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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002 Commission File Number 1-3761
TEXAS INSTRUMENTS INCORPORATED
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 75-0289970
- ------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
12500 TI Boulevard P.O. Box 660199, Dallas, Texas 75266-0199
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 972-995-3773
---------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
1,733,669,195
-----------------------------------------------------------------------------
Number of shares of Registrant's common stock outstanding as of
June 30, 2002
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(In millions of dollars, except per-share amounts)
For Three Months Ended For Six Months Ended
---------------------- --------------------
June 30 June 30 June 30 June 30
Operations . . . . . . . . . . . . . . . . . . . . 2002 2001 2002 2001
- ---------- ------- ------- ------- -------
Net revenues . . . . . . . . . . . . . . . . . . . $ 2,162 $ 2,037 $ 3,989 $ 4,565
Operating costs and expenses:
Cost of revenues . . . . . . . . . . . . . . . . 1,306 1,523 2,523 3,028
Research and development . . . . . . . . . . . . 404 412 792 858
Selling, general and administrative. . . . . . . 297 400 563 748
------- ------- ------- -------
Total. . . . . . . . . . . . . . . . . . . . . 2,007 2,335 3,878 4,634
------- ------- ------- -------
Profit (loss) from operations. . . . . . . . . . . 155 (298) 111 (69)
Other income (expense) net . . . . . . . . . . . . (24) 57 (13) 164
Interest on loans. . . . . . . . . . . . . . . . . 14 15 29 31
------- ------- ------- -------
Income (loss) before income taxes. . . . . . . . . 117 (256) 69 64
Provision (benefit) for income taxes . . . . . . . 22 (59) 12 31
------- ------- ------- -------
Net income (loss). . . . . . . . . . . . . . . . . $ 95 $ (197) $ 57 $ 33
======= ======= ======= =======
Diluted earnings (loss) per common share . . . . . $ .05 $ (.11) $ .03 $ .02
======= ======= ======= =======
Basic earnings (loss) per common share . . . . . . $ .05 $ (.11) $ .03 $ .02
======= ======= ======= =======
Cash dividends declared per share of common stock. $ .021 $ .021 $ .043 $ .043
2
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(In millions of dollars, except share amounts)
Balance Sheet June 30 Dec. 31
- ------------- 2002 2001
Assets ------- -------
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 487 $ 431
Short-term investments . . . . . . . . . . . . . . . . . . 1,983 2,513
Accounts receivable, net of allowances for customer
adjustments and doubtful accounts of $43 million
in 2002 and $61 million in 2001 . . . . . . . . . . . . 1,535 1,198
Inventories:
Raw materials . . . . . . . . . . . . . . . . . . . . . . 124 133
Work in process . . . . . . . . . . . . . . . . . . . . . 474 407
Finished goods. . . . . . . . . . . . . . . . . . . . . . 222 211
------- -------
Inventories . . . . . . . . . . . . . . . . . . . . . . 820 751
------- -------
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 582 554
Prepaid expenses and other current assets. . . . . . . . . . 237 328
------- -------
Total current assets . . . . . . . . . . . . . . . . . . . 5,644 5,775
------- -------
Property, plant and equipment at cost. . . . . . . . . . . . . 9,486 9,683
Less accumulated depreciation. . . . . . . . . . . . . . . . (4,402) (4,094)
------- -------
Property, plant and equipment (net). . . . . . . . . . . . 5,084 5,589
-------- -------
Long-term cash investments . . . . . . . . . . . . . . . . . . 1,004 407
Equity investments . . . . . . . . . . . . . . . . . . . . . . 1,461 2,214
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 629 523
Acquisition-related intangibles. . . . . . . . . . . . . . . . 217 225
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 340 421
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 610 625
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $14,989 $15,779
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Loans payable and current portion long-term debt . . . . . . $ 155 $ 38
Accounts payable and accrued expenses. . . . . . . . . . . . 1,230 1,205
Income taxes payable . . . . . . . . . . . . . . . . . . . . 195 327
Accrued retirement and profit sharing contributions. . . . . 127 10
------- -------
Total current liabilities. . . . . . . . . . . . . . . . . 1,707 1,580
------- -------
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 1,097 1,211
Accrued retirement costs. . . . . . . . . . . . . . . . . . . . 447 485
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 85 331
Deferred credits and other liabilities. . . . . . . . . . . . . 277 293
Stockholders' equity:
Preferred stock, $25 par value. Authorized - 10,000,000 shares
Participating cumulative preferred. None issued. . . . . . -- --
Common stock, $1 par value. Authorized - 2,400,000,000 shares
Shares issued: 2002 - 1,740,330,934; 2001 - 1,740,329,364. 1,740 1,740
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 1,106 1,216
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 8,958 8,975
Less treasury common stock at cost:
Shares: 2002 - 6,661,739; 2001 - 6,395,488 . . . . . . . . (217) (235)
Accumulated other comprehensive income. . . . . . . . . . . . (150) 269
Deferred compensation . . . . . . . . . . . . . . . . . . . . (61) (86)
------- -------
Total stockholders' equity. . . . . . . . . . . . . . . . . 11,376 11,879
------- -------
Total liabilities and stockholders' equity. . . . . . . . . . . $14,989 $15,779
======= =======
3
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
(In millions of dollars)
For Six Months Ended
--------------------
Cash Flows June 30 June 30
- ---------- 2002 2001
Cash flows from operating activities: ------- -------
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 57 $ 33
Depreciation. . . . . . . . . . . . . . . . . . . . . . 787 731
Amortization of acquisition-related costs . . . . . . . 57 117
Deferred income taxes . . . . . . . . . . . . . . . . . 8 14
Net currency exchange (gains) losses. . . . . . . . . . (4) 5
(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. . . . . . . . . . . . . . . . . (308) 513
Inventories. . . . . . . . . . . . . . . . . . . . . (69) 151
Prepaid expenses and other current assets. . . . . . 129 (43)
Accounts payable and accrued expenses. . . . . . . . (50) (508)
Income taxes payable . . . . . . . . . . . . . . . . (111) (89)
Accrued retirement and profit sharing contributions. 123 (356)
Decrease in noncurrent accrued retirement costs. . . . . (101) --
Write-downs of equity investments. . . . . . . . . . . . 116 53
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 49 84
------- -------
Net cash provided by operating activities. . . . . . . . . 683 705
Cash flows from investing activities:
Additions to property, plant and equipment. . . . . . . (297) (1,242)
Purchases of short-term investments . . . . . . . . . . (709) (1,435)
Sales and maturities of short-term investments. . . . . 1,548 2,203
Purchases of long-term cash investments . . . . . . . . (957) --
Sales of long-term cash investments . . . . . . . . . . 46 --
Purchases of equity investments . . . . . . . . . . . . (20) (177)
Sales of equity investments . . . . . . . . . . . . . . 30 39
Acquisition of businesses, net of cash acquired . . . . (69) --
------- -------
Net cash used in investing activities . . . . . . . . . . (428) (612)
Cash flows from financing activities:
Additions to loans payable. . . . . . . . . . . . . . . 9 --
Payments on loans payable . . . . . . . . . . . . . . . (1) --
Additions to long-term debt . . . . . . . . . . . . . . -- 3
Payments on long-term debt. . . . . . . . . . . . . . . (19) (128)
Dividends paid on common stock. . . . . . . . . . . . . (74) (74)
Sales and other common stock transactions . . . . . . . 92 87
Common stock repurchase program . . . . . . . . . . . . (210) (158)
------- -------
Net cash used in financing activities . . . . . . . . . . (203) (270)
Effect of exchange rate changes on cash . . . . . . . . . 4 (26)
------- -------
Net increase (decrease) in cash and cash equivalents. . . 56 (203)
Cash and cash equivalents, January 1. . . . . . . . . . . 431 745
------- -------
Cash and cash equivalents, June 30. . . . . . . . . . . . $ 487 $ 542
======= =======
4
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Notes to Financial Statements
1. Diluted earnings (loss) per common share are based on average common and
dilutive potential common shares outstanding (1774.4 and 1735.6 million shares
for the second quarters of 2002 and 2001 and 1775.4 and 1785.5 million shares
for the six months ended June 30, 2002 and 2001). For the second quarter of
2001, dilutive potential common shares have been excluded due to the net loss
for the period.
2. In the second quarter of 2002, TI completed its acquisition of Condat AG,
Berlin (Condat) for a purchase price of approximately $85 million. Goodwill of
approximately $58 million was recognized due to the acquisition. Some
adjustments to accounting estimates for this purchase acquisition may be
required in the third quarter, but it is not expected that they will have a
material impact on the company's financial position or results of operations.
3. Included in other income (expense) net for the second quarters of 2002 and
2001, in millions of dollars, are investment write-downs of $96 and $18. A
decline in the market value of Hynix Global Depositary Shares accounted for most
of the investment write-down in second quarter 2002.
4. Income for the second quarter of 2002 includes, in millions of dollars, net
special gains of $16, of which $20 is the reversal of a warranty reserve taken
against the gain on the sale of the software business unit in 1997, because the
warranty period has expired. Of the $16 net special gains, $20 is included in
other income, $5 is in selling, general and administrative expense, $2 is a
reduction in cost of revenues and $1 is in research and development expense.
5. Loss for the first quarter of 2002 includes, in millions of dollars, net
special charges of $17, of which $14 is for restructuring charges primarily
related to the closing of the Semiconductor manufacturing facility in Merrimack,
New Hampshire. Of the $14, $9 is for the acceleration of depreciation over the
remaining service life of the facility, and $4 is for fixed asset write-downs
for assets held for sale. Of the $17 net special charges, $16 is included in
cost of revenues and $1 is in other income (expense) net.
6. As of June 30, 2002, in millions of dollars, $260 of the $293 aggregate
severance cost obligations for the 2001 worldwide cost-reduction and
restructuring actions affecting a total of 5724 employees had been paid. Loss
for the second quarter of 2001 includes, in millions of dollars, net special
charges of $252, of which $214 is severance cost for the 2001 worldwide
cost-reduction program affecting 3778 employees and $35 relates to the
restructuring charges for the closing of three Semiconductor facilities. Of the
$35, $14 is severance cost for 559 additional employees and $16 is for the
acceleration of depreciation over the remaining service life of the facilities.
Of the $252 net special charges, $162 is included in cost of revenues, $84 is in
selling, general and administrative expense and $6 is in research and
development expense. Also included in the second quarter of 2001 is a $68
increase in the income tax provision to adjust to the expected tax rate for the
year.
7. Income for the first quarter of 2001 includes, in millions of dollars, net
special charges of $50, of which $27 is severance cost for 502 employees under
the 2001 worldwide cost-reduction program and $25 relates to the closing of a
Semiconductor manufacturing facility in Santa Cruz, California. Of the $25, $16
is severance cost for 600 additional employees and $5 is for acceleration of
depreciation over the remaining service life of the facility. Of the $50 net
special charges, $44 is included in cost of revenues, $7 is in selling, general
and administrative expense, $2 is in research and development expense and $3 is
in other income.
8. Total comprehensive income (loss), i.e., net income (loss) plus
available-for-sale investment and pension liability adjustments to stockholders'
equity, for the second quarters of 2002 and 2001, in millions of dollars, was
negative $400 and negative $231. For the six months ended June 30, 2002 and
2001, it was negative $362 and positive $143.
5
9. There has been no significant change in the status of the ongoing audit
investigation (initially disclosed in 1998) concerning grants from the Italian
government.
10. Federal income taxes for the interim periods presented have been included
in the accompanying financial statements on the basis of an estimated annual
rate. The estimated annualized tax rate for 2002 is 18 percent. The effective
annualized tax rate for 2002 differs from the 35 percent statutory corporate tax
rate due to the expected utilization of tax benefits such as the credit for
research activities.
11. The statements of operations and statements of cash flows for the periods
ended June 30, 2002, and the balance sheet at June 30, 2002, are not audited but
reflect all adjustments which are of a normal recurring nature and are, in the
opinion of management, necessary for a fair statement of the results of the
periods shown.
12. Business segment information follows:
For Three Months Ended For Six Months Ended
---------------------- --------------------
Business Segment Net Revenues June 30 June 30 June 30 June 30
(in millions of dollars) 2002 2001 2002 2001
- ----------------------------- ------- ------- ------- -------
Semiconductor
Trade. . . . . . . . . . . . . . . . . . $ 1,761 $ 1,652 $ 3,275 $ 3,824
Intersegment . . . . . . . . . . . . . . 3 5 7 9
------- ------- ------- -------
1,764 1,657 3,282 3,833
------- ------- ------- -------
Sensors & Controls
Trade. . . . . . . . . . . . . . . . . . 250 255 478 515
Intersegment . . . . . . . . . . . . . . 2 2 2 2
------- ------- ------- -------
252 257 480 517
Education & Productivity Solutions
Trade. . . . . . . . . . . . . . . . . . 150 129 235 210
Corporate activities . . . . . . . . . . . (4) (6) (8) (7)
Divested activities. . . . . . . . . . . . -- -- -- 12
------- ------- ------- -------
Total net revenues . . . . . . . . . . . . $ 2,162 $ 2,037 $ 3,989 $ 4,565
======= ======= ======= =======
Business Segment Profit (Loss)
(in millions of dollars)
- ------------------------------
Semiconductor. . . . . . . . . . . . . . . $ 132 $ (37) $ 105 $ 267
Sensors & Controls . . . . . . . . . . . . 56 52 104 103
Educational & Productivity Solutions . . . 49 38 68 55
Corporate activities . . . . . . . . . . . (49) (42) (89) (79)
Special charges/gains, and acquisition-
related amortization, net of
applicable profit sharing. . . . . . . . (13) (309) (58) (418)
Interest on loans/other income (expense)
net, excluding a second-quarter 2002 gain
of $20, a first-quarter 2002 charge of $1
and a first-quarter 2001 gain of $3,
included above in Special charges/gains
and acquisition-related amortization . . (58) 42 (61) 130
Divested activities. . . . . . . . . . . . -- -- -- 6
------- ------- ------- -------
Income (loss) before income taxes. . . . . $ 117 $ (256) $ 69 $ 64
======= ======= ======= =======
6
13. Year-to-date acquisition-related purchased in-process research and
development (R&D) charges were $1 million in 2002 and zero in 2001. These
charges are for R&D from business purchase acquisitions. Values for acquired
in-process R&D (purchased R&D) were determined at the acquisition date based
upon the appraised value of the related developmental projects. Purchased R&D
projects were assessed, analyzed and valued within the context and framework
articulated by the Securities and Exchange Commission herein described as the
Exclusion Approach.
Major assumptions, detailed in the following table, used in determining the
value of significant purchased R&D included the discount rate, the estimated
beginning date of projected operating cash flows, and the remaining cost and
time, in engineer-months, to complete the R&D projects. The term "engineer
month" refers to the average amount of research work expected to be performed by
an engineer in a month.
7
Millions of Dollars
- -------------------------------------------------------------------------------------------------------------------------
Cost/time to
complete R&D projects
---------------------
Year
Other Deferred Purchased At cash flows
Entity Acquisition Consid- intan- compen- in-process R&D Discount At ac- June projected
acquired date eration Goodwill gibles sation R&D charge focus rate quisition 2002 to begin
- -------- ----------- ------- -------- ------ -------- ---------- ----- ------- --------- ----- ----------
Alantro Third $277 $148 $81 $32 $52 Wireless 24% $4.1/256 Project 2002
Commun- quarter networking engineer completed
ications, 2000 technology months
Inc. for home
and office
8
14. The following is a reconciliation of individual restructuring accruals (in
millions of dollars).
Year of Charge
------------------------------------------------------
2001 2002
-------------------------------------------- ------
Balance, prior
actions - primarily Voluntary/ SC SC SC
severance and involuntary site international site
business divestiture program closings restructuring closings
Description* Total related in U.S. in U.S. actions in U.S.
- ------------ ----- --------------------- ----------- --------- ------------- ---------
BALANCE, DECEMBER 31, 2001 $119 $ 40 $ 17 $ 23 $ 39
CHARGES:
Asset write-downs 14 $ 14
DISPOSITIONS:
Sale of facility (8) (8)
Non-cash write-down of assets (14) (14)
Severance payments (26) (4) (8) (7) (7)
---- ---- ---- ---- ---- ----
BALANCE, MARCH 31, 2002 $ 85 $ 28 $ 9 $ 16 $ 32 $ --
---- ---- ---- ---- ---- ----
CHARGES:
Asset write-downs 1 1
Severance charges 5 5
DISPOSITIONS:
Non-cash write-down of assets (1) (1)
Severance payments (15) (1) (6) (3) (5)
Change in estimates (23) (20) (3)
---- ---- ---- ---- ---- ----
BALANCE, JUNE 30, 2002 $ 52 $ 7 $ 3 $ 10 $ 32 $ --
==== ==== ==== ==== ==== ====
* Abbreviations
SC= Semiconductor Business
15. The company adopted Statement of Financial Accounting Standards(SFAS) No.
144, Accounting for Impairment or Disposal of Long-Lived Assets, effective
January 1, 2002. The standard supercedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations for a Disposal of a Segment of a Business. As of the
adoption date, the standard did not affect the financial position or results of
operations of the company.
16. The company adopted SFAS No. 142, Goodwill and Other Intangible Assets
effective January 1, 2002. Under SFAS 142, goodwill is no longer amortized but
is reviewed for impairment annually, or more frequently if certain indicators
arise. In addition, the statement requires reassessment of the useful lives of
previously recognized intangible assets.
As required by the statement, intangible assets that do not meet the criteria
for recognition apart from goodwill must be reclassified. As a result of the
company's analysis, $14 million (net of tax) of intangibles, primarily relating
to acquired workforce intangibles, was transferred to goodwill as of January 1,
2002.
With the adoption of the statement, the company ceased amortization of goodwill
as of January 1, 2002. The following table presents the quarterly results of the
company on a comparable basis (in millions of dollars, except per-share
amounts):
9
For Three Months Ended For Six Months Ended
---------------------- --------------------
June 30 June 30 June 30 June 30
2002 2001 2002 2001
------- ------- ------- -------
NET INCOME (LOSS):
Reported net income (loss). . . . . . $ 95 $ (197) $ 57 $ 33
Goodwill and workforce amortization
(net of tax). . . . . . . . . . . . -- 29 -- 57
------- ------- ------- -------
Adjusted net income (loss). . . . . . $ 95 $ (168) $ 57 $ 90
======= ======= ======= =======
BASIC EARNINGS (LOSS) PER SHARE:
Reported net income (loss). . . . . . .05 (.11) .03 .02
Goodwill and workforce amortization
(net of tax). . . . . . . . . . . . -- .02 -- .03
------- ------- ------- -------
Adjusted net income (loss). . . . . . $ .05 $ (.09) $ .03 $ .05
======= ======= ======= =======
DILUTED EARNINGS (LOSS) PER SHARE:
Reported net income (loss). . . . . . .05 (.11) .03 .02
Goodwill and workforce amortization
(net of tax). . . . . . . . . . . . -- .02 -- .03
------- ------- ------- -------
Adjusted net income (loss). . . . . . $ .05 $ (.09) $ .03 $ .05
======= ======= ======= =======
As of January 1, 2002, the company completed a goodwill impairment test. This
test involved the use of estimates related to the fair market value of the
company's reporting units with which the goodwill was associated. No impairment
was indicated at that time.
10
The carrying amount of goodwill at June 30, 2002, by business segment, was (in
millions of dollars):
Semiconductor Sensors & Controls E&PS Total
------------- ------------------ ------ ------
$ 611 $ 18 $ -- $ 629
====== ===== ====== ======
The following table reflects the components of amortized intangible assets (in
millions of dollars):
June 30, 2002 January 1, 2002
---------------------- --------------------
Gross Gross
Carrying Accum. Carrying Accum.
Amount Amort. Amount Amort.
-------- ------ -------- ------
Amortized intangible assets:
- Developed technology. . . $ 249 $ 110 $ 213 $ 98
- Deferred compensation . . 59 54 67 52
- Non-compete agreement . . 62 37 59 33
- Other . . . . . . . . . . 118 70 113 63
------ ------ ------ ------
Total . . . . . . . . . . . $ 488 $ 271 $ 452 $ 246
====== ====== ====== ======
Amortization expense on intangible assets (including deferred
compensation in stockholders' equity) was $29 million and $31 million for the
quarters ended June 30, 2002 and 2001.
The following sets forth the estimated amortization expense on intangible assets
for the fiscal years ended December 31 (in millions of dollars):
2002 $113
2003 85
2004 54
2005 37
2006 30
The company completed its acquisition of Condat during the quarter ended June
30, 2002. The following table contains a summary of the intangibles acquired
(in millions of dollars).
Amortization
Intangible Assets Amount Lives
- ----------------- ------ ------------
Developed Technology 26 5 years
Customer Relationship 2 3 years
Non-Compete Agreements 2 3 years
11
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Registrant (the "company" or "TI") announced that its second-quarter revenue
increased 18 percent sequentially and 6 percent compared with the year-ago
period.
Sequential revenue growth of $335 million was driven by double-digit percentage
gains in all of TI's business segments - Semiconductor, Sensors & Controls, and
Educational & Productivity Solutions (E&PS). Semiconductor was the largest
contributor, with a sequential revenue increase of $246 million, or 16 percent.
Revenue for the quarter includes $30 million in catch-up royalties from a new
semiconductor cross-license agreement.
Compared with the year-ago quarter, TI revenue was up $125 million, or 6
percent, based on 6 percent growth in Semiconductor and 16 percent growth in
E&PS.
Operating profit and margin increased sequentially due to increased revenue in
the second quarter of 2002. Compared with the year-ago period, the increase in
operating profit was substantially greater than the increase in revenue, due to
lower severance charges resulting from restructuring activities and higher
semiconductor factory utilization and cost reductions in the second quarter of
2002.
Other income (expense)/interest was negative in the quarter due to a non-cash
charge of $96 million to write down certain equity holdings in the company's
investment portfolio.
Net income was $95 million. EPS (earnings per share) was $0.05. The investment
write-downs reduced earnings by 4 cents per share. The catch-up royalties
increased EPS by 1 cent.
Orders of $2292 million in the second quarter increased 20 percent sequentially
and 34 percent from the year-ago period. Semiconductor orders of $1876 million
were up 22 percent sequentially and 42 percent from the year-ago period. TI and
Semiconductor book-to-bill increased sequentially.
SUMMARY OF FINANCIAL RESULTS
For the second quarter of 2002, TI reported the following:
- Total revenue for TI was $2162 million, up 6 percent from $2037
million in the year-ago quarter, and up 18 percent sequentially,
primarily due to higher Semiconductor shipments.
- Cost of revenues in the second quarter was $1306 million, compared
with $1523 million in the year-ago quarter. Cost of revenues as a
percent of revenue decreased, reflecting lower restructuring charges
and increased factory utilization.
- Research and development (R&D) totaled $404 million, down from $412
million in the second quarter of 2001 due to lower restructuring
charges and lower amortization of acquisition-related intangibles.
- Selling, general and administrative expense in the quarter was $297
million, down from $400 million in the year-ago quarter due to lower
restructuring charges and cessation of amortization of goodwill in
accordance with Statement of Financial Accounting Standards
(SFAS) 142.
12
- Other income (expense) net decreased from $57 million in the second
quarter of 2001 to $(24) million in the second quarter of 2002, due to
increased investment write-downs.
- The effective income tax rate for the quarter was 19 percent.
- TI orders in the second quarter were $2292 million, up from $1704
million in the year-ago quarter and $1905 million in the first quarter
due to growth in Semiconductor.
Information concerning special charges, gains and other items is on pages 16-17.
OUTLOOK
Stabilizing inventory at the company's customers means that in the second half
of 2002, TI should be generally shipping close to the same rate as end demand.
For the third quarter of 2002: TI expects revenue to grow about 5 percent
sequentially (or about 6 percent excluding the $30 million in catch-up royalties
included in second-quarter revenue). Semiconductor revenue is expected to grow
about 4 percent sequentially (or about 6 percent excluding the catch-up
royalties), Sensors & Controls revenue is expected to seasonally decline a few
percentage points, and E&PS revenue is expected to seasonally increase about 25
percent.
Operating margin in the third quarter should increase 1 to 2 percentage points.
Other income/interest is expected to be about $10 million. EPS is expected to be
about $0.09.
For 2002, TI expects R&D to be about $1.6 billion. Capital expenditures are
expected to be about $800 million in 2002, and depreciation is expected to be
about $1.6 billion.
The 2002 effective income tax rate is expected to be about 18 percent.
SEMICONDUCTOR
Semiconductor revenue in the second quarter was $1764 million, up from $1657
million in the year-ago quarter, due to growth in DSP. Second-quarter revenue
was up from $1518 million in the prior quarter due to increased shipments across
the breadth of Semiconductor products.
Semiconductor operating profit for the second quarter was $132 million, or 7.5
percent of revenue, up from an operating loss of $37 million in the year-ago
quarter due to higher factory utilization and revenue growth, and up from an
operating loss of $27 million in the prior quarter due to increased revenue.
Analog revenue was up 3 percent from the year-ago period and 16 percent
sequentially. Growth in Analog was broad-based and included 25 percent
sequential growth in high-performance Analog product revenue.
DSP revenue increased 41 percent from the year-ago quarter and 8 percent
sequentially, primarily due to wireless.
13
TI's remaining Semiconductor revenue decreased 11 percent from the year-ago
quarter and increased 26 percent sequentially.
TI's Semiconductor revenue in key markets was as follows:
- Wireless revenue increased 62 percent from the year-ago quarter and 14
percent sequentially.
- Revenue from TI's catalog products, composed of high-performance
Analog and catalog DSP, decreased 3 percent from the year-ago quarter
but increased 20 percent sequentially.
- Broadband communications revenue, which includes DSL and cable modems,
voice over packet (VoP), and wireless local area networks (WLANs),
decreased 59 percent from the year-ago quarter but increased 15
percent sequentially.
Semiconductor orders were $1876 million, up 42 percent from the year-ago quarter
and 22 percent sequentially as demand increased across the range of
Semiconductor products.
SENSORS & CONTROLS
Sensors & Controls revenue was $252 million for the second quarter of 2002,
compared with $257 million in the year-ago quarter. Sequentially, revenue
increased 10 percent from $229 million primarily due to increased shipments of
sensor products. The sequentially higher shipments were mostly related to the
automotive market, where TI benefited from new products, higher demand and
increased penetration.
Operating profit was $56 million, a record 22.1 percent of revenue, compared
with $52 million in the year-ago quarter, due to manufacturing cost reductions.
Operating profit increased 14 percent from $49 million in the first quarter
primarily due to increased shipments.
EDUCATIONAL & PRODUCTIVITY SOLUTIONS (E&PS)
E&PS revenue was $150 million for the second quarter of 2002, compared with $129
million in the year-ago quarter due to stronger sales of graphing calculators
resulting from earlier retail stocking for back-to-school sales than in the
previous year. Sequentially, revenue increased 75 percent from $85 million due
to retail stocking for upcoming back-to-school sales.
Operating profit was $49 million, or 33 percent of revenue, compared with $38
million in the year-ago quarter, primarily due to higher revenue. Operating
profit increased from $19 million in the prior quarter, primarily due to higher
revenue.
FIRST HALF OF 2002
For the first six months of 2002, TI reported the following:
- TI revenue was $3989 million, down from $4565 million in the first six
months of 2001, primarily due to Semiconductor. The decrease in
Semiconductor revenue was primarily due to lower shipments in the
first quarter of 2002 resulting from excess customer inventories, a
trend that reversed in the second quarter of 2002 as shipments
increased compared to the second quarter of 2001. The decrease in
Sensors & Controls revenue was due to decreased shipments and the
increase in E&PS revenue was primarily due to earlier stocking for
back-to-school sales.
14
- Cost of revenues was $2523 million compared with $3028 million in the
year-ago period. Cost of revenues declined due to lower shipments in
Semiconductor in the first half of 2002 and higher restructuring
charges in the first half of 2001.
- R&D totaled $792 million, compared to $858 million in the first six
months of 2001. The decrease was primarily due to the company's
300-millimeter wafer facility moving from development into production,
and lower restructuring charges and amortization of
acquisition-related intangibles.
- Selling, general and administrative expense was $563 million, down
from $748 million in the year-ago period due primarily to lower
restructuring charges and cessation of amortization of goodwill in
accordance with SFAS 142.
- Other income (expense) net decreased from $164 million in the first
six months of 2001 to $(13) million in the first six months of 2002,
primarily due to investment write-downs and lower interest income.
- The effective income tax rate was 18 percent.
- Orders were $4197 million, up from $3601 million from the same period
a year ago, due to Semiconductor. Semiconductor orders for the first
six months were up across a range of Semiconductor products. Sensors &
Controls orders were down slightly . E&PS orders were up due to
earlier stocking for back-to-school sales.
FINANCIAL CONDITION
- --------------------
The company's balance sheet remains strong. In the first six months of 2002,
total cash, composed of cash and cash equivalents plus short-term investments
and long-term cash investments, increased by $123 million to $3474 million,
primarily due to operating activities.
In the first six months of 2002, accounts receivable increased by $337 million,
to $1535 million, primarily reflecting higher Semiconductor revenue as well as
E&PS seasonality.
In the first six months of 2002, inventory increased by $69 million, to $820
million, as Semiconductor and E&PS built product to support anticipated higher
third-quarter shipments.
Equity investments declined to $1461 million, down $753 million from $2214
million at year-end 2001. Investment write-downs during the first half of 2002
were $116 million. The balance of the decline was from mark-to-market
adjustments of the available-for-sale securities, primarily shares of Micron
Technology, Inc. common stock. The mark-to-market adjustment, net of tax, is
reflected in stockholders' equity.
Capital expenditures totaled $297 million in the first six months of 2002,
compared with $1242 million in the first half of 2001. Capital expenditures in
the year-ago period were primarily for the upgrade of three analog fabrication
facilities to 200-millimeter wafers and the installation of the 300 millimeter
wafer facility production line.
15
Debt-to-total-capital ratio was 0.10 at the end of the second quarter, unchanged
from the end of 2001.
SPECIAL CHARGES, GAINS AND OTHER ITEMS
- --------------------------------------
Second Quarter of 2002:
In the second quarter of 2002, pretax gains of $16 million net were recorded, of
which $20 million was the reversal of a warranty reserve taken against the gain
on the sale of the software business unit in 1997, because the warranty period
has expired. Of the $16 million gain, $20 million is included in other income,
$5 million is in selling, general and administrative expense, $2 million is a
reduction in cost of revenues and $1 million is in research and development
expense. Also included in results for the quarter is the amortization of
acquisition-related intangibles of $29 million.
First Quarter of 2002:
In the first quarter of 2002, pretax charges of $17 million net were taken, of
which $14 million was for restructuring charges primarily related to the closing
of the Semiconductor manufacturing facility in Merrimack, New Hampshire. Of the
$14 million, $9 million was for the acceleration of depreciation over the
remaining service life of the facility, and $4 million was for fixed asset
write-downs for assets held for sale. Of the $17 million charge, $16 million is
included in cost of revenues and $1 million is in other income (expense) net.
Also included in results for the first quarter of 2002 is the amortization of
acquisition-related intangibles of $28 million.
Second Quarter of 2001:
As of June 30, 2002, $260 million of the $293 million aggregate severance cost
obligations for the 2001 worldwide cost-reduction and restructuring actions
affecting a total of 5724 employees had been paid. In the second quarter of
2001, pretax charges of $252 million net were taken, of which $214 million was
severance cost for the 2001 worldwide cost-reduction program affecting 3778
employees and $35 million relates to the restructuring charges for the closing
of three Semiconductor facilities. Of the $35 million, $14 million was severance
cost for 559 additional employees and $16 million was for acceleration of
depreciation over the remaining service life of the facilities. Of the $252
million, $162 million is included in cost of revenues, $84 million is in
selling, general and administrative expense and $6 million is in research and
development expense. Also included in results for the second quarter of 2001 are
a $68 million increase in the income tax provision to adjust to the expected tax
rate for the year, and the amortization of goodwill and other
acquisition-related intangibles of $58 million.
First Quarter of 2001:
In the first quarter of 2001, pretax charges of $50 million net were taken, of
which $27 million was severance cost for 502 employees under the 2001 worldwide
cost-reduction program and $25 million relates to the closing of a Semiconductor
manufacturing facility in Santa Cruz, California. Of the $25 million charge, $16
million was severance cost for 600 additional employees and $5 million was for
acceleration of depreciation over the remaining service life of the facility. Of
the $50 million, $44 million is included in cost of revenues, $7 million is in
selling, general and administrative expense, $2 million is in research and
16
development expense, and $3 million is in other income. Also included in results
for the first quarter of 2001 is the amortization of goodwill and other
acquisition-related intangibles of $59 million.
Purchased In-Process R&D Charges
See discussion in Note 13 to the consolidated financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Information concerning market risk is contained on pages C-37 and C-38 of the
Registrant's proxy statement for the 2002 annual meeting of stockholders and is
incorporated by reference to such proxy statement.
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of stockholders held on April 18, 2002, in addition to the
election of directors the stockholders voted upon the two board proposals
contained in the Registrant's Proxy Statement dated March 1, 2002.
The Board nominees were elected as directors with the following vote:
Nominee For Withheld
------- --- --------
James R. Adams 1,450,153,948 24,226,501
David L. Boren 1,454,868,771 19,511,678
James B. Busey 1,462,160,143 12,220,306
Daniel A. Carp 1,462,302,451 12,077,998
Thomas J. Engibous 1,461,292,794 13,087,655
Gerald W. Fronterhouse 1,459,541,192 14,839,257
David R. Goode 1,455,193,721 19,186,728
Wayne R. Sanders 1,463,087,615 11,292,834
Ruth J. Simmons 1,454,974,534 19,405,915
The two Board proposals were approved with the following vote:
Abstentions (Other
Proposal For Against Than Broker Non-Votes) Broker Non-Votes
-------- --- ------- --------------------- ----------------
Board proposal with 1,346,497,486 116,775,743 11,102,109 5,111
respect to adoption of the
Texas Instruments Executive
Officer Performance Plan
Board proposal with respect 1,443,408,033 21,676,808 9,289,048 6,560
to adoption of the TI
Employees 2002 Stock Purchase
Plan
17
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Designation of
Exhibits in
This Report Description of Exhibit
-------------- -----------------------------
10(a) Texas Instruments Executive Officer
Performance Plan.
11 Computation of Basic and Diluted Earnings
(Loss) Per Common and Dilutive Potential
Common Share.
12 Computation of Ratio of Earnings to Fixed
Charges.
(b) Reports on Form 8-K.
During the quarter ended June 30, 2002, the Registrant filed a report on Form
8-K dated May 14, 2002, reconfirming its outlook for the second quarter of 2002
as set forth in the Outlook Section included in Item 2 of its Form 10-Q for the
quarter ending March 31, 2002.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: This Form 10-Q includes "forward-looking statements" intended to qualify
for the safe harbor from liability established by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally can be
identified by phrases such as TI or its management "believes," "expects,"
"anticipates," "foresees," "forecasts," "estimates" or other words or phrases of
similar import. Similarly, such statements herein that describe the company's
business strategy, outlook, objectives, plans, intentions or goals also are
forward-looking statements. All such forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those in forward-looking statements.
We urge you to carefully consider the following important factors that could
cause actual results to differ materially from the expectations of the company
or its management:
- Market demand for semiconductors, particularly for digital signal processors
and analog chips in key markets, such as telecommunications and computers;
- TI's ability to develop, manufacture and market innovative products in a
rapidly changing technological environment, including timely implementation of
new manufacturing technologies;
- TI's ability to compete in products and prices in an intensely competitive
industry;
- TI's ability to maintain and enforce a strong intellectual property
portfolio and obtain needed licenses from third parties;
- Consolidation of TI's patent licensees and market conditions reducing
royalty payments to TI;
- Timely completion and successful integration of announced acquisitions;
18
- Economic, social and political conditions in the countries in which TI, its
customers or its suppliers operate, including security risks, possible
disruptions in transportation networks and fluctuations in foreign currency
exchange rates;
- Losses or curtailments of purchases from key customers or the timing of
customer inventory adjustments;
- TI's ability to recruit and retain skilled personnel; and
- Availability of raw materials and critical manufacturing equipment.
For a more detailed discussion of these factors, see the text under the heading
"Cautionary Statements Regarding Future Results of Operations" in Item 1 of the
company's most recent Form 10-K. The forward-looking statements included in this
Form 10-Q are made only as of the date of this Form 10-Q, and the company
undertakes no obligation to update the forward-looking statements to reflect
subsequent events or circumstances.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXAS INSTRUMENTS INCORPORATED
BY: /s/ WILLIAM A. AYLESWORTH
_________________________
William A. Aylesworth
Senior Vice President and
Chief Financial Officer
Date: July 29, 2002
19
Exhibit 10(a)
-------------
TEXAS INSTRUMENTS EXECUTIVE OFFICER PERFORMANCE PLAN
Dated April 18, 2002
The purpose of the Plan is to promote the success of the Company by providing
performance-based compensation for executive officers.
For purposes of the Plan, unless otherwise indicated, the term "TI" shall mean
Texas Instruments Incorporated, "Company" shall mean TI and its subsidiaries,
and "Board" shall mean the Board of Directors of TI.
The Plan is intended to provide qualified performance-based compensation in
accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended,
and regulations thereunder ("Code") and will be so interpreted.
Covered Employees
The executive officers of TI (within the meaning of Rule 3b-7 under the
Securities Exchange Act of 1934 as amended from time to time) as of March 30 of
each calendar year ("performance year") shall receive awards under the Plan for
such performance year. An individual who becomes an executive officer after
March 30 and on or before October 1 of a performance year shall receive an award
as provided below.
Administration of Plan
The Plan shall be administered by a Committee of the Board which shall be known
as the Compensation Committee (the "Committee"). The Committee shall be
appointed by a majority of the whole Board and shall consist of not less than
three directors. The Board may designate one or more directors as alternate
members of the Committee, who may replace any absent or disqualified member at
any meeting of the Committee. A director may serve as a member or alternate
member of the Committee only during periods in which the director is an "outside
director" as described in Section 162(m) of the Code. The Committee shall have
full power and authority to construe, interpret and administer the Plan. It may
issue rules and regulations for administration of the Plan. It shall meet at
such times and places as it may determine. A majority of the members of the
Committee shall constitute a quorum and all decisions of the Committee shall be
final, conclusive and binding upon all parties, including the Company, the
stockholders and the employees.
The Committee shall have the full and exclusive right to make reductions in
awards under the Plan. In determining whether to reduce any award and the amount
of any reduction, the Committee shall take into consideration such factors as
the Committee shall determine.
Expenses of Administration
The expenses of the administration of this Plan, including the interest provided
in the Plan, shall be borne by the Company.
Amendments
The Board may, at any time and from time to time, alter, amend, suspend or
terminate the Plan or any part thereof as it may deem proper and in the best
interests of the Company, provided, however, that no such action shall (i)
affect or impair the rights under any award theretofore granted under the Plan,
except that in the case of a covered employee employed outside the United States
the Committee may vary the provisions of the Plan as it may deem appropriate to
conform with local laws, practices and procedures or (ii) increase the maximum
amount of any award above the amount described below.
Awards
Subject to the Committee's discretion to reduce such awards, each covered
employee shall be entitled to an award for each performance year equal to 0.5%
of the Company's consolidated income from continuing operations before (i)
provision for income taxes, (ii) awards under the Plan, (iii) any pretax gain or
loss exceeding $25 million recognized for the year related to divestiture of a
business and (iv) any write-off of in process research and development expenses
exceeding $25 million associated with an acquisition, as determined and reported
to the Committee by TI's independent auditors ("Consolidated Income").
An individual who becomes an executive officer after March 30 and on or before
October 1 of a performance year shall be entitled to a prorated award for that
performance year which shall be 0.5% of the Company's Consolidated Income, as
defined above, for such performance year multiplied by a fraction, the numerator
of which is the number of complete calendar quarters of such year following the
date on which the individual becomes an executive officer and the denominator of
which is 4. Such prorated award shall be subject to the Committee's discretion
to reduce awards.
Scope of the Plan
Nothing in this Plan shall be construed as precluding or prohibiting the Company
from establishing or maintaining other bonus or compensation arrangements, which
may be generally applicable or applicable only to selected employees or
officers.
Report of Awards; Committee Discretion to Reduce
As soon as practicable after the end of each performance year, TI's independent
auditors shall determine and report to the Committee and the Committee shall
certify the amount of each award for that year under the provisions of this
Plan.
The Committee, in its sole discretion, based on any factors the Committee deems
appropriate, may reduce the award to any covered employee in any year (including
reduction to zero if the Committee so determines). The Committee shall make a
determination of whether and to what extent to reduce awards under the Plan for
each year at such time or times following the close of the performance year as
the Committee shall deem appropriate. The reduction in the amount of an award to
any covered employee for a performance year shall have no effect on the amount
of the award to any other covered employee for such year.
Payment of Awards
Awards and any installments thereof shall be paid in cash as of a date or dates
determined by the Committee or, if the Committee makes no determination, then as
soon as practicable after the amount of the awards has been determined.
The Committee may direct the awards to the covered employees or any of them for
any year to be paid in a single amount or in installments of equal or varying
amounts or may defer payment of any awards and may prescribe such terms and
conditions concerning payment of awards as it deems appropriate, including
completion of specific periods of employment with the Company, provided that
such terms and conditions are not more favorable to a covered employee than
those expressly set forth in the Plan. The Committee may determine that interest
will be payable with respect to any payment of any award. The Committee may at
any time amend any such direction and may amend or delete any such terms and
conditions if the Committee deems it appropriate. The Committee's actions under
this paragraph shall be subject to and in accordance with the rules governing
qualified performance based compensation in Section 162(m) of the Code.
Payments of awards to covered employees who are employees of subsidiaries of the
Company shall be paid directly by such subsidiaries.
Exhibit 11
----------
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
EARNINGS (LOSS) PER COMMON AND DILUTIVE POTENTIAL COMMON SHARE
For Three Months Ended For Six Months Ended
---------------------- --------------------
June 30 June 30 June 30 June 30
2002 2001 2002 2001
--------- --------- --------- ---------
Net income (loss) in millions $ 95 $ (197) $ 57 $ 33
Add: Interest, net of tax effect, on convertible
debentures assumed converted -- -- -- --
--------- --------- --------- ---------
Adjusted net income (loss) in millions $ 95 $ (197) $ 57 $ 33
========= ========= ========= =========
Diluted Earnings (Loss) per Common and Dilutive Potential Common Share:
- -----------------------------------------------------------------------
Weighted average common shares outstanding
(in thousands) 1,734,658 1,735,623 1,734,537 1,735,086
Weighted average dilutive potential common shares:
Stock option and compensation plans 39,762 -- 40,893 50,390
Convertible debentures -- -- -- --
--------- --------- --------- ---------
Weighted average common and dilutive potential
common shares 1,774,420 1,735,623 1,775,430 1,785,476
========= ========= ========= =========
Diluted earnings (loss) per common share $ 0.05 $ (0.11) $ 0.03 $ 0.02
========= ========= ========= =========
Basic Earnings (Loss) per Common Share:
- ---------------------------------------
Weighted average common shares outstanding
(in thousands) 1,734,658 1,735,623 1,734,537 1,735,086
========= ========= ========= =========
Basic earnings (loss) per common share $ 0.05 $ (0.11) $ 0.03 $ 0.02
========= ========= ========= =========
Exhibit 12
----------
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions of dollars)
For Six Months
Ended June 30
--------------
1997 1998 1999 2000 2001 2001 2002
---- ---- ---- ---- ---- ---- ----
Earnings:
Income (loss)from continuing operations
before income taxes plus fixed
charges and amortization of
capitalized interest less
interest capitalized . . . . . . . . . $ 973 $ 815 $2,205 $4,702 $ (316) $ 120 $ 119
====== ====== ====== ====== ====== ====== ======
Fixed charges:
Total interest on loans
(expensed and capitalized). . . . . . $ 115 $ 86 $ 84 $ 98 $ 74 $ 40 $ 30
Interest attributable to rental
and lease expense. . . . . . . . . . 44 41 30 32 33 17 13
------ ------ ------ ------ ------ ------ ------
Fixed charges. . . . . . . . . . . . . . . $ 159 $ 127 $ 114 $ 130 $ 107 $ 57 $ 43
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges . . . . 6.1 6.4 19.3 36.2 * 2.1 2.8
====== ====== ====== ====== ====== ====== ======
* The ratio is not meaningful. The coverage deficiency was $423 million in year
2001.