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August
7,
2006
Via
Federal Express
Mr.
Martin F. James
Sr.
Assistant Chief Accountant
U.S.
Securities and Exchange Commission
450
Fifth
Street NW
Washington,
DC 20549-0609
Re:
Texas
Instruments Incorporated
Form
10-K
for the Year Ended December 31, 2005
and
related filings
Form
10-Q
for the Quarter Ended March 31, 2006
SEC
File
No. 001-03761
Dear
Mr.
James:
I
am
writing in response to your letter dated July 24, 2006 to Texas Instruments
Incorporated (the "company" or "TI") containing comments on our Form
10-K
for the year ended December 31, 2005, and Form 10-Q for the quarter ended
March 31, 2006. As you will note below, TI has addressed your comments in
its Form 10-Q for the quarter ended June 30, 2006, or will do so in its Form
10-K for the year ended December 31, 2006, as appropriate, and intends to
include similar disclosures, revised as appropriate, in filings for relevant
subsequent periods.
Form
10-K for the Year Ended December 31, 2005
Texas
Instruments 2005 Annual Report
Note
1. Description of Business and Significant Accounting Policies and Procedures,
page 11
-Revenue
Recognition, page 12
COMMENT
1:
Please
revise this note in future filings to disclose the rights you grant to your
distributors, such as the rights of return, the rights to price adjustments,
etc. Explain how you are able to reliably estimate the expected events in
order
to establish allowances and recognize revenue upon delivery to the
distributor.
RESPONSE
1:
We will
revise this note as requested in future filings.
In
the
meantime, we offer the explanation below of how we are able to reliably estimate
expected events in order to establish allowances and recognize revenue upon
delivery to the distributor. Please note that the portion of our consolidated
net revenue resulting from sales to distributors historically ranges from
25% to
30%.
We
sell
our products to distributors at standard published prices, although, as you
observe, we have certain programs in which distributors may participate at
our
discretion. Revenue is recorded at the time of shipment to distributors net
of
estimated allowances for each of these programs. At the time of shipment,
title
transfers to the distributor and payment from the distributor is due on our
standard commercial terms; payment terms are not contingent upon the
distributor’s resale of the product. A brief description of each program and our
method of estimating the related allowance follows:
| · |
Price
adjustment credits for certain resales: Under this program, we
may grant a distributor price adjustment credits up to an agreed
quantity
for specific resales of TI products to a specific end customer. In
order
to receive price adjustment credits, the distributor must provide
details
regarding the specific price competition they are facing, including
the
product, the end customer, the competitor offering the competitive
pricing, the forecasted quantity of product subject to the competitive
pricing, and the price requested. To estimate allowances for these
price
adjustment credits, we use statistical percentages of revenue, determined
quarterly based upon recent historical claim trends. We record these
allowances as a reduction to revenue when the products are shipped.
Approved allowances are tracked individually by distributor, part
number
and quantity.
|
| · |
Scrap
allowance: Under this program, distributors can reduce their
slow-moving or obsolete inventory and receive a credit from us for
that
inventory. To estimate allowances for scrap, we use a negotiated
fixed
percentage of purchases for each distributor. We record these allowances
as a reduction to revenue when the products are shipped. For the
most
part, allowances occur on a quarterly
basis.
|
| · |
Price
protection: Under this program, if we post a new standard published
price
for a TI product that is below the price paid by a distributor for
the
same product in distributor on-hand inventory, we may credit the
distributor for the difference between those prices. The estimated
allowance recorded for this program is determined by the identified
product price difference rather than on a statistical
basis.
|
We
believe we can reasonably and reliably estimate allowances for these programs
in
a timely manner because:
| · |
Historical
claims data are maintained for each of the programs, with differences
among geographic regions taken into consideration.
|
| · |
We
continually monitor the actual claimed allowances against our estimates,
and we adjust our estimate as appropriate to reflect trends in distributor
revenue and inventory levels. Allowances are also adjusted when
recent historical data does not represent anticipated future
activity.
|
| · |
We
have long-term relationships with our distributors, which provide
a
reasonable basis for our estimates (more than three-fourths of our
distributor revenue comes from distributors with which we have had
a
relationship for more than five years).
|
COMMENT
2:
We note
that you may grant adjustments to your distributors in specific competitive
situations that are applied to their accounts, but do not change the pricing
to
these distributors.
| · |
Please
tell us and revise your future filings to explain the nature of the
adjustments made to your distributors’ accounts and how you account for
these adjustments.
|
| · |
Explain
to us how these adjustments do not change your pricing to the
distributors.
|
| · |
Cite
the accounting guidance relied upon and how you applied this guidance
to
your specific situation. Refer to SAB Topic 13 and EITF
01-09.
|
RESPONSE
2: As
noted
in our response to comment 1 above, we sell our products to distributors
at
standard published prices. Distributors are required to pay for the products
within our standard commercial terms, which are generally 30 days. At our
discretion, we may make exceptions to the standard published rates in the
form
of price adjustment credits for distributor resales in certain circumstances.
To
qualify for the price adjustment credits, the distributor must provide details
regarding the specific price competition they are facing, including the product,
the end customer, the competitor offering the competitive pricing, the
forecasted quantity of product subject to the competitive pricing, and the
price
requested. These requests from the distributor must be made prior to
shipment to the end customer. Only after the product is shipped to the end
customer may the distributor claim the price adjustment credits. An
approved price adjustment credit is valid for a fixed period, typically 90
days.
The
price
adjustment credits do not result in a change in the standard published
price list under which the majority of products are sold to
distributors.
The
price
adjustment credits are accounted for as a reduction of
revenue.
To
account for these price adjustment credits, we consider the guidance of Staff
Accounting Bulletin (SAB) Topic 13A, which requires that the seller’s price to
the buyer be fixed or determinable as a criterion for revenue recognition.
Footnote 5 to SAB Topic 13A states that “paragraphs 26-33 of [Statement of
Position (SOP)] SOP 97-2 [Software
Revenue Recognition]
discuss
how to apply the ‘fixed or determinable’ fee criterion in software transactions.
The [SEC] staff believes that the guidance in paragraphs 26 and 30-33 is
appropriate for other sales transactions where authoritative guidance does
not
otherwise exist.”
Paragraph
30 of SOP 97-2 identifies factors that should be considered in evaluating
the
fixed or determinable fee criterion in connection with reseller (i.e.,
distributor) arrangements. Some of the relevant considerations with respect
to
our distributor programs are:
| · |
There
have been no historical business practices, informal communications,
competitive pressures, or payment patterns indicating that payment
is
substantially contingent on the distributors’ resale of the
product.
|
| · |
Our
distributors are generally large global or regional companies that
are not
undercapitalized and sell products from a wide range of
manufacturers.
|
| · |
There
is no general right of return. Distributors are compensated for damaged
or
obsolete products according to the scrap allowance program described
above.
|
We
also
consider the guidance of Emerging Issues Task Force (EITF) Issue No. 01-9,
“Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of
the
Vendor's Products)”
-
particularly Issues 1, 4 and 6. Price adjustment credits given to
distributors (through the issuance of credit memos or credits on future
purchases) are recorded as a reduction of our product revenue as of the date
at
which the related revenue is recognized.
We
have
determined that we are able to make timely and reliable estimates of pricing
allowances as demonstrated in our response to comment 1 above. Additionally,
we
believe we have appropriate internal controls and adequate books and records
that will allow us to timely identify issues that may necessitate changes
in
estimates. Therefore, we have concluded that prices are fixed or
determinable on the date the shipments are made and pricing allowances are
recorded based on our ability to make timely and reliable estimates of the
allowances to be processed under the distributor programs.
We
will
revise this note as requested in future filings.
Management’s
Discussion and Analysis of Financial Condition, page 45
-2005
Compared with 2004 - Detail of Financial Results, page 48
COMMENT
3:
We note
that you present a 2005 effective tax rate excluding discrete tax items.
In
future filings, when presenting similar non-GAAP measures, please provide
all
the disclosures required by Item 10(c) of Regulation S-K and comply fully
with
the guidance provided in the Division of Corporation Finance Frequently Asked
Questions Regarding the Use of Non-GAAP Financial Measures. Otherwise, revise
future filings to only present an effective rate based on your GAAP results
and
discuss the special or discrete tax events reflected in that rate.
RESPONSE
3:
We are
cognizant of the requirements of Item 10(e) of Regulation S-K and intend
to
comply fully with the guidance provided in the Division of Corporation Finance
Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures.
However, in this case we respectfully disagree with the SEC staff’s
interpretation of this presentation as a non-GAAP measure. We do concede
that
the language we used may have caused confusion.
The
language we used implied that the effective tax rate includes discrete items:
“…excluding the effect of the discrete tax items, the effective tax rate for
2005 was 25 percent." What was intended was a discussion of the effective
tax
rate, which, by definition, excludes the effect of discrete tax items. A
better
worded disclosure would have been, “The effective tax rate for 2005, which, by
definition, does not include discrete tax items, was 25 percent,” or “The
effective tax rate for 2005, which, by definition, does not include taxes
related to significant unusual or extraordinary items, was 25
percent.”
Accounting
Principles Board (APB) Opinion No. 28, “
Interim Financial Reporting”
(Para
19), requires that companies calculate their interim period income taxes
based
on an estimate of the annual effective tax rate applied to “ordinary” income.
Specifically, the guidance in paragraph 19 is to exclude from the estimated
annual effective tax rate calculation taxes related to “significant unusual or
extraordinary items that will be separately reported or reported net of their
related tax effect.” FASB Interpretation 18, “Accounting
for Income Taxes in Interim Periods - An Interpretation of APB Opinion No.
28”
(Para
16), reinforces this point by requiring those items that do not affect the
estimated annual effective tax rate calculation be recognized in the interim
period in which they occur. We believe that this guidance supports our position
that taxes (or benefits) that do not relate to "ordinary income" in the current
year generally should be accounted for discretely in the period in which
they
occur and be excluded from the effective tax rate calculation.
Form
10-Q for the Quarter Ended March 31, 2006
Note
1. Description of Business and Significant Accounting Policies and Practices,
page 8
COMMENT
4:
We note
that you disclose that you recorded a charge of $5 million of in-process
R&D
expenses based on the results of a third-party appraisal. Please note that
if in
future periods you intend to incorporate your Form 10-K by reference into
a
registration statement, you will be required to identify the appraiser and
include its consent pursuant to Securities Act Rule 436. Otherwise, you may
revise the filing, as appropriate.
RESPONSE
4:
We are
aware of the requirements of Rule 436 of the Securities Act of 1933 and,
should
we incorporate this disclosure by reference into a registration statement,
we
will comply with those requirements.
Note
2. Discontinued Operations, page 8
COMMENT
5:
We note
that you entered into an agreement on January 9, 2006 to sell substantially
all
of assets of the Sensors & Controls segment to an affiliate of Bain Capital,
LLC for $3 billion in cash and that you reported the results of operations
of
the former Sensors & Controls business as discontinued operations within
your statement of operations. We further note from your Form 8-K filed on
January 11, 2006 that you will enter into certain cross-license agreements
for
technology and intellectual property with the acquirer following the closing
of
this transaction for purposes of continuing the conduct of their respective
businesses.
| · |
Please
tell us and revise your future filings to describe your level of
continuing involvement in the on-going operations of the Sensors
&
Controls business after the completion of the
transaction.
|
| · |
Please
also discuss if you have or will eliminate the operations and cash
flows
of the Sensors & Controls business from your ongoing operations. Refer
to the guidance in paragraph 42 of SFAS
144.
|
RESPONSE
5:
In
the
first week of January 2006, TI’s Board of Directors approved the sale to an
affiliate of Bain Capital, LLC of substantially all of the Sensors &
Controls segment. At the time of the Board’s approval, the Sensors &
Controls business, which was determined to be a component of an entity, met
the
requirements of SFAS No. 144,“Accounting
for the Impairment or Disposal of Long-Lived Assets,” to
be
classified as assets held for sale and therefore would be accounted for as
a
discontinued operation beginning with the Form 10-Q for the quarter ended
March
31, 2006.
The
sale
was completed on April 27, 2006, and the former Sensors & Controls business
was renamed Sensata Technologies (Sensata). Upon closing, we entered into
a
Transition Services Agreement (TSA) with Sensata, pursuant to which we provide
them with various temporary support services. We also entered into certain
cross-license agreements to allow each party to continue to use the associated
technology and intellectual property in the conduct of their respective
businesses. Therefore, our Form 10-Q for the quarter ended June 30, 2006,
is the
first to include the disclosure you requested.
We
performed an analysis of the “continuing involvement” resulting from the TSA,
the cross license agreements and other closing agreements per the provisions
of
EITF Issue No. 03-13, “Applying
the Conditions of Paragraph 42 of FASB Statement No. 144 in Determining Whether
to Report Discontinued Operations.”
The
majority of the cross-license agreements are royalty free and therefore had
no
effect on the analysis. One cross-license agreement provided for future royalty
payments in the event either party began producing products under the license.
Any royalties received from that agreement would be passive in nature and
would
be considered to generate indirect cash flows. Therefore, that agreement
would
not result in significant continuing involvement.
We
determined that although we had continuing cash flows generated from the
TSA,
the amounts
expected to be received from Sensata over the agreement period were not
significant to Sensata (less than 3% of their estimated annual operating
expenses). Since the continuing cash flows are not considered significant,
and
we have no ability through the TSA or any other agreement to significantly
influence the operating or financial policies of Sensata, we determined that
we
have no significant continuing involvement that would preclude classification
of
the former S&C business as discontinued operations. We will continue to
monitor compliance with EITF 03-13 for the full year after the sale date
(up to
April 27, 2007).
We
have
eliminated the operations and cash flows of our former Sensors & Controls
business from our ongoing operations as required by paragraph 42 of SFAS
144.
In
connection with this response to your comments regarding our Form 10-K for
the
year ended December 31, 2005, and Form 10-Q for the quarter ended March 31,
2006, TI acknowledges that:
| · |
TI
is responsible for the adequacy and accuracy of the disclosure in
the
filing;
|
| · |
Staff
comments or changes to our disclosures in response to staff comments
do
not foreclose the Commission from taking any action with respect
to the
filing; and
|
| · |
TI
may not assert staff comments as a defense in any proceeding initiated
by
the Commission or any person under the federal securities laws of
the
United States.
|
We
trust
that the above information will be sufficient for your purposes. If you have
any
questions, please call Charlie Miller of Texas Instruments at
214-480-6707.
Very
truly yours,
/s/
Kevin P. March
Kevin
P.
March
Senior
Vice President and
Chief
Financial Officer
KPM/CHH/rw