Texas Instruments Incorporated, often referred to as TI, is one of the largest US technology companies. TI designs and manufactures semiconductors and various integrated circuits, which it sells to electronics designers and manufacturers globally.
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 March 31, 2001 Commission File Number 1-3761 TEXAS INSTRUMENTS INCORPORATED -------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 75-0289970 - -------------------------- ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 12500 TI Boulevard P.O. Box 660199, Dallas, Texas 75266-0199 - ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 972-995-3773 --------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- 1,735,984,427 ----------------------------------------------------------------------------- Number of shares of Registrant's common stock outstanding as of March 31, 2001
PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements - ------------------------------ <TABLE> <CAPTION> TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Consolidated Financial Statements (In millions of dollars, except per-share amounts.) For Three Months Ended ---------------------- Mar. 31 Mar. 31 Income 2001 2000 - ------ ------- ------- <S> <C> <C> Net revenues.......................................................... $ 2,528 $ 2,761 Operating costs and expenses: Cost of revenues.................................................... 1,505 1,420 Research and development............................................ 446 386 Selling, general and administrative................................. 348 401 ------- ------- Total............................................................. 2,299 2,207 ------- ------- Profit from operations................................................ 229 554 Other income (expense) net............................................ 107 128 Interest on loans..................................................... 16 21 ------- ------- Income before provision for income taxes and cumulative effect of an accounting change...................................... 320 661 Provision for income taxes............................................ 90 211 ------- ------- Income before cumulative effect of an accounting change............... 230 450 Cumulative effect of an accounting change............................. -- (29) ------- ------- Net income............................................................ $ 230 $ 421 ======= ======= Diluted earnings per common share: Income before cumulative effect of an accounting change............. $ .13 $ .25 Cumulative effect of an accounting change........................... -- (.01) ------- ------- Net income.......................................................... $ .13 $ .24 ======= ======= Basic earnings per common share: Income before cumulative effect of an accounting change............. $ .13 $ .26 Cumulative effect of an accounting change........................... -- (.01) ------- ------- Net income.......................................................... $ .13 $ .25 ======= ======= Cash dividends declared per share of common stock..................... $ .021 $ .021 </TABLE> 2
<TABLE> <CAPTION> TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Consolidated Financial Statements (In millions of dollars, except per-share amounts.) Mar. 31 Dec. 31 Balance Sheet 2001 2000 - ------------- ------- ------- <S> <C> <C> Assets Current assets: Cash and cash equivalents.......................................... $ 304 $ 745 Short-term investments............................................. 2,785 3,258 Accounts receivable, less allowance for losses of $63 million in 2001 and $54 million in 2000...................... 1,948 2,204 Inventories: Raw materials.................................................... 218 245 Work in process.................................................. 678 681 Finished goods................................................... 284 307 ------- ------- Inventories.................................................... 1,180 1,233 ------- ------- Prepaid expenses................................................... 140 80 Deferred income taxes.............................................. 547 595 ------- ------- Total current assets............................................. 6,904 8,115 ------- ------- Property, plant and equipment........................................ 9,702 9,099 Less accumulated depreciation...................................... (3,709) (3,652) ------- ------- Property, plant and equipment (net).............................. 5,993 5,447 ------- ------- Investments.......................................................... 2,661 2,400 Goodwill and other acquisition-related intangibles................... 874 961 Deferred income taxes................................................ 116 106 Other assets......................................................... 694 691 ------- ------- Total assets......................................................... $17,242 $17,720 ======= ======= Liabilities and Stockholders' Equity Current liabilities: Loans payable and current portion long-term debt................... $ 46 $ 148 Accounts payable................................................... 795 997 Accrued and other current liabilities.............................. 1,042 1,668 ------- ------- Total current liabilities........................................ 1,883 2,813 ------- ------- Long-term debt....................................................... 1,228 1,216 Accrued retirement costs............................................. 356 378 Deferred income taxes................................................ 495 469 Deferred credits and other liabilities............................... 278 256 Stockholders' equity: Preferred stock, $25 par value. Authorized - 10,000,000 shares. Participating cumulative preferred. None issued.................. -- -- Common stock, $1 par value. Authorized - 2,400,000,000 shares. Shares issued: 2001 - 1,737,306,923; 2000 - 1,733,237,248........ 1,737 1,733 Paid-in capital.................................................... 1,249 1,185 Retained earnings.................................................. 9,517 9,323 Less treasury common stock at cost. Shares: 2001 - 1,322,496; 2000 - 1,184,880....................... (96) (93) Accumulated other comprehensive income............................. 718 574 Deferred compensation ............................................. (123) (134) ------- ------- Total stockholders' equity....................................... 13,002 12,588 ------- ------- Total liabilities and stockholders' equity........................... $17,242 $17,720 ======= ======= </TABLE> 3
<TABLE> <CAPTION> TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Consolidated Financial Statements (In millions of dollars, except per-share amounts.) For Three Months Ended ---------------------- Mar. 31 Mar. 31 2001 2000 ------- ------- <S> <C> <C> Cash Flows - ---------- Cash flows from operating activities: Income before cumulative effect of an accounting change ....... $ 230 $ 450 Depreciation .................................................. 344 262 Amortization of acquisition-related costs ..................... 59 25 Deferred income taxes ......................................... 21 29 Net currency exchange losses................................... 1 1 (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 ........................................ 234 (10) Inventories ................................................ 54 (133) Prepaid expenses ........................................... (61) (15) Accounts payable ........................................... (186) 193 Accrued and other current liabilities ...................... (609) (302) Increase (decrease) in noncurrent accrued retirement costs .... (9) 4 Other ......................................................... 41 (3) ------ ------ Net cash provided by operating activities ....................... 119 501 Cash flows from investing activities: Additions to property, plant and equipment .................... (900) (647) Purchases of short-term investments ........................... (527) (968) Sales and maturities of short-term investments ................ 1,002 1,209 Purchases of noncurrent investments ........................... (48) (43) Sales of noncurrent investments ............................... 33 54 ------ ------ Net cash used in investing activities ........................... (440) (395) Cash flows from financing activities: Payments on loans payable ..................................... - (2) Additions to long-term debt ................................... 3 243 Payments on long-term debt .................................... (108) (29) Dividends paid on common stock ................................ (37) (35) Sales and other common stock transactions ..................... 42 94 Common stock repurchase program ............................... (7) (66) ------ ------ Net cash provided by (used in) financing activities ............. (107) 205 Effect of exchange rate changes on cash ......................... (13) (18) ------ ------ Net increase (decrease) in cash and cash equivalents ............ (441) 293 Cash and cash equivalents, January 1 ............................ 745 781 ------ ------ Cash and cash equivalents, March 31 ............................. $ 304 $1,074 ====== ====== </TABLE> 4
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Notes to Financial Statements 1. Diluted earnings per common share are based on average common and dilutive potential common shares outstanding (1,785.4 and 1,782.0 million shares for the first quarters of 2001 and 2000). 2. Included in other income (expense) net for the first quarter of 2001 are investment write-downs of $35 million for declines in value determined to be other-than-temporary. 3. Hynix Semiconductor Inc. (Hynix), formerly known as Hyundai Electronics Industries Co., Ltd., has ongoing royalty obligations to TI under a patent license agreement expiring December 31, 2007. As previously noted, Hynix has requested a renegotiation of the payment schedule of the obligations. Agreement on revisions to the payment schedule has not yet been reached. Pending future developments, TI is deferring the recognition of royalty revenues from Hynix. TI, which has significant legal remedies available, believes its recorded receivable balance from Hynix, $129 million at March 31, 2001, is collectible. 4. Income for the first quarter of 2001 includes, in millions of dollars, net special charges of $50, of which $11 is severance cost for 241 first-quarter employee acceptances under the U.S. voluntary retirement program (which covers the corporate, semiconductor and sensors & controls activities and expired April 16, 2001), $16 is severance cost for restructuring actions affecting 261 employees in international semiconductor locations, mostly in Germany, and $25 relates to the fourth-quarter 2001 closing of a semiconductor manufacturing facility in Santa Cruz, California. Of the $25, $16 is for severance cost for 600 employees and $5 is for acceleration of depreciation over the remaining service life of the facility. Of the $50 of net special charges, $44 is an increase in cost of revenues, $7 in selling, general and administrative expense, $2 in research and development expense, and $3 in other income. At March 31, 2001, $2 of the aggregate severance cost obligations had been paid. 5. Income for the first quarter of 2000 included, in millions of dollars, special charges of $29 associated with actions including the closing of the sensors & controls manufacturing facility in Versailles, Kentucky, and TI's acquisition of Toccata Technology ApS. Of the $29 charge, $12 was for severance for 480 employees in Kentucky. At March 31, 2001, $2 of the severance cost obligation had been paid. Of the $29 charge, $20 was included in cost of revenues, $6 in selling, general and administrative expense, and $3 in research and development expense. 6. Total comprehensive income, i.e., net income plus investment and pension liability adjustments to stockholders' equity, for the first quarters of 2001 and 2000 was $374 million and $1844 million. 7. There has been no significant change in the status of the audit concerning grants from the Italian government. 8. The statements of income, statements of cash flows and balance sheet at March 31, 2001, are not audited but reflect all adjustments which are of a normal recurring nature and are, in the opinion of management, necessary to a fair statement of the results of the periods shown. 5
9. Business segment information is as follows: For Three Months Ended ---------------------- Mar. 31 Mar. 31 Business Segment Net Revenues 2001 2000 (millions of dollars) ------- ------- - ----------------------------- Semiconductor Trade.................................... $ 2,172 $ 2,382 Intersegment............................. 4 5 ------- ------- 2,176 2,387 ------- ------- Sensors & Controls Trade.................................... 260 264 Intersegment............................. - - ------- ------- 260 264 ------- ------- Educational & Productivity Solutions Trade.................................... 81 79 Corporate activities....................... (2) 2 Divested activities........................ 13 29 ------- ------- Total...................................... $ 2,528 $ 2,761 ======= ======= Business Segment Profit (Loss) (millions of dollars) - ------------------------------ Semiconductor.............................. $ 304 $ 612 Sensors & Controls......................... 51 52 Educational & Productivity Solutions....... 17 8 Corporate activities....................... (38) (70) Special charges/gains and acquisition-related amortization, net of applicable profit sharing......... (109) (54) Interest on loans/other income (expense) net, excluding a first-quarter 2001 gain of $3 million included above in special charges/gains and acquisition-related amortization......... 89 107 Divested activities........................ 6 6 ------- ------- Income before provision for income taxes and cumulative effect of an accounting change........................ $ 320 $ 661 ======= ======= 6
10. Acquisition-related purchased in-process research and development (R&D) charges were zero in the first quarter of 2001 and $3 million in the first quarter of 2000. These charges are for R&D from business purchase acquisitions. Values for acquired in-process R&D (purchased R&D) were determined at the acquisition date based upon the appraised value of the related developmental projects. Purchased R&D projects were assessed, analyzed and valued within the context and framework articulated by the Securities and Exchange Commission herein described as the Exclusion Approach. Major assumptions, detailed in the following table, used in determining the value of significant purchased R&D included the discount rate, the estimated beginning date of projected operating cash flows, and the remaining cost and time, in engineer-months, to complete the R&D projects. The term "engineer month" refers to the average amount of research work expected to be performed by an engineer in a month. The relative stage of completion and projected operating cash flows of the underlying in-process projects acquired were the most significant and uncertain assumptions utilized in the valuation analysis of the purchased R&D. Such uncertainties could give rise to unforeseen budget overruns and/or revenue shortfalls in the event that TI is unable to successfully complete and commercialize the projects. TI management is primarily responsible for estimating the value of the purchased R&D in all acquisitions accounted for under the purchase method. TI expects to essentially meet its original return expectations for the projects. 7
<TABLE> <CAPTION> Millions of Dollars - --------------------------------------------------------------------------------------------------------------------------------- Purchased Cost/time to complete Year in-process R&D projects cash flows Entity Acquisition Consid- Other Deferred R&D Appraisal R&D Discount ------------------ projected acquired date eration Goodwill intan- compen- charge method focus rate At At to begin gibles sation acquisition Mar. 2001 - -------- ----------- ------- -------- ------ -------- ------- --------- ---------- ---- ----------- ---------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Alantro Third $277 $148 $ 81 $ 32 $ 52 Exclusion Wireless 24% $4.1/ $6.5/260 2002 Commun- quarter approach networking 256 engineer ications, 2000 technology engineer months Inc. for home months and office Dot Third $467 $302 $ 46 $119 $ 60 Exclusion Architec- 20% $2.9/ Project 2003 Wireless, quarter approach ture for 172 completed Inc. 2000 third engineer generation months (3G) wire- less de- vices for delivering voice and high speed data to mobile users </TABLE> 8
<TABLE> <CAPTION> 11. The following is a reconciliation of individual restructuring accruals (in millions of dollars). Year of Charge --------------------------------------------------------------------- 2000 2001 --------------------------------- ---------------------------------- Balance, prior Voluntary SC SC actions -- primarily S&C SC and S&C E&PS retirement site international severance and business site restructuring severance program closing restructuring Description* Total divestiture related closing actions action in U.S. in U.S. actions - ------------ ----- ----------------------- ------- ------------- --------- --------- -------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE, DECEMBER 31, 2000. $ 70 $ 46 $ 11 $ 10 $ 3 CHARGES: Severance ................. 43 $ 11 $ 16 $ 16 Incremental depreciation... 5 5 Various charges ........... 4 4 DISPOSITIONS: Severance payments ........ (8) (2) (1) (1) (2) - (2) Non-cash asset charges (6) - - - (6) - Change in estimates........ (1) - (1) - - - ---- ---- ---- ---- ---- ---- ---- ---- BALANCE, MARCH 31, 2001 $107 $ 44 $ 10 $ 8 $ 1 $ 11 $ 19 $ 14 ==== ==== ==== ==== ==== ==== ==== ==== <FN> *Abbreviations SC = Semiconductor Business S&C = Sensors & Controls Business E&PS = Educational & Productivity Solutions Business </TABLE> 9
12. The company adopted SFAS No. 133 in the first quarter of 2001. The standard requires that all derivatives be marked-to-market on an ongoing basis. Along with the derivatives, underlying hedged items are also to be marked-to-market on an ongoing basis. The standard, which did not have a material impact on the company, was adopted effective January 1, 2001, on a cumulative basis. The cumulative effect of the accounting change on prior years was insignificant and is not separately presented. Following is a discussion of derivatives held by the company at March 31, 2001. Designated fair value hedge: the company has interest rate swaps that, with no ineffectiveness, 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. Other derivatives: the company uses short-term forward currency exchange contracts 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 U.S. dollar is the functional currency for financial reporting). At March 31, 2001, the company had forward currency exchange contracts outstanding, in millions of dollars, of $419 (including $122 to buy euros, $113 to sell yen and $46 to buy Taiwan dollars). The company uses short-term TI stock collars (cash settlement only) to minimize the adverse earnings impact from the effect of stock market value fluctuations on the portion of the company's deferred compensation obligations denominated in TI stock ($30 million at March 31, 2001). The company has several stock investment warrants considered derivatives. At March 31, 2001, their aggregate value was less than $0.5 million. 13. The $29 million cumulative effect of an accounting change in first quarter 2000 related to the company's adoption that year of Staff Accounting Bulletin No. 101 on revenue recognition. 10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Registrant (the "company" or "TI") announced first-quarter financial results that show revenue in the quarter was $2528 million, down 17 percent sequentially. Results were impacted by a combination of weak electronic end-equipment demand and excess customer inventories, resulting in reduced demand for its semiconductor products. Early in the first quarter, TI began an aggressive cost-reduction plan to limit the impact of reduced revenue on profitability. Actions have included a voluntary retirement program, shortened workweeks in some areas, and consolidation of certain manufacturing operations. Overhead costs were significantly reduced, maintaining selling, general and administrative expenses, excluding acquisition-related amortization and special charges, at the same percentage of revenue as in the fourth quarter. To further align the company's expenses with near-term revenue expectations, TI will lay off about 2,500, or 6 percent, of its employees worldwide. These reductions will begin in the second quarter and the company will take associated special charges at that time. Most of these job eliminations are in support functions and manufacturing. In total, these actions are expected to result in annualized savings of approximately $400 million when completed. SUMMARY OF FINANCIAL RESULTS For the first quarter of 2001, TI reported the following: - Total revenue for TI was $2528 million, down 8 percent from $2761 million in the year-ago quarter and down 17 percent sequentially due to weakness in semiconductor. - Cost of revenues in the first quarter was $1505 million, compared with $1420 million in the year-ago quarter. Cost of revenues increased primarily due to increased manufacturing overhead. - Research and development (R&D) totaled $446 million, up from $386 million in the first quarter of 2000 primarily due to increased investment in DSP and 300mm process technology. - Selling, general and administrative expense in the quarter was $348 million, down from $401 million in the year-ago quarter primarily due to reduced profit sharing and bonus accruals. The decrease was more than the total decrease in TI revenues, on a percentage basis. - Other income (expense) net decreased from $128 million in the first quarter of 2000 to $107 million in the first quarter of 2001, due to decreased net investment gains. - The income tax rate for the quarter was 28.2 percent. - TI orders in the first quarter were $1898 million, down from $2996 million in the year-ago quarter and $2772 million in the fourth quarter of 2000 due to weak electronic end-equipment demand and excess customer inventories. Results for this quarter include net special charges of $50 million, of which $11 million is severance cost for first-quarter employee acceptances under the U.S. voluntary retirement program (which covers the corporate, semiconductor and sensors & controls activities and expired April 16, 2001), $16 million is severance cost for restructuring actions in international semiconductor locations, mostly in Germany, and $25 million relates to the fourth-quarter 2001 closing of a semiconductor manufacturing facility in Santa Cruz, California. 11
For the first quarter of 2000, results include special charges of $29 million associated with actions including the closing of the sensors & controls manufacturing facility in Versailles, Kentucky, and TI's acquisition of Toccata Technology ApS. For the fourth quarter of 2000, the company recorded a pretax charge of $3 million for a severance action by the Educational & Productivity Solutions (E&PS) business affecting 51 jobs in Europe and the U.S. The company also recorded a charge of $9 million in the quarter for additional pooling of interests transaction costs from the third-quarter 2000 Burr-Brown Corporation acquisition. In the fourth quarter of 2000, TI recognized a gain of $88 million from the sale of its memory business. Gain recognition had previously been deferred pending repayment of the remaining TI-provided financing for the 1998 transaction, which occurred in the fourth quarter of 2000. TI also recognized a gain of $56 million from the sale of the materials portion of the Sensors & Controls business. In addition, TI recorded a $69 million credit to the provision for income taxes from the reduction of deferred tax valuation allowances, primarily in Japan. Additional information relating to these items appears below under the heading "Special Charges and Gains." OUTLOOK TI expects revenue to decline about 20 percent sequentially in the second quarter as semiconductor customers continue to work through excess inventories in an environment in which consumption of their electronic end-equipment products continues to be weak. Due to continuing uncertain economic conditions, it is unclear when demand for TI's semiconductor products will strengthen. Specifically, TI expects the following for the second quarter: - Revenue from semiconductor to decline sequentially, with weakness affecting almost all product areas; - Revenue from TI's non-semiconductor activities, including Sensors & Controls and E&PS, to increase sequentially, primarily reflecting seasonal retail stocking for back-to-school sales of calculators; - Operating margin to decline to about breakeven in the second quarter before the effect of special charges and amortization of acquisition-related intangibles as a result of lower revenue; and - Non-operating income to decline to about $40 million sequentially due to reduced investment gains and interest income. For 2001, TI expects the following: - R&D of $1.6 billion, excluding acquisition-related amortization and purchased in-process R&D, down from the prior estimate of $1.7 billion; - Capital expenditures of $1.8 billion, down from the prior estimate of $2.0 billion; - Depreciation of $1.5 billion, unchanged from the prior estimate; and - Amortization of acquisition-related costs of $240 million. 12
SEMICONDUCTOR Semiconductor revenue in the first quarter was $2176 million, down from $2387 million in the same period in 2000 and $2695 million in the fourth quarter of 2000 due to weak demand across a breadth of products. Semiconductor operating profit for the first quarter was $304 million, or 14.0 percent of revenue, compared with $612 million in the year-ago period and $679 million in the fourth quarter of 2000, primarily due to reduced product revenue and, to a lesser extent, lower royalties. Analog revenue was up 2 percent from the year-ago period, and declined 17 percent sequentially due to lower shipments. DSP revenue decreased 28 percent from the same quarter a year ago and 21 percent sequentially due to lower shipments. Analog and DSP comprised about 65 percent of TI's semiconductor revenue. TI's remaining semiconductor revenue decreased from the year-ago quarter and from the fourth quarter of 2000. TI's semiconductor revenue in TI's key markets was as follows: - wireless declined 34 percent compared with the year-ago quarter and 25 percent sequentially; - catalog products, which includes DSP and high-performance Analog, increased 4 percent from the year-ago quarter and declined 15 percent sequentially; and - broadband communications, which includes digital subscriber lines (DSL) and cable modems, was more than six times that of the year-ago quarter and increased 15 percent sequentially, driven by strength in DSL which grew more than 50 percent sequentially. Semiconductor orders were down 42 percent from the year-ago quarter and 39 percent sequentially, reflecting weakness across almost all product areas. SENSORS & CONTROLS Sensors & Controls revenue was $260 million, about even with the year-ago quarter. Sequentially, revenue increased 4 percent due to seasonal gains in control products. Operating profit was $51 million, or 19.5 percent of revenue, compared with $52 million in the year-ago quarter. Operating profit increased 20 percent from $42 million in the fourth quarter of 2000 due to lower production costs. EDUCATIONAL & PRODUCTIVITY SOLUTIONS (E&PS) E&PS revenue was $81 million, compared with $79 million in the year-ago quarter. Sequentially, revenue increased 23 percent as sales growth resumed following fourth-quarter inventory adjustments in the retail channel. Operating profit was $17 million, or 21.2 percent of revenue, up from $8 million in the year-ago quarter due to higher gross margin. Operating profit almost tripled from $6 million in the fourth quarter of 2000 primarily due to increased revenue. ADDITIONAL FINANCIAL INFORMATION During the first three months of 2001, cash and cash equivalents plus short-term investments decreased by $914 million to $3089 million, primarily due to capital expenditures. 13
Cash flow from operating activities was $119 million for the quarter. Capital expenditures totaled $900 million in the first quarter of 2001 versus $647 million in the year-ago quarter. Depreciation for the first quarter of 2001 was $339 million, excluding the acceleration of depreciation associated with the fourth quarter closing of a semiconductor manufacturing facility in Santa Cruz, California, versus $262 million in the year-ago quarter. At the end of quarter, the debt-to-total-capital ratio was 0.09, versus 0.10 at the end of 2000. SPECIAL CHARGES AND GAINS First Quarter of 2001 In the first quarter of 2001, pretax charges of $50 million net were taken, of which $11 million was for severance cost for 241 first-quarter employee acceptances under the U.S. voluntary retirement program (which covers the corporate, semiconductor and sensors & controls activities and expired April 16, 2001), $16 million was for severance cost for restructuring actions affecting 261 employees in international semiconductor locations, mostly in Germany, and $25 million relates to the fourth-quarter 2001 closing of a semiconductor manufacturing facility in Santa Cruz, California. Of the $25 million charge, $16 million was for severance cost for 600 employees and $5 million was for acceleration of depreciation over the remaining service life of the facility. Of the $50 million of net special charges, $44 million was an increase in cost of revenues, $7 million in selling, general and administrative expense, $2 million in research and development expense, and $3 million in other income. As of March 31, 2001, $2 million of the aggregate severance cost obligations had been paid. In total, these first-quarter actions, plus other actions affecting the second quarter discussed herein, are expected to result in annualized savings of approximately $400 million when completed. Fourth Quarter of 2000 In the fourth quarter of 2000, TI recognized a gain of $88 million from the sale of its memory business. Gain recognition had previously been deferred pending repayment of the remaining TI-provided financing for the 1998 transaction, which occurred in the fourth quarter of 2000. TI also recognized a gain of $56 million from the sale of the materials portion of the Sensors & Controls business. In the fourth quarter of 2000, TI recorded a $69 million credit to the provision for income taxes from the reduction of deferred tax valuation allowances, primarily in Japan. The company also recorded a pretax charge of $3 million, included in selling, general and administrative expense, for a severance action by E&PS affecting 51 jobs in Europe and the U.S. As of March 31, 2000, $2 million of the severance costs had been paid. The primary benefit from this action is reduced personnel costs, which are estimated to reach $6 million annually. The benefit began in the first quarter of 2001. The company also recorded a charge of $9 million in the quarter for additional pooling of interests transaction costs from the third-quarter 2000 Burr-Brown Corporation acquisition ($5 million included in selling, general and administrative expense and $4 million in cost of revenues). First Quarter of 2000 In the first quarter of 2000, pretax charges of $29 million were taken, associated with actions including the closing of the sensors & controls 14
manufacturing facility in Versailles, Kentucky, and TI's acquisition of Toccata Technology ApS. Of the $29 million charge, $12 million was for severance for the elimination of 480 jobs in Kentucky. Of the $29 million, $20 million is included in cost of revenues, $6 million in selling, general and administrative expense and $3 million in research and development. The primary benefit from the Kentucky action is reduced personnel costs, which are estimated to reach $10 million annually. The benefit began in the fourth quarter of 2000. As of March 31, 2001, $2 million of the severance cost had been paid. Purchased In-Process R&D Charges Acquisition-related purchased in-process R&D charges were zero in the first quarter of 2001 and $3 million in the first quarter of 2000. These charges are for R&D from business purchase acquisitions. Values for acquired in-process R&D (purchased R&D) were determined at the acquisition date based upon the appraised value of the related developmental projects. Purchased R&D projects were assessed, analyzed and valued within the context and framework articulated by the Securities and Exchange Commission herein described as the Exclusion Approach. Major assumptions, detailed in the following table, used in determining the value of significant purchased R&D included the discount rate, the estimated beginning date of projected operating cash flows, and the remaining cost and time, in engineer-months, to complete the R&D projects. The term "engineer month" refers to the average amount of research work expected to be performed by an engineer in a month. The relative stage of completion and projected operating cash flows of the underlying in-process projects acquired were the most significant and uncertain assumptions utilized in the valuation analysis of the purchased R&D. Such uncertainties could give rise to unforeseen budget overruns and/or revenue shortfalls in the event that TI is unable to successfully complete and commercialize the projects. TI management is primarily responsible for estimating the value of the purchased R&D in all acquisitions accounted for under the purchase method. TI expects to essentially meet its original return expectations for the projects. 15
<TABLE> <CAPTION> Millions of Dollars - --------------------------------------------------------------------------------------------------------------------------------- Purchased Cost/time to complete Year in-process R&D projects cash flows Entity Acquisition Consid- Other Deferred R&D Appraisal R&D Discount ------------------ projected acquired date eration Goodwill intan- compen- charge method focus rate At At to begin gibles sation acquisition Mar. 2001 - -------- ----------- ------- -------- ------ -------- ------- --------- ---------- ---- ----------- ---------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Alantro Third $277 $148 $ 81 $ 32 $ 52 Exclusion Wireless 24% $4.1/ $6.5/260 2002 Commun- quarter approach networking 256 engineer ications, 2000 technology engineer months Inc. for home months and office Dot Third $467 $302 $ 46 $119 $ 60 Exclusion Architec- 20% $2.9/ Project 2003 Wireless, quarter approach ture for 172 completed Inc. 2000 third engineer generation months (3G) wire- less de- vices for delivering voice and high speed data to mobile users </TABLE> 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. Information concerning market risk is contained on pages B-43 and B-44 of the Registrant's proxy statement for the 2001 annual meeting of stockholders and is incorporated by reference to such proxy statement. PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits Designation of Exhibits in This Report Description of Exhibit -------------- ----------------------------- 11 Computation of Basic and Diluted Earnings Per Common and Dilutive Potential Common Share 12 Computation of Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K. None. "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; - - TI's ability to compete in products and prices in an intensely competitive industry; - - TI's ability to maintain and enforce a strong intellectual property portfolio and obtain needed licenses from third parties; - - Timely completion and successful integration of announced acquisitions; - - Global economic, social and political conditions in the countries in which TI and its customers and suppliers operate, including fluctuations in foreign currency exchange rates; - - Losses or curtailments of purchases from key customers; 17
- - TI's ability to recruit and retain skilled personnel; and - - Availability of raw materials and critical manufacturing equipment. For a more detailed discussion of these factors, see the text under the heading "Cautionary Statements Regarding Future Results of Operations" in Item 1 of the company's most recent Form 10-K. The forward-looking statements included in this Form 10-Q are made only as of the date of this Form 10-Q and the company undertakes no obligation to update the forward-looking statements to reflect subsequent events or circumstances. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEXAS INSTRUMENTS INCORPORATED BY: /s/ WILLIAM A. AYLESWORTH ________________________________ William A. Aylesworth Senior Vice President, Treasurer and Chief Financial Officer Date: April 26, 2001 18