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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 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
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
--- ---
391,978,086
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Number of shares of common stock outstanding as of March 31, 1999
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List of Items Amended
PART I
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
1. Financial Statements.................................................... 3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 9
PART II
6. Exhibits and Reports on Form 8-K........................................ 18
</TABLE>
Text of Amendments
Explanatory Note:
Each of the above listed Items is hereby amended by deleting the Item
in its entirety and replacing it with the Items included herein.
The purpose of the amendment is to make certain changes to the
Financial Statements (Item 1) and the Management's Discussion and Analysis of
Financial Condition and Results of Operations (Item 2) in Part I of the
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 of Texas
Instruments Incorporated (the "company" or "TI") that was filed on April 23,
1999 (the "Original Filing"), and to the Exhibits and Reports on Form 8-K (Item
6) in Part II of the Original Filing.
The amendment is being made to reflect certain comments received by TI
from the Securities and Exchange Commission (the "SEC"). The SEC requested that
TI amend the Original Filing to, among other things, (i) reorder its
Management's Discussion and Analysis of Financial Condition and Results of
Operations in order to place the discussion of inclusive results ahead of
results without special charges and gains, (ii) provide additional disclosures,
in notes to its financial statements and in its Management's Discussion and
Analysis of Financial Condition and Results of Operations, regarding certain
special charges taken by TI, and (iii) restate results of operations to reduce
costs of revenues by $16 million, which reduction resulted in income for the
quarter increasing from $233 million to $244 million and earnings per share
increasing from $0.58 to $0.60. The $16 million reduction in the first quarter
costs of revenues will be charged to expense as depreciation ratably through the
end of 2000.
Any items in the Original Filing not expressly changed hereby shall be
as set forth in the Original Filing. All information contained in this amendment
and the Original Filing is subject to updating and supplementing as provided in
the company's periodic reports filed with the SEC subsequent to the date of such
reports.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(In millions of dollars, except per-share amounts.)
<TABLE>
<CAPTION>
For Three Months Ended
Mar. 31 Mar. 31
1999 1998
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<S> <C> <C>
Income
Net revenues......................................................... $ 2,039 $ 2,187
Operating costs and expenses:
Cost of revenues.................................................. 1,111 1,517
Research and development.......................................... 306 328
Marketing, general and administrative............................. 323 364
--------- ---------
Total....................................................... 1,740 2,209
--------- ---------
Profit (loss) from operations........................................ 299 (22)
Other income (expense) net........................................... 78 57
Interest on loans.................................................... 18 18
--------- ---------
Income before provision for income taxes............................. 359 17
Provision for income taxes........................................... 115 6
Net income........................................................... $ 244 $ 11
========= =========
Diluted earnings per common share.................................... $ 0.60 $ 0.03
========= =========
Basic earnings per common share...................................... $ 0.62 $ 0.03
========= =========
Cash dividends declared per share of common stock.................... $ .085 --
Cash Flows
Net cash provided by (used in) operating activities.................. $ 217 $ (45)
Cash flows from investing activities:
Additions to property, plant and equipment........................ (202) (384)
Purchases of short-term investments............................... (377) (287)
Sales and maturities of short-term investments.................... 766 749
Sales of noncurrent investments................................... 172 --
Acquisition of businesses, net of cash acquired................... (50) (152)
--------- ---------
Net cash provided by (used in) investing activities.................. 309 (74)
Cash flows from financing activities:
Payments on long-term debt........................................ (34) (35)
Dividends paid on common stock.................................... (33) (33)
Sales and other common stock transactions......................... 77 18
Common stock repurchase program................................... (175) (9)
Other............................................................. -- (3)
--------- ---------
Net cash used in financing activities................................ (165) (62)
Effect of exchange rate changes on cash.............................. (8) (4)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 353 (185)
Cash and cash equivalents, January 1................................. 540 1,015
--------- ---------
Cash and cash equivalents, March 31.................................. $ 893 $ 830
========= =========
</TABLE>
3
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TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(In millions of dollars, except per-share amounts.)
<TABLE>
<CAPTION>
Mar.31 Dec. 31
1999 1998
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<S> <C> <C>
Balance Sheet
Assets
Current assets:
Cash and cash equivalents......................................... $ 893 $ 540
Short-term investments:........................................... 1,316 1,709
Accounts receivable, less allowance for losses of
$56 million in 1999 and $70 million in 1998..................... 1,471 1,343
Inventories:
Raw materials................................................... 80 77
Work in process................................................. 365 354
Finished goods.................................................. 196 165
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Inventories................................................. 641 596
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Prepaid expenses.................................................. 73 75
Deferred income taxes............................................. 574 583
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Total current assets............................................ 4,968 4,846
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Property, plant and equipment at cost................................ 6,472 6,379
Less accumulated depreciation..................................... (3,130) (3,006)
--------- ---------
Property, plant and equipment (net)............................. $ 3,342 $ 3,373
--------- ---------
Investments.......................................................... 2,301 2,564
Deferred income taxes................................................ 21 23
Other assets......................................................... 499 444
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Total assets......................................................... $ 11,131 $ 11,250
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Loans payable and current portion long-term debt.................. $ 260 $ 267
Accounts payable.................................................. 535 510
Accrued and other current liabilities............................. 1,253 1,419
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Total current liabilities....................................... 2,048 2,196
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Long-term debt....................................................... 989 1,027
Accrued retirement costs............................................. 811 895
Deferred income taxes................................................ 354 381
Deferred credits and other liabilities............................... 239 224
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 - 393,104,624; 1998 - 392,395,997......... 393 392
Paid-in capital................................................... 1,088 1,178
Retained earnings................................................. 5,006 4,795
Less treasury common stock at cost.
Shares: 1999 - 1,126,538; 1998 - 1,716,038................... (103) (134)
Accumulated other comprehensive income............................ 306 296
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Total stockholders' equity...................................... 6,690 6,527
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Total liabilities and stockholders' equity........................... $ 11,131 $ 11,250
========= =========
</TABLE>
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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 (404.3 and 400.0 million shares for the
first quarters of 1999 and 1998).
2. At the request of the Securities and Exchange Commission, the results of
operations for the first quarter of 1999 have been restated to reduce cost
of revenues by $16 million, described as follows. The $16 million, which
was previously recorded as part of a $17 million fixed asset impairment
charge for Hatogaya, Japan in the first quarter, will be charged to
depreciation expense ratably beginning with the second quarter of 1999 and
extending through the end of 2000. Additional depreciation expense of $1
million was recorded in the first quarter of 1999. This restatement
increased net income and diluted earnings per share by $11 million and
$0.02 in the first quarter. The information in the following paragraph
reflects this restatement.
In the first quarter of 1999, the company announced a consolidation of
semiconductor manufacturing operations in Japan to improve manufacturing
efficiencies and reduce costs. The consolidation is expected to be
completed by the end of the year 2000. The 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 March 31, 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.
3. In the first quarter of 1999, sale of the Micron subordinated note and
other securities generated $172 million in cash.
4. 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. 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
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uncertainties could give rise to unforeseen budget overruns 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.
5. In the first quarter of 1998, TI'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 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.
6. In connection with TI's acquisition 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.
GO DSP's and Spectron's research and development related to DSP software
tools. These software tools, which include real-time operating systems,
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.
7. Total comprehensive income, i.e., net income plus investment and pension
liability adjustments to stockholders' equity, for the first quarters of
1999 and 1998 was $254 million and $4 million.
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8. There has been no significant change in the status of the audit and
investigation concerning grants from the Italian government.
9. Certain amounts in the prior period's financial statements have been
reclassified to conform to the 1999 presentation.
10. The statements of income, statements of cash flows and balance sheet at
March 31, 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.
11. Business segment information is as follows:
<TABLE>
<CAPTION>
For Three Months Ended
Mar. 31 Mar. 31
1999 1998
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<S> <C> <C>
Business Segment Net Revenues
(millions of dollars)
Semiconductor
Trade............................................................. 1,664 1,593
Intersegment...................................................... 9 5
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1,673 1,598
Materials & Controls
Trade............................................................. 245 242
Intersegment...................................................... -- --
--------- ---------
245 242
Educational & Productivity Solutions
Trade............................................................. 81 76
Corporate activities................................................. 22 48
Divested activities.................................................. 18 223
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Total................................................................ $ 2,039 $ 2,187
========= =========
Business Segment Profit (Loss)
(millions of dollars)
Semiconductor........................................................ $ 340 $ 358
Materials & Controls................................................. 40 36
Educational & Productivity Solutions................................. 10 1
Corporate activities................................................. (75) (44)
Special charges...................................................... (24) (244)
Interest on loans/other income (expense)............................. 60 39
Divested activities.................................................. 8 (129)
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Income before provision for income taxes............................. $ 359 $ 17
========= =========
</TABLE>
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12. The following is a reconciliation of individual restructuring accruals (in
millions of dollars).
YEAR OF CHARGE
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------------- -------------------------- ----------
Reserves SC
Divestiture against operation SC
of MCB/ M&C cost gains on SC and closing & operation
termination reduction business Corp. M&C sale of closing in
Description* Total of DIPD action sales actions operation Japan
-------- ----------- --------- -------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1998 $ 163 $ 16 $ 21 $ 24 $ 49 $ 53
CHARGES:
Severance 13 $ 13
Vendor and warranty 1 1
obligations
DISPOSITIONS:
Severance payments (41) (4) (1) (16) (20)
Vendor and warranty (1) (1)
obligation payments
Adjustments - net (3) (3)
reversal to income
----- ----- ----- ---- ----- ------- ------
BALANCE,
MARCH 31, 1999 $ 132 $ 15 $ 17 $ 23 $ 30 $ 33 $ 14
===== ====== ====== ===== ===== ======= =====
</TABLE>
<TABLE>
<S> <C> <C>
*Abbreviations
SC = Semiconductor Business
MCB = Mobile Computing Business
DIPD = Digital Imaging Printing Development Program
Corp. = Corporate Division
</TABLE>
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Registrant (the "company" or "TI") announced first-quarter 1999 diluted
earnings per share (EPS) of $0.60, an increase of $0.57 from the year-ago
quarter. Compared to the fourth quarter of 1998, EPS was up $0.13, despite
profit-sharing expenses for the quarter that increased $0.08 per share. This
higher profit-sharing expense reflects management expectations of significantly
increased operating margins in 1999 compared to 1998, which included the losses
of the divested memory business.
TI's gross profit margin increased to 45.5 percent, compared with 30.6 percent
in the year-ago quarter, and 44.1 percent in the fourth quarter of 1998.
Semiconductor orders were strong, increasing 19 percent from a year ago,
primarily reflecting increased demand for TI's analog and digital signal
processing products. Semiconductor orders increased 13 percent from the fourth
quarter of 1998, primarily due to demand in analog products. Orders have
increased sequentially for the past three quarters.
Digital signal processor (DSP) revenues increased 16 percent from the year-ago
quarter, driven primarily by strength in wireless communications and to a lesser
extent the mass market, more than offsetting a decline in modems.
During the quarter, TI made good progress in expanding the use of DSPs into new
applications and markets. TI announced the industry's first use of DSP
technology to enhance the performance of desktop color laser printers. Called
xStream DSP(TM) Technology, the solution prints documents with complex color
images and graphics in half the time of current printer technologies. The
acquisition of Butterfly VLSI, Ltd., adds expertise to address the emerging
short-distance wireless market. And TI and Liquid Audio, Inc. announced the
development of hardware and software solutions that will enable digital music to
be downloaded from the Internet for portable audio products.
Note: Throughout this report, TI total financial results for the first quarter
of 1998 are reported with the memory business, which was divested in the third
quarter of 1998. All semiconductor results are reported without memory.
FINANCIAL RESULTS
TI revenues for the first quarter of 1999 were $2039 million, compared to $2187
million in the first quarter of 1998. The decrease was due to the absence of
revenue from the divested memory business. Revenues were up slightly from the
fourth quarter of 1998. TI orders in the first quarter were $2230 million, up 4
percent from the year-ago quarter, and up 13 percent from the fourth quarter of
1998, due to strength across all businesses.
Profit from operations was $299 million for the quarter, leading to an operating
margin of 14.7 percent. In the year-ago quarter, loss from operations was $22
million. The improvement was primarily due to the non-recurrence of a special
charge associated with the discontinuance of the company's memory-chip
manufacturing joint venture with Hitachi, Ltd., and, to a lesser extent, the
absence of losses from the divested memory business. Profit from operations was
up $29 million from the fourth quarter of 1998,
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notwithstanding increased profit-sharing expenses. Income for the quarter was
$244 million compared with $11 million in the year-ago quarter, due primarily to
the non-recurrence of a special charge associated with the discontinuance of the
company's memory-chip manufacturing joint venture with Hitachi, and, to a lesser
extent, the absence of losses from the divested memory business.
Results for the quarter include special charges of $24 million. These charges
include $14 million related to the consolidation of semiconductor manufacturing
operations in Japan, and $10 million for purchased in-process research and
development associated with the previously announced acquisition of Butterfly
VLSI, Ltd. (Butterfly).
In the first quarter of 1998, there was a special charge of $219 million for
discontinuing the dynamic random access memory (DRAM) manufacturing joint
venture with Hitachi, Ltd. and $25 million for purchased in-process R&D.
Results for the fourth quarter of 1998 included special charges of $72 million,
substantially all of which was related to the closing of an assembly/test joint
venture with Samsung Electronica, Lda. in Portugal and the sale of the Aversa,
Italy plant.
Excluding special items, operating margin for the quarter was 15.9 percent, up
almost 6 percentage points from the year-ago quarter, EPS was $0.65, up $0.21
from the year-ago quarter and income for the quarter was $261 million, up 48
percent from the year-ago quarter. The company believes that, for analytical
purposes, the effect of these items should be excluded from operating results
because they are not necessarily 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 increased growth in semiconductor in the second quarter, with
revenues continuing to build through the year, based on continued strength in
wireless, continued improvement in mass market, and recovery in hard disk drives
(HDD). Higher second-quarter revenues also are expected from the calculator
business, as it begins shipments for the back-to-school season.
With the continuing improvement in the large end-equipment markets and the
additional focus on emerging end-equipment businesses, TI is raising its 1999
spending projections for R&D to $1.2 billion from $1.1 billion, and for capital
to $1.3 billion from $1.0 billion.
Wireless communications continues to be a significant market for TI's DSP and
analog products, driven by strong demand for digital cellular handsets. In 1998,
TI shipped 100 million DSPs into this market. TI expects the number of digital
handsets to grow about 50 percent in 1999, from 153 million in 1998 to 230
million this year. TI expects continued strength for DSP and analog products in
the mass market, as recent design-in successes move into production and DSPs
continue to penetrate new application areas. TI expects strength to build this
year in its HDD business. TI is the leading semiconductor supplier to the HDD
industry, providing a range of analog, mixed-signal, DSP, and
application-specific integrated circuit (ASIC) products. The HDD market has a
growing need for DSPs to handle higher-density requirements, driven by the rise
in Internet downloads.
According to market analyst Forward Concepts, DSP sales are expected to increase
25 percent in 1999, to $4.4 billion, and reach $10.2 billion in 2002.
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Market analyst Dataquest estimates analog growth of 16 percent for the year.
SEMICONDUCTORS
Semiconductor revenues were up 5 percent from the first quarter of 1998,
primarily due to gains in DSP. Semiconductor revenues were up 3 percent from the
fourth quarter of 1998.
DSP revenues increased 16 percent from the year-ago quarter. As has been typical
in the first quarter, DSP revenues declined slightly from the fourth quarter,
primarily due to seasonality in HDD, which offset record sequential growth in
the DSP mass market of 27 percent. Analog revenues were up 4 percent from the
year-ago quarter, driven by higher demand in wireless.
Analog revenues were flat sequentially, limited by seasonal conditions in HDD
and temporary manufacturing issues that have been resolved.
TI's remaining semiconductor revenues come from a broad range of products,
including standard logic, ASICs, microcontrollers, and reduced instruction-set
computing (RISC) microprocessors. Revenues for these combined areas declined
from the year-ago quarter and increased from the fourth quarter.
Semiconductor revenues included one-time royalty revenues.
Semiconductor operating margins of 20.3 percent were down 2.1 percentage points
from the year-ago quarter, primarily due to the accrual of increased
profit-sharing expenses.
During the quarter, TI strengthened its product offerings with a number of new
complementary analog and DSP catalog chips. Announcements included
high-performance digital-to-analog converters designed to work with the
`C6000 DSP family for a wide range of video and graphics applications, and two
new floating-point DSPs that bring low-cost precision to applications such as
speech recognition, games and robotics. Additionally, TI announced it was
shipping samples of a single-chip digital baseband product for wireless cellular
phones, the industry's first such device with transistor feature sizes of
0.18-micron drawn (0.15 L-effective). This highly integrated `C5000 DSP-based
device offers customers improved power, cost and space savings.
Further strengthening TI's DSP systems-level integration capabilities were
licensing agreements that will expand TI's embedded microprocessor portfolio.
Licenses with MIPS Technologies, Inc. and NEC Corporation will provide TI access
to RISC cores, which combine with TI DSPs for applications such as
communications and digital consumer devices.
Highlighting TI's continuing leadership in DSP and analog were recent reports
from market analysts. Forward Concepts stated that TI extended its lead in DSP
to 47 percent market share, the only DSP vendor to gain share the last five
years in a row. Dataquest named TI as the number one supplier in analog for the
second straight year, the only major supplier to gain share in each of the last
three years.
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MATERIALS & CONTROLS (M&C)
Revenues for the M&C business were $245 million, about even with the first
quarter of 1998. Revenues were up 7 percent sequentially, primarily due to
strength in the industrial market, including seasonal build in the heating,
ventilation and air-conditioning (HVAC) area, and to a lesser extent, increased
demand in Asia. Operating margin was 16.4 percent, up 1.6 percentage points from
the year-ago quarter, primarily due to actions taken in support of M&C's
best-cost producer strategy.
In the TIRIS[TM] business, the Tag-it[TM] line pilot program was launched with
British Airways in partnership with suppliers of luggage-handling equipment.
EDUCATIONAL & PRODUCTIVITY SOLUTIONS (E&PS)
Revenues for the E&PS business were up 7 percent from the first quarter of 1998
to $81 million, and about even with the fourth quarter. Revenues reflect the
seasonal patterns of this business, with second and third quarters being the
peak period for back-to-school shipments. Operating margin was 12.0 percent,
up more than 10 percentage points from the year-ago quarter, and up almost 5
percentage points from the fourth quarter of 1998, due to significant
improvements in operating costs.
E&PS continues to grow its portfolio of educational products and services, which
comprise its core focus. During the quarter, the business announced the TI-83
Plus, an upgradable graphing calculator enhanced with Flash ROM technology, new
applications and more user-available memory, as well as the TI-30X IIS, TI's
first scientific calculator with a two-line display.
DIGITAL IMAGING
Revenues in digital imaging declined from the year-ago quarter, primarily due to
timing of new ultraportable product introductions and manufacturing issues
associated with the transition to XGA resolution ultraportable products. The
operating loss remained at about the level of the year-ago quarter.
Three new ultraportable projectors were introduced by TI customers, including a
third XGA resolution ultraportable and an SVGA ultraportable below $3,000 from
InFocus[R]. The ultraportable projector market continues to grow rapidly and
TI's Digital Light Processing[TM] (DLP[TM]) is well positioned.
ADDITIONAL FINANCIAL INFORMATION
During the first quarter of 1999, cash and cash equivalents plus short-term
investments decreased by $40 million to $2209 million. The sale of the Micron
subordinated note and other securities generated $172 million of cash. The
acquisition of Butterfly VLSI, Ltd., required approximately $50 million of cash
in the first quarter.
First-quarter 1999 cash flow from operating activities net of additions to
property, plant, and equipment was $15 million. First-quarter capital
expenditures totaled $202 million, compared to $384 million in the first quarter
of 1998, which included the divested memory business.
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During the first quarter 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. TI spent $98 million of cash for
share purchases net of proceeds from sales and other common stock transactions.
Depreciation for the first quarter of 1999 was $225 million, compared to $275
million in the same quarter a year ago. Depreciation for 1999 is projected at
$1.0 billion.
The income tax rate for the first quarter of 1999 was 32 percent, which is the
estimated rate for the full year.
At the end of the first quarter, the debt-to-total capital ratio was .16 versus
.17 at the end of 1998.
SPECIAL CHARGES AND GAINS
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
costs. At March 31, 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 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. 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
13
<PAGE> 14
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 1998
In the first quarter of 1998, TI'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 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 l998, 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.
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.
14
<PAGE> 15
Fourth Quarter of 1998
In the fourth quarter of 1998, the company took further steps to enhance
manufacturing efficiency, including the announced closing of a semiconductor
assembly operation and sale of a materials & controls manufacturing operation,
both in Europe. The sale was completed on December 31, 1998. The primary benefit
from these actions was the consolidation of manufacturing facilities, which
increased efficiencies and reduced manufacturing costs. Estimated savings from
such actions were approximately $24 million annually. The benefit was expected
to begin in the first quarter of 1999. The assembly operation closing, which is
ongoing, affected 740 employees. As a result of these actions, the company took
a fourth-quarter 1998 pretax charge of $72 million, of which $27 million was
included in cost of revenues, $24 million in other income (expense) net and $21
million in marketing, general and administrative expense. Of this $72 million
charge, $35 million was for severance, $35 million for other cash-related costs
and $2 million for asset write-downs, primarily to adjust fixed assets in the
European materials & controls operation to actual sale value. Of the $35 million
severance charge, $19 million had been paid by year-end 1998 and $16 million
will be paid in 1999. Of the other $35 million charge, $20 million was a cash
payment required as part of an agreement with the third-party buyer of a
materials and controls manufacturing operation in Europe. The balance was for
previously-received government grants expected to be repaid as a result of the
closing of the European semiconductor assembly operation.
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:
o Information Technology (computer hardware, software and electronic
data interchange (EDI) interfaces);
o Physical Plant (manufacturing equipment and facilities);
o Products (including product development); and
o Extended Enterprise (suppliers and customers).
For each of these program areas, TI is using a four-step approach:
o Ownership (creating awareness, assigning tasks);
o Inventory (listing items to be assessed for Y2K readiness);
o Assessment (prioritizing the inventoried items, assessing their Y2K
readiness, planning corrective actions, making initial contingency
plans); and
o Corrective Action Deployment (implementing corrective actions,
verifying implementation, finalizing contingency plans).
15
<PAGE> 16
At March 31, 1999, the Ownership, Inventory, and Assessment steps were
essentially complete for priority items in Information Technology, Physical
Plant and Products. TI's assessment activities for Extended Enterprise will
continue through the second quarter of 1999. TI considers priority items to be
those that could significantly disrupt TI's business operations. The target
completion date for priority items for the remaining step (Corrective Action
Deployment) is June 30, 1999 for all program areas.
As of March 31, 1999, the status for each program area is as follows:
o 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. Assessment of
infrastructure hardware and software that support TI's enterprise-wide
networks and servers is essentially complete, and deployment of
corrective actions is under way. TI has also deployed an assessment
tool and corrective action process for desktop computers. The Y2K
readiness of TI's EDI interfaces has been assessed, and testing
continues with major customers. Testing of EDI interfaces with
suppliers is complete, and TI believes that those interfaces are Y2K
ready.
o Physical Plant: Assessment of manufacturing equipment and facilities
is substantially complete and corrective actions are under way.
o Products: TI is essentially complete with the Y2K readiness assessment
of its products and is providing product status information on its
company web site. Divested product lines are not part of the
assessment. This effort includes 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. TI has
identified date-related issues with certain of TI's semiconductor
application software development tools and is providing 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
indicates they are either Y2K ready or have no date logic.
o Extended Enterprise: TI's Y2K supplier program attempts 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, which is ongoing and
expected to be complete by June 30, 1999, has included sending Y2K
surveys and conducting onsite Y2K reviews with selected suppliers. TI
intends to develop contingency plans by June 30, 1999, on the basis of
information gathered through the assessment process. TI continues to
discuss Y2K status with selected strategic customers.
16
<PAGE> 17
Costs to Address Y2K Issues: TI's estimated aggregate costs for its Y2K
activities from 1995 through 2000 are expected to range from $70 million to $90
million. Through March 31, 1999, TI has spent approximately $57 million.
Risks of Y2K Issues and Contingency Plans: TI continues to review Y2K issues
relating to its information technology, physical plant, products, suppliers and
customers. As noted above, TI expects to develop a set of contingency plans by
June 30, 1999, on the basis of information available as of that time. It will
refine those plans as needed in response to further information gathered through
the end of the year.
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 telecommunications
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 is considering alternatives such
as the creation of buffer inventories of critical supplies and identification of
alternative suppliers.
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).
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 claims 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 in the ordinary course of business 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. TI continues to
review legal risks that may be associated with discontinued products and
divested product lines.
17
<PAGE> 18
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Designation of Exhibits
in this Report Description of Exhibit
------------------------ ----------------------
<S> <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 as of March 31,
1999 and for the 3 months then ended
</TABLE>
(b) Reports on Form 8-K.
None.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
This Form 10-Q/A 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
18
<PAGE> 19
current and past products, and effective implementation of contingency
plans and corrective actions;
o Timely completion of announced acquisitions;
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/A are made only as of the date
of this Form 10-Q/A and the company undertakes no obligation to
publicly update the forward-looking statements to reflect subsequent
events or circumstances.
19
<PAGE> 20
SIGNATURE
Pursuant to the requirements of Rule 12b-15 of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, on
August 6, 1999.
TEXAS INSTRUMENTS INCORPORATED
BY: /s/ WILLIAM A. AYLESWORTH
------------------------------------
William A. Aylesworth
Senior Vice President
Treasurer and
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Designation of Exhibits
in this Report Description of Exhibit Paper (P) or 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 as of E
March 31, 1999 and for the 3
months then ended
</TABLE>
<PAGE> 1
EXHIBIT 11
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
EARNINGS PER COMMON AND DILUTIVE POTENTIAL COMMON SHARE
<TABLE>
<CAPTION>
For Three Months Ended
----------------------
Mar. 31 Mar. 31
1999 1998
-------- --------
<S> <C> <C>
Net income (in millions)............................................. $ 244 $ 11
======== ========
Diluted earnings per common and dilutive potential common share:
Weighted average common shares outstanding (in thousands)............ 391,798 390,019
Weighted average dilutive potential common shares:
Stock option and compensation plans............................. 12,454 9,961
-------- --------
Weighted average common and dilutive potential common shares......... 404,252 399,980
======== ========
Diluted earnings per common share.................................... $ 0.60 $ 0.03
======== ========
Basic Earnings Per Common Share:
Weighted average common shares outstanding (in thousands)............ 391,798 390,019
======== ========
Basic earnings per common share...................................... $ 0.62 $ 0.03
======== ========
</TABLE>
<PAGE> 1
EXHIBIT 12
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
For Three Months
Ended March 31
------------------
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 $ 39 $ 381
Add interest attributable to rental
and lease expense.................. 40 41 44 44 41 10 9
------ ------- ------ ------ ------ ------ ------
$ 983 $ 1,571 $ 109 $ 869 $ 751 $ 49 $ 390
====== ======= ====== ====== ====== ====== ======
Fixed charges:
Total interest on loans (expensed
and capitalized)..................... $ 58 $ 69 $ 108 $ 114 $ 85 $ 22 $ 20
Interest attributable to rental
and lease expenses................... 40 41 44 44 41 10 9
------ ------- ------ ------ ------ ------ ------
Fixed charges............................ $ 98 $ 110 $ 152 $ 158 $ 126 $ 32 $ 29
====== ======= ====== ====== ====== ====== ======
Ratio of earnings to fixed charges........ 10.0 14.3 * 5.5 6.0 1.5 13.4
====== ======= ====== ====== ====== ====== ======
</TABLE>
*Not meaningful. The coverage deficiency was $43 million in 1996.
<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 MARCH 31, 1999, AND FOR THE THREE MONTHS THEN ENDED, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 893
<SECURITIES> 1,316
<RECEIVABLES> 1,471
<ALLOWANCES> 56
<INVENTORY> 641
<CURRENT-ASSETS> 4,968
<PP&E> 6,472
<DEPRECIATION> 3,130
<TOTAL-ASSETS> 11,131
<CURRENT-LIABILITIES> 2,048
<BONDS> 989
0
0
<COMMON> 393
<OTHER-SE> 6,297
<TOTAL-LIABILITY-AND-EQUITY> 11,131
<SALES> 2,039
<TOTAL-REVENUES> 2,039
<CGS> 1,111
<TOTAL-COSTS> 1,111
<OTHER-EXPENSES> 306
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 359
<INCOME-TAX> 115
<INCOME-CONTINUING> 244
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 244
<EPS-BASIC> .62
<EPS-DILUTED> .60
</TABLE>