Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 2, 2017)
  • 10-Q (Aug 3, 2017)
  • 10-Q (May 3, 2017)
  • 10-Q (Aug 4, 2016)
  • 10-Q (May 4, 2016)
  • 10-Q (Nov 5, 2015)

 
8-K

 
Other

Texas Instruments 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
TXN-2011.6.30- 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________________________________________________________________________________
FORM 10-Q 
 _______________________________________________________________________________________________________________
S
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2011

£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to  
 Commission File Number 001-03761
 _______________________________________________________________________________________________________________
 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  S   No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  S   No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
S
 
Accelerated filer
£
Non-accelerated filer
£
(Do not check if a smaller reporting company)
Smaller reporting company
£

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £  No S
1,155,320,663
Number of shares of Registrant’s common stock outstanding as of
June 30, 2011
 


PART I - FINANCIAL INFORMATION
 
ITEM 1. Financial Statements.
 
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Income
(Millions of dollars, except share and per-share amounts)

 
For Three Months Ended June 30,
 
For Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Revenue
$
3,458

 
$
3,496

 
$
6,849

 
$
6,701

Cost of revenue
1,705

 
1,602

 
3,369

 
3,118

Gross profit
1,753

 
1,894

 
3,480

 
3,583

Research and development
424

 
392

 
846

 
761

Selling, general and administrative
411

 
378

 
806

 
737

Restructuring expense

 
17

 

 
28

Acquisition cost
13

 

 
15

 

Operating profit
905

 
1,107

 
1,813

 
2,057

Other income (expense) net
10

 
4

 
19

 
11

Interest and debt expense
6

 

 
6

 

Income before income taxes
909

 
1,111

 
1,826

 
2,068

Provision for income taxes
237

 
342

 
488

 
641

Net income
$
672

 
$
769

 
$
1,338

 
$
1,427

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 
 
 
Basic
$
.57

 
$
.63

 
$
1.13

 
$
1.15

Diluted
$
.56

 
$
.62

 
$
1.11

 
$
1.14

 
 
 
 
 
 
 
 
Average shares outstanding (millions):
 

 
 

 
 
 
 
Basic
1,156

 
1,208

 
1,161

 
1,221

Diluted
1,180

 
1,221

 
1,187

 
1,234

 
 
 
 
 
 
 
 
Cash dividends declared per share of common stock
$
.13

 
$
.12

 
$
.26

 
$
.24


See accompanying notes.

2

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Millions of dollars)

 
For Three Months Ended June 30,
 
For Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Net income
$
672

 
$
769

 
$
1,338

 
$
1,427

Other comprehensive income (loss):

 

 

 


Available-for-sale investments:

 

 

 


Unrealized gains, net of taxes

 
2

 
1

 
3

Reclassification of recognized transactions, net of taxes
12

 

 
12

 

Net actuarial gains (losses) of defined benefit plans:


 


 


 


Adjustment, net of taxes
(5
)
 
(52
)
 
(19
)
 
(75
)
Reclassification of recognized transactions, net of taxes
12

 
22

 
23

 
38

Prior service cost of defined benefit plans:

 

 

 


Adjustment, net of taxes

 
1

 
1

 
1

Change in fair value of derivative instrument, net of taxes
(3
)
 

 
(3
)
 

Total
16

 
(27
)
 
15

 
(33
)
Total comprehensive income
$
688

 
$
742

 
$
1,353

 
$
1,394


See accompanying notes.

3


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(Millions of dollars, except share amounts)

 
June 30,
2011
 
December 31,
2010
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,501

 
$
1,319

Short-term investments
1,899

 
1,753

Accounts receivable, net of allowances of ($23) and ($18)
1,672

 
1,518

Raw materials
148

 
122

Work in process
970

 
919

Finished goods
644

 
479

Inventories
1,762

 
1,520

Deferred income taxes
793

 
770

Prepaid expenses and other current assets
233

 
180

Total current assets
10,860

 
7,060

Property, plant and equipment at cost
6,573

 
6,907

Less accumulated depreciation
(2,859
)
 
(3,227
)
Property, plant and equipment, net
3,714

 
3,680

Long-term investments
334

 
453

Goodwill
924

 
924

Acquisition-related intangibles
63

 
76

Deferred income taxes
925

 
927

Capitalized software licenses, net
184

 
205

Overfunded retirement plans
25

 
31

Other assets
69

 
45

Total assets
$
17,098

 
$
13,401

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
623

 
$
621

Accrued compensation
428

 
629

Income taxes payable
65

 
109

Accrued expenses and other liabilities
637

 
622

Total current liabilities
1,753

 
1,981

Long-term debt
3,498

 

Underfunded retirement plans
532

 
519

Deferred income taxes
92

 
86

Deferred credits and other liabilities
320

 
378

Total liabilities
6,195

 
2,964

 
 
 
 
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:  June 30, 2011 – 1,740,530,417; December 31, 2010 –  1,740,166,101
1,741

 
1,740

Paid-in capital
1,108

 
1,114

Retained earnings
25,726

 
24,695

Less treasury common stock at cost.  Shares:  June 30, 2011 – 585,209,754; December 31, 2010 – 572,722,397
(16,986
)
 
(16,411
)
Accumulated other comprehensive income (loss), net of taxes
(686
)
 
(701
)
Total stockholders’ equity
10,903

 
10,437

Total liabilities and stockholders’ equity
$
17,098

 
$
13,401


See accompanying notes.

4

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Millions of dollars)
 
 
For Six Months Ended June 30,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net income
$
1,338

 
$
1,427

Adjustments to net income:


 


Depreciation
444

 
426

Stock-based compensation
110

 
96

Amortization of acquisition-related intangibles
13

 
25

Deferred income taxes
(15
)
 
(18
)
Increase (decrease) from changes in:


 


Accounts receivable
(146
)
 
(439
)
Inventories
(242
)
 
(147
)
Prepaid expenses and other current assets
(12
)
 
(34
)
Accounts payable and accrued expenses
(25
)
 
(18
)
Accrued compensation
(201
)
 
33

Income taxes payable
(103
)
 
(120
)
Other
(14
)
 
41

Net cash provided by operating activities
1,147

 
1,272

 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to property, plant and equipment
(470
)
 
(502
)
Purchases of short-term investments
(1,688
)
 
(1,212
)
Sales, redemptions and maturities of short-term investments
1,616

 
1,801

Purchases of long-term investments
(3
)
 
(2
)
Sales and redemptions of long-term investments
64

 
68

Net cash (used in) provided by investing activities
(481
)
 
153

 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of long-term debt
3,497

 

Issuance costs for long-term debt
(12
)
 

Dividends paid
(303
)
 
(296
)
Sales and other common stock transactions
530

 
79

Excess tax benefit from share-based payments
27

 
2

Stock repurchases
(1,223
)
 
(1,254
)
Net cash provided by (used in) financing activities
2,516

 
(1,469
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
3,182

 
(44
)
Cash and cash equivalents, beginning of period
1,319

 
1,182

Cash and cash equivalents, end of period
$
4,501

 
$
1,138


See accompanying notes.

5

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Notes to Financial Statements
1.
Description of business and significant accounting policies and practices. Texas Instruments (TI) designs and makes semiconductors that we sell to electronics designers and manufacturers; about 80,000 customers all over the world buy our products.

Basis of Presentation - The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP) and on the same basis as the audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2010.  The consolidated statements of income, statements of comprehensive income and statements of cash flows for the periods ended June 30, 2011 and 2010, and the balance sheet as of June 30, 2011, are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown.  The consolidated balance sheet as of December 31, 2010, presented herein is derived from the audited consolidated balance sheet presented in our annual report on Form 10-K at that date.  Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period presentation.  Certain information and note disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission.  Because the consolidated interim financial statements do not include all of the information and notes required by U.S. GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2010.  The results for the three- and six-month periods are not necessarily indicative of a full year’s results.

The consolidated financial statements include the accounts of all subsidiaries.  All intercompany balances and transactions have been eliminated in consolidation.  All dollar amounts in the financial statements and tables in the notes, except share and per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated.

Acquisition Cost - During the first six months of 2011, we incurred $15 million of acquisition-related expenses ($13 million for the second quarter) associated with the announced agreement to acquire National Semiconductor (“National”).

Use of Derivatives and Hedging - In connection with the issuance of long-term debt in May 2011, as more fully described in Note 3, we entered into an interest rate swap designated as a hedge of the variability of cash flows related to interest payments on the variable-rate portion of the debt. Gains and losses from changes in the fair value of the interest rate swap are credited or charged to accumulated other comprehensive income (AOCI).

We also use derivative financial instruments to manage exposure to foreign exchange risk.  These instruments are primarily forward foreign currency exchange contracts that are used as economic hedges to reduce the earnings impact exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures or for specified non-U.S. dollar forecasted transactions.  Gains and losses from changes in the fair value of these forward foreign currency exchange contracts are credited or charged to other income (expense) net (OI&E).  We do not apply hedge accounting to our foreign currency derivative instruments.
 
We do not use derivatives for speculative or trading purposes.

Fair Values of Financial Instruments - The fair values of our derivative financial instruments were not significant at June 30, 2011.  Our investments in cash equivalents, short-term investments and certain long-term investments are carried at fair value and are discussed in Note 6.  The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. The fair value of our long-term debt approximates the carrying value.

Accounting Standards Adopted - In October 2009, the Financial Accounting Standards Board (FASB) concurrently issued the following Accounting Standards Updates (ASUs):

Ÿ ASU No. 2009 - 14 - Software (Topic 985): Certain Revenue Arrangements That Include Software Elements. This standard removes tangible products from the scope of software revenue recognition guidance and also provides guidance on determining whether software deliverables in an arrangement that includes a tangible product, such as embedded software, are within the scope of the software revenue guidance.
Ÿ ASU No. 2009 - 13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This standard modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services and support, to a customer at different times as part of a single revenue generating

6

transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables.

We adopted these standards in the first quarter of 2011 by applying them on a prospective basis to revenue arrangements entered into or materially modified beginning January 1, 2011. The adoption of these standards did not have a significant impact on our financial position or results of operations.

New Accounting Standard Not Yet Adopted - In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This standard results in a common requirement between the FASB and the International Accounting Standards Board (IASB) for measuring fair value and for disclosing information about fair value measurements. While this new standard will not affect how we measure or account for assets and liabilities at fair value, the disclosure requirements will be required for interim and annual periods beginning January 1, 2012. There will be no impact to our financial condition or results of operation from the adoption of this new standard.

2.
Losses associated with the earthquake in Japan. On March 11, 2011, a magnitude 9.0 earthquake struck near two of our three semiconductor wafer manufacturing facilities in Japan. Our manufacturing site in Miho suffered substantial damage during the earthquake, our facility in Aizu experienced significantly less damage, and our site in Hiji was undamaged. We maintain earthquake insurance policies in Japan for limited coverage for property damage and business interruption losses.

Assessment and recovery efforts began immediately at these facilities.  Our Aizu factory recovered first and has been in production for most of the second quarter. Our Miho factory was shut down through the first half of April, then ramped steadily through May and the first part of June. Our production loadings, based on wafer starts, were nearly back to full capacity by the middle of June. There will be a few months of lag between when we start a wafer and when those products ship to our customers due to the manufacturing cycle time.

During the first half of 2011, we recorded total expenses of about $80 million (about $50 million for the second quarter) based on the costs of property damages incurred and costs associated with business interruption, net of proceeds from ongoing insurance claims. Almost all of these costs are included in Cost of revenue in the statement of income and are reported in our Other segment. These costs include the underutilization expense we incurred from having our manufacturing assets only partially loaded, costs related to the recovery teams that have been assembled from across the world and other costs. To date, no proceeds from ongoing insurance claims have been recognized related to amounts for business interruption or associated lost profits.

We have yet to determine the final total losses attributable to the earthquake. It is reasonably possible that the final losses may exceed the limits of our insurance policies.  We are in discussions with our insurers and their advisors, but at this time, we cannot estimate the timing and amount of proceeds we will ultimately receive from these policies.
 
3.
Long-term debt. On May 23, 2011, we issued an aggregate principal amount of $3.50 billion of fixed- and floating-rate long-term debt as detailed below to help fund the National acquisition. The proceeds of the offering were $3.497 billion, net of the original issuance discount. We also incurred $12 million of issuance costs which are included in Other assets and will be amortized to Interest and debt expense over the individual notes’ lives.

In connection with this issuance, we also entered into an interest rate swap transaction related to the $1.0 billion notional amount of our floating-rate debt due 2013. Under this swap agreement we will receive variable payments based on three-month LIBOR rates and pay a fixed rate through May 15, 2013. Changes in the cash flows of the interest rate swap are expected to exactly offset the changes in cash flows attributable to fluctuations in the three-month LIBOR-based interest payments. We have designated this interest rate swap as a cash flow hedge and record changes in its fair value in AOCI. The net effect of this swap is to convert the variable interest rate to a fixed rate of 0.922%.

7


Following is a summary of the long-term debt outstanding as of June 30, 2011:

$1.0 billion floating-rate notes due 2013 (swapped to a 0.922% fixed rate)
$
1,000

$500 million 0.875% notes due 2013
500

$1.0 billion 1.375% notes due 2014
1,000

$1.0 billion 2.375% notes due 2016
1,000

Less unamortized discount
(2
)
Total long-term debt
$
3,498


If our planned acquisition of National does not close by April 30, 2012, or the agreement is otherwise terminated, we are obligated to redeem the $2.5 billion of fixed-rate debt. This redemption would be 15 business days following the earlier of April 30, 2012, or the date the agreement is terminated, at a redemption price equal to 101% of the aggregate principal amount of the fixed-rate debt, plus accrued interest. We are not obligated to redeem the floating-rate notes.

4.
Income taxes. Federal income taxes for the interim periods presented have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate.  As of June 30, 2011, the estimated annual effective tax rate for 2011 is about 27 percent, which differs from the 35 percent statutory corporate tax rate primarily due to the effects of non-U.S. tax rates.

5.
Earnings per share (EPS). Unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock units (RSUs), are considered to be participating securities and the two-class method is used for purposes of calculating EPS.  Under the two-class method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock, as shown in the table below.

Computation and reconciliation of earnings per common share are as follows:

 
For Three Months Ended
June 30, 2011
 
For Three Months Ended
June 30, 2010
 
Income
 
Shares
 
EPS
 
Income
 
Shares
 
EPS
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
672

 
 
 
 
 
$
769

 
 
 
 
Less income allocated to RSUs
(11
)
 
 
 
 
 
(11
)
 
 
 
 
Income allocated to common stock for basic EPS calculation
$
661

 
1,156

 
$
.57

 
$
758

 
1,208

 
$
.63

 
 
 
 
 
 
 
 
 
 
 
 
Adjustment for dilutive shares:
 

 
 

 
 

 
 

 
 

 
 
Stock-based compensation plans
 

 
24

 
 

 
 

 
13

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS:
 

 
 

 
 

 
 

 
 

 
 
Net income
$
672

 
 

 
 

 
$
769

 
 

 
 
Less income allocated to RSUs
(10
)
 
 

 
 

 
(11
)
 
 

 
 
Income allocated to common stock for diluted EPS calculation
$
662

 
1,180

 
$
.56

 
$
758

 
1,221

 
$
.62


8

 
For Six Months Ended
June 30, 2011
 
For Six Months Ended
June 30, 2010
 
Income
 
Shares
 
EPS
 
Income
 
Shares
 
EPS
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
1,338

 
 
 
 
 
$
1,427

 
 
 
 
Less income allocated to RSUs
(21
)
 
 
 
 
 
(19
)
 
 
 
 
Income allocated to common stock for basic EPS calculation
$
1,317

 
1,161

 
$
1.13

 
$
1,408

 
1,221

 
$
1.15

 
 
 
 
 
 
 
 
 
 
 
 
Adjustment for dilutive shares:
 

 
 

 
 

 
 

 
 

 
 
Stock-based compensation plans
 

 
26

 
 

 
 

 
13

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS:
 

 
 

 
 

 
 

 
 

 
 
Net income
$
1,338

 
 

 
 

 
$
1,427

 
 

 
 
Less income allocated to RSUs
(21
)
 
 

 
 

 
(19
)
 
 

 
 
Income allocated to common stock for diluted EPS calculation
$
1,317

 
1,187

 
$
1.11

 
$
1,408

 
1,234

 
$
1.14


Options to purchase 20 million and 97 million shares of common stock that were outstanding during the second quarters of 2011 and 2010, respectively, and 19 million and 97 million shares outstanding during the six months of 2011 and 2010, respectively, were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

6.
Valuation of debt and equity investments and certain liabilities.
 
Debt and equity investments

We classify our investments as available-for-sale, trading, equity method or cost method.  Most of our investments are classified as available-for-sale.

Available-for-sale and trading securities are stated at fair value, which is generally based on market prices, broker quotes or, when necessary, financial models (see fair value discussion below).

Unrealized gains and losses on available-for-sale securities are recorded as an increase or decrease, net of taxes, in AOCI. We record other-than-temporary losses (impairments) on available-for-sale securities in OI&E.

Changes in the fair value of debt securities classified as trading securities are recorded in OI&E.

We classify certain mutual funds as trading securities. These mutual funds hold a variety of debt and equity investments intended to generate returns that offset changes in certain deferred compensation liabilities.  We record changes in the fair value of these mutual funds and the related deferred compensation liabilities in selling, general and administrative expense.

Our other investments are not measured at fair value but are accounted for using either the equity method or cost method.  These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity method investments are reflected in OI&E based on our ownership share of the investee’s financial results.  Gains and losses on cost method investments are recorded in OI&E when realized or when an impairment of the investment’s value is warranted based on our assessment of the recoverability of each investment.

Details of our investments and related unrealized gains and losses included in AOCI are as follows:
 

9

 
June 30, 2011
 
December 31, 2010
 
Cash and Cash
Equivalents
 
Short-Term Investments
 
Long-Term Investments
 
Cash and Cash
Equivalents
 
Short-Term Investments
 
Long-Term Investments
Measured at fair value:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
434

 
$

 
$

 
$
167

 
$

 
$

Corporate obligations
795

 
270

 

 
44

 
649

 

U.S. government agency and Treasury securities
3,018

 
1,556

 

 
855

 
1,081

 

Auction-rate securities

 

 
44

 

 
23

 
257

 
 
 
 
 
 
 
 
 
 
 
 
Trading
 

 
 

 
 

 
 

 
 

 
 

Auction-rate securities

 
73

 
94

 

 

 

Mutual funds

 

 
134

 

 

 
139

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
4,247

 
$
1,899

 
$
272

 
$
1,066

 
$
1,753

 
$
396

 
 
 
 
 
 
 
 
 
 
 
 
Other measurement basis:
 

 
 

 
 

 
 

 
 

 
 

Equity method investments

 

 
40

 

 

 
36

Cost method investments

 

 
22

 

 

 
21

Cash on hand
254

 

 

 
253

 

 

Total
$
4,501

 
$
1,899

 
$
334

 
$
1,319

 
$
1,753

 
$
453

 
 
 
 
 
 
 
 
 
 
 
 
Amounts included in AOCI from available-for-sale securities:
 

 
 

 
 

 
 

 
 

 
 

Unrealized gains (pre-tax)
$

 
$
1

 
$

 
$

 
$
1

 
$

Unrealized losses (pre-tax)
$

 
$

 
$
2

 
$

 
$
1

 
$
22

 

As of June 30, 2011, and December 31, 2010, the majority of unrealized losses included in AOCI were associated with auction-rate securities classified as securities that are available-for-sale.  We have determined that our available-for-sale investments with unrealized losses are not other-than-temporarily impaired as we expect to recover the entire cost basis of these securities and we do not intend to sell these investments, nor do we expect to be required to sell these investments before a recovery of the cost basis.  In the second quarter of 2011, we recategorized certain auction-rate securities from an available-for-sale classification to a trading classification as we intend to sell them.

For the six months ended June 30, 2011 and 2010, the proceeds from sales, redemptions and maturities of short-term available-for-sale securities, excluding cash equivalents, were $1.62 billion and $1.80 billion, respectively.  Gross realized gains and losses from these sales were not significant.

The following table presents the aggregate maturities of investments in money market funds and other debt securities classified as available-for-sale at June 30, 2011:

Due
 
Fair Value
 
 
 
One year or less
 
$
5,826

One to three years
 
247

Greater than three years
 
44

 
Fair value
We measure and report our financial assets and certain liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The three-level hierarchy discussed below indicates the extent and level of judgment used to estimate fair value

10

measurements.

Level 1 - Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date.

Level 2 - Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active.  Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. Our Level 2 assets consist of corporate obligations, some U.S. government agency securities and auction-rate securities that have been called for redemption. We utilize a third-party data service to provide Level 2 valuations, verifying these valuations for reasonableness relative to unadjusted quotes obtained from brokers or dealers based on observable prices for similar assets in active markets.

Level 3 - Uses inputs that are unobservable, supported by little or no market activity and reflect the use of significant management judgment.  These values are generally determined using pricing models that utilize management estimates of market participant assumptions.

Our auction-rate securities are primarily classified as Level 3 assets.  Auction-rate securities are debt instruments with variable interest rates that historically would periodically reset through an auction process.  These auctions have not functioned since 2008. There is no active secondary market for these securities, although limited observable transactions do occasionally occur. As a result, we use a discounted cash flow (DCF) model to determine the estimated fair value of these investments as of each quarter end.  The assumptions used in preparing the DCF model include estimates for the amount and timing of future interest and principal payments and the rate of return required by investors to own these securities in the current environment.  In making these assumptions we consider relevant factors including: the formula for each security that defines the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the guarantees by the U.S. Department of Education of the underlying student loans and additional credit enhancements provided through other means; and, publicly available pricing data for student loan asset-backed securities that are not subject to auctions.  Our estimate of the rate of return required by investors to own these securities also considers the reduced liquidity for auction-rate securities. To date, we have collected all interest on all of our auction-rate securities when due and expect to continue to do so in the future.  

The following are our assets and liabilities that are accounted for at fair value on a recurring basis as of June 30, 2011 and December 31, 2010.  These tables do not include cash on hand, assets held by our postretirement plans or assets and liabilities that are measured at historical cost or any basis other than fair value.

 
Fair Value
June 30,
2011
 
Level
1
 
Level
2
 
Level
3
 
 
 
 
 
 
 
 
Assets:
 
 
 

 
 

 
 

Money market funds
$
434

 
$
434

 
$

 
$

Corporate obligations
1,065

 

 
1,065

 

U.S. government agency and Treasury securities
4,574

 
3,613

 
961

 

Auction-rate securities
211

 

 

 
211

Mutual funds
134

 
134

 

 

Total assets
$
6,418

 
$
4,181

 
$
2,026

 
$
211

 
 
 
 
 
 
 
 
Liabilities (a):
 

 
 

 
 

 
 

Deferred compensation
155

 
155

 

 

Total liabilities
$
155

 
$
155

 
$

 
$



11

 
Fair Value
December 31,
2010
 
Level
1
 
Level
2
 
Level
3
 
 
 
 
 
 
 
 
Assets:
 
 
 

 
 

 
 

Money market funds
$
167

 
$
167

 
$

 
$

Corporate obligations
693

 

 
693

 

U.S. government agency and Treasury securities
1,936

 
1,120

 
816

 

Auction-rate securities
280

 

 
23

 
257

Mutual funds
139

 
139

 

 

Total assets
$
3,215

 
$
1,426

 
$
1,532

 
$
257

 
 
 
 
 
 
 
 
Liabilities (a):
 

 
 

 
 

 
 

Contingent consideration
8

 

 

 
8

Deferred compensation
159

 
159

 

 

Total liabilities
$
167

 
$
159

 
$

 
$
8

 

(a)
The liabilities above are a component of Accrued expenses and other liabilities or Deferred credits and other liabilities on our balance sheets, depending on the expected timing of payment.

The following table provides a reconciliation of changes in the fair values for Level 3 assets and liabilities.  

 
Level 3
Changes in fair value during the period (pre-tax):
Auction-rate securities
 
Contingent consideration
 
 
 
 
Beginning Balance, December 31, 2009
$
458

 
$
18

Change in fair value of contingent consideration - included in operating profit

 
(1
)
Reduction in unrealized loss - included in AOCI
4

 

Redemptions
(68
)
 

Transfers into Level 2
(13
)
 

Ending Balance, June 30, 2010
381

 
17

 
 
 
 
Change in fair value of contingent consideration - included in operating profit

 
(9
)
Reduction in unrealized loss - included in AOCI
6

 

Redemptions
(120
)
 

Transfers into Level 2
(10
)
 

Ending Balance, December 31, 2010
257

 
8

 
 
 
 
Change in fair value of contingent consideration - included in operating profit

 
(8
)
Reduction in unrealized loss - included in AOCI
1

 

Redemptions and sales
(47
)
 

Ending Balance, June 30, 2011
$
211

 
$


7.
Postretirement benefit plans. Components of net periodic employee benefit cost are as follows:


12



 
U.S.
Defined Benefit
 
U.S.
Retiree Health Care
 
Non-U.S.
Defined Benefit
For three months ended June 30,
2011
 
2010
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
5

 
$
4

 
$
1

 
$
1

 
$
9

 
$
9

Interest cost
12

 
12

 
7

 
6

 
16

 
15

Expected return on plan assets
(11
)
 
(12
)
 
(5
)
 
(6
)
 
(20
)
 
(18
)
Amortization of prior service cost

 

 

 
1

 
(1
)
 
(1
)
Recognized net actuarial loss
6

 
5

 
3

 
3

 
10

 
7

Net periodic benefit cost
$
12

 
$
9

 
$
6

 
$
5

 
$
14

 
$
12

 
 
 
 
 
 
 
 
 
 
 
 
Settlement charges *

 
19

 

 

 

 

Total, including charges
$
12

 
$
28

 
$
6

 
$
5

 
$
14

 
$
12


 
U.S.
Defined Benefit
 
U.S.
Retiree Health Care
 
Non-U.S.
Defined Benefit
For six months ended June 30,
2011
 
2010
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
11

 
$
9

 
$
2

 
$
2

 
$
18

 
$
17

Interest cost
23

 
24

 
12

 
13

 
32

 
30

Expected return on plan assets
(22
)
 
(25
)
 
(10
)
 
(12
)
 
(39
)
 
(36
)
Amortization of prior service cost

 

 
1

 
1

 
(2
)
 
(2
)
Recognized net actuarial loss
12

 
10

 
6

 
6

 
19

 
15

Net periodic benefit cost
$
24

 
$
18

 
$
11

 
$
10

 
$
28

 
$
24

 
 
 
 
 
 
 
 
 
 
 
 
Settlement charges *

 
30

 

 

 

 

Total, including charges
$
24

 
$
48

 
$
11

 
$
10

 
$
28

 
$
24


* Includes restructuring and non-restructuring related settlement charges.

8.
Contingencies. We routinely sell products with an intellectual property indemnification included in the terms of sale. Historically, we have had only minimal, infrequent losses associated with these indemnities. Consequently, we cannot reasonably estimate or accrue for any future liabilities that may result.

We accrue 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. Historically, we have experienced a low rate of payments on product claims. Although we cannot predict the likelihood or amount of any future claims, we do not believe they will have a material adverse effect on our financial condition, results of operations or liquidity. Consistent with general industry practice, we enter into formal contracts with certain customers that include negotiated warranty remedies. Typically, under these agreements, our warranty for semiconductor products includes: three years coverage; an obligation to repair, replace or refund; and a maximum payment obligation tied to the price paid for our products.  In some cases, product claims may exceed the price of our products. From time to time, we also negotiate contingent consideration payment arrangements associated with certain acquisitions, which are recorded at fair value.

We are subject to various legal and administrative proceedings. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity.

Discontinued operations indemnity - In connection with the 2006 sale of the former Sensors & Controls business, we have agreed to indemnify Sensata Technologies, Inc., for specified litigation matters and certain liabilities, including environmental liabilities. Our indemnification obligations with respect to breaches of representations and warranties and the specified litigation matters are generally subject to a total deductible of $30 million and our maximum potential exposure is limited to $300 million. We have not made any indemnity payments related to this matter and do not expect that any potential payments related to this indemnity obligation would have a material adverse effect on our financial condition, results of operations or liquidity in future periods.

Acquisition reverse termination fee - In connection with our recently announced agreement to acquire National, if we

13

are unable to close the transaction due to our inability to obtain the remaining regulatory approval, we may be required to pay National a reverse termination fee of $350 million. In addition, we would be required to redeem the fixed-rate portions of our long-term debt (see Note 3).

9.
Segment data.
 
 
For Three Months Ended June 30,
 
For Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
Segment Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Analog
$
1,588

 
$
1,512

 
$
3,123

 
$
2,880

Embedded Processing
596

 
516

 
1,129

 
956

Wireless
558

 
727

 
1,216

 
1,444

Other
716

 
741

 
1,381

 
1,421

Total revenue
$
3,458

 
$
3,496

 
$
6,849

 
$
6,701


 
For Three Months Ended June 30,
 
For Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
Segment Operating Profit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Analog
$
446

 
$
472

 
$
864

 
$
871

Embedded Processing
141

 
115

 
243

 
188

Wireless
82

 
165

 
223

 
322

Other
236

 
355

 
483

 
676

Total operating profit
$
905

 
$
1,107

 
$
1,813

 
$
2,057



14

10.    Subsequent events. On July 14, 2011, in anticipation of our pending acquisition of National, we issued an aggregate of $1.2 billion of commercial paper, which was supported by existing revolving credit facilities.

15


ITEM 2.  Management’s discussion and analysis of financial condition and results of operations

The following should be read in conjunction with the Financial Statements and the related Notes that appear elsewhere in this document.  All dollar amounts in the tables in this discussion are stated in millions of U.S. dollars, except per-share amounts.  

Overview

We design and make semiconductors that we sell to electronics designers and manufacturers all over the world.  We began operations in 1930.  We are incorporated in Delaware, headquartered in Dallas, Texas, and have design, manufacturing or sales operations in more than 30 countries.  We have four segments: Analog, Embedded Processing, Wireless and Other.  We expect Analog and Embedded Processing to be our primary growth engines in the years ahead, and we therefore focus our resources on these segments. 

We were the world’s fourth largest semiconductor company in 2010 as measured by revenue, according to an external source.  Additionally, we sell calculators and related products.

On April 4, 2011, we announced that we had entered into an agreement to acquire National Semiconductor Corporation (“National”). Under the terms of the agreement, National stockholders will receive $25 in cash for each share of National common stock they hold at the time of closing. On June 21, 2011, National stockholders approved the adoption of the agreement. The acquisition has cleared all antitrust reviews with the exception of China, which is underway. We expect the transaction to close in the second half of 2011 and will fund the acquisition with a combination of available cash and the proceeds of debt issuances, including $3.5 billion of debt securities issued in the quarter. The National acquisition will bring to TI a portfolio of 12,000 analog products and strong customer design tools, and is consistent with our strategy to grow our Analog business. Upon the close of the transaction, National will become part of TIs Analog segment.

Product information

Semiconductors are electronic components that serve as the building blocks inside modern electronic systems and equipment.  Semiconductors come in two basic forms: individual transistors and integrated circuits (generally known as “chips”) that combine multiple transistors on a single piece of material to form a complete electronic circuit.  Our semiconductors are used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution.  Our portfolio includes products that are integral to almost all electronic equipment.

We sell custom and standard semiconductor products.  Custom products are designed for a specific customer for a specific application, are sold only to that customer and are typically sold directly to the customer.  The life cycles of custom products are generally determined by end-equipment upgrade cycles and can be as short as 12 to 24 months.   Standard products are designed for use by many customers and/or many applications and are generally sold through both distribution and direct channels.  They include both proprietary and commodity products.  The life cycles of standard products are generally longer than for custom products.

Additional information regarding each segment’s products follows.

Analog

Analog semiconductors change real-world signals – such as sound, temperature, pressure or images – by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as digital signal processors (DSPs).  Analog semiconductors are also used to manage power distribution and consumption.  Sales to our Analog segment’s more than 80,000 customers generated 43 percent of our revenue in 2010.  According to external sources, the worldwide market for analog semiconductors was about $42 billion in 2010.  Our Analog segment’s revenue in 2010 was about $6 billion, or about 14 percent of this fragmented market, the leading position.  We believe that we are well positioned to increase our market share over time.

Our Analog product lines are: high-volume analog & logic, high-performance analog and power management.

High-volume analog & logic products:  High-volume analog includes products for specific applications, including custom products.  The life cycles of our high-volume analog products are generally shorter than those of our high-performance analog products.  End markets for high-volume analog products include communications, automotive, computing and many consumer

16

electronics products.  Logic and standard linear includes commodity products marketed to many different customers for many different applications.

High-performance analog products:  These include standard analog semiconductors, such as amplifiers, data converters and interface semiconductors (our portfolio includes nearly 16,000 products), that we market to many different customers who use them in manufacturing a wide range of products sold in many end markets, including the industrial, communications, computing and consumer electronics markets.  High-performance analog products generally have long life cycles, often more than 10 years.

Power management products:  These include both standard and custom semiconductors that help customers manage power in any type of electronic system.  We design and manufacture power management semiconductors for both portable devices (battery-powered devices, such as handheld consumer electronics, laptop computers and cordless power tools) and line-powered systems (products that require an external electrical source, such as computers, digital TVs, wireless base stations and high-voltage industrial equipment).

Embedded Processing

Our Embedded Processing products include our DSPs and microcontrollers.  DSPs perform mathematical computations almost instantaneously to process or improve digital data.  Microcontrollers are designed to control a set of specific tasks for electronic equipment.  Sales of Embedded Processing products generated 15 percent of our revenue in 2010.  According to external sources, the worldwide market for embedded processors was about $18 billion in 2010.  Our Embedded Processing segment’s revenue in 2010 was about $2 billion, or about 11 percent of this fragmented market.  We believe we are well positioned to increase our market share over time.

An important characteristic of our Embedded Processing products is that our customers often invest their own research and development (R&D) to write software that operates on our products.  This investment tends to increase the length of our customer relationships because customers prefer to re-use software from one product generation to the next.  We make and sell standard, or catalog, Embedded Processing products used in many different applications and custom Embedded Processing products used in specific applications, such as communications infrastructure equipment and automotive.

Wireless

Growth in the wireless market is being driven by the demand for smartphones, tablet computers and other emerging portable devices.  Many of today’s smartphones and tablets use an applications processor to run the device’s software operating system and to enable the expanding functionality that has made smartphones the fastest growing wireless segment.  Smartphones and tablets also use other semiconductors to enable connectivity through means other than the cellular network (such as Bluetooth® devices, WiFi networks, GPS location services, and Near Field Communication (NFC)).

We design, make and sell products to satisfy each of these requirements.  Wireless products are typically sold in high volumes, and our Wireless portfolio includes both standard products and custom products.  Sales of Wireless products generated about $3 billion, or 21 percent of our revenue, in 2010, with a significant portion of those sales to a single customer.

Our Wireless investments are concentrated on our connectivity products and OMAP applications processors, areas we believe offer significant growth opportunities and which will enable us to take advantage of the increasing demand for more powerful and more functional mobile devices.  We no longer invest in development of baseband products (products that allow a cell phone to connect to the cellular network), an area we believe offers far less promising growth prospects.  Almost all of our baseband products are sold to a single customer.  We expect substantially all of our baseband revenue, which was $1.7 billion in 2010, to cease by the end of 2012.

Other

Our Other segment includes revenue from our smaller semiconductor product lines and from sales of our handheld graphing and scientific calculators.  It also includes royalties received for our patented technology that we license to other electronics companies and revenue from transitional supply agreements entered into in connection with acquisitions and divestitures.  The semiconductor products in our Other segment include DLP® products (primarily used in projectors to create high-definition images) and custom semiconductors known as application-specific integrated circuits (ASICs).  This segment generated about $3 billion, or 21 percent of our revenue, in 2010.



17

Inventory

Our inventory practices differ by product, but we generally maintain inventory levels that are consistent with our expectations of customer demand.  Because of the longer product life cycles of standard products and their inherently lower risk of obsolescence, we generally carry more of those products than custom products.  Additionally, we sometimes maintain standard-product inventory in unfinished wafer form, as well as higher finished goods inventory of low-volume products, allowing greater flexibility in periods of high demand.   We also have consignment inventory programs in place for our largest customers and some distributors.

Manufacturing

Semiconductor manufacturing begins with a sequence of photo-lithographic and chemical processing steps that fabricate a number of semiconductor devices on a thin silicon wafer.  Each device on the wafer is tested and the wafer is cut into pieces called chips.  Each chip is assembled into a package that then is usually retested.  The entire process typically requires between 12 and 18 weeks and takes place in highly specialized facilities.

We own and operate semiconductor manufacturing facilities in North America, Asia and Europe.  These include both high-volume wafer fabrication and assembly/test facilities.  Our facilities require substantial investment to construct and are largely fixed-cost assets once in operation.  Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed.  In general, these fixed costs do not decline with reductions in customer demand or utilization of capacity, potentially hurting our profit margins.  Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over increased output, potentially benefiting our profit margins.

The cost and lifespan of the equipment and processes we use to manufacture semiconductors vary by product.  Our Analog products and most of our Embedded Processing products can be manufactured using older, less expensive equipment than is needed for manufacturing advanced logic products, such as our Wireless products.  Advanced logic wafer manufacturing continually requires new and expensive processes and equipment.  In contrast, the processes and equipment required for manufacturing our Analog products and most of our Embedded Processing products do not have this requirement.

To supplement our internal wafer fabrication capacity and maximize our responsiveness to customer demand and return on capital, our wafer manufacturing strategy utilizes the capacity of outside suppliers, commonly known as foundries.  We source about 25 percent of our wafers from external foundries, with the vast majority of this outsourcing being for advanced logic wafers.  In 2010, external foundries provided 60 percent of the fabricated wafers for our advanced logic manufacturing needs.  We expect the proportion of our advanced logic wafers provided by foundries will increase over time.  We expect to maintain sufficient internal wafer fabrication capacity to meet the vast majority of our analog production needs.

In addition to using foundries to supplement our wafer fabrication capacity, we selectively use subcontractors to supplement our assembly/test capacity.  We generally use subcontractors for assembly/test of products that would be less cost-efficient to complete in-house (e.g., relatively low-volume products that are unlikely to keep internal equipment fully utilized), or when demand temporarily exceeds our internal capacity.  We believe we often have a cost advantage from maintaining internal assembly/test capacity.

Our internal/external manufacturing strategy reduces the level of our required capital expenditures, and thereby reduces our subsequent levels of depreciation below what it would be if we sourced all manufacturing internally.  Consequently, we experience less fluctuation in our profit margins due to changing product demand, and lower cash requirements for expanding and updating our manufacturing capabilities.

Product cycle

The global semiconductor market is characterized by constant, though generally incremental, advances in product designs and manufacturing processes.  Semiconductor prices and manufacturing costs tend to decline over time as manufacturing processes and product life cycles mature.  Typically, new chips are produced in limited quantities at first and then ramp to high-volume production over time.  Consequently, new products tend not to have a significant revenue impact for one or more quarters after their introduction.  In the results discussions below, changes in our shipments are caused by changing demand for our products unless otherwise noted.

Market cycle

The “semiconductor cycle” is an important concept that refers to the ebb and flow of supply.  The semiconductor market

18

historically has been characterized by periods of tight supply caused by strengthening demand and/or insufficient manufacturing capacity, followed by periods of surplus inventory caused by weakening demand and/or excess manufacturing capacity.  This cycle is affected by the significant time and money required to build and maintain semiconductor manufacturing facilities.

Seasonality

Our revenue and operating results are subject to some seasonal variation.  Our semiconductor sales generally are seasonally weaker in the first quarter than in other quarters, particularly for products sold into cell phones and other consumer electronics devices, which have stronger sales later in the year as manufacturers prepare for the major holiday selling seasons.  Calculator revenue is tied to the U.S. back-to-school season and is therefore at its highest in the second and third quarters.  Royalty revenue is not always uniform or predictable, in part due to the performance of our licensees and in part due to the timing of new license agreements or the expiration and renewal of existing agreements.

Tax considerations

We operate in a number of tax jurisdictions and are subject to several types of taxes including those that are based on income, capital, property and payroll, as well as sales and other transactional taxes.  The timing of the final determination of our tax liabilities varies by jurisdiction and taxing authority.  As a result, during any particular reporting period we might reflect in our financial statements one or more tax refunds or assessments, or changes to tax liabilities, involving one or more taxing authorities.

Second-Quarter 2011 results
Our second-quarter revenue was $3.46 billion, net income was $672 million and earnings per share (EPS) were 56 cents.

We are pleased with the continued success of our portfolio in Analog and Embedded Processing.  Sequential revenue growth was driven by Embedded Processing up 12 percent and Analog up 3 percent, resulting in market share gains in both segments. In the quarter, we also resumed production ahead of schedule at our Japan factories that were damaged in the March 2011 earthquake, thanks to excellent work by our teams on the ground.

We expect growth in the third quarter, but because of mixed macroeconomic and market signals we are prepared for a broader-than-normal range of growth possibilities.  We note that production at some computing and consumer manufacturers appears lukewarm even though we are heading into the back-to-school and holiday seasons.  At the same time, Asian distributor resales have been strong, demand from our Japanese customers is increasing and our backlog increased in the second quarter.  We have planned for modest sequential growth in the third quarter, yet are prepared to support higher demand if it materializes.



19



TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Income
(Millions of dollars, except share and per-share amounts)