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.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2005
For the transition period from to
Commission File Number 001-03761
TEXAS INSTRUMENTS INCORPORATED
(Exact name of Registrant as specified in its charter)
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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
1,662,164,848
Number of shares of Registrant’s common stock outstanding as of
March 31, 2005
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Income
(In millions, except per-share amounts)
Net revenue
Operating costs and expenses:
Cost of revenue
Research and development
Selling, general and administrative
Total
Profit from operations
Other income (expense) net
Interest on loans
Income before income taxes
Provision for income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
Average shares outstanding, basic
Average shares outstanding, diluted
Cash dividends declared per share of common stock
See accompanying notes.
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Consolidated Statements of Comprehensive Income
(In millions)
Accumulated other comprehensive income (loss):
Minimum pension liability adjustment:
Adjustment (net of tax benefit (expense) of ($5) and $1)
Changes in available-for-sale investments:
Adjustment (net of tax benefit (expense) of $5 and $2)
Reclassification of recognized transactions (net of tax benefit (expense) of $0 and ($3))
Total comprehensive income
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Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances for customer adjustments and doubtful accounts of $42 million in 2005 and $41 million in 2004
Inventories:
Raw materials
Work in process
Finished goods
Inventories
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment at cost
Less accumulated depreciation
Property, plant and equipment (net)
Equity and debt investments
Goodwill
Acquisition-related intangibles
Capitalized software licenses, net
Prepaid retirement costs
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Loans payable and current portion long-term debt
Accounts payable and accrued expenses
Income taxes payable
Accrued profit sharing and retirement
Total current liabilities
Long-term debt
Accrued retirement costs
Deferred credits and other liabilities
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: 2005 – 1,738,491,029; 2004 – 1,738,156,615
Paid-in capital
Retained earnings
Less treasury common stock at cost:
Shares: 2005 – 76,326,181; 2004 – 20,041,497
Minimum pension liability
Unrealized holding gains (losses) on investments
Unearned compensation
Total stockholders’ equity
Total liabilities and stockholders’ equity
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Consolidated Statements of Cash Flows
Mar. 31,
2005
2004
Cash flows from operating activities:
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation
Amortization of acquisition-related costs
Writedowns of equity investments
Gains on sales of equity and debt investments
Gains on sales of assets
(Increase) decrease in:
Accounts receivable
Noncurrent accrued retirement costs
Other
Net cash provided by operating activities
Cash flows from investing activities:
Additions to property, plant and equipment
Sales of assets
Purchases of cash investments
Sales and maturities of cash investments
Purchases of equity investments
Sales of equity and debt investments
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Payments on loans payable
Dividends paid on common stock
Sales and other common stock transactions
Common stock repurchases
Net cash used in financing activities
Effect of exchange rate changes on cash
Net decrease in cash and cash equivalents
Cash and cash equivalents, January 1
Cash and cash equivalents, March 31
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Notes to Financial Statements
For further information, refer to the consolidated financial statements and footnotes thereto included in Texas Instruments Incorporated’s annual report on Form 10-K for the year ended December 31, 2004.
Basic EPS
Dilutives:
Stock option and compensation plans
Diluted EPS
Options granted under the Company’s non-qualified stock option plans have 10-year terms and generally vest over a four year service period from the date of grant.
Based on recent clarifications that affect the Company’s previous interpretation of the timing of expense recognition under SFAS No. 123 for certain retirement eligible recipients of stock option awards, the Company reduced the attribution period it used for certain grants to recognize fair value-based compensation expense for pro forma footnote disclosure purposes for stock option recipients who are retirement eligible or become retirement eligible following the grant of the awards. Such compensation expense for active, retirement eligible employees will now be recognized over a six-month period, and for active, non-retirement eligible employees, over the shorter of the period from grant date to the date they become retirement eligible (not less than the six month required service period) or the normal four year vesting period. Prior to 2005, the Company recognized fair value-based compensation expense for inclusion in its pro forma footnote disclosures generally over the original four year vesting period of each award for all employees, including those who were or became eligible to retire.
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The pro forma disclosures for the quarter ended March 31, 2005 set forth below include $94 million ($0.05 per share) as an inception-to-date adjustment of fair value based compensation expense for both retirement eligible employees and employees who became retirement eligible since the date of grants, to reflect the reduced attribution period.
Net income, as reported (in millions)
Add: Stock-based employee compensation expense included in reported net income, net of ($2) and ($2) tax
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of $38 and $52 tax
Deduct: Adjustment for retirement-eligible employees, net of $50 tax
Adjusted net income
Earnings per common share:
Basic – as reported
Basic – as adjusted
Diluted – as reported
Diluted – as adjusted
Non-U.S.
Pension
For the three months ended March 31,
Service cost
Interest cost
Expected return on assets
Amortization of prior service cost
Amortization of net (gain)/loss
Net periodic benefit cost
Settlement and curtailment (gains)/losses and special termination benefit costs were not significant for any of the periods presented.
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Sensors & Controls Restructuring Action: In the second quarter of 2003, the Company announced a plan to move certain production lines from Attleboro, Massachusetts, to other TI sites in order to be geographically closer to customers and their markets and to reduce manufacturing costs. This restructuring action is expected to affect about 920 jobs through voluntary retirement and involuntary termination programs, primarily in manufacturing operations at the Attleboro headquarters of the Sensors & Controls business. The total cost of this restructuring action is expected to be about $70 million. As of March 31, 2005, a total of 656 employees have been terminated and total net pretax charges of $58 million have been recorded associated with this action. The remaining charges are expected to be completed in 2006.
In the first quarter of 2005, the Company recorded net pretax charges of $5 million, primarily for severance costs. Of the $5 million, $4 million is included in cost of revenue and $1 million is included in selling, general and administrative expense.
During the first quarter of 2004, the Company recorded net pretax charges of $3 million, primarily for severance and benefit costs.
Semiconductor Restructuring Action: In the second quarter of 2003, the Company announced a restructuring action for the Semiconductor manufacturing operations in the U.S. and international locations, as those operations continued to become more productive with fewer people. During the first quarter of 2004, the Company recorded net pretax charges of $2 million, primarily for severance and benefit costs. This action was completed in the first quarter of 2005 with a total of 897 terminated employees and a total net pretax cost of $82 million. As of March 31, 2005, all affected employees have been terminated and a balance of $8 million of severance and benefit costs remains to be paid through 2011.
Prior Years’ Restructuring Programs
As of March 31, 2005, all employees associated with restructuring actions taken in earlier periods have been terminated and a balance of $16 million of severance and benefit costs remains to be paid through 2008. The extended payment dates reflect the requirements of various foreign government regulations for benefits due to terminated employees.
The following is a reconciliation of the above-mentioned restructuring accruals.
Description*
BALANCE DEC. 31, 2004
CHARGES:
Severance charges
DISPOSITIONS:
Severance payments
BALANCE MARCH 31, 2005
Note: All charges/dispositions are cash items unless otherwise noted.
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Business segment information follows (in millions of dollars):
Business Segment Net Revenue
Semiconductor
Trade
Intersegment
Sensors & Controls
Educational & Productivity Solutions
Corporate activities
Total net revenue
Business Segment Profit (Loss)
Charges/gains and acquisition-related amortization
Charges/gains and acquisition-related amortization in the first quarter of 2005 includes a gain of $23 million due to the disposition of a sales facility and, to a lesser extent, the sale of assets associated with the Company’s commodity liquid crystal display (LCD) driver product line.
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In October 2004 the President signed a new tax law, the American Jobs Creation Act of 2004 (the “Jobs Creation Act”), which creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations.
As of March 31, 2005, the Company was not in a position to decide on whether, and to what extent, foreign earnings that have not yet been remitted to the U.S. may be repatriated. Based on analysis to date, however, it is reasonably possible that the Company may repatriate some amount up to $1.6 billion, with the respective tax liability ranging up to $0.2 billion. The Company’s analysis was based on the statute as currently enacted. Technical corrections, clarifications and regulations related to the statute could impact the Company’s estimate of the tax liability associated with the repatriation.
The Company has investments in certain venture capital funds. TI has committed to provide additional capital to those funds. As appropriate investments are entered into, the venture capital general partners may draw upon those committed funds from TI. As of March 31, 2005, TI may be required to provide an additional $33 million when the committed funds are called by the venture capital funds’ general partners.
The Company routinely sells products with a limited intellectual property indemnification included in the terms of sale. Historically, the Company has had only minimal and infrequent losses associated with these indemnities. Consequently, any future liabilities brought about by the intellectual property indemnities cannot reasonably be estimated or accrued for.
The Company accrues for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability, and historically the Company has experienced a low rate of payments on product claims. Consistent with general industry practice, the Company enters formal contracts with certain customers in which the parties
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define warranty remedies. Typically, the Company’s warranty for semiconductor products covers three years, an obligation to repair, replace or refund, and a maximum payment obligation tied to the price paid for the Company’s products. In some cases, product claims may be disproportionate to the price of the Company’s products.
The Company is subject to various legal and administrative proceedings. Although it is not possible to predict the outcome of these matters, the Company believes that the results of these proceedings will not have a material adverse effect upon its financial condition, results of operations or liquidity.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this document.
Overview
Texas Instruments makes, markets and sells high-technology components; more than 30,000 customers all over the world buy our products. We have three separate business segments: 1) Semiconductor; 2) Sensors & Controls; and 3) Educational & Productivity Solutions. Semiconductor is by far the largest of these business segments. It accounted for over 85 percent of our revenue in 2004, and historically it averages a higher growth rate than the other two business segments, although the semiconductor market is characterized by wide swings in growth rates from year to year. We were the world’s third-largest semiconductor company in 2004 in terms of revenue, according to Gartner, Inc., an industry analyst.
In our Semiconductor segment, we focus primarily on technologies that make it possible for a variety of consumer and industrial electronic equipment to process both analog and digital signals in real time. These technologies are known as analog semiconductors and digital signal processors, or DSPs, and together they account for about three-fourths of our Semiconductor revenue. Almost all of today’s digital electronic equipment requires some form of analog or digital signal processing.
Analog semiconductors process “real world” inputs, such as sound, temperature, pressure and visual images, conditioning them, amplifying them and converting them into digital signals. They also assist in the management of power distribution and consumption, aspects critical to today’s portable electronic devices. Generally, analog products require less capital-intensive factories to manufacture than digital products.
Our analog semiconductors consist of custom products and standard products. Custom products are designed for specific applications for specific customers. Standard products include application-specific standard products (designed for a specific application and usable by multiple customers) and high-performance standard catalog products (usable in multiple applications by multiple customers). These standard products are characterized by differentiated features and specifications, as well as relatively high margins. Standard analog products tend to have long life spans. Many custom and standard products are proprietary and difficult for competitors to imitate. Analog products also include commodity products, which are sold in high volume and into a broad range of applications, and generally are differentiated by price and availability. We are one of the world’s largest suppliers of analog semiconductors.
DSPs use complex algorithms and compression techniques to alter and improve a data stream. These products are ideal for applications that require precise, real-time processing of real-world analog signals that have been converted into digital form. Their power efficiency is important for battery-powered devices.
Our DSPs include both custom and standard products. Custom products are designed for specific applications (such as wireless cell phones, very fast modems that connect users to the Internet via cable or phone lines, or consumer electronics such as digital music players and digital
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cameras). Standard products are sold into a broad range of applications, and like custom products, are difficult for competitors to imitate. We are the world’s largest supplier of DSPs.
In addition to analog semiconductors and DSPs, Digital Light Processing™ (DLP™) products have become strong contributors to our Semiconductor segment. DLP products are micro-electromechanical systems that use optical semiconductors to digitally manipulate light. In 2004, DLP products accounted for more than 5 percent of TI’s revenue.
We own and operate semiconductor manufacturing sites in the Americas, Japan, Europe and Asia. During 2004, we broke ground on a new semiconductor manufacturing complex in Texas. We plan to construct the building and infrastructure ahead of market demand, followed by stages of equipment installation as demand increases. When completed, the new facility will build some of the world’s most advanced semiconductor devices on 300-millimeter wafers.
Our facilities require substantial investment to construct and are largely fixed-cost assets once in operation. Because we own most of our manufacturing capacity, a significant portion of our operating costs are fixed. In general, these costs do not decline with reductions in customer demand or our utilization of our manufacturing capacity, and can adversely affect profit margins as a result. Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over increased output, which should improve profit margins.
As part of our manufacturing strategy, we outsource a portion of our product manufacturing to outside suppliers (foundries and assembly/test subcontractors), which reduces the amount of capital expenditures and subsequent depreciation required to meet customer demands, as well as fluctuations in profit margins. Outside foundries provided about 20 percent of our total capacity needs in 2004.
The semiconductor market is characterized by constant and typically incremental innovation in product design and manufacturing technologies. We make significant investments in research and development (R&D). Products resulting from our R&D investments in the current period did not contribute materially to revenue in that period, but should benefit us in future years. In general, new semiconductor products are shipped in limited quantities initially, and will then ramp into high volumes over time. Prices and manufacturing costs tend to decline over time as products and technologies mature.
In our Sensors & Controls segment, products include sensors, electrical and electronic controls, and radio frequency identification (RFID) systems. Our primary markets are automotive and industrial. Other targeted markets include heating, ventilation, air conditioning, refrigeration and industrial control systems. This business segment represented about 10 percent of our revenue in 2004.
Our Educational & Productivity Solutions (E&PS) segment is a leading supplier of graphing handheld calculators. It also provides our customers with business and scientific calculators and a wide range of advanced classroom tools and professional development that enables students and teachers to interactively explore math and science. Our products are marketed primarily through retailers and to schools through instructional dealers. This business segment represented about 5 percent of our revenue in 2004.
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Profit sharing accruals in 2005 will be lower than in 2004. In 2005, payments under the TI employee profit sharing plan are determined using a different formula than was used in 2004. The 2005 plan provides for profit sharing to be paid based solely upon our operating margin for the full calendar year. Under the new plan, a minimum threshold of 10 percent operating margin must be achieved before any profit sharing is paid. Profit sharing at 10 percent operating margin will be 2 percent of eligible payroll. The maximum amount of profit sharing available under the plan will be 20 percent of eligible payroll, and will only be paid when our operating margin meets or exceeds 35 percent for a full calendar year. We will continue to accrue profit sharing based on how we expect the Company to perform for the year in total. The accrual in a given quarter is based on our expectations at that time as to annual performance. The profit-sharing accrual is included in cost of revenue, research and development (R&D) expense, and selling, general and administrative (SG&A) expense.
We operate in a number of tax jurisdictions and are subject to several types of taxes including income, property, payroll and sales and other transactional taxes. The timing of the final determination of our tax liabilities varies among these jurisdictions and their taxing authorities. As a result, during any particular reporting period, we might reflect (in either income before income taxes, the provision for income taxes or both) one or more tax refunds or assessments, or changes to tax liabilities, involving one or more of the taxing authorities.
First Quarter 2005 Results
TI’s first-quarter 2005 revenue was $2972 million, about even with the year-ago period. Sequentially, revenue decreased 6 percent as gains in our Sensors & Controls and E&PS businesses were more than offset by an expected decline in our Semiconductor business.
Sequentially, our gross and operating profit margins increased despite the decline in revenue. Our gross profit margin expanded 2.6 percentage points to 44.9 percent of revenue, and our operating margin increased 1.3 percentage points to 16.7 percent of revenue.
TI inventories declined slightly from the fourth quarter of 2004, a period in which they were reduced by $100 million. Having adjusted inventories to desired levels during the fourth quarter, we increased production in our Semiconductor factories in the first quarter to realign factory output with our shipments.
Earnings per share (EPS) were $0.24 in the first quarter.
We started 2005 with stronger profit performance despite a slower semiconductor market environment. This improved profitability, in a quarter where revenue declined sequentially, was primarily due to, in decreasing order, higher utilization of our owned factories, lower manufacturing costs and lower operating expenses.
However, the market environment is improving. We believe that the inventory correction in our standard semiconductor products at distributors that began in the third quarter of 2004 is complete, as demonstrated by sequential growth in revenue and orders for these products. We expect that the inventory correction associated with our DLP semiconductor products used in high-definition televisions and projectors will continue into the second quarter of 2005, although the rate of reductions should subside.
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While the overall environment for cell phones will likely support a lower growth rate than last year, we continue to have high expectations for our wireless performance in 2005. In the first quarter, our wireless revenue grew 15 percent from a year ago and declined 14 percent sequentially following a strong fourth quarter. Recent market reports have confirmed that we are the world’s top provider of semiconductors used in the wireless market, and we expect to gain additional share this year in the fast-growing market for third-generation universal mobile telecommunications system (3G UMTS) modems based on the strength of our DSPs.
We continued to repurchase our common stock during the first quarter, and are now more than halfway through the $3 billion of repurchase plans announced in September 2004 and January 2005.
A separate discussion of operating results by segment is presented below.
Statements of Income – Selected Items
Mar. 31
Dec. 31
Revenues by segment:
E&PS
Intercompany elimination and other
Gross profit
Gross profit % of revenue
Research and development (R&D)
R&D % of revenue
Selling, general and administrative (SG&A)
SG&A % of revenue
Operating profit % of revenue
Details of Financial Results
In the first quarter, our gross profit of $1336 million was about even sequentially. Compared with a year ago, gross profit increased $14 million, reflecting higher gross profit in E&PS and a gain on the sale of assets associated with our commodity liquid crystal display (LCD) driver product line.
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Research and development (R&D) expense of $495 million, or 16.6 percent of revenue, increased $8 million sequentially due to higher Semiconductor product development expenses. Compared with the year-ago period, R&D expense was about even as lower expenses offset higher Semiconductor product development expenses.
Selling, general and administrative (SG&A) expense of $344 million, or 11.6 percent of revenue, decreased $19 million sequentially and $10 million from a year ago due to the gain recognized on the disposition of a sales facility and, to a lesser extent, lower expenses.
Operating profit of $497 million, or 16.7 percent of revenue, increased $13 million sequentially due to lower SG&A expenses and, to a lesser extent, higher gross profit. Operating profit increased $23 million from a year ago due to higher gross profit and, to a lesser extent, lower SG&A expenses.
Other income (expense) net (OI&E) of $48 million decreased $38 million sequentially primarily due to the impact in the previous quarter of a partial settlement of matters related to grants from the Italian government regarding our former memory business operations and equally, the resolution in that quarter of an open sales-tax item associated with the company’s previously divested defense electronics business. Compared with the year ago period, OI&E decreased $2 million.
The estimated annual and quarterly effective tax rate for the first quarter was 24 percent. This compares to the previous quarter’s annual rate of 23 percent and quarterly effective tax rate of 14 percent that included a cumulative catch-up reduction in tax expense. The effective tax rate in the year-ago quarter was 29 percent. The primary reason the effective annual tax rate for 2005 differs from the 35 percent statutory corporate tax rate is the effect of non-U.S. tax rates and, to a lesser extent, various tax benefits such as the credits for export sales and research activities. The decline in the estimated annual tax rate in 2005 versus the estimated rate used in last year’s first quarter is primarily due to an increase in estimated effect of non-U.S. taxes and, to a lesser extent, the benefits of credits for export sales and research activities.
Our first quarter financial statements are presented based upon the tax laws in effect as of March 31, 2005. At that time, it was our intention to continue to indefinitely reinvest a portion of our undistributed earnings of non-U.S. subsidiaries and, accordingly, no deferred U.S. tax liability has been recorded in connection therewith. On October 22, 2004, The American Jobs Creation Act of 2004 (the Jobs Creation Act) was signed into law. One of the provisions of the Jobs Creation Act allows a corporation to claim a special tax deduction for certain qualifying earnings that are repatriated from non-U.S. subsidiaries during a one-year qualifying period. This special deduction will have the effect of substantially reducing the U.S. tax rate applicable to non-U.S. subsidiary earnings that are repatriated and eligible for this benefit. We are currently studying the new rules under the Jobs Creation Act to determine the extent to which we might decide to increase the level of repatriation of non-U.S. earnings and elect to apply the reduced rate of U.S. tax to such earnings. See Note 7 to the financial statements for additional discussion.
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Orders of $3028 million increased $84 million sequentially primarily due to seasonally higher demand for E&PS graphing calculators as well as higher demand for Sensors & Controls products. Compared with a year ago, orders decreased $203 million due to lower demand for Semiconductor products.
In the first quarter, Semiconductor revenue of $2597 million decreased $201 million sequentially primarily due to lower shipments resulting from decreased demand for wireless products, and to a lesser extent, DLP products. Compared with a year ago, revenue was about even as higher shipments in wireless were offset by declines in shipments in most other product areas.
Wireless revenue decreased 14 percent sequentially, primarily due to seasonality. The sequential trend was generally consistent across all handset technologies—2G, 2.5G and 3G. Wireless revenue grew 15 percent from a year ago as growth in the advanced 2.5G and 3G technologies more than offset a decline in 2G revenue.
As mentioned above, we sold the assets associated with our commodity LCD driver product line in the first quarter. In 2004, this product line averaged about $50 million of revenue per quarter and, prior to its sale, contributed $39 million in revenue in the first quarter of 2005.
Analog revenue decreased 3 percent sequentially primarily due to lower shipments resulting from decreased demand from wireless customers. Compared with a year ago, analog revenue decreased 8 percent due to lower shipments resulting from broad-based declines in demand. High-performance analog revenue increased 5 percent sequentially reflecting the completion of distributor inventory reductions during the quarter and declined 2 percent from the year-ago quarter, a quarter in which distributors were building inventory.
DSP revenue decreased 12 percent sequentially and grew 16 percent compared with a year ago, in both cases due to changes in shipments resulting from changing demand from wireless customers.
Our remaining Semiconductor revenue decreased 6 percent sequentially due to reductions of excess inventory at TI’s DLP product customers. This decrease more than offset growth in revenue from increased shipments of commodity standard logic products, microcontrollers and RISC microprocessors. Compared with a year ago, this revenue declined 4 percent due to lower DLP and commodity standard logic revenue as a result of lower shipments caused by decreased demand, which more than offset growth in microcontrollers and RISC microprocessors.
Royalties of about $130 million were even sequentially. For the remainder of 2005, we expect royalty revenue to initially decrease and then remain flat at about $100 million per quarter.
Gross profit for the first quarter was $1189 million, or 45.8 percent of revenue. Gross profit declined $17 million sequentially, as a combination of lower expenses and higher utilization of manufacturing assets mostly offset the impact of lower revenue. Having completed a significant inventory reduction in the fourth quarter of 2004, we increased first-quarter factory loadings to realign factory output with shipment levels, resulting in higher utilization levels. Compared with a year ago, gross profit was about even as lower expenses and (to a lesser extent) the impact of higher shipments offset the effect of lower factory utilization.
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Operating profit for the first quarter was $460 million, or 17.7 percent of revenue, down $18 million sequentially due to lower gross profit. Compared with a year ago, operating profit was about the same.
Semiconductor orders of $2567 million were about even sequentially as lower demand for wireless and DLP products offset gains in most other areas. Compared with a year ago, orders decreased 9 percent as growth in demand for wireless products was more than offset by declines in most other product areas.
Sensors & Controls revenue was a quarterly record of $296 million, up $19 million sequentially and $12 million from the year-ago period due to higher shipments resulting from increased demand for sensor products.
Gross profit was $106 million, or 35.8 percent of revenue, up $7 million sequentially primarily due to higher revenue. Compared with a year ago, gross profit decreased $4 million due to price reductions, primarily for automotive sensor products.
Operating profit was $69 million, or 23.2 percent of revenue, up $7 million sequentially and down $6 million from a year ago primarily due to gross profit.
Orders of $312 million increased $38 million sequentially and $10 million from the year-ago quarter. Both increases are primarily attributable to increased demand for sensor products.
Educational & Productivity Solutions (E&PS)
E&PS revenue was $82 million, up $2 million from the prior quarter and $3 million from a year ago.
Gross profit was $44 million, or 54.2 percent of revenue, up $2 million sequentially due to higher revenue, and $7 million from a year ago due to lower manufacturing costs.
Operating profit was $20 million, or 24.1 percent of revenue, up $4 million sequentially due to the combination of higher gross profit and lower SG&A expenses. Compared with a year ago, operating profit increased $11 million primarily due to higher gross profit.
Orders of $151 million increased $72 million sequentially due to seasonal demand for graphing calculators. Compared with a year ago, E&PS orders increased $31 million due to some customers accelerating to the first quarter their annual back-to-school orders.
Financial Condition
At the end of the first quarter, total cash (cash and cash equivalents plus short-term investments plus long-term cash investments) was $5140 million, a decrease of $1218 million from the end of the previous quarter and a decrease of $353 million from the end of the year-ago period. During the quarter, we used $1493 million in cash to repurchase 58 million shares of our common stock. We are continuing the stock repurchase programs in the second quarter.
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Capital expenditures in the first quarter of $277 million increased by $66 million sequentially and decreased by $124 million from a year ago.
Depreciation in the first quarter of $347 million decreased $43 million sequentially and $1 million from the year-ago period.
Accounts receivable at the end of the first quarter of $1696 million were the same as at the end of the previous quarter. Accounts receivable increased $18 million from the end of the year-ago quarter due to higher sales. Days sales outstanding were 51 at the end of the first quarter compared with 48 at the end of the previous quarter and 51 at the end of the year-ago quarter.
Inventories of $1245 million at the end of the first quarter declined $11 million from the end of the previous quarter. Compared with the end of the year-ago quarter, inventories increased $97 million due to inventories we built in the first three quarters of 2004 to increase our ability to quickly deliver products to customers. Days of inventory at the end of the first quarter were 69, up from 62 days at the end of the previous quarter and 64 days at the end of the year-ago period.
Liquidity and Capital Resources
Cash flow from operations in the first quarter of $523 million increased $130 million from the year-ago quarter primarily due to changes in accounts receivable and in inventory, partially offset by the payment of employee profit sharing for 2004 performance.
Net cash provided by investing activities was $149 million for the first quarter of 2005, compared with $427 million used in investing activities for the same period a year ago. Increases in net cash flows from purchases, sales and maturities of cash investments totaled $421 million, which was used to support stock repurchase programs. Additions to property, plant and equipment of $277 million were $124 million lower than in the first quarter of 2004, when expenditures were being made primarily to increase assembly and test capacity and for semiconductor equipment used in 90-nanometer wafer fabrication.
For the first three months of 2005, net cash used in financing activities was $1479 million compared with $168 million in the year-ago period, reflecting our repurchase of a larger number of shares of TI common stock. We used $1493 million of cash to repurchase 58 million shares of common stock in the first quarter of 2005, compared with $172 million used to repurchase 5.6 million shares of common stock in the year-ago period. Also, we paid a total of $43 million in dividends on our common stock in the first quarter of 2005 compared with $37 million in the year-ago quarter. The dividend rate was increased in the third quarter of 2004 and dividends were first paid at the new rate in the following quarter.
We believe we have the necessary financial resources to fund our working capital needs, capital expenditures, authorized stock repurchases, dividend payments and other business requirements for at least the next 12 months.
For 2005, we continue to expect: R&D to be about $2.1 billion, capital expenditures to be about $1.3 billion and depreciation to be about $1.4 billion. The effective tax rate for the year is expected to be about 24 percent, unchanged from the prior estimate. This tax rate does not include any impact related to the expensing of stock options under the Financial Accounting Standards Board’s Statement 123(R), which we expect
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to implement in the third quarter of 2005. In addition, this outlook does not reflect the impact of any potential repatriation of cash under the Jobs Creation Act.
Change in Accounting Standards
See Notes 3 and 9 to the Financial Statements for detailed information regarding the status of new accounting standards that are not yet effective for TI.
Restructuring Actions and Other Items
Sensors & Controls Restructuring Action: In the second quarter of 2003, we announced a plan to move certain production lines from Attleboro, Massachusetts, to other TI sites in order to be geographically closer to customers and their markets and to reduce manufacturing costs. This restructuring action is expected to affect about 920 jobs through voluntary retirement and involuntary termination programs primarily in manufacturing operations at the Attleboro headquarters of the Sensors & Controls business. The total cost of this restructuring action is expected to be about $70 million, primarily for severance and benefit costs. When completed at the end of 2006, the projected savings from this restructuring action are estimated to be an annualized $40 million, predominantly comprised of payroll and benefit savings. As of March 31, 2005, a total of 656 employees have been terminated and total net pretax charges of $58 million have been recorded associated with this action. Charges are expected to be completed in 2006.
Semiconductor Restructuring Action: In the second quarter of 2003, we announced a restructuring action that affected 897 jobs in Semiconductor manufacturing operations in the U.S. and international locations, as those operations continued to become more productive with fewer people. This program was completed in the first quarter of 2005. The total cost of the restructuring action was $82 million, and the projected savings are estimated to be an annualized $67 million, predominantly comprised of payroll and benefit savings.
For more detailed information on the restructuring actions, see note 5 to the financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Information concerning market risk is contained on pages 56 and 57 of Exhibit 13 to Registrant’s Form 10-K for the year ended December 31, 2004, and is incorporated by reference to such exhibit.
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ITEM 4. Controls and Procedures.
An evaluation as of the end of the period covered by this report was carried out under the supervision and with the participation of the Registrant’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures were adequate to ensure that information required to be disclosed by the Registrant in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. In addition, there has been no change in the Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table contains information regarding the Registrant’s repurchase of its common stock during the quarter.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Maximum Numberof Shares that
May Yet BePurchased
Under the
Plans orPrograms(1)
January 1 through January 31, 2005
February 1 through February 28, 2005
March 1 through March 31, 2005
All purchases were made through open-market purchases. They include 4,500,000 shares for which trades were settled in the first three business days of April 2005, for $115 million.
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ITEM 6. Exhibits.
Description of Exhibit
Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: This report 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, statements in this report 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:
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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 quarterly report on Form 10-Q are made only as of the date of this report, and the Company undertakes no obligation to update the forward-looking statements to reflect subsequent events or circumstances.
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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.
/s/ Kevin P. March
Date: May 4, 2005
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