest attributable to rental
and lease expense.................... 40 41 44 44 41 30 29
----- ------ ----- ----- ----- ----- ------
Fixed charges............................ $ 98 $ 110 $ 152 $ 158 $ 126 $ 94 $ 89
===== ====== ===== ===== ===== ===== ======
Ratio of earnings to fixed charges....... 10.0 14.3 * 5.5 6.0 4.6 17.1
===== ====== ===== ===== ===== ===== ======
* Not meaningful. The coverage deficiency was $43 million in 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from THE CONSOLIDATED FINANCIAL
STATEMENTS OF TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES AS OF SEPTEMBER 30, 1999, AND
FOR THE NINE MONTHS THEN ENDED, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 291
<SECURITIES> 1,724
<RECEIVABLES> 2,030
<ALLOWANCES> 70
<INVENTORY> 753
<CURRENT-ASSETS> 5,488
<PP&E> 6,747
<DEPRECIATION> 3,228
<TOTAL-ASSETS> 13,198
<CURRENT-LIABILITIES> 2,438
<BONDS> 1,159
0
0
<COMMON> 794
<OTHER-SE> 7,129
<TOTAL-LIABILITY-AND-EQUITY> 13,198
<SALES> 6,770
<TOTAL-REVENUES> 6,770
<CGS> 3,555
<TOTAL-COSTS> 3,555
<OTHER-EXPENSES> 996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 1,429
<INCOME-TAX> 479
<INCOME-CONTINUING> 950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 950
<EPS-BASIC> 1.21
<EPS-DILUTED> 1.17
</TABLE>
