SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File Number 1-3761
TEXAS INSTRUMENTS INCORPORATED
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(Exact name of Registrant as specified in its charter)
Delaware 75-0289970
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(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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ----------------------------- ------------------------
Common Stock, par value $1.00 New York Stock Exchange
The Swiss Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $17,423,000,000 as of December 31, 1997.
389,498,552
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(Number of shares of common stock outstanding as of December 31, 1997)
Parts I, II and IV hereof incorporate information by reference to the
Registrant's 1997 annual report to stockholders. Part III hereof incorporates
information by reference to the Registrant's proxy statement for the 1998
annual meeting of stockholders.
PART I
ITEM 1. Business.
Semiconductors
- --------------
Texas Instruments Incorporated ("TI," or the "Registrant," including
subsidiaries except where the context indicates otherwise) is a global
semiconductor company and the world's leading designer and supplier of digital
signal processing solutions, the engines driving the digitization of
electronics. These digital signal processing solutions consist primarily of
digital signal processors and mixed-signal/analog devices that convert the
analog signals of the real world into digital data, then back again as analog
output. They enable a wide range of new products and features for TI's more
than 30,000 customers in industrial, commercial and government end-equipment
markets.
TI also is a world leader in the design and manufacturing of other
semiconductor products. Those products include application-specific
integrated circuits, reduced instruction-set microprocessors,
microcontrollers, standard logic, and memories.
Semiconductors comprised 83% of TI's total revenues in 1997. TI's
semiconductor products are used in a diverse range of electronic systems,
including digital cell phones, pagers, computers, printers, mass storage
devices, modems, networking equipment, digital cameras and video recorders,
motor controls, autos, and home appliances. Products are sold primarily to
original-equipment manufacturers and through distributors. In addition, TI's
semiconductor patent portfolio has been established as an ongoing contributor
to semiconductor revenues.
The semiconductor business is intensely competitive, subject to rapid
technological change, and requires high rates of investment. TI faces strong
competition in all of its semiconductor product lines. The rapid pace of
change and technological breakthroughs constantly create new opportunities for
existing competitors and start-ups, which can quickly render existing
technologies less valuable.
In digital signal processors, TI competes with a growing number of large and
smaller companies, both U.S.-based and international. New product development
capabilities, applications support, software knowledge and advanced technology
are the primary competitive factors in this business.
The market for mixed-signal/analog devices is highly fragmented. TI competes
with many large and smaller companies, both U.S.-based and international.
Primary competitive factors in this business are the availability of
innovative designs, a broad range of process technologies and applications
support and in the standard products area, price.
In memory, TI competes with a number of very large companies, primarily in
Japan and Korea. TI is among the smaller competitors in this highly volatile
market. Competitive factors in this business are primarily price and
performance.
Acquisitions and Divestitures
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From time to time TI considers acquisitions and divestitures that may
strengthen its business portfolio. TI may effect one or more of these
transactions at such time or times as it determines to be appropriate. In
2
1997, as TI tightened its focus on digital signal processing solutions, it
announced the acquisition of technology companies that brought unique
expertise to its core business. In the first quarter, TI acquired Intersect
Technologies, Inc., a developer and designer of hardware, software and
firmware for the mass storage market, a market that increasingly uses digital
signal processing solutions. In the fourth quarter, TI acquired Amati
Communications Corporation, the leading developer of technology for high-speed
Internet connections, a market expected to reach $6 billion over the next
decade. TI also acquired GO DSP Corporation, a developer of software for
digital signal processors, in the first quarter of 1998.
In 1997 TI divested various business units. These divestitures included the
sale of the mobile computing business to The Acer Group in the first quarter,
the software business to Sterling Software, Inc. in the second quarter, and
the defense systems and electronics business (DSE) to Raytheon Company
("Raytheon") in the third quarter. In accordance with generally accepted
accounting principles, the consolidated financial statements have been
restated to classify DSE as discontinued operations. Operating results, net
asset and other information for discontinued operations appear in the note to
the financial statements captioned "Discontinued Operations" on pages 20-21 of
TI's 1997 annual report to stockholders; unless otherwise indicated, the
financial amounts in this Form 10-K have been adjusted to reflect continuing
operations only.
Other TI Businesses
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In addition to semiconductors, TI has two other principal segments. The
largest, representing 10% of TI's revenues, is materials and controls. This
business sells electrical and electronic controls, electronic connectors,
sensors, radio-frequency identification systems and clad metals into markets
such as automotive, heating and air conditioning, and home appliances. While
the top supplier in some product areas, TI faces strong multinational
competitors. The primary competitive factors in this business are product
reliability, manufacturing costs, and engineering expertise. The products of
this business are sold directly to original-equipment manufacturers and
through distributors.
Educational & Productivity Solutions (E&PS) represents 5 percent of TI's
revenues and consists largely of educational and graphing calculators. This
business sells primarily through retailers and to schools through
instructional dealers. TI's principal competitors in this business are
several Japanese companies. Technology expertise, price and infrastructure
for education and market understanding are primary competitive factors in this
business.
In addition, TI continues to invest in digital imaging, an emerging business
that produces micro-mirror-based devices that enable revolutionary brightness
and clarity in large-screen video displays. The primary sales route is
directly to original-equipment manufacturers. TI faces competition in this
business primarily from a competing technology known as liquid crystal
displays from Asian manufacturers. Primary competitive factors in this
business are price, brightness and performance of the display, and in some
applications, size and weight.
General Information
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TI is headquartered in Dallas, Texas, and has manufacturing, design or sales
operations in more than 25 countries. TI's largest geographic markets are in
the United States, Japan and Europe. TI has been in operation since 1930.
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The financial information with respect to TI's business segments
and operations outside the United States, which is contained in the note to
the financial statements captioned "Business Segment and Geographic Area Data"
on pages 30-32 of TI's 1997 annual report to stockholders, is incorporated
herein by reference to such annual report.
Backlog
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The dollar amount of backlog of orders believed by the Registrant to
be firm was $1623 million as of December 31, 1997 and 1996. The Registrant's
backlog does not represent actual revenues and is only an indication of future
revenues which may be entered on the books of account of the Registrant.
Backlog orders are, under certain circumstances, subject to cancellation by
the purchaser without penalty and do not reflect any potential adjustments for
price decreases.
Raw Materials
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The Registrant purchases materials, parts and supplies from a number
of suppliers. The materials, parts and supplies essential to the Registrant's
business are generally available at present and the Registrant believes at
this time that such materials, parts and supplies will be available in the
foreseeable future.
Patents and Trademarks
- ----------------------
The Registrant owns many patents in the United States and other
countries in fields relating to its business. The Registrant has developed a
strong, broad-based patent portfolio. The Registrant also has several
agreements with other companies involving license rights and anticipates that
other licenses may be negotiated in the future. The Registrant does not
consider its business materially dependent upon any one patent or patent
license, although taken as a whole, the rights of the Registrant and the
products made and sold under patents and patent licenses are important to the
Registrant's business. The Registrant's patent portfolio has been established
as an ongoing contributor to the revenues of the Registrant.
The Registrant owns trademarks that are used in the conduct of its
business. These trademarks are valuable assets, the most important of which
are "Texas Instruments" and the Registrant's corporate monogram.
Research and Development
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The Registrant's research and development expense was $1536 million
in 1997, compared with $1181 million in 1996 and $842 million in 1995.
Included is a charge for the value of in-process research and development of
$461 million in 1997 and $192 million in 1996 as a result of the acquisitions
of Amati Communications Corporation and Silicon Systems, Inc., respectively.
Seasonality
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The Registrant's revenues are subject to some seasonal variation.
Employees
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The information concerning the number of persons employed by the
Registrant, at December 31, 1997 on page 35 of the Registrant's 1997 annual
report to stockholders is incorporated herein by reference to such annual
report.
4
ITEM 2. Properties.
The Registrant's principal executive offices are located at 8505
Forest Lane, Dallas, Texas. The Registrant owns and leases plants in the
United States and 15 other countries for manufacturing and related purposes.
The following table indicates the general location of the principal plants of
the Registrant and the business segments which make major use of them. Except
as otherwise indicated, the principal plants are owned by the Registrant.
Materials
Semiconductor and Controls E&PS
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Dallas, Texas(1) X X X
Houston, Texas X
Lubbock, Texas X
Sherman, Texas(1)(2) X
Santa Cruz, California X
Attleboro, X X
Massachusetts
Freising, Germany X X
Avezzano, Italy(3) X
Baguio, X
Philippines(4)
Hiji, Japan X
Kuala Lumpur, X X
Malaysia(2)
Miho, Japan X
Singapore(4) X
Taipei, Taiwan X
Aguascalientes, Mexico X X
____________________
(1) Certain plants or portions thereof in Dallas and Sherman are leased to
Raytheon or Raytheon-related entities in connection with the sale of DSE.
(2) Leased or primarily leased.
(3) Owned, subject to mortgage.
(4) Owned on leased land.
The Registrant's facilities in the United States contained
approximately 17,900,000 square feet as of December 31, 1997, of which
approximately 3,700,000 square feet were leased. The Registrant's facilities
outside the United States contained approximately 7,000,000 square feet as of
December 31, 1997, of which approximately 1,700,000 square feet were leased.
The Registrant believes that its existing properties are in good
condition and suitable for the manufacture of its products. At the end of
1997, the Registrant utilized substantially all of the space in its
facilities.
Leases covering the Registrant's leased facilities expire at varying
dates generally within the next 10 years. The Registrant anticipates no
difficulty in either retaining occupancy through lease renewals, month-to-
month occupancy or purchases of leased facilities, or replacing the leased
facilities with equivalent facilities.
5
ITEM 3. Legal Proceedings.
On July 19, 1991, the Registrant filed a lawsuit in Tokyo District
Court against Fujitsu Limited of Japan ("Fujitsu") seeking injunctive relief,
alleging that Fujitsu's manufacture and sale of certain DRAMs infringe the
Registrant's Japanese patent on the invention of the integrated circuit (the
"Kilby" patent). Concurrently, Fujitsu brought a lawsuit in the same court
against the Registrant, seeking a declaration that Fujitsu is not infringing
the Kilby patent. On August 31, 1994, the district court ruled that Fujitsu's
production of 1-megabit and 4-megabit DRAMs and 32K EPROMs does not infringe
the Kilby patent. The Registrant appealed the court's decision to the
Tokyo High Court.
In September 1997, the Tokyo High Court upheld the decision that
Fujitsu's production of such products does not infringe TI's Kilby patent.
The Registrant has appealed the ruling to the Japan Supreme Court. In
November, the Japan Patent Office invalidated the Kilby patent. The Registrant
plans to appeal this decision to the Tokyo High Court. Since the Kilby patent
expires in 2001, the Registrant does not expect the outcome of either appeal
to be material.
The Registrant is involved in various investigations and proceedings
conducted by the federal Environmental Protection Agency and certain state
environmental agencies regarding disposal of waste materials. Although the
factual situations and the progress of each of these matters differ, the
Registrant believes that the amount of its liability will not have a material
adverse effect upon its financial position or results of operations and, in
most cases, the Registrant's liability will be limited to sharing clean-up or
other remedial costs with other potentially responsible parties.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
6
Executive Officers of the Registrant
The following is an alphabetical list of the names and ages of the
executive officers of the Registrant and the positions or offices with the
Registrant presently held by each person named:
Name Age Position
James R. Adams 58 Director; Chairman of the Board
Richard J. Agnich 54 Senior Vice President, Secretary
and General Counsel
William A. Aylesworth 55 Senior Vice President,
Treasurer and Chief Financial
Officer (Chief Accounting
Officer)
Gary D. Clubb 51 Executive Vice President
(President, Digital Imaging)
Thomas J. Engibous 45 Director; President and
Chief Executive
Officer
David D. Martin 58 Executive Vice President
Charles F. Nielson 60 Vice President
Elwin L. Skiles, Jr. 56 Vice President
Richard K. Templeton 39 Executive Vice President
(President, Semiconductor Group)
William P. Weber 57 Director; Vice Chairman
The term of office of each of the above listed officers is from the
date of his election until his successor shall have been elected and
qualified, and the most recent date of election of each of them was April 17,
1997. Mr. Adams, who has been a director of the Registrant since 1989, was
Group President of SBC Communications Inc. from 1992 until his retirement in
1995, and President and Chief Executive Officer of Southwestern Bell Telephone
Company from 1988 to 1992. Messrs. Agnich, Aylesworth, Martin, Nielson,
Skiles and Weber have served as officers of the Registrant for more than five
years. Messrs. Clubb and Engibous have served as officers of the Registrant
since 1993. Messrs. Adams and Templeton have served as officers of the
Registrant since 1996. Messrs. Clubb, Engibous and Templeton have been
employees of the Registrant for more than five years.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The information which is contained in the note to the financial
statements captioned "Common Stock Prices and Dividends" on page 41 of the
Registrant's 1997 annual report to stockholders, and the information
concerning the number of stockholders of record at December 31, 1997 on
page 35 of such annual report, are incorporated herein by reference to such
annual report.
7
ITEM 6. Selected Financial Data.
The "Summary of Selected Financial Data" for the years 1993 through
1997 which appears on page 35 of the Registrant's 1997 annual report to
stockholders is incorporated herein by reference to such annual report.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information contained under the caption "Management Discussion
and Analysis of Financial Condition and Results of Operations" on pages 36-41
of such annual report are incorporated herein by reference to such annual
report.
ITEM 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Registrant at December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997, and the report thereon of the independent auditors, on pages 14-34
of the Registrant's 1997 annual report to stockholders, are incorporated
herein by reference to such annual report.
The "Quarterly Financial Data" on page 42-43 of the Registrant's
1997 annual report to stockholders is also incorporated herein by reference to
such annual report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The information with respect to directors' names, ages, positions,
term of office and periods of service, which is contained under the caption
"Nominees for Directorship" in the Registrant's proxy statement for the 1998
annual meeting of stockholders is incorporated herein by reference to such
proxy statement.
Information concerning executive officers is set forth in Part I
hereof under the caption "Executive Officers of the Registrant."
ITEM 11. Executive Compensation.
The information which is contained under the captions "Directors
Compensation," "Executive Compensation" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Registrant's proxy statement for the
1998 annual meeting of stockholders is incorporated herein by reference to
such proxy statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information concerning (a) the only persons that have reported
beneficial ownership of more than 5% of the common stock of the Registrant,
and (b) the ownership of the Registrant's common stock by the Chief Executive
Officer and the four other most highly compensated executive officers, and all
executive officers and directors as a group, which is contained under the
caption "Voting Securities" in the Registrant's proxy statement for the 1998
annual meeting of stockholders, is incorporated herein by reference to such
proxy statement. The information concerning ownership of the Registrant's
8
common stock by each of the directors, which is contained under the caption
"Nominees for Directorship" in such proxy statement, is also incorporated
herein by reference to such proxy statement.
The aggregate market value of voting stock held by non-affiliates of
the Registrant shown on the cover page hereof excludes the shares held by the
Registrant's directors, some of whom disclaim affiliate status, executive vice
presidents and senior vice presidents. These holdings were considered to
include shares credited to certain individuals' profit sharing accounts.
ITEM 13. Certain Relationships and Related Transactions.
Not applicable.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1 and 2. Financial Statements and Financial Statement
Schedules:
The financial statements and financial statement schedules are
listed in the index on page 16 hereof.
3. Exhibits:
Designation of
Exhibit in
this Report Description of Exhibit
-------------- -------------------------------------------------
2 Asset Purchase Agreement dated as of January 4,
1997 between the Registrant and Raytheon Company
(exhibits and schedules omitted) (incorporated by
reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated January 4,
1997).
3(a) Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit
3(a) to the Registrant's Annual Report on Form
10-K for the year 1993).
3(b) Certificate of Amendment to Restated Certificate
of Incorporation of the Registrant (incorporated
by reference to Exhibit 3(b) to the Registrant's
Annual Report on Form 10-K for the year 1993).
3(c) Certificate of Amendment to Restated Certificate
of Incorporation of the Registrant (incorporated
by reference to Exhibit 3(c) to the Registrant's
Annual Report on Form 10-K for the year 1993).
3(d) Certificate of Amendment to Restated Certificate
of Incorporation of the Registrant (incorporated
by reference to Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
9
3(e) Certificate of Designations relating to the
Registrant's Participating Cumulative Preferred
Stock (incorporated by reference to Exhibit 3(d)
to the Registrant's Annual Report on Form 10-K
for the year 1993).
3(f) Certificate of Ownership Merging Texas
Instruments Automation Controls, Inc. into the
Registrant (incorporated by reference to Exhibit
3(e) to the Registrant's Annual Report on Form
10-K for the year 1993).
3(g) Certificate of Elimination of Designations of
Preferred Stock of the Registrant (incorporated
by reference to Exhibit 3(f) to the Registrant's
Annual Report on Form 10-K for the year 1993).
3(h) Certificate of Ownership and Merger Merging
Tiburon Systems, Inc. into the Company
(incorporated by reference to Exhibit 4(g) to the
Registrant's Registration Statement No.
333-41919 on Form S-8).
3(i) Certificate of Ownership and Merger Merging
Tartan, Inc. into the Company (incorporated by
reference to Exhibit 4(h) to the Registrant's
Registration Statement No. 333-41919 on Form
S-8).
3(j) By-Laws of the Registrant (incorporated by
reference to Exhibit 3 to the Registrant's
Current Report on Form 8-K dated
December 4, 1997).
4(a)(i) Rights Agreement dated as of June 17, 1988
between the Registrant and First Chicago Trust
Company of New York, formerly Morgan Shareholder
Services Trust Company, as Rights Agent, which
includes as Exhibit B the form of Rights
Certificate (incorporated by reference to Exhibit
4(a)(i) to the Registrant's Annual Report on Form
10-K for the year 1993).
4(a)(ii) Assignment and Assumption Agreement dated as of
September 24, 1992 among the Registrant, First
Chicago Trust Company of New York, formerly
Morgan Shareholder Services Trust Company, and
Harris Trust and Savings Bank (incorporated by
reference to Exhibit 4(a)(i) to the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992).
4(b) The Registrant agrees to provide the Commission,
upon request, copies of instruments defining the
rights of holders of long-term debt of the
Registrant and its subsidiaries.
10(a)(i) TI Deferred Compensation Plan (incorporated by
reference to Exhibit 10(a)(ii) to the
Registrant's Annual Report on Form 10-K for the
year 1994).*
10
10(a)(ii) Amendment No. 1 to TI Deferred Compensation Plan
(incorporated by reference to Exhibit 10(a)(iii)
to the Registrant's Annual Report on Form 10-K
for the year 1994).*
10(a)(iii) Amendment No. 2 to TI Deferred Compensation Plan
(incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).*
10(a)(iv) Amendment No. 3 to TI Deferred Compensation Plan
(incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997).*
10(b) Texas Instruments Long-Term Incentive Plan
(incorporated by reference to Exhibit 10(a)(ii)
to the Registrant's Annual Report on Form 10-K
for the year 1993).*
10(c) Texas Instruments 1996 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996).*
10(d) Texas Instruments Executive Officer Performance
Plan (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997).*
10(e) Texas Instruments Restricted Stock Unit Plan for
Directors (incorporated by reference to
Exhibit 10(c) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1996).
10(f) Texas Instruments Directors Deferred Compensation
Plan (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997).
10(g) Statement of Policy of Registrant's Board of
Directors on Top Officer and Board Member
Retirement Practices (incorporated by reference
to Exhibit 10(b)(vi) to the Registrant's Annual
Report on Form 10-K for the year 1993).*
11 Computation of earnings per common and dilutive
potential common share.
12 Computation of Ratio of Earnings to Fixed Charges
and Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends.
13 Registrant's 1997 Annual Report to Stockholders.
(With the exception of the items listed in the
index to financial statements and financial
statement schedules herein, and the items
referred to in ITEMS 1, 5, 6, 7 and 8 hereof, the
1997 Annual Report to Stockholders is not to be
deemed filed as part of this report.)
11
21 List of subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
________________
*Executive Compensation Plans and Arrangements:
TI Deferred Compensation Plan (incorporated by reference to Exhibit
10(a)(ii) to the Registrant's Annual Report on Form 10-K for the
year 1994).
Amendment No. 1 to TI Deferred Compensation Plan (incorporated by
reference to Exhibit 10(a)(iii) to Registrant's Annual Report on
Form 10-K for the year 1994).
Amendment No. 2 to TI Deferred Compensation Plan (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
Amendment No. 3 to TI Deferred Compensation Plan (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
Texas Instruments Long-Term Incentive Plan (incorporated by
reference to Exhibit 10(a)(ii) to the Registrant's Annual Report on
Form 10-K for the year 1993).
Texas Instruments 1996 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
Texas Instruments Executive Officer Performance Plan (incorporated
by reference to the Registrant's Quarterly Report on form 10-Q for
the quarter ended March 31, 1997).
Statement of Policy of Registrant's Board of Directors on Top
Officer and Board Member Retirement Practices (incorporated by
reference to Exhibit 10(b)(vi) to the Registrant's Annual Report on
Form 10-K for the year 1993).
(b) Reports on Form 8-K:
None.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
With the exception of historical information, the matters discussed
or incorporated by reference in this Report on Form 10-K are forward-looking
statements that involve risks and uncertainties including, but not limited to,
global economic conditions, product demand and industry capacity, competitive
products and pricing, manufacturing efficiencies, new product development,
ability to enforce patents, availability of raw materials and critical
manufacturing equipment, new plant startups and continuity of DRAM joint
venture manufacturing operations, timely completion of announced acquisitions,
the regulatory and trade environment, timely completion of Year 2000 software
modifications, and other risks indicated in filings with the Securities and
Exchange Commission.
12
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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: February 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 23rd day of February, 1998.
Signature Title
*JAMES R. ADAMS Chairman of the Board; Director
- ------------------------------------
James R. Adams
*DAVID L. BOREN Director
- ------------------------------------
David L. Boren
*JAMES B. BUSEY IV Director
- ------------------------------------
James B. Busey IV
*DANIEL A. CARP Director
- ------------------------------------
Daniel A. Carp
*THOMAS J. ENGIBOUS President; Chief Executive Officer;
- ------------------------------------ Director
Thomas J. Engibous
*GERALD W. FRONTERHOUSE Director
- ------------------------------------
Gerald W. Fronterhouse
*DAVID R. GOODE Director
- ------------------------------------
David R. Goode
*WAYNE R. SANDERS Director
- ------------------------------------
Wayne R. Sanders
*GLORIA M. SHATTO Director
- ------------------------------------
Gloria M. Shatto
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*WILLIAM P. WEBER Vice Chairman; Director
- ------------------------------------
William P. Weber
*CLAYTON K. YEUTTER Director
- ------------------------------------
Clayton K. Yeutter
/s/ WILLIAM A. AYLESWORTH Senior Vice President; Treasurer;
- ------------------------------------ Chief Financial Officer; Chief
William A. Aylesworth Accounting Officer
*By:
/s/ WILLIAM A. AYLESWORTH
-----------------------------
William A. Aylesworth
Attorney-in-fact
14
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14(a))
Page Reference
--------------
Annual
Report to
Form 10-K Stockholders
--------- ------------
Information incorporated by reference
to the Registrant's 1997 Annual Report
to Stockholders:
Consolidated Financial Statements:
Income for each of the three 14
years in the period ended
December 31, 1997
Balance sheet at December 31, 15
1997 and 1996
Cash flows for each of the 16-17
three years in the period
ended December 31, 1997
Stockholders' equity for each of 18
the three years in the period
ended December 31, 1997
Notes to financial statements 19-33
Report of Independent Auditors 34
Consolidated Schedule for each of the three
years in the period ended December 31, 1997:
II. Allowance for losses 16
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
15
Schedule II
-----------
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
ALLOWANCE FOR LOSSES
(IN MILLIONS OF DOLLARS)
Years Ended December 31, 1997, 1996, and 1995
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
1997 $90 $133 $150 $73
- ---- ==== ==== ==== ====
1996 $45 $163 $118 $90
- ---- ==== ==== ==== ====
1995 $37 $113 $105 $45
- ---- ==== ==== ==== ====
Allowances for losses from uncollectible accounts, returns, etc., are deducted
from accounts receivable in the balance sheet.
16
Exhibit Index
Designation of
Exhibit in Electronic
this Report Description of Exhibit or Paper
-------------- ---------------------- ---------
2 Asset Purchase Agreement dated as
of January 4, 1997 between the
Registrant and Raytheon Company
(exhibits and schedules omitted)
(incorporated by reference to
Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated
January 4, 1997).
3(a) Restated Certificate of Incorporation
of the Registrant (incorporated by
reference to Exhibit 3(a) to the
Registrant's Annual Report on Form
10-K for the year 1993).
3(b) Certificate of Amendment to Restated
Certificate of Incorporation of the
Registrant (incorporated by reference
to Exhibit 3(b) to the Registrant's
Annual Report on Form 10-K for the year
1993).
3(c) Certificate of Amendment to Restated
Certificate of Incorporation of the
Registrant (incorporated by reference
to Exhibit 3(c) to the Registrant's
Annual Report on Form 10-K for the
Year 1993).
3(d) Certificate of Amendment to Restated
Certificate of Incorporation of the
Registrant (incorporated by reference
to Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996).
3(e) Certificate of Designations relating
to the Registrant's Participating
Cumulative Preferred Stock
(incorporated by reference
to Exhibit 3(d) to the Registrant's
Annual Report on Form 10-K for the
year 1993).
3(f) Certificate of Ownership Merging Texas
Instruments Automation Controls, Inc.
into the Registrant (incorporated by
reference to Exhibit 3(e) to the
Registrant's Annual Report on Form
10-K for the year 1993).
3(g) Certificate of Elimination of
Designations of Preferred Stock of the
Registrant (incorporated by reference
to Exhibit 3(f) to the Registrant's
Annual Report on Form 10-K for the
year 1993).
3(h) Certificate of Ownership and Merger
Merging Tiburon Systems, Inc. into
the Company (incorporated by reference
to Exhibit 4(g) to the Registrant's
Registration Statement No. 333-41919
on Form S-8).
3(i) Certificate of Ownership and Merger
Merging Tartan, Inc. into the Company
(incorporated by reference to Exhibit
4(h) to the Registrant's Registration
Statement No. 333-41919 on Form S-8).
3(j) By-Laws of the Registrant
(incorporated by reference to
Exhibit 3 to the Registrant's
Current Report on Form 8-K
dated December 4, 1997).
4(a)(i) Rights Agreement dated as of
June 17, 1988 between the Registrant
and First Chicago Trust Company
of New York, formerly Morgan
Shareholder Services Trust Company,
as Rights Agent, which includes as
Exhibit B the form of Rights
Certificate (incorporated by
reference to Exhibit 4(a)(i)
to the Registrant's Annual Report
on Form 10-K for the year 1993).
4(a)(ii) Assignment and Assumption Agreement
dated as of September 24, 1992
among the Registrant, First Chicago
Trust Company of New York, formerly
Morgan Shareholder Services Trust
Company, and Harris Trust and
Savings Bank (incorporated by
reference to Exhibit 4(a)(i) to
the Registrant's Quarterly Report
on Form 10-Q for the quarter
ended September 30, 1992).
4(b) The Registrant agrees to provide
the Commission, upon request, copies
of instruments defining the rights
of holders of long-term debt of
the Registrant and its subsidiaries.
10(a)(i) TI Deferred Compensation Plan
(incorporated by reference to
Exhibit 10(a)(ii) to the
Registrant's Annual Report on
Form 10-K for the year 1994).*
10(a)(ii) Amendment No. 1 to TI Deferred
Compensation Plan (incorporated
by reference to Exhibit
10(a)(iii) to the Registrant's
Annual Report on Form 10-K
for the year 1994).*
10(a)(iii) Amendment No. 2 to TI Deferred
Compensation Plan (incorporated
by reference to the Registrant's
Quarterly Report on Form 10-Q
for the quarter ended
June 30, 1997).*
10(a)(iv) Amendment No. 3 to TI Deferred
Compensation Plan (incorporated
by reference to the Registrant's
Quarterly Report on Form 10-Q
for the quarter ended
September 30, 1997).*
10(b) Texas Instruments Long-Term
Incentive Plan (incorporated
by reference to Exhibit
10(a)(ii) to the Registrant's
Annual Report on Form 10-K
for the year 1993).*
10(c) Texas Instruments 1996 Long-Term
Incentive Plan (incorporated by
reference to Exhibit 10 to
the Registrant's Quarterly
Report on Form 10-Q for the
quarter ended June 30, 1996).*
10(d) Texas Instruments Executive
Officer Performance Plan
(incorporated by reference
to the Registrant's Quarterly
Report on Form 10-Q for the
quarter ended March 31, 1997).*
10(e) Texas Instruments Restricted
Stock Unit Plan for Directors
(incorporated by reference to
Exhibit 10(c) to the
Registrant's Quarterly Report
on Form 10-Q for the quarter
ended June 30, 1996).
10(f) Texas Instruments Directors
Deferred Compensation Plan
(incorporated by reference
to the Registrant's Quarterly
Report on Form 10-Q for the
quarter ended September 30, 1997).
10(g) Statement of Policy of Registrant's
Board of Directors on Top Officer
and Board Member Retirement
Practices (incorporated by reference
to Exhibit 10(b)(vi) to the
Registrant's Annual Report on Form
10-K for the year 1993).*
11 Computation of earnings per common E
and dilutive potential common share.
12 Computation of Ratio of Earnings to E
Fixed Charges and Ratio of Earnings
to Combined Fixed Charges and
Preferred Stock Dividends.
13 Registrant's 1997 Annual Report to E
Stockholders. (With the exception
of the items listed in the index
to financial statements and
financial statement schedules
herein, and the items referred to
in ITEMS 1, 5, 6, 7 and 8 hereof,
the 1996 Annual Report to Stockholders
is not to be deemed filed as part
of this report.)
21 List of subsidiaries of the Registrant. E
23 Consent of Ernst & Young LLP. E
24 Powers of Attorney. E
27 Financial Data Schedule. E
________________
*Executive Compensation Plans and Arrangements:
TI Deferred Compensation Plan (incorporated by reference to
Exhibit 10(a)(ii) to the Registrant's Annual Report on Form 10-K for
the year 1994).
Amendment No. 1 to TI Deferred Compensation Plan
(incorporated by reference to Exhibit 10(a)(iii) to Registrant's Annual Report
on Form 10-K for the year 1994).
Amendment No. 2 to TI Deferred Compensation Plan
(incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
Amendment No. 3 to TI Deferred Compensation Plan
(incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30,
1997).
Texas Instruments Long-Term Incentive Plan (incorporated by
reference to Exhibit 10(a)(ii) to the Registrant's Annual Report on
Form 10-K for the year 1993).
Texas Instruments 1996 Long-Term Incentive Plan (incorporated
by reference to Exhibit 10 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
Texas Instruments Executive Officer Performance Plan
(incorporated by reference to the Registrant's Quarterly Report on form
10-Q for the quarter ended March 31, 1997).
Statement of Policy of Registrant's Board of Directors on Top
Officer and Board Member Retirement Practices (incorporated by
reference to Exhibit 10(b)(vi) to the Registrant's Annual Report on
Form 10-K for the year 1993).
EXHIBIT 11
----------
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
EARNINGS PER COMMON AND DILUTIVE POTENTIAL COMMON SHARE
(In thousands, except per-share amounts.)
Years ended December 31
------------------------------------------
1997 1996 1995
---------- ---------- ----------
Income (loss) from continuing operations
before extraordinary item.................................. $ 301,864 $ (46,774) $ 996,226
Add: Interest, net of tax and profit sharing effect,
on convertible debentures assumed converted......... -- -- 1,582
---------- ---------- ----------
Adjusted income (loss) from continuing operations
before extraordinary item.................................. 301,864 (46,774) 997,808
Discontinued operations:
Income from operations....................................... 52,718 109,397 91,875
Gain on sale................................................. 1,472,710 -- --
Extraordinary item............................................. (22,157) -- --
---------- ---------- ----------
Adjusted net income............................................ $1,805,135 $ 62,623 $1,089,683
========== ========== ==========
Diluted Earnings (loss) per Common and Dilutive Potential Common
Share:
Weighted average common shares outstanding..................... 385,141 379,388 375,288
Weighted average dilutive potential common shares:
Stock option and compensation plans........................ 9,319 -- 6,254
Convertible debentures..................................... 3,267 -- 5,720
---------- ---------- ----------
Weighted average common and dilutive potential common shares... 397,727 379,388 387,262
========== ========== ==========
Diluted Earnings (loss) per Common Share:
Income (loss) from continuing operations
before extraordinary item................................ $ .76 $ (.12) $ 2.58
Discontinued operations:
Income from operations..................................... .13 .29 .23
Gain on sale............................................... 3.70 -- --
Extraordinary item........................................... (.05) -- --
---------- ---------- ----------
Net Income................................................... $ 4.54 $ .17 $ 2.81
========== ========== ==========
Basic Earnings (loss) per Common Share:
Weighted average common shares outstanding..................... 385,141 379,388 375,288
========== ========== ==========
Basic Earnings (loss) per Common Share:
Income (loss) from continuing operations
before extraordinary item................................ $ .78 $ (.12) $ 2.65
Discontinued operations:
Income from operations..................................... .14 .29 .25
Gain on sale............................................... 3.82 -- --
Extraordinary item........................................... (.05) -- --
---------- ---------- ----------
Net income................................................... $ 4.69 $ .17 $ 2.90
========== ========== ==========
The earnings per common share computation for 1996 excludes 4.8 million shares for
stock options/compensation plans and 5.0 million shares for convertible debentures
because their effect would have been antidilutive.
EXHIBIT 12
----------
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Dollars in millions)
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Income before income taxes
and fixed charges:
Income before extraordinary item and
cumulative effect of accounting changes,
interest expense on loans,
capitalized interest amortized,
and provision for income taxes.......... $ 825 $ 65 $1,530 $ 943 $ 561
Add interest attributable to
rental and lease expense................ 44 44 41 40 38
------ ------ ------ ------ ------
$ 869 $ 109 $1,571 $ 983 $ 599
====== ====== ====== ====== ======
Fixed charges:
Total interest on loans (expensed
and capitalized).......................... $ 114 $ 108 $ 69 $ 58 $ 55
Interest attributable to rental
and lease expense......................... 44 44 41 40 38
------ ------ ------ ------ ------
Fixed charges................................. $ 158 $ 152 $ 110 $ 98 $ 93
====== ====== ====== ====== ======
Combined fixed charges and
preferred stock dividends:
Fixed charges............................. $ 158 $ 152 $ 110 $ 98 $ 93
Preferred stock dividends
(adjusted as appropriate to a
pretax equivalent basis)................ -- -- -- -- 29
------ ------ ------ ------ ------
Combined fixed charges and
preferred stock dividends............... $ 158 152 $ 110 $ 98 $ 122
====== ====== ====== ====== ======
Ratio of earnings to fixed charges............ 5.5 * 14.3 10.0 6.4
====== ====== ====== ====== ======
Ratio of earnings to combined fixed
charges and preferred stock dividends....... 5.5 * 14.3 10.0 4.9
====== ====== ====== ====== ======
* Not meaningful. The coverage deficiency was $43 million in 1996.
Exhibit 13
----------
Consolidated Financial Statements
(In millions of dollars, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
INCOME 1997 1996 1995
- ----------------------------------------------------------------------------
Net revenues .............................. $ 9,750 $ 9,940 $11,409
------- ------- -------
Operating costs and expenses:
Cost of revenues ......................... 6,067 7,146 7,401
Research and development ................. 1,536 1,181 842
Marketing, general and administrative .... 1,532 1,639 1,727
------- ------- -------
Total .................................. 9,135 9,966 9,970
------- ------- -------
Profit (loss) from operations ............. 615 (26) 1,439
Other income (expense) net ................ 192 76 79
Interest on loans ......................... 94 73 48
------- ------- -------
Income (loss) from continuing operations
before provision for income taxes
and extraordinary item ................... 713 (23) 1,470
Provision for income taxes ................ 411 23 474
------- ------- -------
Income (loss) from continuing operations
before extraordinary item ................ 302 (46) 996
Discontinued operations:
Income from operations ................... 52 109 92
Gain on sale ............................. 1,473 -- --
------- ------- -------
Income before extraordinary item .......... 1,827 63 1,088
Extraordinary item: extinguishment
of debt .................................. (22) -- --
------- ------- -------
Net income ................................ $ 1,805 $ 63 $ 1,088
======= ======= =======
Diluted earnings (loss) per common share:
Continuing operations before extraordinary
item .................................... $ .76 $ (.12) $ 2.58
Discontinued operations:
Income from operations .................. .13 .29 .23
Gain on sale ............................ 3.70 -- --
Extraordinary item ....................... (.05) -- --
------- ------- -------
Net income ............................... $ 4.54 $ .17 $ 2.81
======= ======= =======
Basic earnings (loss) per common share:
Continuing operations before extraordinary
item .................................... $ .78 $ (.12) $ 2.65
Discontinued operations:
Income from operations .................. .14 .29 .25
Gain on sale ............................ 3.82 -- --
Extraordinary item ....................... (.05) -- --
------- ------- -------
Net income ............................... $ 4.69 $ .17 $ 2.90
======= ======= =======
See accompanying notes.
14
DECEMBER 31
------------------
BALANCE SHEET 1997 1996
- ---------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents ................................... $ 1,015 $ 964
Short-term investments ...................................... 2,005 14
Accounts receivable, less allowance for losses of
$73 million in 1997 and $90 million in 1996................ 1,705 1,799
Inventories ................................................. 742 703
Prepaid expenses ............................................ 59 50
Deferred income taxes ....................................... 577 395
Net assets of discontinued operations ....................... -- 529
------- -------
Total current assets ...................................... 6,103 4,454
------- -------
Property, plant and equipment at cost ........................ 7,414 6,712
Less accumulated depreciation ............................... (3,234) (2,550)
------- -------
Property, plant and equipment (net) ....................... 4,180 4,162
------- -------
Deferred income taxes ........................................ 134 192
Other assets ................................................. 432 552
------- -------
Total assets ................................................. $10,849 $ 9,360
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Loans payable and current portion long-term debt ............ $ 71 $ 314
Accounts payable and accrued expenses ....................... 2,082 1,940
Income taxes payable ........................................ 154 163
Accrued retirement and profit sharing contributions ......... 189 69
------- -------
Total current liabilities ................................. 2,496 2,486
------- -------
Long-term debt ............................................... 1,286 1,697
Accrued retirement costs ..................................... 731 719
Deferred credits and other liabilities ....................... 422 361
Stockholders' equity:
Preferred stock, $25 par value. Authorized - 10,000,000
shares.
Participating cumulative preferred. ....................... -- --
Common stock, $1 par value. Authorized - 500,000,000
shares. Shares issued: 1997 - 390,359,317;
1996 - 190,396,797......................................... 390 190
Paid-in capital ............................................. 1,183 1,116
Retained earnings ........................................... 4,488 2,814
Less treasury common stock at cost.
Shares: 1997 - 860,765; 1996 - 143,525................... (94) (12)
Other ....................................................... (53) (11)
------- -------
Total stockholders' equity ............................... 5,914 4,097
------- -------
Total liabilities and stockholders' equity ................... $10,849 $ 9,360
======= =======
See accompanying notes.
15
Consolidated Financial Statements
(In millions of dollars, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
CASH FLOWS 1997 1996 1995
- ---------------------------------------------------------------------------------
Continuing operations:
Cash flows from operating activities:
Income (loss) from continuing operations
before extraordinary item ...................... $ 302 $ (46) $ 996
Depreciation .................................... 1,109 904 681
Acquired in-process research and development .... 461 192 --
Deferred income taxes ........................... (148) (51) (54)
Net currency exchange losses .................... 6 7 6
(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 .......................... (39) 250 (795)
Inventories .................................. (34) 245 (221)
Prepaid expenses ............................. (19) 9 9
Accounts payable and accrued expenses ........ (36) (404) 691
Income taxes payable ......................... (26) (3) 112
Accrued retirement and profit sharing
contributions ............................... 128 (283) 155
Extraordinary item: extinguishment of debt ..... (22) -- --
Increase in noncurrent accrued
retirement costs ............................... 7 79 48
Other ........................................... 154 (101) 65
------ ------ ------
Net cash provided by operating activities ........ 1,843 798 1,693
Cash flows from investing activities:
Additions to property, plant and equipment ...... (1,238) (2,063) (1,351)
Purchases of short-term investments ............. (2,457) (27) (733)
Sales and maturities of short-term investments .. 479 202 1,076
Acquisition of businesses, net of cash acquired . (304) (313) --
Proceeds from sale of discontinued operations
less income taxes and transaction costs ........ 2,138 -- --
Proceeds from sale of other businesses .......... 177 150 --
------ ------ ------
Net cash used in investing activities ............ (1,205) (2,051) (1,008)
Cash flows from financing activities:
Additions to loans payable ...................... -- 288 12
Payments on loans payable ....................... (314) (2) --
Additions to long-term debt ..................... 28 871 24
Payments on long-term debt ...................... (256) (199) (12)
Dividends paid on common stock .................. (131) (129) (111)
Sales and other common stock transactions ....... 140 35 111
Common stock repurchase program ................. (86) -- --
Other ........................................... (2) (1) (1)
------ ------ ------
Net cash provided by (used in) financing
activities ...................................... (621) 863 23
Effect of exchange rate changes on cash .......... (23) (16) 10
------ ------ ------
Cash provided by (used in) continuing operations . $ (6) $ (406) $ 718
------ ------ ------
16
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
CASH FLOWS (continued) 1997 1996 1995
Discontinued operations:
Operating activities ............................. $ 73 $ 86 $ (26)
Investing activities ............................. (16) (80) (88)
Financing activities ............................. -- -- --
------ ------ ------
Cash provided by (used in) discontinued operations 57 6 (114)
------ ------ ------
Net increase (decrease) in cash and
cash equivalents ................................. 51 (400) 604
Cash and cash equivalents at beginning of year .... 964 1,364 760
------ ------ ------
Cash and cash equivalents at end of year .......... $1,015 $ 964 $1,364
====== ====== ======
See accompanying notes.
17
Consolidated Financial Statements
(In millions of dollars, except per share amounts)
TREASURY
COMMON PAID-IN RETAINED COMMON
STOCKHOLDERS' EQUITY STOCK CAPITAL EARNINGS STOCK OTHER
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1994 ............ $ 93 $1,041 $1,912 $ (6) $ (1)
1995
- ----
Net income .......................... 1,088
Dividends declared on common
stock ($.32 per share) ............ (119)
Two-for-one common stock split....... 94 (94)
Common stock issued:
On exercise of stock options ...... 3 81 6
On conversion of debentures ....... 20
Other stock transactions, net ....... 33 (12)
Pension liability adjustment ........ (45)
Cash investments adjustment.......... 1
------ ------ ------ ------ ------
Balance, December 31, 1995 ............ 190 1,081 2,881 (12) (45)
1996
- ----
Net income .......................... 63
Dividends declared on common
stock ($.34 per share) ............ (130)
Common stock issued on exercise
of stock options .................. 28
Other stock transactions, net ....... 7
Pension liability adjustment ........ 6
Equity and cash investments
adjustment ........................ 28
------ ------ ------ ------ ------
Balance, December 31, 1996 ............ 190 1,116 2,814 (12) (11)
1997
- ----
Net income .......................... 1,805
Dividends declared on common
stock ($.34 per share) ............ (131)
Two-for-one common stock split ...... 195 (195)
Common stock issued:
On exercise of stock options ...... 3 95 5
On conversion of debentures ....... 2 101
Stock repurchase program ............ (86)
Other stock transactions, net ....... 66 (1)
Pension liability adjustment ........ (24)
Equity and cash investments
adjustment ........................ (18)
------ ------ ------ ------ ------
Balance, December 31, 1997 ............ $ 390 $1,183 $4,488 $ (94) $ (53)
====== ====== ====== ====== ======
See accompanying notes.
18
Notes to Financial Statements
ACCOUNTING POLICIES AND PRACTICES
- ------------------------------------------------------------------------------
Effective for the year, as well as the three months ended December 31, 1997,
the company adopted SFAS No. 128, which requires disclosure of two new
earnings per share amounts and elimination of prior earnings per share
amounts, all on a retroactive basis. The two new amounts are as follows:
Diluted earnings per share, whose calculation includes not only average
outstanding common shares but also the impact of dilutive potential common
shares such as outstanding common stock options. Basic earnings per share,
which includes the effect of outstanding common shares but excludes dilutive
potential common shares. Of the two, the company believes diluted earnings
per share to be the most meaningful due to the inclusion of potential shares.
Also, effective for the year ended December 31, 1997, the company adopted SFAS
No. 131, which requires a new basis of determining reportable business
segments, i.e., the management approach. This approach (as contrasted with
the prior requirement which utilized a specified classification system for
determining segments) designates the company's internal organization as used
by management for making operating decisions and assessing performance as the
source of business segments. On this basis, the company has three principal
businesses and, therefore, three reportable business segments: Semiconductor,
Materials & Controls, and Educational & Productivity Solutions. Segment
results, as well as selected geographic data, are presented on this new basis
in 1997, as well as retroactively. Neither of these two new accounting
pronouncements altered reported net income. Another new standard, SFAS
No. 130, will be adopted in first quarter, 1998. It will require disclosure
of total nonowner changes in stockholders' equity, which is defined as net
income plus direct adjustments to stockholders' equity such as equity and cash
investment adjustments and pension liability adjustments. This disclosure
will have no effect on reported net income.
The consolidated financial statements include the accounts of all
subsidiaries. The preparation of financial statements requires the use of
estimates from which final results may vary. Intercompany balances and
transactions have been eliminated. The U.S. dollar is the functional currency
for financial reporting. With regard to accounts recorded in currencies other
than U.S. dollars, current assets (except inventories), deferred income taxes,
other assets, current liabilities and long-term liabilities are remeasured at
exchange rates in effect at year end. Inventories, property, plant and
equipment and depreciation thereon are remeasured at historic exchange rates.
Revenue and expense accounts other than depreciation for each month are
remeasured at the appropriate month-end rate of exchange. Net currency
exchange gains and losses from remeasurement and forward currency exchange
contracts to hedge net balance sheet exposures are charged or credited on a
current basis to other income (expense) net. Gains and losses from forward
currency exchange contracts to hedge specific transactions are deferred and
included in the measurement of the related transactions. Gains and losses
from interest rate swaps are included on the accrual basis in interest
expense. Gains and losses from terminated forward currency exchange contracts
and interest rate swaps are deferred and recognized consistent with the terms
of the underlying transaction.
As discussed in the Discontinued Operations footnote, the consolidated
financial statements have been restated to classify TI's Defense Systems and
Electronics business as discontinued operations. This business was sold on
July 11, 1997.
Inventories are stated at the lower of cost or estimated realizable value.
Cost is generally computed on a currently adjusted standard (which
approximates current average costs) or average basis.
Revenues are generally recognized as products are shipped. Royalty
revenue is recognized by the company upon fulfillment of its contractual
obligations and determination of a fixed royalty amount, or, in the case of
ongoing royalties, upon sale by the licensee of royalty-bearing products, as
estimated by the company.
Depreciation is computed by either the declining-balance method (primarily
150 percent declining method) or the sum-of-the-years-digits method. Fully
depreciated assets are written off against accumulated depreciation.
19
Notes to Financial Statements
(continued)
Advertising costs are expensed as incurred. Advertising expense was
$128 million in 1997, $124 million in 1996 and $131 million in 1995.
Share amounts have been retroactively adjusted for the two-for-one stock
split in 1997. Computation of earnings per common share (EPS) amounts for
income (loss) from continuing operations before extraordinary item are as
follows (millions, except per-share amounts):
1997 1996 1995
------------------- ------------------- --------------------
Income Shares EPS Loss Shares EPS Income Shares EPS
------ ------ ----- ---- ------ ------- ------ ------ -----
Basic EPS $ 302 385.1 $ .78 $(46) 379.4 $ (.12) $ 996 375.3 $2.65
Dilutives:
Stock options/
compensation plans -- 9.3 -- -- -- 6.3
Convertible debentures -- 3.3 -- -- 2 5.7
----- ----- ----- ---- ----- ------ ----- ----- -----
Diluted EPS $ 302 397.7 $ .76 $(46) 379.4 $ (.12) $ 998 387.3 $2.58
===== ===== ===== ==== ===== ====== ===== ===== =====
The EPS computation for 1996 excludes 4.8 million shares for stock options/compensation plans and
5.0 million shares for convertible debentures because their effect would have been antidilutive.
DISCONTINUED OPERATIONS
- ------------------------------------------------------------------------------
On January 6, 1997, TI and Raytheon Company announced that their boards of
directors had approved a definitive agreement dated as of January 4, 1997, for
Raytheon to purchase TI's Defense Systems and Electronics business (DSE) for
$2.95 billion in cash. This transaction was closed on July 11, 1997. The net
gain on sale of this discontinued operation, after income taxes of $876
million, was $1473 million. The consolidated financial statements of TI have
been restated to present the DSE operations, assets and liabilities as
discontinued operations.
The assets and liabilities of DSE were classified on the 1996 balance
sheet as net assets of discontinued operations and consisted of the following
(millions of dollars):
Accounts receivable ......................... $ 278
Inventories (net of progress billings) ...... 221
Prepaid expenses ............................ 1
Current deferred income taxes ............... 91
Property, plant and equipment (net) ......... 296
Noncurrent deferred income taxes ............ 62
Other assets ................................ 40
------
Total assets of DSE ....................... 989
------
Accounts payable and accrued expenses ....... 234
Accrued retirement costs .................... 226
------
Total liabilities of DSE .................. 460
------
Net assets of discontinued operations ....... $ 529
======
The net income from operations of DSE was classified on the statement of
income as income from discontinued operations. Summarized results of
discontinued operations prior to the close were as follows:
MILLIONS OF DOLLARS
--------------------------
1997 1996 1995
------ ------ ------
Net revenues ............................... $ 812 $1,773 $1,720
Income before provision for income taxes ... 84 175 149
Provision for income taxes ................. 32 66 57
Income from discontinued operations ........ 52 109 92
The Defense Systems and Electronics business included products such as radar
systems, navigation systems, infrared surveillance and fire control systems,
defense suppression missiles, missile guidance and control systems, and
electronic warfare systems, which were sold to the U.S. government (either
directly or through prime contractors) and to international customers approved
by the U.S. government. TI provided various ongoing services to DSE
including, but not limited to, facilities management, data processing,
security, payroll and employee benefits administration, insurance
administration, duplicating and telecommunications services. Their inclusion
in discontinued operations was based upon TI's intercorporate allocation
proce-
20
dures for such services. The allocation basis of these expenses and all
other central operating costs was first on the basis of direct usage when
identifiable, with the remainder allocated among DSE and other TI businesses
on the basis of their respective revenues, headcount or other measures. These
expenses allocated to DSE totaled $76 million in 1997, $163 million in 1996
and $167 million in 1995. TI has agreements to receive payments from Raytheon
for continuing to provide certain of these services on an ongoing basis and
others on a transition basis to DSE.
Income from discontinued operations for 1996 includes the effect of a
fourth quarter pretax charge of $32 million for voluntary and involuntary
severance actions in the United States. These actions were essentially
completed by year-end 1996 and affected approximately 700 DSE employees.
CASH EQUIVALENTS AND INVESTMENTS
- ------------------------------------------------------------------------------
Debt securities with original maturities within three months are considered
cash equivalents. Debt securities with original maturities beyond three months
have remaining maturities within 13 months and are considered short-term
investments. These cash equivalent and short-term investment debt securities
are available for sale and stated at fair value, which approximates their
specific amortized cost. As of December 31, 1997, these debt securities
consisted primarily of the following types: corporate ($1943 million), and
asset-backed commercial paper ($623 million). At December 31, 1996, these
debt securities consisted primarily of the following types: U.S. government
($9 million), corporate ($413 million), and asset-backed commercial paper
($300 million). Gross realized and unrealized gains and losses for each of
these security types were immaterial in 1997, 1996 and 1995. Proceeds from
sales of these cash equivalent and short-term investment debt securities in
1997, 1996 and 1995 were $859 million, $10 million and $190 million.
Adjustments to fair value of cash equivalent and short-term investments
as well as noncurrent publicly traded equity investments are recorded as an
increase or decrease in stockholders' equity. As of December 31, 1997, this
adjustment, net of a deferred tax effect of $10 million, was a decrease of $18
million (zero for cash equivalent and short-term investments and $18 million
for noncurrent equity investments). At December 31, 1996, the adjustment, net
of a deferred tax effect of $15 million, was an increase of $28 million (zero
for cash equivalent and short-term investments and $28 million for noncurrent
equity investments). At year-end 1995 this adjustment was zero. Gross
realized and unrealized holding gains and losses and proceeds from sales of
equity investments were not material in 1997, 1996 and 1995. The aggregate
fair value of these noncurrent equity investments at December 31, 1997 and
1996, was $30 million and $63 million, compared to their original cost of $15
million and $20 million.
INVENTORIES
- ---------------------------------------------------------------------------
MILLIONS OF DOLLARS
-------------------
1997 1996
------ ------
Raw materials and purchased parts .................... $ 105 $ 111
Work in process ...................................... 364 361
Finished goods ....................................... 273 231
------ ------
Inventories .......................................... $ 742 $ 703
====== ======
To secure access to additional semiconductor plant capacity, TI participates
in several joint ventures formed to construct and operate DRAM semiconductor
manufacturing facilities. TI holds minority interests in, and has long-term
inventory purchase commitments with, each joint venture. Under the
agreements, TI purchases the output of the ventures at prices based upon
percentage discounts from TI's average selling prices. This pricing method is
designed to help reduce the effect of market volatility on TI, although it has
not been able to comprehend fully a sharp decline in average unit prices.
Certain co-venturers have the right to buy a portion of the output from TI.
Under the ventures' financing arrangements, the venturers have provided
certain debt and other guarantees. At December 31, 1997 and 1996, TI was
contingently liable for an aggregate of $19 million and $25 million of such
guarantees. TI and other co-venturers are currently exploring further
measures with respect to the joint venture structures. In this regard, TI and
Hitachi, Ltd., major co-venturers in one joint venture,
21
Notes to Financial Statements
(continued)
announced on February 9, 1998, plans to discontinue their joint venture
arrangement, with TI to purchase the assets of the venture. In connection
with this action, TI expects to take a special charge in the first quarter of
1998.
Inventory purchases from the ventures aggregated $977 million in 1997,
$1176 million in 1996 and $1779 million in 1995. Receivables from and
payables to the ventures were $135 million and $69 million at December 31,
1997, and $43 million and $66 million at December 31, 1996.
The purpose of the joint ventures is to provide semiconductor output for
TI and other co-venturers. As a result, TI expects to recover its cost of the
ventures through sale of the semiconductor output, and is amortizing its cost
of the ventures over the expected initial output period of 3 to 5 years, and
recognizing its share of any cumulative venture net losses in excess of
amortization. The related expense charged to operations was $88 million in
1997, $33 million in 1996 and $15 million in 1995.
PROPERTY, PLANT AND EQUIPMENT AT COST
- ---------------------------------------------------------------------------
MILLIONS OF DOLLARS
-------------------
Depreciable Lives 1997 1996
----------------- ------ ------
Land ............................ $ 94 $ 89
Buildings and improvements ...... 5-40 years 2,583 2,372
Machinery and equipment ......... 3-10 years 4,737 4,251
------ ------
Total ........................... $7,414 $6,712
====== ======
Authorizations for property, plant and equipment expenditures in future years
were approximately $1105 million at December 31, 1997, and $795 million at
December 31, 1996.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ---------------------------------------------------------------------------
MILLIONS OF DOLLARS
-------------------
1997 1996
------ ------
Accounts payable .................................... $ 698 $ 775
Advance payments .................................... 13 84
Accrued salaries, wages, severance
and vacation pay ................................... 405 309
Other accrued expenses and liabilities .............. 966 772
------ ------
Total ............................................... $2,082 $1,940
====== ======
DEBT AND LINES OF CREDIT
- ---------------------------------------------------------------------------
MILLIONS OF DOLLARS
-------------------
Long-Term Debt 1997 1996
- -------------- ----- -----
6.75% notes due 1999 .................................. $ 200 $ 200
6.875% notes due 2000 ................................. 200 200
9.0% notes due 2001 ................................... 55 150
6.65% notes, due in installments through 2001 ......... 204 200
9.25% notes due 2003 .................................. 104 150
6.125% notes due 2006 ................................. 300 300
8.75% notes due 2007 .................................. 43 150
3.80% to 6.10% Italian lira mortgage notes
(12% swapped for 1.60% U.S. dollar obligation) ....... 190 200
2.75% convertible subordinated
debentures due 2002 .................................. -- 103
Other ................................................. 57 59
------ ------
1,353 1,712
Less current portion long-term debt ................... 67 15
------ ------
Total ................................................. $1,286 $1,697
====== ======
In the third quarter of 1997, the company gave notice of redemption for the
$103 million outstanding balance of its 2.75% convertible subordinated
debentures due 2002. In response, essentially all of the debenture holders
elected to convert their debentures into TI common stock. This resulted in
the issuance of 2,488,175 shares of TI common stock in the third quarter. In
addition, the company announced on October 14, 1997, a fixed-spread tender
offer for any or all of its 9.0% notes due 2001, its 9.25% notes due 2003 and
its 8.75% notes due 2007. As a result of the tender offer, which closed
October 21, an aggregate of $248 million of such debt principal was tendered
at a price of $280 million and extinguished by the company through the use of
existing cash balances. This resulted in an extraordinary charge of $22
million in the fourth quarter of 1997, after elimination of deferred issuance
costs and recognition of an income tax effect of $12 million.
The coupon rates for the notes due 2006 (in 1996, notes due 2001 and 2007)
have been swapped for LIBOR-based variable rates through 2006, for an
effective interest rate of approximately 5.1% and 9.1% as of December 31, 1997
and 1996. The Italian lira mortgage notes, and related swaps, are due in
installments through 2005. The mortgage notes are collateralized by real
estate and building equipment.
22
Interest incurred on loans in 1997, 1996 and 1995 was $114 million, $108
million and $69 million. Of these amounts, $20 million in 1997, $35 million
in 1996 and $21 million in 1995 were capitalized as a component of capital
asset construction costs. Interest paid on loans (net of amounts capitalized)
was $94 million in 1997, $54 million in 1996 and $48 million in 1995.
Aggregate maturities of long-term debt due during the four years
subsequent to December 31, 1998, are as follows:
MILLIONS OF DOLLARS
-------------------
1999 ................................................. $ 259
2000 ................................................. 314
2001 ................................................. 135
2002 ................................................. 26
The company maintains lines of credit to support commercial paper borrowings
and to provide additional liquidity. These lines of credit totaled $651
million at December 31, 1997, and $696 million at December 31, 1996. Of these
amounts, at December 31, 1997 and 1996, $600 million existed to support
outstanding and future commercial paper borrowings or short-term bank loans.
At December 31, 1996, outstanding commercial paper borrowings of $299 million
with a weighted-average interest rate of 5.49% were included in current loans
payable. No commercial paper borrowings were outstanding at December 31,
1997.
FINANCIAL INSTRUMENTS AND RISK CONCENTRATION
- ------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS: In addition to the swaps discussed in the preceding
note, as of December 31, 1997, the company had forward currency exchange
contracts outstanding of $275 million to hedge net balance sheet exposures
(including $101 million to buy lira, $73 million to buy deutsche marks, and
$24 million to buy Singapore dollars). At December 31, 1996, the company had
forward currency exchange contracts outstanding of $333 million to hedge net
balance sheet exposures (including $82 million to buy deutsche marks, $48
million to sell yen, and $36 million to sell French francs). As of
December 31, 1997 and 1996, the carrying amounts and current market settlement
values of these swaps and forward contracts were not significant.
The company uses forward currency exchange contracts, including the lira
note currency swaps, to minimize the adverse earnings impact from the effect
of exchange rate fluctuations on the company's non-U.S. dollar net balance
sheet exposures. The interest rate swaps for the company's notes due 2006 (in
1996, notes due 2001 and 2007) are used to change the characteristics of the
interest rate stream on the debt from fixed rates to short-term variable rates
in order to achieve a mix of interest rates which, over time, is expected to
moderate financing costs. The effect of these interest rate swaps was to
reduce interest expense by $2 million in 1997 and increase interest expense by
$2 million and $6 million in 1996 and 1995.
In order to minimize its exposure to credit risk, the company limits its
counterparties on the forward currency exchange contracts and interest rate
swaps to investment-grade rated financial institutions.
As of December 31, 1997 and 1996, the fair value of long-term debt, based
on current interest rates, was approximately $1390 million and $1759 million,
compared with the carrying amount of $1353 million and $1712 million.
RISK CONCENTRATION: Financial instruments which potentially subject the
company to concentrations of credit risk are primarily cash investments and
accounts receivable. The company places its cash investments in investment-
grade, short-term debt securities and limits the amount of credit exposure to
any one commercial issuer. Concentrations of credit risk with respect to the
receivables are limited due to the large number of customers in the company's
customer base, and their dispersion across different industries and geographic
areas. The company maintains an allowance for losses based upon the expected
collectibility of accounts receivable.
STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
The company is authorized to issue 10,000,000 shares of preferred stock. None
are currently outstanding.
Each outstanding share of the company's common stock carries one-fourth of
a stock purchase right. Under certain circum-
23
Notes to Financial Statements
(continued)
stances, each right may be exercised to purchase one one-hundredth of a share
of the company's participating cumulative preferred stock for $200. Under
certain circumstances following the acquisition of 20% or more of the
company's outstanding common stock by an acquiring person (as defined in the
rights agreement), each right (other than rights held by an acquiring person)
may be exercised to purchase common stock of the company or a successor
company with a market value of twice the $200 exercise price. The rights,
which are redeemable by the company at 1 cent per right, expire in June 1998.
RESEARCH AND DEVELOPMENT EXPENSE
- ---------------------------------------------------------------------------
Research and development expense, which totaled $1536 million in 1997, $1181
million in 1996 and $842 million in 1995, included a charge in 1997 of $461
million for the value of acquired in-process research and development as a
result of the acquisition of Amati Communications Corporation (Amati). The
company acquired Amati as a result of an all-cash tender offer which commenced
on November 25, 1997, and expired on December 23, 1997, through which
approximately 78% of Amati's outstanding common shares were acquired for an
aggregate of $306 million, or $20 per share. As contractually required, the
company is acquiring the balance of the Amati shares through a second-step
merger transaction for an aggregate of $89 million, or $20 per share. In
addition to these stock purchase costs, the company has incurred approximately
$121 million of additional acquisition costs, which includes $73 million for
the value of TI common stock options contractually required to be issued to
replace outstanding Amati employee stock options. Research and development
expense for 1996 included a charge of $192 million for the value of acquired
in-process research and development in connection with the 1996 acquisition of
Silicon Systems, Inc. (SSi). There was no tax offset associated with either
of these two charges.
OTHER INCOME (EXPENSE) NET
- ---------------------------------------------------------------------------
MILLIONS OF DOLLARS
------------------------------
1997 1996 1995
------ ------ ------
Interest income ........................... $ 146 $ 62 $ 87
Other income (expense) net ................ 46 14 (8)
------ ------ ------
Total ..................................... $ 192 $ 76 $ 79
====== ====== ======
STOCK OPTIONS
- ------------------------------------------------------------------------------
The company has stock options outstanding to participants under the Texas
Instruments 1996 Long-Term Incentive Plan, approved by stockholders on
April 18, 1996. Options are also outstanding under the 1984 and 1988 Stock
Option Plans and the Texas Instruments Long-Term Incentive Plan; however, no
further options may be granted under these plans. Under all these
stockholder-approved plans, unless the options are replacement options, e.g.,
acquisition-related, the option price per share may not be less than 100
percent of the fair market value on the date of the grant. Substantially all
the options have a 10-year term. Options granted in 1997 generally vest
ratably over four years. Options granted prior to that are either fully
vested or will vest within one year.
Under the 1996 Long-Term Incentive Plan, the company may grant stock
options, including incentive stock options; restricted stock and restricted
stock units; performance units; and other stock-based awards. The plan
provides for the issuance of 37,000,000 shares of the company's common stock;
in addition, if any award under the 1984 or 1988 Stock Option Plans or the
Long-Term Incentive Plan terminates, then any unissued shares subject to the
terminated award become available for granting awards under the 1996 Long-Term
Incentive Plan. No more than 4,000,000 shares of common stock may be awarded
as restricted stock, restricted stock units or other stock-based awards under
the plan. In 1997 and 1996, 201,500 and 110,028 shares of restricted stock
units, which vest over 1 to 5 years, were granted (weighted-average award-date
value of $37.78 and $22.65 per share). In addition, in 1997 and 1996, 5,700
and 69,812 previously unissued shares were issued as Annual Incentive Plan
stock awards
24
(weighted-average award-date value of $22.94 and $23.28 per share).
Compensation expense for restricted stock units and annual stock awards
totaled $3.5 million and $1.6 million in 1997 and 1996.
The company also has stock options outstanding under the Employee Stock
Purchase Plan approved by stockholders in 1997. The plan provides for options
to be offered semiannually to all eligible employees in amounts based on a
percentage of the employee's compensation. The option price per share may not
be less than 85 percent of the fair market value on the date of grant. If the
optionee authorizes and does not cancel payroll deductions which will be equal
to or greater than the purchase price, options granted become exercisable 7
months, and expire not more than 13 months, from date of grant. Options are
also outstanding under the 1988 Employees Stock Option Purchase Plan; however,
no further options may be granted under this plan.
Stock option transactions during 1997, 1996 and 1995 were as follows:
LONG-TERM
INCENTIVE WEIGHTED- WEIGHTED-
AND STOCK AVERAGE EMPLOYEE STOCK AVERAGE
OPTION EXERCISE AND STOCK OPTION EXERCISE
PLANS PRICE PURCHASE PLANS PRICE
--------- --------- ---------------- ---------
Balance, Dec. 31, 1994 ....... 16,319,108 $11.96 1,897,564 $19.19
Granted ..................... 5,823,520 17.84 1,965,896* 29.66
Forfeited ................... (236,728) 16.84 (220,970) 24.23
Expired ..................... -- -- -- --
Exercised** ................. (6,140,756) 10.49 (1,375,072) 18.71
---------- ------ ---------- ------
Balance, Dec. 31, 1995 ....... 15,765,144 14.62 2,267,418 28.07
Granted ..................... 5,326,750 22.92 1,697,092* 28.13
Forfeited ................... (397,478) 13.08 (799,818) 29.22
Expired ..................... -- -- -- --
Exercised** ................. (869,320) 12.90 (772,324) 25.18
---------- ------ ---------- ------
Balance, Dec. 31, 1996 19,825,096 16.96 2,392,368 28.66
Granted ..................... 10,237,160 36.45 1,187,887* 48.30
Forfeited ................... (2,365,382) 28.79 (763,335) 30.02
Expired ..................... -- -- -- --
Exercised** ................. (3,874,438) 14.01 (1,487,181) 28.96
---------- ------ ---------- ------
Balance, Dec. 31, 1997 23,822,436 $24.64 1,329,739 $44.71
========== ====== ========== ======
* Excludes options offered but not accepted.
** Includes previously unissued shares and treasury shares of 5,324,348 and
37,271; 1,641,644 and zero; and 7,414,786 and 101,042 for 1997, 1996 and 1995.
In accordance with the terms of APB No. 25, the company records no
Compensation expense for its stock option awards. As required by SFAS
No. 123, the company provides the following disclosure of hypothetical values
for these awards. The weighted-average grant-date value of options granted
during 1997 and 1996 was estimated to be $15.72 and $9.24 under the Long-Term
Incentive Plans (Long-Term Plans) and $13.47 and $6.05 under the Employee
Stock and Stock Option Purchase Plans (Employee Plans). These values were
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1997 and 1996: expected dividend yields of
.93% and 1.48% (Long-Term Plans) and .70% and 1.21% (Employee Plans); expected
volatility of 39%; risk-free interest rates of 5.76% and 5.42% (Long-Term
Plans) and 5.69% and 6.15% (Employee Plans); and expected lives of 6 years
(Long-Term Plans) and .8 years and 1.5 years (Employee Plans). Had
compensation expense been recorded based on these hypothetical values, the
company's 1997 net income would have been $1764 million, or diluted earnings
per share of $4.43. A similar computation for 1996 and 1995 would have
resulted in net income of $40 million and $1078 million, or diluted earnings
per share of $0.11 and $2.78. Because options vest over several years and
additional option grants are expected, the effects of these hypothetical
calculations are not likely to be representative of similar future
calculations.
Summarized information about stock options outstanding under the
Long-Term Plans and 1984 and 1988 Stock Option Plans at December 31, 1997, is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------ --------------------
WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
NUMBER AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE AT DEC. 31, EXERCISE
EXERCISE PRICES AT DEC. 31, 1997 CONTRACTUAL LIFE PRICE 1997 PRICE
- --------------- ---------------- ---------------- -------- ----------- --------
$ 8.21 to 25.94 14,772,536 6.3 years $17.21 9,328,942 $14.51
31.74 to 47.41 8,495,820 9.1 34.83 74,700 36.74
55.22 to 70.41 554,080 9.7 66.49 -- --
- --------------- ---------- ---- ------ --------- ------
$ 8.21 to 70.41 23,822,436 7.4 $24.64 9,403,642 $14.69
=============== ========== ==== ====== ========= ======
25
Notes to Financial Statements
(continued)
At December 31, 1997, the stock options outstanding under the Employee Plans
have exercise prices of $48.30 or $28.13, depending on the year of grant, and
a weighted-average remaining contractual life of 8 to 9 months. Of the total
outstanding options, 236,771 are exercisable at year-end 1997.
At year-end 1997, 28,825,652 shares were available for future grants under
the 1996 Long-Term Incentive Plan and 8,907,032 shares under the Employee
Stock Purchase Plan. As of year-end 1997, 53,016,852 shares were reserved for
issuance under the company's stock option and incentive plans and 10,000,000
shares were reserved for issuance under the Employee Stock Purchase Plan.
In the third quarter of 1997, the company began a stock repurchase program
with the goal of neutralizing the dilutive effect of shares to be issued upon
the exercise of stock options under the new Employee Stock Purchase Plan and
Long-Term Plans. Treasury shares acquired in connection with this repurchase
program and other stock transactions in 1997, 1996 and 1995 were 754,511
shares, 7,730 shares and 135,001 shares. Previously unissued common shares
issued under the Long-Term Incentive Plan and the Annual Incentive Plan in
1997, 1996 and 1995 were 30,174 shares, 98,072 shares and 32,772 shares.
Treasury shares issued under the Texas Instruments Restricted Stock Unit Plan
for Directors in 1997 and 1996 were zero shares and 2,334 shares.
PROFIT SHARING AND RETIREMENT PLANS
- -----------------------------------------------------------------------------
The company provides various incentive plans for employees, including general
profit sharing and savings programs as well as annual performance awards. The
company also provides pension and retiree health care benefit plans in the U.S.
and pension plans in certain non-U.S. locations.
PROFIT SHARING: Profit sharing expense was $122 million in 1997 and
$257 million in 1995. There was no profit sharing expense in 1996. Under the
plans, unless otherwise provided by local law, the company and certain of its
subsidiaries contribute a portion of their net profits equal to 25% of the
amount by which consolidated income (as defined) before profit sharing and
income taxes exceeds 8% of the company's consolidated average assets for the
year. In 1997, the board of directors of the company amended the plans to
exclude from consolidated income for purposes of this computation the 1997
fourth quarter charge of $461 million for acquired in-process research and
development arising as a result of the acquisition of Amati.
Beginning January 1, 1998, the profit sharing formula will change in order
to more closely align it with the company's business objectives. Under the
new formula, unless otherwise provided by local law or other plans (e.g., the
separate profit sharing plan for the materials & controls business), the
worldwide profit sharing amount will be based on the company's annual
consolidated profit from operations (PFO) performance including profit
sharing. The profit sharing contribution percentage, which is applied to
employees' earnings worldwide to determine the annual profit sharing amount,
will vary depending on the PFO percentage attained, i.e., PFO divided by net
revenues. For example, for a PFO percentage below 10%, the profit sharing
contribution percentage is zero; at 10% PFO, the contribution percentage to
be applied to employees' earnings is 4%. At 16% PFO, the contribution
percentage is 16%; at PFO of 20% or above, the contribution percentage is 26%.
The majority of the profit sharing plans worldwide provide that, depending
on the individual plan, from 50% to 100% of the profit sharing earned by
employees is paid in cash to the eligible participants with the balance
contributed to a deferred plan. For non-U.S. employees, contributions to a
deferred plan generally are invested in TI common stock. For U.S. employees,
several investment options, including TI common stock, are available.
Except in the event of company contributions in stock, investments in TI
common stock are made by the trustees through purchases of outstanding shares
or through purchases of shares offered from time to time by the company. The
board of directors has authorized the issuance of previously unissued shares
for purposes of the plans; 9,233,836 of such shares were available for future
issuance at December 31, 1997.
The trustees of the profit sharing plans purchased 3,535,471 outstanding
shares of TI common stock in 1997 (3,123,905 shares in 1996 and 4,762,460
shares in 1995) and no previously unissued
26
shares in 1997, 1996 and 1995 for use in the profit sharing plans and savings
program.
SAVINGS PROGRAM: The company provides a matched savings program whereby a
U.S. employee's contribution, up to 4% of earnings, is matched by the company
at the rate of 50 cents per dollar. Contributions are subject to statutory
limitations. The contributions may be invested in several investment funds
including TI common stock. The company's expense under this program was
$15 million in 1997, $17 million in 1996 and $14 million in 1995.
U.S. PENSION PLAN: The company has a defined benefit plan covering most
U.S. employees with benefits based on years of service and employee's
compensation. The plan is a career-average-pay plan which has been amended
periodically in the past to produce approximately the same results as a final-
pay type plan. The board of directors of the company has expressed an intent
to make such amendments in the future, circumstances permitting, and the
expected effects of such amendments have been considered in calculating U.S.
pension expense. The company's funding policy is to contribute to the plan at
least the minimum amount required by ERISA. Plan assets consist primarily of
common stock, U.S. government obligations, commercial paper and real estate.
Effective January 1, 1998, the company will provide an alternative to the
combination of the current defined benefit plan and savings program (current
plan) for U.S. employees employed prior to December 1, 1997. The alternative
plan (new plan) is designed to favorably compare with other retirement
programs in the semiconductor industry. It consists of a defined contribution
plan whereby the company will contribute 2% of an employee's earnings, and a
matched savings program whereby an employee's contribution, up to 4% of the
employee's earnings, will be matched by the company at a dollar-per-dollar
rate. The contributions may be invested in several investment funds including
TI common stock. During a selection period, which ended December 12, 1997,
employees irrevocably elected whether to remain in the current plan or choose
the new plan. Benefits earned through December 31, 1997, under the current
plan will be retained by those employees who chose the new plan.
Approximately 36% chose the new plan. Employees hired subsequent to
November 30, 1997, will automatically participate in the new plan.
As noted in the Discontinued Operations footnote, accrued retirement costs
of $226 million at year-end 1996, which consisted primarily of the U.S.
pension plan and the retiree health care benefit plan obligations and assets
related to DSE employees, were included in the net assets of discontinued
operations. The following information on pension and retiree health care
benefit plans excludes discontinued operations amounts.
Pension expense of the U.S. plan includes the following components:
MILLIONS OF DOLLARS
--------------------------------
1997 1996 1995
------ ------ ------
Service cost - benefits earned
during the period ...................... $ 36 $ 40 $ 31
Interest cost on projected benefit
obligation ............................. 48 51 44
Return on plan assets:
Actual return .......................... (102) (123) (95)
Deferral ............................... 69 82 57
Net amortization ........................ -- (2) (5)
------ ------ ------
U.S. pension expense .................... $ 51 $ 48 $ 32
====== ====== ======
The funded status of the U.S. plan was as follows:
MILLIONS OF DOLLARS
-------------------
1997 1996
------- -------
Actuarial present value at Dec. 31 of:
Vested benefit obligation .................... $ (428) $ (540)
======= =======
Accumulated benefit obligation ............... $ (488) $ (595)
======= =======
Projected benefit obligation ................. $ (688) $ (819)
Plan assets at fair value ..................... 543 611
------- -------
Projected benefit obligation in excess of
plan assets .................................. (145) (208)
Unrecognized net asset from initial
application of SFAS 87 ....................... (16) (20)
Unrecognized net (gain) loss .................. (29) 8
Unrecognized prior service cost ............... 8 18
------- -------
Accrued pension at Dec. 31 .................... (182) (202)
Less current portion .......................... 40 45
------- -------
Accrued U.S. pension costs .................... $ (142) $ (157)
======= =======
27
Notes to Financial Statements
(continued)
The projected benefit obligations for 1997 and 1996 were determined using
assumed discount rates of 7.0% and 7.25% and an assumed average long-term pay
progression rate of 4.25%. The assumed long-term rate of return on plan
assets was 9.0%.
NON-U.S. PENSION PLANS: Retirement coverage for non-U.S. employees of the
company is provided, to the extent deemed appropriate, through separate plans.
Retirement benefits are based on years of service and employee's compensation,
generally during a fixed number of years immediately prior to retirement.
Funding policies are based on local statutes. Plan assets consist primarily
of common stock, government obligations and corporate bonds.
Pension expense of the non-U.S. plans includes the following components:
MILLIONS OF DOLLARS
-------------------------------
1997 1996 1995
------ ------ ------
Service cost - benefits earned
during the period ...................... $ 59 $ 64 $ 59
Interest cost on projected benefit
obligations ............................ 35 34 38
Return on plan assets:
Actual return .......................... (60) (49) (32)
Deferral ............................... 22 14 (3)
Net amortization ........................ 12 13 10
------ ------ ------
Non-U.S. pension expense ................ $ 68 $ 76 $ 72
====== ====== ======
The funded status of the non-U.S. plans was as follows:
MILLIONS OF DOLLARS
---------------------
1997 1996
------ ------
Actuarial present value at Sept. 30 of:
Vested benefit obligations .................. $ (583) $ (535)
====== ======
Accumulated benefit obligations ............. $ (753) $ (696)
====== ======
Projected benefit obligations ............... $ (999) $ (940)
Plan assets at fair value .................... 543 500
------ ------
Projected benefit obligations in excess of
plan assets ................................. (456) (440)
Unrecognized net liabilities from initial
application of SFAS 87 ...................... 13 18
Unrecognized net loss ........................ 252 236
Unrecognized prior service cost .............. 9 12
------ ------
Accrued non-U.S. pension at Sept. 30 ......... (182) (174)
Additional minimum liability ................. (69) (48)
Adjustments from Sept. 30 to Dec. 31 ......... 4 (3)
Less prepaid pension costs at Dec. 31 ........ 10 13
------ ------
Accrued pension at Dec. 31 ................... (257) (238)
Less current portion ......................... 3 4
------ ------
Accrued non-U.S. pension costs ............... $ (254) $ (234)
====== ======
The range of assumptions used for the non-U.S. plans reflects the
different economic environments within the various countries. The projected
benefit obligations were determined using a range of assumed discount rates of
2.5% to 7.0% in 1997 and 3.25% to 8.0% in 1996 and a range of assumed average
long-term pay progression rates of 3.0% to 6.0% in 1997 and 1996. The range
of assumed long-term rates of return on plan assets was 7.0% to 9.0%. Accrued
pension at December 31 includes approximately $110 million in 1997 and $111
million in 1996 for two non-U.S. plans that are not funded. Pension
accounting rules require recognition in the balance sheet of an additional
minimum pension liability equal to the excess of the accumulated benefit
obligation over the fair value of the plan assets. A corresponding amount is
recognized as an intangible asset, not to exceed the amount of unrecognized
prior service cost, with the balance recorded as a reduction of stockholders'
equity. As of December 31, 1997 and 1996, the company has recorded an
additional non-U.S. minimum pension
28
liability of $69 million and $48 million and an equity reduction of
$63 million and $39 million.
RETIREE HEALTH CARE BENEFIT PLAN: The company's U.S. employees are currently
eligible to receive, during retirement, specified company-paid medical
benefits. The plan is contributory and premiums are adjusted annually. For
employees retiring on or after January 5, 1993, the company has specified a
maximum annual amount per retiree, based on years of service, that it will pay
toward retiree medical premiums. For employees who retired prior to that
date, the company maintains a consistent level of cost sharing between the
company and the retiree. Any funding of the plan obligation will be at
amounts determined at the discretion of management. Effective
January 1, 1998, new employees will be eligible for this benefit when they
reach 20 years of service, regardless of age. For a 15 year transition
period, current employees may qualify for eligibility under either the new
20 year rule or the previous requirement, which is based upon retirement
eligibility under the defined benefit pension plan. Coverage eligibility
under the 20 year rule is only available at termination, i.e., no subsequent
election to participate is allowable.
Expense of the retiree health care benefit plan includes the following
components:
MILLIONS OF DOLLARS
-------------------
1997 1996 1995
------ ------ ------
Service cost - benefits earned
during the period ........................... $ 3 $ 4 $ 4
Interest cost on accumulated
postretirement benefit obligation ........... 20 22 23
------ ------ ------
Retiree health care benefit expense .......... $ 23 $ 26 $ 27
====== ====== ======
The funded status of the plan was as follows:
MILLIONS OF DOLLARS
-------------------
1997 1996
------ ------
Actuarial present value at Dec. 31 of accumulated
postretirement benefit obligation:
Retirees ....................................... $ (240) $ (239)
Fully eligible employees ....................... (22) (11)
Other employees ................................ (57) (62)
------ ------
Accumulated postretirement benefit obligation .... (319) (312)
Unrecognized net gain ............................ (33) (23)
Unrecognized prior service cost .................. (2) (7)
------ ------
Accrued at Dec. 31 ............................... (354) (342)
Less current portion ............................. 19 14
------ ------
Accrued retiree health care benefit costs ........ $ (335) $ (328)
====== ======
Retiree health care benefit amounts were determined using health care cost
trend rates of 6.6% for 1998 decreasing to 5.0% by 2000, and assumed discount
rates of 7.0% for 1997 and 7.25% for 1996. Increasing the health care cost
trend rates by 1% would have increased the accumulated postretirement benefit
obligation at December 31, 1997, by $16 million and 1997 plan expense by
$1 million.
SPECIAL ACTIONS: In the first quarter of 1997, the company sold its mobile
computing business and terminated its digital imaging printing development
program. As a result of these divestitures, the company took a pretax charge
of $56 million in the first quarter, of which $27 million was for severance
for involuntary reductions worldwide. These severance actions were
essentially completed by the end of the quarter and affected approximately
1,045 employees. The balance, $29 million, was for other costs associated
with the business sale and program termination, including vendor cancellation
and lease charges. In the fourth quarter of 1997, the company took a pretax
charge of $42 million, primarily for severance costs related to cost reduction
actions by the materials & controls business. These actions are expected to
be completed in 1998 and affected approximately 260 employees. In the fourth
quarter of 1996, the company took a pretax charge of $208 million, of which
$91 million was for severance for cost
29
Notes to Financial Statements
(continued)
reduction actions consisting of a voluntary retirement program in the United
States and selected involuntary employment reductions worldwide. These 1996
actions, which primarily involved the semiconductor segment as well as
activities since divested, were essentially completed by year-end 1996 and
affected approximately 2,600 employees. The balance of the charge,
$117 million, was for asset write-downs on several product lines, primarily
mobile computing, a divested activity.
BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
- -----------------------------------------------------------------------------
Texas Instruments develops, manufactures and sells a variety of products used
in the commercial electronic and electrical equipment industry, primarily for
industrial and consumer markets. The company's principal businesses are based
on TI's broad semiconductor technology and application of this technology to
digital solutions for the networked society.
TI HAS THREE PRINCIPAL BUSINESSES: Semiconductor, Materials & Controls, and
Educational & Productivity Solutions. Each of these is a business
segment,with its respective financial performance detailed in this report.
Semiconductor consists of digital signal processors, mixed-signal/analog
devices, application-specific integrated circuits, reduced instruction-set
microprocessors, microcontrollers, standard logic, and memories. These
semiconductors are sold primarily to original-equipment manufacturers and
through distributors.
Materials & Controls consists primarily of electrical and electronic
control devices, electronic connectors and clad metals. They are sold
primarily to original-equipment manufacturers and through distributors.
Educational & Productivity Solutions, which includes educational and
graphing calculators, are marketed primarily through retailers and to schools
through instructional dealers.
Operating profits of the three principal businesses include the effects of
profit sharing and exclude the effects of special charges and gains. The
results for semiconductor include the effects of all royalty revenues from
semiconductor-related cross-license agreements. Results for semiconductor
also include expenses charged to operations related to its joint ventures of
$88 million, $33 million and $15 million in 1997, 1996 and 1995. Business
assets are the owned or allocated assets used by each business.
Included in corporate activities are general corporate expenses,
elimination of intersegment transactions (which are generally intended to
approximate market prices), results for TI's emerging digital imaging
operation, and royalty revenues from computer-related cross-license
agreements. Assets of corporate activities include unallocated cash and
short-term investments and deferred income taxes.
Divested activities include the historical operating results and assets of
mobile computing and software (both sold in 1997), custom manufacturing
services and printers (both sold in 1996), and other smaller divestitures.
Business Segment Net Revenues
MILLIONS OF DOLLARS
-------------------------------
1997 1996 1995
------- ------- -------
Semiconductor
Trade ................................ $ 8,063 $ 7,310 $ 8,750
Intersegment ......................... 24 47 62
------- ------- -------
8,087 7,357 8,812
------- ------- -------
Materials & Controls
Trade ................................ 950 887 830
Intersegment ......................... 4 3 3
------- ------- -------
954 890 833
------- ------- -------
Educational & Productivity Solutions
Trade ................................ 447 422 381
Corporate activities .................. 154 91 16
Divested activities.................... 108 1,180 1,367
------- ------- -------
Total ................................. $ 9,750 $ 9,940 $11,409
======= ======= =======
30
Business Segment Profit (Loss)
MILLIONS OF DOLLARS
------------------------------
1997 1996 1995
------- ------- -------
Semiconductor ......................... $ 1,354 $ 783 $ 1,850
Materials & Controls .................. 123 90 82
Educational & Productivity Solutions .. 59 56 51
Corporate activities .................. (273) (312) (332)
Special charges and gains, net of
profit sharing* ...................... (532) (400) --
Interest on loans/other income
(expense), excluding 1997 gain of
$66 million included above .......... 32 3 31
Divested activities ................... (50) (243) (212)
------- ------- -------
Income (loss) from continuing operations
before provision for income taxes
and extraordinary item ............... $ 713 $ (23) $ 1,470
======= ======= =======
*Details are as follows: 1997 1996 1995
------- ------- -------
Acquired in-process R&D charge......... $ (461) $ (192) --
Severance and other costs, primarily
from the divestiture of mobile
computing ........................... (56) -- --
Other income: gain on sale of three
divested activities, primarily
software ............................ 66 -- --
Termination of agreements related to
proposed Thailand joint ventures .... (44) -- --
Severance and other costs, primarily
for materials & controls cost
reductions .......................... (42) -- --
Asset write-downs, primarily mobile
computing ........................... -- (117) --
Voluntary retirement and severance,
primarily for semiconductor
and activities since divested ....... -- (91) --
Other, including profit sharing
effect of above items ............... 5 -- --
------- ------- -------
$ (532) $ (400) --
Business Segment Assets
MILLIONS OF DOLLARS
------------------------------
1997 1996 1995
------- ------- -------
Semiconductor ......................... $ 5,968 $ 5,788 $ 4,666
Materials & Controls .................. 391 380 378
Educational & Productivity Solutions .. 151 141 129
Corporate activities .................. 4,309 2,197 2,489
Divested activities ................... 30 325 665
Net assets of discontinued operations . -- 529 421
------- ------- -------
Total ................................. $10,849 $ 9,360 $ 8,748
======= ======= =======
Business Segment Property, Plant and Equipment
MILLIONS OF DOLLARS
------------------------------
Depreciation 1997 1996 1995
- ------------ ------- ------- -------
Semiconductor ......................... $ 1,002 $ 794 $ 588
Materials & Controls .................. 46 41 33
Educational & Productivity Solutions .. 1 -- --
Corporate activities .................. 58 56 42
Divested activities ................... 2 13 18
------- ------- -------
Total ................................. $ 1,109 $ 904 $ 681
======= ======= =======
MILLIONS OF DOLLARS
------------------------------
Additions 1997 1996 1995
- --------- ------- ------- -------
Semiconductor ......................... $ 1,039 $ 1,768 $ 1,132
Materials & Controls .................. 49 53 56
Educational & Productivity Solutions .. 1 -- --
Corporate activities .................. 147 225 140
Divested activities ................... 2 17 23
------- ------- -------
Total ................................. $ 1,238 $ 2,063 $ 1,351
======= ======= =======
31
Notes to Financial Statements
(continued)
The following geographic area data include trade revenues based on product
shipment destination and royalty payor location, and property, plant and
equipment based on physical location:
Geographic Area Net Trade Revenues
MILLIONS OF DOLLARS
-------------------------------
1997 1996 1995
------- ------- -------
United States ......................... $ 3,216 $ 3,548 $ 4,026
Japan ................................. 1,971 1,832 2,474
Singapore ............................. 1,110 866 918
Rest of world ......................... 3,453 3,694 3,991
------- ------- -------
Total ................................. $ 9,750 $ 9,940 $11,409
======= ======= =======
Geographic Area Property, Plant and Equipment (Net)
MILLIONS OF DOLLARS
-------------------------------
1997 1996 1995
------- ------- -------
United States ......................... $ 2,640 $ 2,619 $ 1,505
Japan ................................. 478 519 459
Rest of world ......................... 1,062 1,024 930
------- ------- -------
Total ................................. $ 4,180 $ 4,162 $ 2,894
======= ======= =======
INCOME TAXES
- ----------------------------------------------------------------------------
Income (Loss) from Continuing Operations before Provision for Income Taxes and
Extraordinary Item
MILLIONS OF DOLLARS
-----------------------------
U.S. Non-U.S. Total
------- -------- -------
1997 ........................ $ 93 $ 620 $ 713
1996 ........................ (529) 506 (23)
1995......................... 1,026 444 1,470
Provision (Credit) for Income Taxes
MILLIONS OF DOLLARS
--------------------------------------------
U.S. Federal Non-U.S. U.S. State Total
------------ -------- ---------- -----
1997
- ----
Current ....................... $ 232 $ 323 $ 4 $ 559
Deferred ...................... (69) (81) 2 (148)
----- ----- ----- -----
Total ......................... $ 163 $ 242 $ 6 $ 411
===== ===== ===== =====
1996
- ----
Current ....................... $(125) $ 202 $ (3) $ 74
Deferred ...................... (44) (6) (1) (51)
----- ----- ----- -----
Total ......................... $(169) $ 196 $ (4) $ 23
===== ===== ===== =====
1995
- ----
Current ....................... $ 319 $ 182 $ 27 $ 528
Deferred ...................... (36) (19) 1 (54)
----- ----- ----- -----
Total ......................... $ 283 $ 163 $ 28 $ 474
===== ===== ===== =====
Principal reconciling items from income tax computed at the statutory
federal rate follow.
MILLIONS OF DOLLARS
------------------------------
1997 1996 1995
------ ------ ------
Computed tax at statutory rate .............. $ 249 $ (8) $ 515
Effect of acquired in-process R&D ........... 161 67 --
Effect of non-U.S. rates .................... (11) (3) (89)
Research and experimentation tax credits .... (30) (11) (5)
Effect of U.S. state income taxes ........... 4 (3) 17
Effect of unbenefited joint venture costs ... 31 12 5
Other ....................................... 7 (31) 31
------ ------ ------
Total provision for income taxes ............ $ 411 $ 23 $ 474
====== ====== ======
Included in the effect of non-U.S. rates for 1996 and 1995 is a $4 million and
a $93 million benefit from tax loss carryforward utilization reduced by
certain non-U.S. taxes and losses for which no benefit was recognized.
Provision has been made for deferred taxes on undistributed earnings of non-
U.S. subsidiaries to the extent that dividend payments from such companies are
expected to result in additional tax liability. The remaining undistributed
earnings (approximately $870 million at December 31, 1997) have been
indefinitely reinvested; therefore, no provision has been made for taxes due
upon remittance of these earnings. Determination of the amount of
unrecognized deferred tax liability on these unremitted earnings is not
practicable.
32
The primary components of deferred income tax assets and liabilities
at December 31 were as follows:
MILLIONS OF DOLLARS
-------------------
1997 1996
------ ------
Deferred income tax assets:
Accrued retirement costs (pension and
retiree health care) ............................ $ 221 $ 220
Inventories and related reserves ................. 216 193
Accrued expenses ................................. 283 186
Loss and credit carryforwards .................... 80 44
Other ............................................ 210 197
------ ------
1,010 840
------ ------
Less valuation allowance .......................... (121) (134)
------ ------
889 706
------ ------
Deferred income tax liabilities:
Property, plant and equipment .................... (165) (96)
Other ............................................ (148) (155)
------ ------
(313) (251)
------ ------
Net deferred income tax asset ..................... $ 576 $ 455
====== ======
As of December 31, 1997 and 1996, the net deferred income tax asset of $576
million and $455 million was presented in the balance sheet, based on tax
jurisdiction, as deferred income tax assets of $711 million and $587 million
and deferred income tax liabilities of $135 million and $132 million. The
valuation allowance shown above reflects the company's ongoing assessment
regarding the realizability of certain non-U.S. deferred income tax assets.
The balance of the deferred income tax assets is considered realizable based
on carryback potential, existing taxable temporary differences, and
expectation of future income levels comparable to recent results. Such future
income levels are not assured because of the nature of the company's
businesses, which are generally characterized by rapidly changing technology
and intense competition.
The company has aggregate U.S. and non-U.S. tax loss carryforwards of
approximately $80 million and U.S. tax credit carryforwards of $47 million.
Of these amounts, $113 million expires through the year 2007 and $14 million
of the loss carryforwards has no expiration.
Income taxes paid were $1145 million, $240 million and $384 million for
1997, 1996 and 1995.
RENTAL EXPENSE AND LEASE COMMITMENTS
- ------------------------------------------------------------------------------
Rental and lease expense was $168 million in 1997, $175 million in 1996 and
$151 million in 1995. The company conducts certain operations in leased
facilities and also leases a portion of its data processing and other
equipment. The lease agreements frequently include purchase and renewal
provisions and require the company to pay taxes, insurance and maintenance
costs.
At December 31, 1997, the company was committed under noncancelable
leases with minimum rentals in succeeding years as follows:
NONCANCELABLE LEASES
- --------------------------------------------------------------------------
MILLIONS OF DOLLARS
-------------------
1998 ............................................ $ 97
1999 ............................................ 67
2000 ............................................ 46
2001 ............................................ 31
2002 ............................................ 19
Thereafter ..................................... 154
33
Report of Ernst & Young LLP, Independent Auditors
- ------------------------------------------------------------------------------
The Board of Directors
Texas Instruments Incorporated
We have audited the accompanying consolidated balance sheets of Texas
Instruments Incorporated and subsidiaries (the Company) at December 31, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Instruments Incorporated and subsidiaries at December 31, 1997 and 1996, and
the results of its operations and cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/Ernst & Young LLP
Dallas, Texas
January 20, 1998
34
Summary of Selected Financial Data
MILLIONS OF DOLLARS
-----------------------------------------
YEARS ENDED DECEMBER 31 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
Net revenues ..................... $ 9,750 $ 9,940 $11,409 $ 8,608 $ 6,687
Operating costs and expenses ..... 9,135 9,966 9,970 7,682 6,157
------- ------- ------- ------- -------
Profit (loss) from operations .... 615 (26) 1,439 926 530
Other income (expense) net........ 192 76 79 6 19
Interest on loans ................ 94 73 48 45 47
------- ------- ------- ------- -------
Income (loss) from continuing
operations before provision
for income taxes, extraordinary
item and cumulative effect of
accounting changes............... 713 (23) 1,470 887 502
Provision for income taxes ....... 411 23 474 295 147
------- ------- ------- ------- -------
Income (loss) from continuing
operations before extraordinary
item and cumulative effect
of accounting changes ........... $ 302 $ (46) $ 996 $ 592 $ 355
======= ======= ======= ======= =======
- -------------------------------------------------------------------------------
Diluted earnings (loss) per
common share from
continuing operations
before extraordinary item
and cumulative effect of
accounting changes .............. $ .76 $ (.12) $ 2.58 $ 1.56 $ .94
======= ======= ======= ======= =======
Basic earnings (loss) per
common share from
continuing operations
before extraordinary item
and cumulative effect of
accounting changes .............. $ .78 $ (.12) $ 2.65 $ 1.61 $ .97
======= ======= ======= ======= =======
Dividends declared per
common share .................... $ .34 $ .34 $ .32 $ .235 $ .18
- -------------------------------------------------------------------------------
Average common and dilutive
potential common shares
outstanding during year,
in thousands .................... 397,727 379,388 387,262 381,709 363,396
- -------------------------------------------------------------------------------
MILLIONS OF DOLLARS
-----------------------------------------
AS OF DECEMBER 31 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
Working capital .................. $ 3,607 $1,968 $2,566 $1,965 $1,499
Property, plant and
equipment (net) ................. 4,180 4,162 2,894 2,277 1,870
Total assets ..................... 10,849 9,360 8,748 6,468 5,471
Long-term debt ................... 1,286 1,697 804 808 694
Stockholders' equity ............. 5,914 4,097 4,095 3,039 2,315
- -------------------------------------------------------------------------------
Employees ........................ 44,140 59,927 59,574 56,333 59,048
Stockholders of record ........... 29,550 32,804 30,034 28,740 29,129
Employees for 1996 and prior include persons employed in the company's defense
business, a discontinued operation.
See Notes to Financial Statements and Management Discussion and Analysis of
Financial Condition and Results of Operations.
35
Supplemental Financial Information
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
CHANGE IN CHANGE IN
ORDERS, REVENUES,
BUSINESS 1997 VS. 1996 1997 VS. 1996
- -----------------------------------------------------------------------
Semiconductor up 21% up 10%
Materials & Controls up 9% up 7%
Educational & Productivity Solutions up 5% up 6%
Total TI up 6% down 2%
Total TI excluding businesses sold up 19% up 10%
CHANGE IN CHANGE IN
ORDERS, REVENUES,
BUSINESS 4Q97 VS. 4Q96 4Q97 VS. 4Q96
- -----------------------------------------------------------------------
Semiconductor down 4% up 6%
Materials & Controls up 7% up 9%
Educational & Productivity Solutions up 13% up 16%
Total TI down 10% down 1%
Total TI excluding businesses sold down 2% up 7%
1997 RESULTS OF OPERATIONS COMPARED WITH 1996
UNLESS STATED OTHERWISE, THE FINANCIAL RESULTS THAT FOLLOW ARE FROM CONTINUING
OPERATIONS AND EXCLUDE SPECIAL ITEMS.
TI's orders were $9796 million, compared with $9268 million in 1996. Net
revenues in 1997 were $9750 million, compared with $9940 million in 1996.
Financial results in 1996 included revenues from TI businesses that have since
been sold, primarily software, mobile computing and printers. Excluding the
sold businesses, TI orders were up 19 percent for the year and revenues were
up 10 percent, primarily due to growth in semiconductor.
Profit from operations in 1997 was $1213 million, up from $374 million in
1996. The increase was primarily from higher semiconductor profits in the
non-memory portion of the business and the absence of losses in the sold
businesses, primarily mobile computing. In 1996, these sold businesses lost
$193 million more than in 1997.
Results for the fourth quarter include a charge of $461 million for in-
process R&D associated with the acquisition of Amati Communications
Corporation, along with a pretax charge of $42 million for cost reduction
actions, primarily in the materials & controls business. In addition to the
fourth quarter charges, the 1997 earnings include previously announced special
pretax charges of $56 million, primarily related to the sale of TI's mobile
computing business, and $44 million for the termination of joint-venture
agreements in Thailand.
Results for 1997 also include a $66 million gain for the sale of three
businesses, the largest of which was software. The total of the 1997 special
items is equivalent to $1.27 per share. In 1996, special charges were $400
million before taxes, with $208 million being in the fourth quarter. These
charges were equivalent to $0.86 per share for the year.
Income for the year was $809 million, compared with $281 million in 1996.
TI's diluted earnings per share (EPS) in 1997 were $2.03, compared with $0.74
in 1996. Including the effect of the special items, income for the year was
$302 million compared to a loss of $46 million in 1996, and earnings per share
were $0.76 compared with a loss per share of $0.12 in 1996.
Results for 1997 also included an accrual for profit sharing of $122
million, which was 7.82 percent of eligible payroll. There was no profit
sharing in 1996.
Including the effect of special items, net income for 1997 was $1805
million, which consisted of income from continuing operations of $302 million,
income from the discontinued defense business of $52 million, gain on sale of
the discontinued defense business of $1473 million, and an extraordinary
charge of $22 million associated with debt retirement. On a similar basis,
net income for 1996 was $63 million, which consisted of a loss from continuing
operations of $46 million and income from the discontinued defense business of
$109 million.
36
Royalty revenues in 1997 were essentially steady with 1996. Negotiations
continue with potential licensees. TI continues to expect a significant
ongoing stream of royalty revenue into the next century.
In September, the Tokyo High Court upheld a ruling that Fujitsu Limited's
production of certain memory products does not infringe TI's Kilby patent.
The company has appealed the ruling to the Japan Supreme Court. In November,
the Japan Patent Office invalidated the Kilby patent. TI plans to appeal this
decision to the Tokyo High Court. Since the Kilby patent expires in 2001, the
company does not expect the outcome of either appeal to be material.
Interest income for 1997 was up $84 million from 1996, primarily as a
result of investment of net proceeds from the sale of the defense business to
Raytheon.
The income tax rate for 1997 was 35 percent.
TI's backlog of unfilled orders as of December 31, 1997, was $1623
million, unchanged from year-end 1996.
R&D for 1997 was $1075 million, excluding the $461 million charge for in-
process R&D associated with the Amati acquisition, compared with $989 million
in 1996, excluding the $192 million charge for in-process R&D associated with
the SSi acquisition.
Capital expenditures were $1238 million in 1997, compared with $2063
million in 1996. Depreciation for 1997 was $1109 million compared with $904
million in 1996. Depreciation for 1998 is expected to be $1.3 billion.
TI management will recommend to the Board of Directors that the timing of
dividend declarations be moved to the first month of the quarter, with
paydates shifting accordingly to the second month of the quarter. The change
is planned to begin in March 1998.
SEMICONDUCTOR: Orders in semiconductor for 1997 were $8109 million, up 21
percent from $6723 million in 1996. The increase resulted from strong demand
for digital signal processing solutions, as DSPS orders increased over 40
percent. Semiconductor revenues were $8087 million, up 10 percent from $7357
million in 1996. The increase in semiconductor resulted from an increase of
more than 35 percent in DSPS revenues due to increased shipments, which more
than offset a $400 million decrease in memory, as DRAM prices continued to
decline sharply.
For the fourth quarter, semiconductor revenues, which include royalties
from semiconductor patent licenses, represented about 85 percent of TI's
revenues. Digital signal processors plus mixed-signal/analog represented
about 45 percent of semiconductor. Memory, made up primarily of DRAMs,
accounted for less than 20 percent of semiconductor. The remainder of
semiconductor consists primarily of a broad range of advanced products,
including application-specific integrated circuits, reduced instruction-set
microprocessors, microcontrollers and standard logic.
Revenues reached record levels for digital signal processing for both the
year and the fourth quarter. Mixed-signal/analog also had a strong year, with
record revenues for the year and fourth quarter, growing more than twice as
fast as the market in 1997.
Memory continued to be significantly affected by DRAM price pressures,
with revenues down by 10 percent in the fourth quarter from the year-ago
fourth quarter. TI continues to emphasize aggressive shrinks of DRAM devices
and the transition to new synchronous DRAMs. TI believes these improvements
will help offset some of the financial pressures faced by joint venture
manufacturing operations in this environment. TI and other joint venture
shareholders continue to explore further measures with respect to the joint
venture structures. In this regard, TI and Hitachi, Ltd., major shareholders
of one joint venture, announced on February 9, 1998, plans to discontinue
their joint venture arrangement, with TI to purchase the assets of the
venture. In connection with this action, TI expects to take a special charge
in the first quarter of 1998.
TI's other semiconductor products, such as microcontrollers and
application-specific integrated circuits, made good progress in growth and
profitability in 1997.
37
Supplemental Financial Information
(continued)
Semiconductor profit from operations increased from $783 million in 1996
to $1354 million in 1997 and operating margins improved from 10.6 percent to
16.7 percent. The improvement was primarily from higher margins in the non-
memory portion of the business, particularly benefiting from higher DSPS
shipments.
The outlook remains positive for longer-term growth of the semiconductor
market, although TI remains cautious in the near-term as continuing volatility
in DRAMs and slowing in Asian economies are expected to put pressure on first
quarter 1998 revenues and margins.
TI now believes the 1998 worldwide semiconductor market will grow at
about 10 percent, up from 4 percent in 1997. In the non-memory area of the
market, TI expects to see faster growth than the total market, led by about 30
percent growth for DSPs and mixed-signal devices.
The U.S. market outlook remains healthy and Europe shows ongoing
strengthening, although turmoil in Asia could impact these markets as well.
In addition, new markets are emerging, such as low cost personal computers,
higher speed internet access and digital consumer products, important to the
future growth of the industry. TI continues to see strength in wireless
communications and networking markets, with semiconductor content rising about
60 percent over the past four years.
MATERIALS & CONTROLS: Orders in materials & controls of $972 million were up
from $896 million in 1996, primarily due to TIRIS. Revenues of $954 million
were up $64 million from 1996 due primarily to the growing acceptance of TIRIS
in automotive applications. PFO increased from $90 million in 1996 to $123
million in 1997, with margins improving from 10.1 percent to 12.9 percent.
The increase was due primarily to manufacturing cost reduction.
EDUCATIONAL & PRODUCTIVITY SOLUTIONS: Orders in educational & productivity
solutions were $448 million, up $22 million from 1996 as a result of continued
growth in instructional calculators. Revenues were $447 million, an increase
of $24 million from 1996 also as a result of growth in instructional
calculators. PFO increased from $56 million in 1996 to $59 million in 1997
and operating margins remained flat at 13.2 percent.
DIGITAL IMAGING: TI's digital imaging business continued to make progress
throughout 1997, further focusing its strategy on key market opportunities.
FINANCIAL CONDITION: During 1997, cash and cash equivalents plus short-term
investments increased by $2042 million to $3020 million. The sale of TI's
defense operations to Raytheon Company on July 11 provided $2950 million of
cash. In addition, the sale of three other TI businesses generated $177
million of cash in the second quarter. In the fourth quarter, TI used $306
million of cash to acquire about 78 percent of the issued and outstanding
shares of Amati Communications Corporation's common stock at a price of $20
per share. TI intends to acquire the remaining shares of Amati's common stock
in the first quarter of 1998. Additionally, TI used $740 million of cash in
the fourth quarter to pay 1997 federal income taxes which included taxes of
$676 million on the gain on the sale of TI's defense operations. This sale
and the related accrued income tax liability were recognized in the third
quarter of 1997. For 1997, cash flow from operating activities net of
additions to property, plant, and equipment was $605 million, and 1997 capital
expenditures totaled $1238 million.
During the third quarter TI began a stock repurchase program with
the goal of neutralizing the potential dilutive effect of shares to be
issued upon the exercise of stock options under the 1997 employee stock
purchase plan and stock option/incentive plans. Through December, TI
used $86 million of cash to repurchase shares of its common stock.
The outstanding balance of commercial paper was reduced from $300 million
to zero during the second quarter of 1997. The company's outstanding 2.75%
convertible subordinated debentures due 2002 in the principal amount of $103
million were called for redemption and converted to TI common stock in the
third quarter of 1997. In the fourth quarter, TI retired a face amount of
$248 million of its previously outstanding long-term debt. At year-end 1997
the debt-to-total-capital ratio was .19, down from the year-end 1996 value of
.33.
Authorizations for future capital expenditures were $1105 million at
December 31, 1997. TI's capital expenditures for 1998 are being constrained
to $1.4 billion, up from $1.2 billion in 1997.
38
R&D will be increased to $1.3 billion, up from $1.1 billion in 1997, primarily
to support digital signal processing solutions and other advanced
semiconductor technologies.
The company maintains lines of credit to support commercial paper
borrowings and to provide additional liquidity. These lines of credit totaled
$651 million at December 31, 1997. Of this amount, $600 million exists to
support outstanding and future commercial paper borrowings or short-term bank
loans.
TI's financial strength puts the company in an excellent position to
continue to take strategic actions even in a cautious global economy.
YEAR 2000: The company is actively engaged in resolving the issues involved
with the Year 2000 challenge. These issues result from the use of two-digit
year dates rather than four-digit year dates in computer code, which could
cause potential failures in date-sensitive software that does not recognize
"00" as 2000. In 1995, TI formed teams to address the company's Year 2000
challenge. The company is on schedule to complete assessment, testing, and
modifications to strategic business systems in 1998. TI is also assessing the
scope of Year 2000 issues in its physical plant and infrastructure and will
soon begin corrective actions. TI is communicating with its major customers
and suppliers to resolve Year 2000 interface issues. While TI expects success
in this cooperative effort, it cannot guarantee the performance of third
parties. The company is developing contingency plans to minimize potential
disruptions. Based on assessments to date, the company believes its current
products are ready for Year 2000. Obsolete and discontinued products, as well
as divested product lines, are not included in this assessment. The estimate
of overall costs for TI's Year 2000 project is not expected to be material.
The completion dates and costs are based on management's current best
estimates.
MARKET RISK SENSITIVE INSTRUMENTS: The U.S. dollar is the functional currency
for financial reporting. In this regard, the company uses forward currency
exchange contracts, including Italian lira note currency swaps, to minimize
the adverse earnings impact from the effect of exchange rate fluctuations on
the company's non-U.S. dollar net balance sheet exposures. For example, at
year-end 1997, the company had forward currency exchange contracts
outstanding of $275 million (including $101 million to buy lira, $73 million
to buy deutsche marks, and $24 million to buy Singapore dollars). Because
most of the aggregate non-U.S. dollar balance sheet exposure is hedged by
these exchange contracts and swaps, a hypothetical 10% plus or minus
fluctuation in non-U.S. currency exchange rates would not be expected to have
a material earnings impact, e.g., based on year-end 1997 balances and rates, a
pretax currency exchange gain or loss of $10 million.
The company has interest rate swaps which change the characteristics of
the interest payments on its $300 million of 6.125% notes due 2006 from fixed-
rate payments to short-term LIBOR-based variable rate payments in order to
achieve a mix of interest rates on the company's long-term debt which, over
time, is expected to moderate financing costs. The effect of these interest
rate swaps was to reduce interest expense by $2 million in 1997. The year-end
1997 effective interest rate for the $300 million of notes due 2006, including
the effect of the swaps, was approximately 5.1%. These swaps are sensitive to
interest rate changes. For example, if short-term interest rates increase
(decrease) by one percentage point from year-end 1997 rates, annual pretax
interest expense would increase (decrease) by $3 million.
The company's long-term debt has a fair value, based on current interest
rates, of approximately $1390 million at year-end 1997. Fair value will vary
as interest rates change. The following table presents the aggregate
maturities and carrying amounts of the debt principal and related weighted
average interest rates by maturity dates (millions of dollars):
ITALIAN
U.S. DOLLAR AVERAGE LIRA AVERAGE
MATURITY FIXED-RATE INTEREST FIXED-RATE INTEREST
DATE DEBT RATE DEBT RATE
- -------- ----------- -------- ---------- --------
1998 $ 50 6.65% $ 17 5.55%
1999 228 6.74% 31 5.23%
2000 278 6.81% 36 5.07%
2001 105 7.90% 30 4.93%
2002 -- -- 26 4.71%
Thereafter 489 7.00% 63 4.59%
------ ------
Total $1,150 6.97% $ 203 4.92%
Total long-term debt carrying amount at year-end 1997 was $1353 million.
39
Supplemental Financial Information
(continued)
The company's cash equivalents and short-term investments are debt securities
with remaining maturities within three months (cash equivalents) and beyond
three months and within 13 months (short-term investments). Their aggregate
fair value and carrying amount was $2566 million at year-end 1997. Fair value
will vary as interest rates change. The following table presents the
aggregate maturities of cash equivalents and short-term investments and
related weighted average interest rates by maturity dates (millions of
dollars):
CASH EQUIVALENTS AVERAGE
MATURITY AND SHORT-TERM INTEREST
DATE INVESTMENTS RATE
- -------- ---------------- -------
1998 $2,566 5.88%
1999 None N/A
- -------- ---------------- -------
Total $2,566 5.88%
1996 RESULTS OF OPERATIONS COMPARED WITH 1995
The content of this discussion and analysis was modified in 1997 from its
original form to be consistent with the company's new business segment
disclosures.
CHANGE IN CHANGE IN
ORDERS, NET REVENUES,
BUSINESS 1996 VS. 1995 1996 VS. 1995
-----------------------------------------------------------------------
Semiconductor ......................... Down 29% Down 17%
Materials & Controls .................. Up 6% Up 7%
Educational & Productivity Solutions .. Up 12% Up 11%
-----------------------------------------------------------------------
Total TI Down 23% Down 13%
TI's orders for continuing operations for 1996 were $9.3 billion, down 23
percent from $12.1 billion in 1995. Significantly reduced DRAM prices in the
semiconductor segment were the primary contributor to the change.
TI's net revenues for continuing operations for 1996 were $9.9 billion,
down 13 percent from $11.4 billion in 1995. The decrease in the semiconductor
segment was due to significantly lower DRAM prices and reduced royalties.
From the fourth quarter of 1995 to the fourth quarter of 1996, DRAM prices
dropped about 80 percent. Digital signal processors and mixed-signal/analog
products grew strongly in 1996. Revenues for all differentiated semiconductor
products were nearly two-thirds of the company's total semiconductor revenues
in fourth quarter 1996.
PFO from continuing operations for 1996, excluding special charges for
cost reduction actions and in-process R&D, was $374 million, down from $1439
million in 1995 primarily because of significantly lower DRAM prices and
reduced royalties. Including the special charges, loss from operations was
$26 million.
Net loss from continuing operations including special charges in 1996 was
$46 million, and loss per share was $0.12. Net income for the year from
continuing operations, excluding the special charges, was $281 million,
compared with $996 million in 1995. Diluted earnings per share from
continuing operations, excluding the special charges, were $0.74, compared
with $2.58 in 1995.
Results from continuing operations for 1995 included $257 million of
profit sharing. There was no profit sharing in 1996.
Net income including discontinued operations for the year was $63
million, and diluted earnings per share were $0.17.
Royalty revenues were $300 million lower in 1996 than the record
royalties received in 1995. The decrease was primarily due to a reduction in
royalty rates in exchange for longer-term agreements, expired licenses not yet
renewed, and licensees' lower DRAM revenues. Also, first-quarter 1995 royalty
revenues included a favorable adjustment of $36 million related to higher-
than-estimated licensee shipments in the second half of 1994.
Payments that licensees will make over the next five years under the ten-
year agreements with Samsung Electronics Co., Ltd., Fujitsu Limited, Oki Ltd.
and Matsushita Electric Industrial Co., Ltd. are expected to exceed payments
made under the expired five-year licenses.
TI's backlog of unfilled orders for continuing operations as of
December 31, 1996, was $1623 million, down $671 million from the end of 1995,
due primarily to decreases in semiconductors and the sale of CMS, a divested
activity.
R&D for continuing operations was $1181 million for 1996, compared with
$842 million for 1995. The 1996 R&D includes the $192 million charge
associated with the SSi acquisition.
40
Capital expenditures for continuing operations were $2063 million in
1996, compared with $1351 million in 1995.
Depreciation for continuing operations for 1996 was $904 million,
compared with $681 million in 1995.
SEMICONDUCTOR: For 1996, orders in the semiconductor segment were down 29
percent, and revenues were down 17 percent from 1995, primarily because of the
precipitous drop in DRAM prices and lower royalties. Fourth quarter orders
for DSPS, comprised of digital signal processors plus mixed-signal/analog
products, grew more than 30 percent over the fourth quarter of 1995, with
particular strength in wireless communications and mass storage applications.
DSPS revenues in 1996 increased strongly from 1995 and were slightly less than
40 percent of the company's total semiconductor revenues during the fourth
quarter.
Semiconductor segment profits for 1996 were down from 1995 because of
sharply lower DRAM prices and lower royalties. Semiconductor segment profit
in the fourth quarter of 1996 was up significantly from the third quarter as
all product groups showed improvement. Memory, while improved, operated at a
loss in the fourth quarter due to continued lower prices and the high level of
fixed investment.
MATERIALS & CONTROLS: Compared with 1995, orders in the materials & controls
segment were up 6 percent in 1996, and revenues were up 7 percent, primarily
due to strength in sensors and automotive. PFO increased from $82 million in
1995 to $90 million in 1996.
EDUCATIONAL & PRODUCTIVITY SOLUTIONS: Orders in TI's educational &
productivity solutions segment were up 12 percent in 1996, and revenues were
up 11 percent, compared with 1995. As expected, calculators operated at
break-even in the fourth quarter after achieving substantial seasonal profits
in the second and third quarters. PFO improved from $51 million in 1995 to
$56 million in 1996.
EMERGING OPPORTUNITIES: TI's digital imaging products continue to make steady
progress in the transition from R&D to initial production, targeted at the
very competitive commercial projection display market. The major long-term
challenge continues to be cost reduction to levels that will permit
participation in several markets.
SPECIAL CHARGES/GAINS: The special charges for continuing operations during
1996 included $192 million for in-process R&D associated with the purchase of
SSi in the third quarter, and $91 million in the fourth quarter for severance
costs related to voluntary retirement and involuntary actions (including $61
million for semiconductor employees), as well as $117 million for asset write-
downs on certain product lines, principally mobile computing, a divested
activity.
DIVESTED ACTIVITIES: These activities operated at a loss during the year,
mainly due to the high level of marketing expense and intense price
competition in mobile computing, as well as continued investments and new
product development in the software business and in communications and
electronics systems.
DISCONTINUED OPERATIONS: For discontinued operations, a special pretax charge
of $32 million was taken for voluntary and involuntary severance actions
during the fourth quarter of 1996.
COMMON STOCK PRICES AND DIVIDENDS
- -----------------------------------------------------------------------------
TI common stock is listed on the New York Stock Exchange and traded
principally in that market. The table below shows the high and low prices of
TI common stock on the composite tape as reported by The Wall Street Journal
and the dividends paid per common share for each quarter during the past two
years, adjusted for the two-for-one stock split in 1997.
QUARTER
--------------------------------------------
1st 2nd 3rd 4th
--------------------------------------------
Stock prices:
1997 High .................... $43.63 $48.19 $71.00 $71.25
Low ..................... 31.06 36.81 42.13 39.63
1996 High .................... 27.88 29.82 29.63 34.19
Low ..................... 21.38 24.32 20.25 23.75
Dividends paid:
1997 ......................... $ .085 $ .085 $ .085 $ .085
1996 ......................... $ .085 $ .085 $ .085 $ .085
41
Quarterly Financial Data
- ------------------------------------------------------------------------------
MILLIONS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS
---------------------------------------------
1997 1st 2nd 3rd 4th
- ---- ------------------------------------------
Net revenues ...................... $2,263 $2,559 $2,500 $2,428
Gross profit ...................... 791 962 982 948
Profit (loss) from operations ..... 171 287 358 (201)
Income (loss) from continuing
operations before extraordinary
item ............................. 102 224 239 (263)
Discontinued operations:
Income from operations ........... 27 25 -- --
Gain on sale ..................... -- -- 1,473 --
Extraordinary item ................ -- -- -- (22)
------ ------ ------ ------
Net income (loss) ................. $ 129 $ 249 $1,712 $ (285)
====== ====== ====== ======
Diluted earnings (loss) per
common share:
Continuing operations
before extraordinary item ..... $ .26 $ .56 $ .60 $ (.67)
Discontinued operations:
Income from operations ........ .07 .07 -- --
Gain on sale .................. -- -- 3.68 --
Extraordinary item ............. -- -- -- (.06)
------ ------ ------ ------
Net income (loss) .............. $ .33 $ .63 $ 4.28 $ (.73)
====== ====== ====== ======
Basic earnings (loss) per
common share:
Continuing operations
before extraordinary item ..... $ .27 $ .58 $ .62 $ (.67)
Discontinued operations:
Income from operations ........ .07 .07 -- --
Gain on sale .................. -- -- 3.81 --
Extraordinary item ............. -- -- -- (.06)
------ ------ ------ ------
Net income (loss) .............. $ .34 $ .65 $ 4.43 $ (.73)
====== ====== ====== ======
MILLIONS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS
---------------------------------------------
1996 1st 2nd 3rd 4th
- ---- ------------------------------------------
Net revenues ...................... $2,675 $2,399 $2,407 $2,459
Gross profit ...................... 786 677 664 667
Profit (loss) from operations ..... 146 40 (177) (35)
Income (loss) from continuing
operations ....................... 132 41 (179) (40)
Income from discontinued operations 31 35 32 11
------ ------ ------ ------
Net income (loss) ................. $ 163 $ 76 $ (147) $ (29)
====== ====== ====== ======
Diluted earnings (loss) per
common share:
Continuing operations ........... $ .34 $ .11 $ (.47) $ (.11)
Discontinued operations ......... .08 .09 .08 .03
------ ------ ------ ------
Net income (loss) ............... $ .42 $ .20 $ (.39) $ (.08)
====== ====== ====== ======
Basic earnings (loss) per
common share:
Continuing operations ........... $ .35 $ .11 $ (.47) $ (.11)
Discontinued operations ......... .08 .09 .08 .03
------ ------ ------ ------
Net income (loss) ............... $ .43 $ .20 $ (.39) $ (.08)
====== ====== ====== ======
42
In the first quarter of 1997, the company took a pretax charge of $56 million
related to the sale of its mobile computing business and termination of its
digital imaging printing development program. Results for the second quarter
of 1997 include a pretax operating charge of $44 million for the termination
of agreements related to proposed Thailand joint ventures and a $66 million
pretax gain from the sale of three divested activities, principally software.
As a result of the 1997 acquisition of Amati Communications Corporation, the
Company took a charge of $461 million in the fourth quarter for the value of
acquired in-process research and development. Also in the fourth quarter, the
company took a pretax charge of $42 million, primarily for severance costs
related to cost reduction actions by the materials & controls business.
As a result of the 1996 acquisition of SSi, the company took a charge of
$192 million in the third quarter of 1996 for the value of acquired in-process
research and development. In the fourth quarter of 1996, the company accrued
$105 million for catch-up royalty revenues due under the new cross-license
agreement with Samsung Electronics Co., Ltd. Also in the fourth quarter, the
company took a pretax charge of $208 million for cost reduction actions.
Diluted earnings (loss) per common share are calculated in accordance with
SFAS No. 128 and are based on average common shares outstanding (389,695,136
shares and 380,152,855 shares for the fourth quarters of 1997 and 1996).
43
EXHIBIT 21
----------
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
LIST OF SUBSIDIARIES OF THE REGISTRANT
The following are current subsidiaries of the Registrant.
Subsidiary and Name Under Which Business is Done Where Organized
- ------------------------------------------------ ---------------
Silicon Systems, Inc. Delaware
Texas Instruments Deutschland G.m.b.H. Germany
Texas Instruments France S.A. France
Texas Instruments Holland B.V. Netherlands
Texas Instruments Hong Kong Limited Hong Kong
Texas Instruments Italia S.p.A. Italy
Texas Instruments Japan Limited Japan
Texas Instruments Limited United Kingdom
Texas Instruments Malaysia Sdn. Bhd. Malaysia
Texas Instruments (Philippines) Incorporated Delaware
Texas Instruments Singapore (Pte) Limited Singapore
Texas Instruments Taiwan Limited Taiwan
Note: The names of other subsidiaries of the Registrant are not listed herein
since the additional subsidiaries considered in the aggregate as a single
subsidiary do not constitute a significant subsidiary as defined by Rule
1.02(v) of Regulation S-X.
EXHIBIT 23
----------
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on Form
10-K of Texas Instruments Incorporated of our report dated January 20, 1998,
included in the 1997 Annual Report to Stockholders of Texas Instruments
Incorporated.
Our audits also included the financial statement schedule of Texas Instruments
Incorporated listed in Item 14(a). This schedule is the responsibility of the
Registrant's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the following
registration statements, and in the related prospectuses thereto, of our
report dated January 20, 1998 with respect to the consolidated financial
statements and schedule of Texas Instruments Incorporated, included in or
incorporated by reference in this Annual Report on Form 10-K for the year
ended December 31, 1997: Registration Statements (Form S-8) No. 33-61154, No.
33-21407, No. 33-42172 No. 33-54615, No. 333-07127, No. 333-41913, No. 333-
41919, No. 333-31319, No. 333-31321 and No. 333-31323, and Registration
Statement (Form S-3) No. 333-03571.
ERNST & YOUNG LLP
Dallas, Texas
February 18, 1998
Exhibit 24
----------
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints THOMAS J. ENGIBOUS,
WILLIAM A. AYLESWORTH and RICHARD J. AGNICH, and each of them, with full
Power to act without the others, his true and lawful attorneys-in-fact and
agents, with full and several power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign the Annual Report
on Form 10-K of Texas Instruments Incorporated for the year ended December
31, 1997, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they or he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ JAMES R. ADAMS
James R. Adams
Exhibit 24
----------
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JAMES R. ADAMS, THOMAS J.
ENGIBOUS, WILLIAM A. AYLESWORTH and RICHARD J. AGNICH, and each of them, with
full power to act without the others, his true and lawful attorneys-in-fact
and agents, with full and several power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign the Annual Report
on Form 10-K of Texas Instruments Incorporated for the year ended December
31, 1997, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they or he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ DAVID L. BOREN
David L. Boren
Exhibit 24
---------
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JAMES R. ADAMS, THOMAS
J. ENGIBOUS, WILLIAM A. AYLESWORTH and RICHARD J. AGNICH, and each of them,
with full power to act without the others, his true and lawful attorneys-in-
fact and agents, with full and several power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Texas Instruments Incorporated for the year ended
December 31, 1997, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they or he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ JAMES B. BUSEY IV
James B. Busey IV
Exhibit 24
----------
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JAMES R. ADAMS, THOMAS
J. ENGIBOUS, WILLIAM A. AYLESWORTH and RICHARD J. AGNICH, and each of them,
with full power to act without the others, his true and lawful attorneys-in-
fact and agents, with full and several power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Texas Instruments Incorporated for the year ended
December 31, 1997, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they or he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ DANIEL A. CARP
Daniel A. Carp
Exhibit 24
----------
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JAMES R. ADAMS,
WILLIAM A.AYLESWORTH and RICHARD J. AGNICH, and each of them, with full
power to act without the others, his true and lawful attorneys-in-fact and
agents, with full and several power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Texas Instruments Incorporated for the year ended December 31, 1997,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as they or he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ THOMAS J. ENGIBOUS
Thomas J. Engibous
Exhibit 24
----------
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JAMES R. ADAMS, THOMAS
J. ENGIBOUS, WILLIAM A. AYLESWORTH and RICHARD J. AGNICH, and each of them,
with full power to act without the others, his true and lawful attorneys-in-
fact and agents, with full and several power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Texas Instruments Incorporated for the year ended
December 31, 1997, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they or he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ GERALD W. FRONTERHOUSE
Gerald W. Fronterhouse
Exhibit 24
----------
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JAMES R. ADAMS, THOMAS
J. ENGIBOUS, WILLIAM A. AYLESWORTH and RICHARD J. AGNICH, and each of them,
with full power to act without the others, his true and lawful attorneys-in-
fact and agents, with full and several power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Texas Instruments Incorporated for the year ended
December 31, 1997, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as they or he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ DAVID R. GOODE
David R. Goode
Exhibit 24
----------
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JAMES R. ADAMS, THOMAS
J. ENGIBOUS, WILLIAM A. AYLESWORTH and RICHARD J. AGNICH, and each of them,
with full power to act without the others, his true and lawful attorneys-in-
fact and agents, with full and several power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Texas Instruments Incorporated for the year ended
December 31, 1997, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as they or he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents
or any of them, or their or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ WAYNE R. SANDERS
Wayne R. Sanders
Exhibit 24
----------
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JAMES R. ADAMS, THOMAS
J. ENGIBOUS, WILLIAM A. AYLESWORTH and RICHARD J. AGNICH, and each of them,
with full power to act without the others, her true and lawful attorneys-in-
fact and agents, with full and several power of substitution, for her and in
her name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Texas Instruments Incorporated for the year ended
December 31, 1997, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as they or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents or
any of them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ GLORIA M. SHATTO
Gloria M. Shatto
Exhibit 24
----------
POWER OF ATTORNEY
The undersigned hereby constitutes JAMES R. ADAMS, THOMAS J. ENGIBOUS,
WILLIAM A. AYLESWORTH and RICHARD J. AGNICH, and each of them, with full
power to act without the others, his true and lawful attorneys-in-fact and
agents, with full and several power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign the Annual Report
on Form 10-K of Texas Instruments Incorporated for the year ended December
31, 1997, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as they or he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents or
any of them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ WILLIAM P. WEBER
William P. Weber
Exhibit 24
----------
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JAMES R. ADAMS, THOMAS
J. ENGIBOUS, WILLIAM A. AYLESWORTH and RICHARD J. AGNICH, and each of them,
with full power to act without the others, his true and lawful attorneys-in-
fact and agents, with full and several power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Texas Instruments Incorporated for the year ended
December 31, 1997, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as they or he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents
or any of them, or their or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on this 19th day of February 1998.
/s/ CLAYTON K. YEUTTER
Clayton K. Yeutter
5
1,000,000
YEAR
DEC-31-1997
DEC-31-1997
1,015
2,005
1,705
73
742
6,103
7,414
3,234
10,849
2,496
1,286
0
0
390
5,524
10,849
9,750
9,750
6,067
6,067
1,536
0
94
713
411
302
1,525
(22)
0
1,805
4.69
4.54
