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, 2001 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.)
12500 TI Boulevard, P.O. Box 660199, Dallas, Texas 75266-0199
----------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 972-995-3773
---------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------ ------
1,732,198,880
-----------------------------------------------------------------------------
Number of shares of Registrant's common stock outstanding as of
September 30, 2001
PART I. - FINANCIAL INFORMATION
ITEM 1. Financial Statements
-----------------------------
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
Operations 2001 2000 2001 2000
---------- -------- -------- -------- --------
Net revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,849 $ 3,149 $ 6,414 $ 8,843
Operating costs and expenses:
Cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . 1,424 1,637 4,452 4,544
Research and development. . . . . . . . . . . . . . . . . . . . 358 533 1,216 1,306
Selling, general and administrative . . . . . . . . . . . . . . 312 453 1,060 1,268
-------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,094 2,623 6,728 7,118
-------- -------- -------- --------
Profit (loss) from operations . . . . . . . . . . . . . . . . . . (245) 526 (314) 1,725
Other income (expense) net. . . . . . . . . . . . . . . . . . . . 37 565 201 2,039
Interest on loans . . . . . . . . . . . . . . . . . . . . . . . . 15 17 45 58
-------- -------- -------- --------
Income (loss) before provision for income taxes and
cumulative effect of an accounting change . . . . . . . . . . . (223) 1,074 (158) 3,706
Provision (benefit) for income taxes. . . . . . . . . . . . . . . (106) 398 (73) 1,284
-------- -------- -------- --------
Income (loss) before cumulative effect of an accounting change. . (117) 676 (85) 2,422
Cumulative effect of an accounting change . . . . . . . . . . . . -- -- -- (29)
-------- -------- -------- --------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $ (117) $ 676 $ (85) $ 2,393
======== ======== ======== ========
Diluted earnings (loss) per common share:
Income (loss) before cumulative effect of an accounting change. $ (.07) $ .38 $ (.05) $ 1.36
Cumulative effect of an accounting change . . . . . . . . . . . -- -- -- (.02)
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (.07) $ .38 $ (.05) $ 1.34
======== ======== ======== ========
Basic earnings (loss) per common share:
Income (loss) before cumulative effect of an accounting change. $ (.07) $ .39 $ (.05) $ 1.41
Cumulative effect of an accounting change . . . . . . . . . . . -- -- -- (.01)
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (.07) $ .39 $ (.05) $ 1.40
======== ======== ======== ========
Cash dividends declared per share of common stock. . . . . . . . . $ .021 $ .021 $ .064 $ .064
2
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(In millions of dollars, except per-share amounts.)
Sept. 30 Dec. 31
Balance Sheet 2001 2000
------------- -------- --------
Assets
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . $ 387 $ 745
Short-term investments . . . . . . . . . . . . . . . . . . . . . 2,605 3,258
Accounts receivable, less allowance for losses of
$74 million in 2001 and $54 million in 2000. . . . . . . . . . 1,449 2,204
Inventories:
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . 162 245
Work in process. . . . . . . . . . . . . . . . . . . . . . . . 530 681
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . 208 307
-------- --------
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 900 1,233
-------- --------
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . 383 595
Prepaid expenses and other current assets. . . . . . . . . . . . 380 80
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . 6,104 8,115
-------- --------
Property, plant and equipment at cost. . . . . . . . . . . . . . . 9,575 9,099
Less accumulated depreciation. . . . . . . . . . . . . . . . . . (3,745) (3,652)
-------- --------
Property, plant and equipment (net). . . . . . . . . . . . . 5,830 5,447
-------- --------
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,392 2,400
Goodwill and other acquisition-related intangibles . . . . . . . . 792 961
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . 462 106
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 664 691
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,244 $ 17,720
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Loans payable and current portion long-term debt . . . . . . . . $ 42 $ 148
Accounts payable and accrued expenses . . . . . . . . . . . . . 1,367 1,921
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 200 323
Accrued retirement and profit sharing contributions. . . . . . . 12 421
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . 1,621 2,813
-------- --------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 1,222 1,216
Accrued retirement costs . . . . . . . . . . . . . . . . . . . . . 416 378
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . 162 469
Deferred credits and other liabilities . . . . . . . . . . . . . . 275 256
Stockholders' equity:
Preferred stock, $25 par value. Authorized - 10,000,000 shares.
Participating cumulative preferred. None issued. . . . . . . . -- --
Common stock, $1 par value. Authorized - 2,400,000,000 shares.
Shares issued: 2001 - 1,740,329,349; 2000 - 1,733,237,248. . . 1,740 1,733
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 1,287 1,185
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . 9,128 9,323
Less treasury common stock at cost.
Shares: 2001 - 8,130,469; 2000 - 1,184,880 . . . . . . . . . . (320) (93)
Accumulated other comprehensive income (loss). . . . . . . . . . (190) 574
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . (97) (134)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . 11,548 12,588
-------- --------
Total liabilities and stockholders' equity . . . . . . . . . . . . $ 15,244 $ 17,720
======== ========
3
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(In millions of dollars, except per-share amounts.)
For Nine Months Ended
---------------------
Sept. 30 Sept. 30
2001 2000
-------- --------
Cash Flows
----------
Cash flows from operating activities:
Income (loss) before cumulative effect of an accounting change. . . $ (85) $ 2,422
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,145 869
Amortization of goodwill and other acquisition-related intangibles. 173 92
Purchased in-process research and development . . . . . . . . . . . -- 112
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 3 56
Net currency exchange losses. . . . . . . . . . . . . . . . . . . . 5 8
(Increase) decrease in working capital (excluding cash
and cash equivalents, short-term investments, deferred
income taxes, and loans payable and current portion
long-term debt):
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . 741 (580)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 333 (176)
Prepaid expenses and other current assets. . . . . . . . . . . 302 8
Accounts payable and accrued expenses. . . . . . . . . . . . . (603) 190
Income taxes payable . . . . . . . . . . . . . . . . . . . . . (42) 450
Accrued retirement and profit sharing contributions. . . . . . (399) (17)
Gain on sale of Micron common stock. . . . . . . . . . . . . . . . -- (1,636)
Increase in noncurrent accrued retirement costs. . . . . . . . . . (30) (80)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 (135)
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . . 1,039 1,583
Cash flows from investing activities:
Additions to property, plant and equipment. . . . . . . . . . . . (1,554) (1,789)
Purchases of short-term investments . . . . . . . . . . . . . . . (2,373) (4,304)
Sales and maturities of short-term investments. . . . . . . . . . 3,012 2,730
Purchases of noncurrent investments . . . . . . . . . . . . . . . (194) (114)
Sales of noncurrent investments . . . . . . . . . . . . . . . . . 102 2,160
Acquisition of businesses, net of cash acquired . . . . . . . . . -- (3)
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . (1,007) (1,320)
Cash flows from financing activities:
Additions to loans payable. . . . . . . . . . . . . . . . . . . . -- 2
Payments on loans payable . . . . . . . . . . . . . . . . . . . . (2) (19)
Additions to long-term debt . . . . . . . . . . . . . . . . . . . 3 249
Payments on long-term debt. . . . . . . . . . . . . . . . . . . . (129) (250)
Dividends paid on common stock. . . . . . . . . . . . . . . . . . (111) (104)
Sales and other common stock transactions . . . . . . . . . . . . 111 191
Common stock repurchase program . . . . . . . . . . . . . . . . . (310) (133)
-------- --------
Net cash used in financing activities . . . . . . . . . . . . . . . (438) (64)
Effect of exchange rate changes on cash . . . . . . . . . . . . . . 48 (42)
-------- --------
Net increase (decrease) in cash and cash equivalents. . . . . . . . (358) 157
Cash and cash equivalents, January 1. . . . . . . . . . . . . . . . 745 781
-------- --------
Cash and cash equivalents, September 30 . . . . . . . . . . . . . . $ 387 $ 938
======== ========
4
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Notes to Financial Statements
1. Diluted earnings (loss) per common share are based on average common
and dilutive potential common shares outstanding (1,733.5 and 1,791.9
million shares for the third quarters of 2001 and 2000, and 1,734.6 and
1,788.3 million shares for the nine months ended September 30, 2001 and
2000). For the third quarter of 2001 and nine months ended September
30, 2001, dilutive potential common shares have been excluded due to
the net loss for the periods.
2. As of September 30, 2001, in millions of dollars, $184 of the $290
aggregate severance cost obligations for the first, second and third
quarter 2001 worldwide cost reduction and restructuring actions
affecting a total of 5724 employees had been paid. Loss for the third
quarter of 2001 includes, in millions of dollars, net special charges
of $37, of which $19 is severance cost for a worldwide cost reduction
program affecting 285 employees and $16 relates to the restructuring
charges for the closing of three Semiconductor facilities (Santa Cruz,
California; Merrimack, New Hampshire; and Tustin, California). Of the
$16, $15 is for the acceleration of depreciation over the remaining
service life of the facilities. Of the $37 net special charges, $27 is
included in cost of revenues, $8 is in selling, general and
administrative expense and $2 is in research and development expense.
3. Loss for the second quarter of 2001 includes, in millions of dollars,
net special charges of $252, of which $214 is severance cost for a
worldwide cost-reduction program affecting 3778 employees and $35
relates to the restructuring charges for the closing of three
Semiconductor facilities (Merrimack, New Hampshire; Tustin, California;
and Santa Cruz, California) affecting an additional 559 employees. Of
the $35, $14 is for severance cost and $16 is for the acceleration of
depreciation over the remaining service life of the facilities. Of the
$252 net special charges, $162 is included in cost of revenues, $84 is
in selling, general and administrative expense and $6 is in research
and development expense. Also included in the second quarter of 2001
is a $68 increase to the income tax provision to adjust to the expected
tax rate for the year.
4. Income for the first quarter of 2001 includes, in millions of dollars,
net special charges of $50, of which $11 is severance cost for 241
first-quarter employee acceptances under the U.S. voluntary retirement
program, $16 is severance cost for restructuring actions affecting 261
employees in international Semiconductor locations and $25 relates to
the closing of a Semiconductor manufacturing facility in Santa Cruz,
California. Of the $25, $16 is for severance cost for 600 employees
and $5 is for acceleration of depreciation over the remaining service
life of the facility. Of the $50 of net special charges, $44 is
included in cost of revenues, $7 is in selling, general and
administrative expense, $2 is in research and development expense, and
$3 is in other income.
5. Income for the third quarter of 2000 includes, in millions of dollars,
5
investment gains of $425, included in other income, from the sale of
5.6 million shares of Micron Technology, Inc. (Micron) common stock,
and special charges of $163, of which $112 is for purchased in-process
R&D costs from the Dot Wireless, Inc. and Alantro Communications, Inc.
acquisitions, $41 is for pooling of interests transaction costs from
the Burr-Brown Corporation acquisition, and $10, net, is for several
Semiconductor and Sensors & Controls restructuring and other actions in
the U.S., Japan and Europe affecting 432 employees. As of September
30, 2001, $13 of the $19 severance cost obligation had been paid. Of
the $163, $112 is included in research and development expense, $46 is
in selling, general and administrative expense, $31 is in cost of
revenues, $15 is in net revenues and $11 is in other income.
6. Income for the second quarter of 2000 includes, in millions of dollars,
an investment gain of $1211 in other income from the sale of 20 million
shares of Micron common stock.
7. Income for the first quarter of 2000 includes, in millions of dollars,
special charges of $29 associated with actions including the closing of
the Sensors & Controls manufacturing facility in Versailles, Kentucky,
and TI's acquisition of Toccata Technology ApS. Of the $29 charge, $12
was for severance for 480 employees in Kentucky. As of September 30,
2001, $9 of the severance cost obligation had been paid. Of the $29,
$20 is included in cost of revenues, $6 is in selling, general and
administrative expense, and $3 is in research and development expense.
8. Total comprehensive income (loss), i.e., net income plus investment and
pension liability adjustments to stockholders' equity, for the third
quarters of 2001 and 2000, in millions of dollars, was negative $991
and negative $1266. For the nine months ended September 30, 2001 and
2000, it was negative $849 and positive $1991.
9. There has been no significant change in the status of the audit
investigation concerning grants from the Italian government.
10. Federal income taxes for the interim periods presented have been
included in the accompanying financial statements on the basis of an
estimated annual rate. The estimated annualized tax rate for 2001 is
46 percent. The primary reason the effective annualized tax rate for
2001 differs from the 35 percent statutory corporate tax rate is due to
decreased profit combined with tax benefits such as the credit for
research activities.
11. In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangibles, effective
for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The company will
apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the non-
6
amortization provisions of the Statement is expected to result in an
increase in net income of about $100 million ($0.06 per share). During
2002, the company will perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January
1, 2002 and has not yet determined what effect, if any, these tests
will have on the earnings and financial position of the company.
12. The statements of operations and statements of cash flows for the
periods ended September 30, 2001, and the balance sheet at September
30, 2001, are not audited but reflect all adjustments which are of a
normal recurring nature and are, in the opinion of management,
necessary for a fair statement of the results of the periods shown.
7
13. Business segment information is as follows:
For Three Months Ended For Nine Months Ended
---------------------- ---------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
Business Segment Net Revenues 2001 2000 2001 2000
(millions of dollars) --------- --------- --------- ---------
-----------------------------
Semiconductor
Trade. . . . . . . . . . . . . . . . . . $ 1,450 $ 2,688 $ 5,275 $ 7,576
Intersegment . . . . . . . . . . . . . . 3 4 11 13
---------- ---------- ---------- ----------
1,453 2,692 5,286 7,589
---------- ---------- ---------- ----------
Sensors & Controls
Trade. . . . . . . . . . . . . . . . . . 221 245 736 780
Intersegment . . . . . . . . . . . . . . 1 -- 3 --
---------- ---------- ---------- ----------
222 245 739 780
---------- ---------- ---------- ----------
Educational & Productivity Solutions
Trade. . . . . . . . . . . . . . . . . . 179 175 389 380
Corporate activities . . . . . . . . . . . (5) 11 (12) 8
Divested activities. . . . . . . . . . . . -- 26 12 86
---------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . $ 1,849 $ 3,149 $ 6,414 $ 8,843
========== ========== ========== ==========
Business Segment Profit (Loss)
(millions of dollars)
------------------------------
Semiconductor. . . . . . . . . . . . . . . $ (219) $ 681 $ 48 $ 1,927
Sensors & Controls . . . . . . . . . . . . 45 43 148 148
Educational & Productivity Solutions . . . 67 64 122 105
Corporate activities . . . . . . . . . . . (45) (53) (125) (180)
Special charges/gains and
acquisition-related amortization,
net of applicable profit sharing . . . . (93) 221 (510) 1,353
Interest on loans/other income (expense) net,
excluding a first-quarter 2001 gain
of $3, a third-quarter 2000 gain of
$436, and a second-quarter 2000 gain
of $1211 included above in special
charges/gains and acquisition-related
amortization . . . . . . . . . . . . . . 22 112 153 334
Divested activities. . . . . . . . . . . . -- 6 6 19
---------- ---------- ---------- ----------
Income (loss) before provision for income
taxes and cumulative effect of an
accounting change. . . . . . . . . . . . $ (223) $ 1,074 $ (158) $ 3,706
========== ========== ========== ==========
8
14. Year-to-date acquisition-related purchased in-process research and
development (R&D) charges were zero in 2001 and $112 million in 2000.
These charges are for R&D from business purchase acquisitions. Values
for acquired in-process R&D (purchased R&D) were determined at the
acquisition date based upon the appraised value of the related
developmental projects. Purchased R&D projects were assessed, analyzed
and valued within the context and framework articulated by the Securities
and Exchange Commission herein described as the Exclusion Approach.
Major assumptions, detailed in the following table, used in determining
the value of significant purchased R&D included the discount rate, the
estimated beginning date of projected operating cash flows, and the
remaining cost and time, in engineer-months, to complete the R&D projects.
The term "engineer month" refers to the average amount of research work
expected to be performed by an engineer in a month.
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 purchased
R&D. Such 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. TI expects to
essentially meet its original return expectations for the projects.
9
Millions of Dollars
-----------------------------------------------------------------------------------------------------------------------------------
Cost/time to
Purchased complete R&D Year
in-process projects cash flows
Entity Acquisition Consid- Other Deferred R&D Appraisal R&D Discount -------------------- projected
acquired date eration Goodwill intan- compen- charge method focus rate At acquisi- At to begin
gibles sation tion Sept. 2001
--------- ----------- --------- -------- ------ -------- -------- --------- --------- -------- ---------- ---------- --------
Alantro Third $277 $148 $ 81 $ 32 $ 52 Exclusion Wireless 24% $4.1/ $1.7/66 2002
Commun- quarter approach networking 256 engineer
ications, 2000 technology engineer months
Inc. for home months
and office
10
15. The following is a reconciliation of individual restructuring accruals (in
millions of dollars).
Year of Charge
--------------------------------------------------------------------------
Balance, prior 2000 2001
actions - primarily ------------------------------------ -----------------------------------
severance and Voluntary/ SC SC
business S&C SC and S&C E&PS involuntary site international
divestiture site restructuring severance program closings restructuring
Description* Total related closing actions action in U.S. in U.S. actions
------------ ------- ------------- --------- --------------- ----------- --------- ---------- ---------
BALANCE, DECEMBER 31, 2000 $ 70 $ 46 $ 11 $ 10 $ 3
CHARGES:
Severance 43 $ 11 $ 16 $ 16
Asset write-downs 6 6
Various charges 3 3
DISPOSITIONS:
Change in estimates (1) (1)
Non-cash write-down
of assets (6) (6)
Severance payments (8) (2) (1) (1) (2) (2)
------ ------------- --------- --------------- -------- -------- -------- --------
BALANCE, March 31, 2001 107 44 10 8 1 11 19 14
------ ------------ -------- -------------- ---------- -------- --------- --------
CHARGES:
Severance 172 90 14 68
Asset write-downs 16 16
Various charges 8 2 5 1
FAS 88 56 48 8
DISPOSITIONS:
Various payments (2) (2)
Non-cash write-down
of assets (16) (16)
Pension payments (56) (48) (8)
Severance payments (72) (5) (4) (2) (1) (46) (1) (13)
------- ------------- --------- --------------- ----------- --------- ---------- ---------
BALANCE, June 30, 2001 213 39 6 6 - 57 35 70
------- ------------- --------- --------------- ----------- --------- ---------- ---------
CHARGES:
Severance 15 15
Asset write-downs 15 15
Various charges 3 2 1
FAS 88 4 4
DISPOSITIONS:
Various payments (3) (3)
Non-cash write-down
of assets (15) (15)
Pension payments (4) (4)
Severance payments (67) (1) (3) (1) (16) (4) (42)
------- ------------- --------- --------------- ----------- --------- ---------- ---------
BALANCE, September 30, 2001 $ 161 $ 38 $ 3 $ 5 $ - $ 43 $ 29 $ 43
====== ============ ======== ============== ========== ======== ========= ========
*Abbreviations
SC = Semiconductor Business
S&C = Sensors & Controls Business
E&PS = Educational & Productivity Solutions Business
11
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Registrant (the "company" or "TI") announced third-quarter financial
results that show the company's third-quarter revenue was $1849 million, down
9 percent from the second quarter and slightly better than the company's
outlook issued in July for a decline of 10 to 15 percent. Orders, which had
fallen 10 percent sequentially in the second quarter, declined 4 percent
sequentially in the third quarter to $1638 million. Semiconductor orders
were about even with the second-quarter level.
TI's overall book-to-bill for semiconductors continued to rise sequentially,
and TI's DSP book-to-bill exceeded one for the second consecutive quarter.
DSP revenue was up 10 percent sequentially and orders were up 11 percent
sequentially. Orders for high-performance Analog turned the corner and
increased 10 percent sequentially.
Inventory was reduced by $182 million from the end of the second quarter.
Despite the decline in revenue, days of inventory were reduced to 58 from 72
at the end of the second quarter. Cash flow from operations was $334
million, and free cash flow was $22 million. The company also repurchased
$152 million of company stock.
SUMMARY OF FINANCIAL RESULTS
For the third quarter of 2001, TI reported the following:
- Total revenue for TI was $1849 million, down 41 percent from $3149
million in the year-ago quarter and down 9 percent sequentially
due to weakness in Semiconductor.
- Cost of revenues in the third quarter was $1424 million, compared with
$1637 million in the year-ago quarter. Cost of revenues decreased
primarily due to decreased Semiconductor revenue.
- Research and development (R&D) totaled $358 million, down from $533
million in the third quarter of 2000 primarily due to acquisition-
related charges for in-process R&D in the third quarter of 2000.
- Selling, general and administrative expense in the quarter was $312
million, down from $453 million in the year-ago quarter due to savings
resulting from restructuring activities and tight spending controls.
- Other income (expense) net decreased from $565 million in the third
quarter of 2000 to $37 million in the third quarter of 2001, primarily
due to a gain on the sale of Micron stock in the third quarter of 2000.
- The income tax rate for the quarter was 47 percent.
- TI orders in the third quarter were $1638 million, compared with $3250
million in the year-ago quarter and $1704 million in the second
quarter.
12
Results for the third quarter of 2001 include net special charges of $37
million, of which $19 million is severance cost for a worldwide cost-
reduction program and $16 million relates to the restructuring charges for
the closing of three Semiconductor facilities (Santa Cruz, California;
Merrimack, New Hampshire; and Tustin, California). Of the $16 million,
$15 million is for the acceleration of depreciation over the remaining
service life of the facilities. Also included is amortization of goodwill
and other acquisition-related intangibles of $56 million.
For the second quarter of 2001, results include net special charges of
$252 million, of which $214 million is severance cost for a worldwide
cost-reduction program and $35 million relates to the restructuring
charges for the closing of three Semiconductor facilities (Merrimack, New
Hampshire; Tustin, California; and Santa Cruz, California). In addition,
TI recorded a $68 million increase to the income tax provision to adjust
to the expected tax rate for the year. Also included is amortization of
goodwill and other acquisition-related intangibles of $58 million.
For the first quarter of 2001, results include net special charges of $50
million, of which $11 million is severance cost for first-quarter employee
acceptances under the U.S. voluntary retirement program, $16 million is
severance cost for restructuring actions in international Semiconductor
locations, and $25 million relates to the closing of a Semiconductor
manufacturing facility in Santa Cruz, California. Also included is
amortization of goodwill and other acquisition-related intangibles of $59
million.
For the third quarter of 2000, results include investment gains of $425
million, included in other income, from the sale of 5.6 million shares of
Micron Technology, Inc. (Micron) common stock, and net special charges of
$163 million, of which $112 million is for purchased in-process R&D costs
from the Dot Wireless, Inc. and Alantro Communications, Inc. acquisitions,
$41 million is for pooling of interests transaction costs from the Burr-
Brown Corporation acquisition, and $10 million, net, is for several
Semiconductor and Sensors & Controls restructuring and other actions in
the U.S., Japan and Europe. Also included is amortization of goodwill and
other acquisition-related intangibles of $41 million.
For the second quarter of 2000, results include an investment gain of
$1211 million, included in other income, from the sale of 20 million
shares of Micron common stock. Also included is amortization of goodwill
and other acquisition-related intangibles of $25 million.
For the first quarter of 2000, results included net special charges of $29
million for actions including the closing of a Sensors & Controls
manufacturing facility in Versailles, Kentucky, and TI's acquisition of
Toccata Technology ApS. Also included is amortization of goodwill and
other acquisition-related intangibles of $25 million.
Additional information relating to these items appears below under the
heading "Special Charges and Gains."
13
OUTLOOK
It appears that third quarter of 2001 will mark the bottom for semiconductor
orders, and the floor for revenue should be set in the fourth quarter.
Fourth-quarter TI revenue is expected to decline about 10 percent
sequentially, mostly due to normal seasonal declines in Educational &
Productivity Solutions (E&PS) as well as continued weakness in Semiconductor.
Specifically, TI expects the following for the fourth quarter compared to the
third quarter:
- In Semiconductor, revenue will decline about 5 percent as
continued growth in DSP is more than offset by declines in other
products.
- Sensors & Controls revenue will be about even.
- E&PS revenue will decline by about $110 million, or 60 percent, as
the back-to-school season for educational products ends.
- Operating margin will decline about 9 percentage points before the
effect of special charges and amortization of goodwill and other
acquisition-related intangibles, reflecting the lower revenue level and
further reductions in inventory.
- Non-operating income will decline about $10 million reflecting lower
interest rates.
- Loss per share will be about 6 cents more in the fourth quarter,
compared with the third quarter, before the effect of special charges
and amortization of goodwill and other acquisition-related intangibles.
For 2001, TI expects the following:
- R&D of $1.5 billion, excluding acquisition-related amortization and
purchased in-process R&D, compared with the company's prior estimate of
$1.6 billion and last year's $1.6 billion.
- Capital expenditures of $1.8 billion, unchanged from the prior estimate
and down about 35 percent from last year.
- Depreciation of $1.6 billion, compared with the prior estimate of $1.5
billion and up about 30 percent from last year.
SEMICONDUCTOR
Semiconductor revenue in the third quarter was $1453 million, down from $2692
million in the year-ago period. Revenue was down from $1657 million in the
second quarter due to continued weakness across most Semiconductor products,
excluding DSP.
As a result of lower revenue, Semiconductor had a $219 million operating
loss, compared with an operating profit of $681 million in the year-ago
period and an operating loss of $37 million in the second quarter.
14
Analog revenue was down 45 percent from the year-ago period and 16 percent
sequentially due to broad based weakness in demand. In the first nine months
of the year, about 40 percent of total Semiconductor revenue came from
Analog.
DSP revenue decreased 37 percent from the year-ago quarter due to broad based
weakness in demand but increased 10 percent sequentially due to strength in
wireless. In the first nine months of the year, about 25 percent of total
Semiconductor revenue came from DSP.
TI's remaining Semiconductor revenue decreased from the year-ago quarter and
sequentially.
TI's Semiconductor revenue in key markets was as follows:
- Wireless revenue was down 42 percent from the year-ago period but
increased 16 percent sequentially. In the first nine months of the
year, about 20 percent of total Semiconductor revenue came from
wireless.
- Revenue from TI's catalog products, comprised of high-performance
Analog and DSP, declined 52 percent from the year-ago quarter and 16
percent sequentially. In the first nine months of the year, about 15
percent of total Semiconductor revenue came from catalog products.
- Broadband communications revenue, which includes digital subscriber
line (DSL) and cable modems, was up 8 percent from the year-ago quarter
but declined 53 percent sequentially. In the first nine months of the
year, about 5 percent of total Semiconductor revenue came from
broadband communications.
- Semiconductor orders were $1308 million, compared with $2884 in the
year-ago period and $1321 million in the second quarter.
SENSORS & CONTROLS
Revenue was $222 million, compared with $245 million in the year-ago period
due to overall market weakness, and down from $257 million in the second
quarter due to seasonal patterns in the heating and air conditioning industry
and market weakness.
Operating profit was $45 million, or 20.2 percent of revenue. Operating
profit in the year-ago period was $43 million, or 17.5 percent of revenue.
Operating profit in the second quarter was $52 million, or 20.2 percent of
revenue.
15
EDUCATIONAL & PRODUCTIVITY SOLUTIONS (E&PS)
E&PS revenue was $179 million, compared with $175 million in the year-ago
quarter. Sequentially, revenue increased by $50 million due to back-to-
school sales of educational products.
Operating profit was $67 million, or 37.3 percent of revenue, compared with
$64 million, or 36.3 percent of revenue in the year-ago quarter. Operating
profit increased 76 percent from the second quarter's $38 million due to
seasonality.
FIRST NINE MONTHS OF 2001
For the first nine months of 2001, TI reported the following:
- TI revenue was $6414 million, down from $8843 million in the first nine
months of 2000, due to Semiconductor. The decrease in Semiconductor
revenue for the first nine months of 2001 was primarily due to weakness
across most Semiconductor products. The decrease in Sensors & Controls
was primarily due to overall market weakness. E&PS was up slightly due to
strength of educational products.
- Cost of revenues was $4452 million compared with $4544 million in the
year-ago period. Cost of revenues decreased primarily due to decreased
Semiconductor revenue.
- R&D totaled $1216 million, compared with $1306 million in the first nine
months of 2000. The decrease was primarily due to acquisition-related
charges for purchased in-process R&D in the first nine months of 2000.
- Selling, general and administrative expense was $1060 million, down from
$1268 million in the year-ago period primarily due to cost reduction
actions and reduced profit sharing.
- Other income (expense) net decreased from $2039 million in the first nine
months of 2000 to $201 million for the first nine months of 2001,
primarily due to the sale of Micron stock in 2000.
- The income tax rate was 46 percent.
- Orders were $5239 million, down from $9601 million for the same period a
year ago, primarily due to weakness in Semiconductor. Semiconductor
orders for the first nine months were down, primarily due to a combination
of weak electronic end-equipment markets and excess customer inventories.
Sensors & Controls orders were down due to overall market weakness. E&PS
orders were up slightly due to strength of educational products.
FINANCIAL CONDITION
In the first nine months of 2001, cash and cash equivalents plus short-term
investments decreased by $1011 million to $2992 million, primarily due to
capital expenditures. During the third quarter of 2001, cash and cash
equivalents plus short-term investments decreased by $22 million due to the
repurchase of the company's common stock.
16
Cash flow from operating activities was $1039 million in the first three
quarters of 2001.
Capital expenditures totaled $1554 million in the first nine months of 2001,
compared with $1789 million in the first nine months of 2000. Capital
expenditures totaled $312 million in the third quarter of 2001 versus $585
million in the year-ago quarter.
Depreciation for the first three quarters of 2001 was $1145 million, compared
with $869 million in the same period a year ago. Depreciation for the third
quarter of 2001 was $414 million, versus $319 million in the year-ago
quarter.
Debt-to-total-capital ratio was 0.10 at the end of the third quarter, the
same as at the end of 2000.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangibles, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed
to have indefinite lives will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The company
will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the non-
amortization provisions of the Statement is expected to result in an increase
in net income of $100 million ($0.06 per share). During 2002, the company
will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what effect, if any, these tests will have on the earnings and
financial position of the company.
SPECIAL CHARGES AND GAINS
Third Quarter of 2001
As of September 30, 2001, $184 million of the $290 million aggregate
severance cost obligations for the first, second and third quarter 2001
worldwide cost reduction and restructuring actions affecting a total of 5724
employees had been paid. In total, these first, second and third quarter
2001 actions are expected to result in annualized savings of approximately
$400 million. In the third quarter of 2001, pretax charges of $37 million
net were taken, of which $19 million was severance cost for a worldwide cost-
reduction program affecting 285 employees and $16 million relates to the
restructuring charges for the closing of three Semiconductor facilities
(Santa Cruz, California; Merrimack, New Hampshire; and Tustin, California).
Of the $16 million, $15 million was for the acceleration of depreciation over
the remaining service life of the facilities. Of the $37 million, $27
million is included in cost of revenues, $8 million is in selling, general
and administrative expense and $2 million is in research and development
expense.
17
Second Quarter of 2001
In the second quarter of 2001, pretax charges of $252 million net were taken,
of which $214 million was severance cost for a worldwide cost-reduction
program affecting 3778 employees and $35 million relates to the restructuring
charges for the closing of three Semiconductor facilities (Merrimack, New
Hampshire; Tustin, California; and Santa Cruz, California) affecting an
additional 559 employees. Of the $35 million charge, $14 million was for
severance cost and $16 million was for the acceleration of depreciation over
the remaining service life of the facilities. Of the $252 million, $162
million was included in cost of revenues, $84 million is in selling, general
and administrative expense and $6 million is in research and development
expense. Also included was a $68 million increase to the income tax provision
to adjust to the expected tax rate for the year.
First Quarter of 2001
In the first quarter of 2001, pretax charges of $50 million net were taken,
of which $11 million was for severance cost for 241 first-quarter employee
acceptances under the U.S. voluntary retirement program, $16 million was for
severance cost for restructuring actions affecting 261 employees in
international Semiconductor locations, and $25 million relates to the closing
of a Semiconductor manufacturing facility in Santa Cruz, California. Of the
$25 million charge, $16 million was for severance cost for 600 employees and
$5 million was for acceleration of depreciation over the remaining service
life of the facility. Of the $50 million, $44 million was included in cost of
revenues, $7 million is in selling, general and administrative expense, $2
million is in research and development expense, and $3 million is in other
income.
Third Quarter of 2000
In the third quarter of 2000, TI recorded investment gains of $425 million
from the sale of 5.6 million shares of Micron Technology, Inc. (Micron)
common stock, offset by special charges of $163 million net, of which $112
million was for purchased in-process R&D costs from the Dot Wireless, Inc.
and Alantro Communications, Inc. acquisitions, $41 million was for
acquisition costs from the pooling of interests with Burr-Brown Corporation,
and $10 million, net, was for several Semiconductor and Sensors & Controls
restructuring and other actions in the U.S., Japan and Europe affecting 432
employees. Of the $163 million, $112 million was included in research and
development expense, $46 million is in selling, general and administrative
expense, $31 million is in cost of revenues, $15 million is in net revenues
and $11 million is in other income. The primary benefit from the above
actions is reduced personnel costs, which are estimated to reach $31 million
annually. The benefit began in the fourth quarter of 2000. As of September
30, 2001, $13 million of the $19 million severance cost obligation had been
paid.
18
Second Quarter of 2000
In the second quarter of 2000, an investment gain of $1211 million, included
in other income, was realized from the sale of 20 million shares of Micron
common stock.
First Quarter of 2000
In the first quarter of 2000, pretax charges of $29 million net were taken,
associated with actions including the closing of the Sensors & Controls
manufacturing facility in Versailles, Kentucky, and TI's acquisition of
Toccata Technology ApS. Of the $29 million charge, $12 million was for
severance for the elimination of 480 jobs in Kentucky. Of the $29 million,
$20 million was included in cost of revenues, $6 million is in selling,
general and administrative expense and $3 million is in research and
development expense. The primary benefit from the Kentucky action is reduced
personnel costs, which are estimated to reach $10 million annually. The
benefit began in the fourth quarter of 2000. As of September 30, 2001, $9
million of the severance cost obligation had been paid.
Purchased In-Process R&D Charges
Year-to-date acquisition-related purchased in-process research and development
(R&D) charges were zero in 2001 and $112 million in 2000. These charges are
for R&D from business purchase acquisitions. Values for acquired in-process
R&D (purchased R&D) were determined at the acquisition date based upon the
appraised value of the related developmental projects. Purchased R&D projects
were assessed, analyzed and valued within the context and framework
articulated by the Securities and Exchange Commission herein described as the
Exclusion Approach.
Major assumptions, detailed in the following table, used in determining the
value of significant purchased R&D included the discount rate, the estimated
beginning date of projected operating cash flows, and the remaining cost and
time, in engineer-months, to complete the R&D projects. The term "engineer
month" refers to the average amount of research work expected to be
performed by an engineer in a month.
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 purchased
R&D. Such 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. TI expects to essentially meet its original return
expectations for the projects.
19
Millions of Dollars
-----------------------------------------------------------------------------------------------------------------------------------
Cost/time to
Purchased complete R&D Year
in-process projects cash flows
Entity Acquisition Consid- Other Deferred R&D Appraisal R&D Discount -------------------- projected
acquired date eration Goodwill intan- compen- charge method focus rate At acquisi- At to begin
gibles sation tion Sept. 2001
--------- ----------- --------- -------- ------ -------- -------- --------- --------- -------- ---------- --------- --------
Alantro Third $277 $148 $ 81 $ 32 $ 52 Exclusion Wireless 24% $4.1/ $1.7/66 2002
Commun- quarter approach networking 256 engineer
ications, 2000 technology engineer months
Inc. for home months
and office
20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Information concerning market risk is contained on pages B-43 and B-44 of the
Registrant's proxy statement for the 2001 annual meeting of stockholders and
is incorporated by reference to such proxy statement.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Designation of
Exhibits in
This Report Description of Exhibit
-------------- ------------------------------------------
11 Earnings (Loss) Per Common and Dilutive
Potential Common Share
12 Computation of Ratio of Earnings to
Fixed Charges
(b) Reports on Form 8-K
During the quarter ended September 30, 2001, the Registrant filed reports on
Form 8-K dated August 14, 2001 and September 5, 2001, each confirming its
outlook for the third quarter of 2001 as set forth in the Outlook Section
included in Item 2 of its Form 10-Q for the quarter ending June 30, 2001.
"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:
- Market demand for semiconductors, particularly for digital signal
processors and analog chips in key markets, such as telecommunications
and computers;
- TI's ability to develop, manufacture and market innovative products in
a rapidly changing technological environment;
21
- TI's ability to compete in products and prices in an intensely
competitive industry;
- TI's ability to maintain and enforce a strong intellectual property
portfolio and obtain needed licenses from third parties;
- Timely completion and successful integration of announced acquisitions;
- 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;
- Losses or curtailments of purchases from key customers;
- TI's ability to recruit and retain skilled personnel; and
- Availability of raw materials and critical manufacturing equipment.
For a more detailed discussion of these factors, see the text under the
heading "Cautionary Statements Regarding Future Results of Operations" in
Item 1 of the company's most recent Form 10-K. 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 update the forward-looking statements
to reflect subsequent events or circumstances.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXAS INSTRUMENTS INCORPORATED
BY: /s/ WILLIAM A. AYLESWORTH
------------------------------
William A. Aylesworth
Senior Vice President,
Treasurer and
Chief Financial Officer
Date: October 24, 2001
22
EXHIBIT 11
-----------
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
EARNINGS (LOSS) PER COMMON AND DILUTIVE POTENTIAL COMMON SHARE
For Three Months Ended For Nine Months Ended
---------------------- ---------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
2001 2000 2001 2000
---------- ---------- ----------- -----------
Income (loss) before cumulative effect of an accounting change. . $ (117) $ 676 $ (85) $ 2,422
Add: Interest, net of tax effect, on convertible
debentures assumed converted. . . . . . . . . . . . . . . . . . -- 2 -- 4
----------- ---------- ----------- -----------
Adjusted income (loss) before cumulative effect
of an accounting change . . . . . . . . . . . . . . . . . . . . (117) 678 (85) 2,426
Cumulative effect of an accounting change . . . . . . . . . . . . -- -- -- (29)
----------- ---------- ----------- -----------
Adjusted net income (loss) in millions. . . . . . . . . . . . . . $ (117) $ 678 $ (85) $ 2,397
=========== ========== =========== ===========
Diluted earnings(loss) per common and dilutive potential common share:
---------------------------------------------------------------------
Weighted average common shares outstanding (in thousands) . . . . 1,733,511 1,720,890 1,734,555 1,712,804
Weighted average dilutive potential common shares:
Stock option and compensation plans . . . . . . . . . . . . . -- 65,358 -- 71,049
Convertible debentures. . . . . . . . . . . . . . . . . . . . . -- 5,625 -- 4,496
----------- ---------- ----------- -----------
Weighted average common and dilutive potential common shares. . . 1,733,511 1,791,873 1,734,555 1,788,349
=========== ========== =========== ===========
Diluted earnings (loss) per common share:
Income (loss) before cumulative effect of an accounting change. $ (0.07) $ 0.38 $ (0.05) $ 1.36
Cumulative effect of an accounting change . . . . . . . . . . . -- -- -- (0.02)
----------- ---------- ----------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ (0.07) $ 0.38 $ (0.05) $ 1.34
========== ========== ========== ==========
Basic earnings (loss) per common share:
--------------------------------------
Weighted average common shares outstanding (in thousands) . . . . 1,733,511 1,720,890 1,734,555 1,712,804
========== ========== ========== ==========
Basic earnings (loss) per common share:
Income (loss) before cumulative effect of an accounting change. $ (0.07) $ 0.39 $ (0.05) $ 1.41
Cumulative effect of an accounting change . . . . . . . . . . . -- -- -- (0.01)
----------- ---------- ----------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ (0.07) $ 0.39 $ (0.05) $ 1.40
=========== ========== =========== ===========
Exhibit 12
------------
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
For Nine Months
Ended Sept. 30
--------------
1996 1997 1998 1999 2000 2000 2001
----- ----- ----- ------ ------ ------ ------
Earnings:
Income (loss) from continuing operations
before income taxes plus fixed
charges and amortization of
capitalized interest less
interest capitalized. . . . . . $ 190 $ 973 $ 815 $2,205 $4,702 $3,799 $ (74)
===== ===== ===== ====== ====== ====== ======
Fixed charges:
Total interest on loans (expensed
and capitalized . . . . . . . . 108 115 86 84 98 75 58
Interest attributable to rental
and lease expense . . . . . . . 44 44 41 30 32 23 26
----- ----- ----- ------ ------ ------ ------
Fixed charges . . . . . . . . . . . $ 152 $ 159 $ 127 $ 114 $ 130 $ 98 $ 84
===== ===== ===== ====== ====== ====== ======
Ratio of earnings to fixed charges. 1.2 6.1 6.4 19.3 36.2 38.8 *
* Not meaningful. The coverage deficiency was $158 million for the nine months ended
September 30, 2001.