TXN-2013.9.30 - 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________________________________________
FORM 10-Q
_______________________________________________________________________________________________________________
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2013
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¨ | TRANSITION REPORT UNDER 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)
_______________________________________________________________________________________________________________
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Delaware | 75-0289970 |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
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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 214-479-3773
_______________________________________________________________________________________________________________
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 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 x 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.
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| | | | |
Large accelerated filer | x | | 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 x
1,094,563,114
Number of shares of Registrant's common stock outstanding as of
September 30, 2013
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 September 30, | | For Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenue | $ | 3,244 |
| | $ | 3,390 |
| | $ | 9,177 |
| | $ | 9,846 |
|
Cost of revenue (COR) | 1,465 |
| | 1,650 |
| | 4,453 |
| | 4,924 |
|
Gross profit | 1,779 |
| | 1,740 |
| | 4,724 |
| | 4,922 |
|
Research and development (R&D) | 368 |
| | 463 |
| | 1,176 |
| | 1,452 |
|
Selling, general and administrative (SG&A) | 465 |
| | 453 |
| | 1,397 |
| | 1,372 |
|
Acquisition charges | 86 |
| | 106 |
| | 257 |
| | 363 |
|
Restructuring charges/other | 16 |
| | (122 | ) | | (251 | ) | | (99 | ) |
Operating profit | 844 |
| | 840 |
| | 2,145 |
| | 1,834 |
|
Other income (expense), net (OI&E) | (4 | ) | | 24 |
| | (2 | ) | | 8 |
|
Interest and debt expense | 24 |
| | 21 |
| | 71 |
| | 62 |
|
Income before income taxes | 816 |
| | 843 |
| | 2,072 |
| | 1,780 |
|
Provision for income taxes | 187 |
| | 59 |
| | 421 |
| | 285 |
|
Net income | $ | 629 |
| | $ | 784 |
| | $ | 1,651 |
| | $ | 1,495 |
|
| | | | | | | |
Earnings per common share: | |
| | |
| | | | |
Basic | $ | .56 |
| | $ | .68 |
| | $ | 1.47 |
| | $ | 1.29 |
|
Diluted | $ | .56 |
| | $ | .67 |
| | $ | 1.45 |
| | $ | 1.27 |
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| | | | | | | |
Average shares outstanding (millions): | |
| | |
| | | | |
Basic | 1,096 |
| | 1,130 |
| | 1,102 |
| | 1,138 |
|
Diluted | 1,111 |
| | 1,141 |
| | 1,117 |
| | 1,153 |
|
| | | | | | | |
Cash dividends declared per share of common stock | $ | .28 |
| | $ | .17 |
| | $ | .77 |
| | $ | .51 |
|
See accompanying notes.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated statements of comprehensive income
[Millions of dollars]
|
| | | | | | | | | | | | | | | |
| For Three Months Ended September 30, | | For Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net income | $ | 629 |
| | $ | 784 |
| | $ | 1,651 |
| | $ | 1,495 |
|
Other comprehensive income (loss): | | | | | | | |
Available-for-sale investments: | | | | | | | |
Unrealized gains (losses), net of taxes | — |
| | 1 |
| | — |
| | 3 |
|
Net actuarial gains (losses) of defined benefit plans: | | | | | | | |
Adjustment, net of taxes | 6 |
| | (3 | ) | | 86 |
| | 8 |
|
Reclassification of recognized transactions, net of taxes | 13 |
| | 128 |
| | 46 |
| | 151 |
|
Prior service cost of defined benefit plans: | | | | | | | |
Adjustment, net of taxes | — |
| | — |
| | (2 | ) | | — |
|
Reclassification of recognized transactions, net of taxes | (1 | ) | | — |
| | (3 | ) | | — |
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Derivative instrument: | | | | | | | |
Change in fair value, net of taxes | — |
| | (3 | ) | | (1 | ) | | (3 | ) |
Reclassification of recognized transactions, net of taxes | — |
| | — |
| | 1 |
| | — |
|
Other comprehensive income (loss), net of taxes | 18 |
| | 123 |
| | 127 |
| | 159 |
|
Total comprehensive income | $ | 647 |
| | $ | 907 |
| | $ | 1,778 |
| | $ | 1,654 |
|
See accompanying notes.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated balance sheets
[Millions of dollars, except share amounts]
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| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,435 |
| | $ | 1,416 |
|
Short-term investments | 2,158 |
| | 2,549 |
|
Accounts receivable, net of allowances of ($29) and ($31) | 1,524 |
| | 1,230 |
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Raw materials | 107 |
| | 116 |
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Work in process | 954 |
| | 935 |
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Finished goods | 665 |
| | 706 |
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Inventories | 1,726 |
| | 1,757 |
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Deferred income taxes | 1,039 |
| | 1,044 |
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Prepaid expenses and other current assets | 219 |
| | 234 |
|
Total current assets | 8,101 |
| | 8,230 |
|
Property, plant and equipment at cost | 6,539 |
| | 6,891 |
|
Less accumulated depreciation | (3,030 | ) | | (2,979 | ) |
Property, plant and equipment, net | 3,509 |
| | 3,912 |
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Long-term investments | 210 |
| | 215 |
|
Goodwill, net | 4,362 |
| | 4,362 |
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Acquisition-related intangibles, net | 2,305 |
| | 2,558 |
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Deferred income taxes | 227 |
| | 280 |
|
Capitalized software licenses, net | 139 |
| | 142 |
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Overfunded retirement plans | 119 |
| | 68 |
|
Other assets | 272 |
| | 254 |
|
Total assets | $ | 19,244 |
| | $ | 20,021 |
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| | | |
Liabilities and stockholders’ equity | |
| | |
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Current liabilities: | |
| | |
|
Current portion of long-term debt | $ | 1,000 |
| | $ | 1,500 |
|
Accounts payable | 426 |
| | 444 |
|
Accrued compensation | 567 |
| | 524 |
|
Income taxes payable | 37 |
| | 79 |
|
Deferred income taxes | 2 |
| | 2 |
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Accrued expenses and other liabilities | 691 |
| | 881 |
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Total current liabilities | 2,723 |
| | 3,430 |
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Long-term debt | 4,161 |
| | 4,186 |
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Underfunded retirement plans | 253 |
| | 269 |
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Deferred income taxes | 564 |
| | 572 |
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Deferred credits and other liabilities | 492 |
| | 603 |
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Total liabilities | 8,193 |
| | 9,060 |
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| | | |
Stockholders’ equity: | |
| | |
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Preferred stock, $25 par value. Authorized – 10,000,000 shares. Participating cumulative preferred. None issued. | — |
| | — |
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Common stock, $1 par value. Authorized – 2,400,000,000 shares. Shares issued – 1,740,815,939 | 1,741 |
| | 1,741 |
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Paid-in capital | 1,125 |
| | 1,176 |
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Retained earnings | 27,993 |
| | 27,205 |
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Less treasury common stock at cost. Shares: September 30, 2013 – 646,252,825; December 31, 2012 – 632,636,970 | (19,236 | ) | | (18,462 | ) |
Accumulated other comprehensive income (loss), net of taxes | (572 | ) | | (699 | ) |
Total stockholders’ equity | 11,051 |
| | 10,961 |
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Total liabilities and stockholders’ equity | $ | 19,244 |
| | $ | 20,021 |
|
See accompanying notes.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated statements of cash flows
[Millions of dollars]
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| | | | | | | |
| For Nine Months Ended September 30, |
| 2013 | | 2012 |
Cash flows from operating activities: | | | |
Net income | $ | 1,651 |
| | $ | 1,495 |
|
Adjustments to net income: |
|
| |
|
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Depreciation | 666 |
| | 725 |
|
Amortization of acquisition-related intangibles | 253 |
| | 257 |
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Stock-based compensation | 221 |
| | 199 |
|
Gains on sales of assets | (6 | ) | | — |
|
Deferred income taxes | (9 | ) | | 136 |
|
Gain on transfer of Japan substitutional pension | — |
| | (144 | ) |
Increase (decrease) from changes in: |
|
| |
|
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Accounts receivable | (302 | ) | | (70 | ) |
Inventories | 31 |
| | (86 | ) |
Prepaid expenses and other current assets | (54 | ) | | 80 |
|
Accounts payable and accrued expenses | (297 | ) | | (123 | ) |
Accrued compensation | 37 |
| | (41 | ) |
Income taxes payable | (29 | ) | | (177 | ) |
Changes in funded status of retirement plans | 82 |
| | 59 |
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Other | (59 | ) | | 19 |
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Cash flows from operating activities | 2,185 |
| | 2,329 |
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| | | |
Cash flows from investing activities: | |
| | |
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Capital expenditures | (305 | ) | | (399 | ) |
Proceeds from asset sales | 21 |
| | — |
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Purchases of short-term investments | (3,177 | ) | | (2,141 | ) |
Proceeds from short-term investments | 3,564 |
| | 1,639 |
|
Purchases of long-term investments | (1 | ) | | (1 | ) |
Proceeds from long-term investments | 18 |
| | 52 |
|
Cash flows from investing activities | 120 |
| | (850 | ) |
| | | |
Cash flows from financing activities: | |
| | |
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Proceeds from issuance of debt | 986 |
| | 1,492 |
|
Repayment of debt and commercial paper borrowings | (1,500 | ) | | (1,375 | ) |
Dividends paid | (849 | ) | | (584 | ) |
Stock repurchases | (2,134 | ) | | (1,200 | ) |
Proceeds from common stock transactions | 1,146 |
| | 390 |
|
Excess tax benefit from share-based payments | 72 |
| | 26 |
|
Other | (7 | ) | | (10 | ) |
Cash flows from financing activities | (2,286 | ) | | (1,261 | ) |
| | | |
Net change in cash and cash equivalents | 19 |
| | 218 |
|
Cash and cash equivalents, beginning of period | 1,416 |
| | 992 |
|
Cash and cash equivalents, end of period | $ | 1,435 |
| | $ | 1,210 |
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See accompanying notes.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Notes to financial statements
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1. | Description of business and significant accounting policies and practices |
At Texas Instruments (TI), we design and make semiconductors that we sell to electronics designers and manufacturers all over the world. Effective January 1, 2013, we have two reportable segments, which are established along major categories of products as follows:
Analog - consists of the following major product lines: High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA); and
Embedded Processing - consists of the following major product lines: Processors, Microcontrollers and Connectivity.
We report the results of our remaining business activities in Other. As previously announced, we restructured our Wireless business to focus our OMAP™ applications processors and connectivity products (formerly Wireless products) on embedded applications with long life cycles. Consistent with this restructuring, effective January 1, 2013, the Wireless segment was eliminated. Financial results for embedded OMAP applications processors and embedded connectivity products, both of which have many of the same characteristics as the products in our Embedded Processing segment, are now reported in that segment. Financial results for baseband products and Wireless products for the smartphone and consumer tablet markets, both of which are product lines that we have announced we are exiting, are included in Other and are collectively referred to as “legacy wireless products.” We also reclassified certain product lines, primarily radio frequency identification (RFID) products, from Other to Embedded Processing.
See Note 11 for the results of our business segments. On May 3, 2013, we filed a Form 8-K to update our Form 10-K for the year ended December 31, 2012, to reflect these changes. Prior period segment presentations have been recast to conform to this new reporting structure.
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, 2012, and as updated by the Form 8-K. The consolidated statements of income, statements of comprehensive income and statements of cash flows for the periods ended September 30, 2013 and 2012, and the balance sheet as of September 30, 2013, 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. 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, 2012, as updated by the Form 8-K. The results for the three- and nine-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 these notes, except per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated.
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 (shares in millions):
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| | | | | | | | | | | | | | | | | | | | | |
| For Three Months Ended September 30, 2013 | | For Three Months Ended September 30, 2012 |
| Net Income | | Shares | | EPS | | Net Income | | Shares | | EPS |
Basic EPS: | | | | | | | | | | | |
Net income | $ | 629 |
| | | | | | $ | 784 |
| | | | |
Less income allocated to RSUs | (11 | ) | | | | | | (15 | ) | | | | |
Income allocated to common stock for basic EPS calculation | $ | 618 |
| | 1,096 |
| | $ | .56 |
| | $ | 769 |
| | 1,130 |
| | $ | .68 |
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| | | | | | | | | | | |
Adjustment for dilutive shares: | |
| | |
| | |
| | |
| | |
| | |
Stock-based compensation plans | |
| | 15 |
| | |
| | |
| | 11 |
| | |
| | | | | | | | | | | |
Diluted EPS: | |
| | |
| | |
| | |
| | |
| | |
Net income | $ | 629 |
| | |
| | |
| | $ | 784 |
| | |
| | |
Less income allocated to RSUs | (11 | ) | | |
| | |
| | (14 | ) | | |
| | |
Income allocated to common stock for diluted EPS calculation | $ | 618 |
| | 1,111 |
| | $ | .56 |
| | $ | 770 |
| | 1,141 |
| | $ | .67 |
|
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| | | | | | | | | | | | | | | | | | | | | |
| For Nine Months Ended September 30, 2013 | | For Nine Months Ended September 30, 2012 |
| Net Income | | Shares | | EPS | | Net Income | | Shares | | EPS |
Basic EPS: | | | | | | | | | | | |
Net income | $ | 1,651 |
| | | | | | $ | 1,495 |
| | | | |
Less income allocated to RSUs | (29 | ) | | | | | | (27 | ) | | | | |
Income allocated to common stock for basic EPS calculation | $ | 1,622 |
| | 1,102 |
| | $ | 1.47 |
| | $ | 1,468 |
| | 1,138 |
| | $ | 1.29 |
|
| | | | | | | | | | | |
Adjustment for dilutive shares: | |
| | |
| | |
| | |
| | |
| | |
Stock-based compensation plans | |
| | 15 |
| | |
| | |
| | 15 |
| | |
| | | | | | | | | | | |
Diluted EPS: | |
| | |
| | |
| | |
| | |
| | |
Net income | $ | 1,651 |
| | |
| | |
| | $ | 1,495 |
| | |
| | |
Less income allocated to RSUs | (28 | ) | | |
| | |
| | (27 | ) | | |
| | |
Income allocated to common stock for diluted EPS calculation | $ | 1,623 |
| | 1,117 |
| | $ | 1.45 |
| | $ | 1,468 |
| | 1,153 |
| | $ | 1.27 |
|
There were no potentially dilutive securities excluded from the computation of diluted earnings per common share during the third quarter and the first nine months of 2013. Potentially dilutive securities representing 65 million shares of common stock that were outstanding during both the third quarter and the first nine months of 2012 were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive.
Derivatives and hedging
In connection with the issuance of variable-rate long-term debt in May 2011, we entered into an interest rate swap designated as a hedge of the variability of cash flows related to interest payments. Gains and losses from changes in the fair value of the interest rate swap were credited or charged to Accumulated other comprehensive income (loss), net of taxes (AOCI). In connection with the repayment of this long-term debt in the second quarter of 2013, this interest rate swap was settled for no gain or loss. In association with the issuance of long-term debt, we use financial derivatives such as treasury rate lock agreements, the results of which have not been material.
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. Gains and losses from changes in the fair value of these forward foreign currency exchange contracts are credited or charged to 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 September 30, 2013. Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our deferred compensation liabilities, are carried at fair value and are discussed in Note 5. 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 carrying value of our long-term debt approximates the fair value as measured using broker-dealer quotes, which are based on Level 2 inputs. See Note 5 for the definition of Level 2 inputs.
Changes in Accounting Standards
In January 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This standard clarifies that a previously issued standard on disclosure requirements of offsetting (or netting) financial instruments applies only to derivatives, repurchase agreements and certain securities lending transactions. The required disclosures are both gross and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This standard is effective as of the first quarter of 2013 and did not have a material impact on our financial disclosures because the derivatives to which it applies are not significant.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This standard requires an entity to disclose information about amounts reclassified out of AOCI by component and by statement of income line item. This standard is effective as of the first quarter of 2013 and is applied prospectively. See Note 10 for the required disclosure.
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2. | Acquisition-related charges |
We completed the acquisition of National Semiconductor Corporation (National) in September 2011. Various costs incurred as a result of that acquisition are included in Other, consistent with how management measures the performance of its segments. These total acquisition-related charges are as follows:
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| | | | | | | | | | | | | | | |
| For Three Months Ended September 30, | | For Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Acquisition charges: | | | | | | | |
Amortization of intangible assets | $ | 81 |
| | $ | 81 |
| | $ | 244 |
| | $ | 244 |
|
Retention bonuses | 2 |
| | 5 |
| | 5 |
| | 53 |
|
Severance and other benefits | — |
| | 3 |
| | — |
| | 17 |
|
Stock-based compensation | 3 |
| | 4 |
| | 8 |
| | 14 |
|
Transaction and other costs | — |
| | 13 |
| | — |
| | 35 |
|
As recorded in Acquisition charges | 86 |
| | 106 |
| | 257 |
| | 363 |
|
Distributor contract termination recorded in COR | — |
| | — |
| | — |
| | 21 |
|
Total acquisition-related costs | $ | 86 |
| | $ | 106 |
| | $ | 257 |
| | $ | 384 |
|
The amount of recognized amortization of acquired intangible assets resulting from the National acquisition is based on estimated useful lives varying between two and ten years. See Note 6 for additional information.
Retention bonuses reflect amounts already or expected to be paid to former National employees who fulfill agreed-upon service period obligations and are recognized ratably over the required service period.
Severance and other benefits costs were for former National employees who were terminated after the closing date. About 350 jobs were eliminated by the end of 2012 as a result of redundancies and cost efficiency measures. As of September 30, 2013, a total of $86 million in cumulative charges have been recognized, of which $82 million has been paid.
Stock-based compensation was recognized for the accelerated vesting of equity awards upon the termination of employees, with additional compensation being recognized over the applicable vesting period for the remaining grantees.
Transaction and other costs include various expenses incurred in connection with the National acquisition.
In 2011, we discontinued using one of National’s distributors. We acquired the distributor’s inventory at fair value, resulting in an incremental charge of $21 million to COR upon sale of the inventory in 2012.
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3. | Restructuring charges/other |
Restructuring charges/other is included in Other and is comprised of the following components:
|
| | | | | | | | | | | | | | | | | | | |
| For Three Months Ended September 30, | | For Nine Months Ended September 30, | | Cumulative Since Actions Initiated |
| 2013 | | 2012 | | 2013 | | 2012 | |
Restructuring charges: | | | | | | | | | |
2012 Wireless action | | | | | | | | | |
Severance and benefits cost | $ | — |
| | $ | — |
| | $ | 30 |
| | $ | — |
| | $ | 275 |
|
Accelerated depreciation | — |
| | — |
| | 6 |
| | — |
| | 9 |
|
Other exit costs | — |
| | — |
| | 2 |
| | — |
| | 105 |
|
| — |
| | — |
| | 38 |
| | — |
| | 389 |
|
2011 actions | | | | | | | | | |
Severance and benefits cost | 2 |
| | 1 |
| | 3 |
| | 3 |
| | 116 |
|
Accelerated depreciation | — |
| | 4 |
| | 5 |
| | 13 |
| | 28 |
|
Other exit costs | 14 |
| | 9 |
| | 18 |
| | 21 |
| | 43 |
|
| 16 |
| | 14 |
| | 26 |
| | 37 |
| | 187 |
|
Total restructuring charges | 16 |
| | 14 |
| | 64 |
| | 37 |
| | $ | 576 |
|
| | | | | | | | | |
Other: | | | | | | | | | |
Gain on technology transfer | — |
| | — |
| | (315 | ) | | — |
| | |
Gain on transfer of Japan substitutional pension | — |
| | (144 | ) | | — |
| | (144 | ) | | |
Other | — |
| | 8 |
| | — |
| | 8 |
| | |
Total Restructuring charges/other | $ | 16 |
| | $ | (122 | ) | | $ | (251 | ) | | $ | (99 | ) | | |
Restructuring actions related to the acquisition of National are discussed in Note 2 and are reflected on the Acquisition charges line of our Consolidated statements of income.
2012 Wireless action
In November 2012, we announced an action concerning our former Wireless segment that, when complete, is expected to reduce annualized expenses by about $450 million and will focus our investments on embedded markets with greater potential for sustainable growth. This action will be substantially complete by the end of 2013, eliminating about 1,700 jobs worldwide. As of September 30, 2013, $124 million has been paid to terminated employees for severance and benefits related to this action.
2011 actions
Beginning in the fourth quarter of 2011, we recognized restructuring charges associated with the closure of two older semiconductor manufacturing facilities in Houston, Texas, and Hiji, Japan, in 2013. This action will be substantially complete by the end of 2013. As of September 30, 2013, about $90 million has been paid to terminated employees for severance and benefits related to this action.
The table below reflects the changes in accrued restructuring balances associated with these actions:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 Wireless Action | | 2011 Actions | | Prior Actions | | |
| Severance and Benefits | | Other Charges | | Severance and Benefits | | Other Charges | | Severance and Benefits | | Other Charges | | Total |
Remaining accrual at December 31, 2012 | $ | 241 |
| | $ | — |
| | $ | 94 |
| | $ | 3 |
| | $ | 5 |
| | $ | 6 |
| | $ | 349 |
|
Restructuring charges | 30 |
| | 8 |
| | 3 |
| | 23 |
| | — |
| | — |
| | 64 |
|
Non-cash items (a) | — |
| | (6 | ) | | (1 | ) | | (11 | ) | | — |
| | — |
| | (18 | ) |
Payments | (119 | ) | | (2 | ) | | (79 | ) | | (13 | ) | | (4 | ) | | — |
| | (217 | ) |
Remaining accrual at September 30, 2013 | $ | 152 |
| | $ | — |
| | $ | 17 |
| | $ | 2 |
| | $ | 1 |
| | $ | 6 |
| | $ | 178 |
|
(a) Reflects charges for stock-based compensation, impacts of postretirement benefit plans and accelerated depreciation.
The accrual balances above are primarily a component of Accrued expenses and other liabilities or Deferred credits and other liabilities on our Consolidated balance sheets, depending on the expected timing of payment.
Other
Gain on technology transfer
During the second quarter of 2013, we entered into an agreement to transfer wireless connectivity technology to a customer. This technology was associated with the former Wireless business that we have previously announced we are exiting. As a result, we recognized a gain of $315 million.
Gain on transfer of Japan substitutional pension
During the third quarter of 2012, we transferred the obligations and assets of the substitutional portion of our Japan pension plan to the government of Japan, resulting in a net gain of $144 million. See Note 7 for additional details.
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 September 30, 2013, the estimated annual effective tax rate for 2013 is about 24 percent, which differs from the 35 percent statutory corporate tax rate due to lower statutory tax rates applicable to our operations in many of the jurisdictions in which we operate and from U.S. tax benefits. These lower tax rates are generally statutory in nature, without expiration and available to companies that operate in those taxing jurisdictions. The tax provision for the nine months ended September 30, 2013 includes a $65 million discrete tax benefit from the reinstatement in the first quarter of 2013 of the federal research tax credit retroactive to the beginning of 2012.
| |
5. | 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 on our Consolidated balance sheets. We record other-than-temporary impairments on available-for-sale securities in OI&E in our Consolidated statements of income.
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 SG&A.
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 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| 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 securities | | | | | | | | | | | |
Money market funds | $ | 582 |
| | $ | — |
| | $ | — |
| | $ | 211 |
| | $ | — |
| | $ | — |
|
Corporate obligations | 75 |
| | 317 |
| | — |
| | 188 |
| | 325 |
| | — |
|
U.S. Government agency and Treasury securities | 680 |
| | 1,841 |
| | — |
| | 795 |
| | 2,224 |
| | — |
|
Trading securities | |
| | |
| | |
| | |
| | |
| | |
|
Mutual funds | — |
| | — |
| | 168 |
| | — |
| | — |
| | 159 |
|
Total | $ | 1,337 |
| | $ | 2,158 |
| | $ | 168 |
| | $ | 1,194 |
| | $ | 2,549 |
| | $ | 159 |
|
| | | | | | | | | | | |
Other measurement basis: | |
| | |
| | |
| | |
| | |
| | |
|
Equity-method investments | $ | — |
| | $ | — |
| | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 34 |
|
Cost-method investments | — |
| | — |
| | 18 |
| | — |
| | — |
| | 22 |
|
Cash on hand | 98 |
| | — |
| | — |
| | 222 |
| | — |
| | — |
|
Total | $ | 1,435 |
| | $ | 2,158 |
| | $ | 210 |
| | $ | 1,416 |
| | $ | 2,549 |
| | $ | 215 |
|
As of September 30, 2013, and December 31, 2012, we had no significant unrealized gains or losses associated with our available-for-sale investments. For the three months and nine months ended September 30, 2013 and 2012, we did not recognize in earnings any credit losses related to these investments.
For the nine months ended September 30, 2013 and 2012, the proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $3.56 billion and $1.64 billion, respectively. Gross realized gains and losses from these sales were not significant.
The following table presents the aggregate maturities of investments in debt securities classified as available for sale at September 30, 2013:
|
| | | | |
Due | | Fair Value |
One year or less | | $ | 3,230 |
|
One to three years | | 265 |
|
Fair-value considerations
We measure and report certain financial assets and liabilities at fair value on a recurring basis. 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 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 and some U.S. government agency and Treasury securities. 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.
The following are our assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2013, and December 31, 2012. For these periods, we had no Level 3 assets or liabilities. 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 | | | | |
| September 30, 2013 | | Level 1 | | Level 2 |
Assets: | | | |
| | |
|
Money market funds | $ | 582 |
| | $ | 582 |
| | $ | — |
|
Corporate obligations | 392 |
| | — |
| | 392 |
|
U.S. Government agency and Treasury securities | 2,521 |
| | 1,667 |
| | 854 |
|
Mutual funds | 168 |
| | 168 |
| | — |
|
Total assets | $ | 3,663 |
| | $ | 2,417 |
| | $ | 1,246 |
|
| | | | | |
Liabilities: | |
| | |
| | |
|
Deferred compensation | $ | 186 |
| | $ | 186 |
| | $ | — |
|
Total liabilities | $ | 186 |
| | $ | 186 |
| | $ | — |
|
|
| | | | | | | | | | | |
| Fair Value | | | | |
| December 31, 2012 | | Level 1 | | Level 2 |
Assets: | | | |
| | |
|
Money market funds | $ | 211 |
| | $ | 211 |
| | $ | — |
|
Corporate obligations | 513 |
| | — |
| | 513 |
|
U.S. Government agency and Treasury securities | 3,019 |
| | 1,145 |
| | 1,874 |
|
Mutual funds | 159 |
| | 159 |
| | — |
|
Total assets | $ | 3,902 |
| | $ | 1,515 |
| | $ | 2,387 |
|
| | | | | |
Liabilities: | |
| | |
| | |
|
Deferred compensation | $ | 174 |
| | $ | 174 |
| | $ | — |
|
Total liabilities | $ | 174 |
| | $ | 174 |
| | $ | — |
|
The following table summarizes the change in the fair values for Level 3 assets:
|
| | | |
| Level 3 |
Changes in fair value during the period (pre-tax): | Auction-rate Securities |
Balance, December 31, 2011 | $ | 134 |
|
Change in unrealized loss – included in AOCI | 13 |
|
Redemptions | (84 | ) |
Sales | (63 | ) |
Balance, September 30, 2012 | $ | — |
|
We had no Level 3 assets as of either September 30, 2013, or December 31, 2012.
| |
6. | Goodwill and acquisition-related intangibles |
Goodwill was $4.362 billion net of accumulated impairment of $90 million as of September 30, 2013, and December 31, 2012. There was no impairment of goodwill during the three months and nine months ended September 30, 2013. The following table shows the components of acquisition-related intangible assets as of September 30, 2013, and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2013 | | December 31, 2012 |
Acquisition-related Intangibles | | Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Developed technology | | 5 - 10 | | $ | 2,153 |
| | $ | 469 |
| | $ | 1,684 |
| | $ | 2,145 |
| | $ | 312 |
| | $ | 1,833 |
|
Customer relationships | | 5 - 8 | | 820 |
| | 213 |
| | 607 |
| | 821 |
| | 137 |
| | 684 |
|
Other intangibles | | 5 | | 5 |
| | 3 |
| | 2 |
| | 46 |
| | 36 |
| | 10 |
|
In-process R&D | | (a) | | 12 |
| | n/a |
| | 12 |
| | 31 |
| | n/a |
| | 31 |
|
Total | | | | $ | 2,990 |
| | $ | 685 |
| | $ | 2,305 |
| | $ | 3,043 |
| | $ | 485 |
| | $ | 2,558 |
|
(a) In-process R&D is not amortized until the associated project has been successfully completed, at which point it would be reclassified to developed technology. Alternatively, if the associated project is determined not to be viable, it will be expensed.
Amortization of acquisition-related intangibles was $83 million and $86 million for the three months ($253 million and $257 million for the nine months) ended September 30, 2013 and 2012.
| |
7. | Postretirement benefit plans |
Components of net periodic employee benefit cost are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Defined Benefit | | U.S. Retiree Health Care | | Non-U.S. Defined Benefit |
For Three Months Ended September 30 | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
Service cost | $ | 6 |
| | $ | 6 |
| | $ | 1 |
| | $ | 1 |
| | $ | 9 |
| | $ | 10 |
|
Interest cost | 12 |
| | 11 |
| | 5 |
| | 6 |
| | 15 |
| | 19 |
|
Expected return on plan assets | (11 | ) | | (12 | ) | | (6 | ) | | (6 | ) | | (17 | ) | | (20 | ) |
Amortization of prior service cost (credit) | — |
| | — |
| | 1 |
| | 1 |
| | (1 | ) | | (1 | ) |
Recognized net actuarial loss | 5 |
| | 4 |
| | 3 |
| | 4 |
| | 7 |
| | 10 |
|
Net periodic benefit cost | 12 |
| | 9 |
| | 4 |
| | 6 |
| | 13 |
| | 18 |
|
| | | | | | | | | | | |
Settlement loss | 5 |
| | — |
| | — |
| | — |
| | 4 |
| | 193 |
|
Curtailment gain | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
|
Special termination benefit gain | — |
| | — |
| | — |
| | — |
| | — |
| | (337 | ) |
Total, including other postretirement losses (gains) | $ | 17 |
| | $ | 9 |
| | $ | 4 |
| | $ | 6 |
| | $ | 15 |
| | $ | (126 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Defined Benefit | | U.S. Retiree Health Care | | Non-U.S. Defined Benefit |
For Nine Months Ended September 30 | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
Service cost | $ | 20 |
| | $ | 18 |
| | $ | 4 |
| | $ | 4 |
| | $ | 29 |
| | $ | 29 |
|
Interest cost | 33 |
| | 33 |
| | 15 |
| | 18 |
| | 46 |
| | 58 |
|
Expected return on plan assets | (36 | ) | | (37 | ) | | (18 | ) | | (18 | ) | | (50 | ) | | (59 | ) |
Amortization of prior service cost (credit) | — |
| | 1 |
| | 3 |
| | 3 |
| | (3 | ) | | (3 | ) |
Recognized net actuarial loss | 16 |
| | 12 |
| | 9 |
| | 10 |
| | 24 |
| | 34 |
|
Net periodic benefit cost | 33 |
| | 27 |
| | 13 |
| | 17 |
| | 46 |
| | 59 |
|
| | | | | | | | | | | |
Settlement loss | 18 |
| | — |
| | — |
| | — |
| | 4 |
| | 193 |
|
Curtailment gain | — |
| | — |
| | — |
| | (1 | ) | | (5 | ) | | — |
|
Special termination benefit gain | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (337 | ) |
Total, including other postretirement losses (gains) | $ | 51 |
| | $ | 25 |
| | $ | 13 |
| | $ | 16 |
| | $ | 45 |
| | $ | (85 | ) |
In the nine months ended September 30, 2013, we remeasured our U.S. and Japan defined benefit plans, as a result of increased retirement activities. These remeasurements resulted in net actuarial gains on a pre-tax basis in Other comprehensive income of $14 million and $79 million for the three and nine months ended September 30, 2013, respectively. Of these gains, $7 million related to the U.S. plans and $7 million was for the Japan plan in the three-month period; $24 million related to the U.S. plans and $55 million was for the Japan plan in the nine-month period. From these remeasurements, we recognized settlement losses on the U.S. and Japan plans, as well as curtailment gains on the Japan plan. These are detailed in the above table. The effects of these remeasurements, and the effects of foreign currency exchange rate fluctuations, are reflected in Overfunded retirement plans and Underfunded retirement plans on our Consolidated balance sheets.
Transfer of Japan substitutional pension
In Japan, we maintained employee pension fund plans (EPFs) pursuant to the Japanese Welfare Pension Insurance Law (JWPIL). An EPF consists of two portions: a substitutional portion based on JWPIL-determined minimum old-age pension benefits similar to Social Security benefits in the United States; and a corporate portion established at the discretion of each employer. Employers and employees are exempt from contributing to the Japanese Pension Insurance (JPI) if the substitutional portion is funded by an EPF.
The JWPIL was amended to permit each EPF to separate the substitutional portion and transfer those obligations and related assets to the government of Japan. After such a transfer, the employer is required to contribute periodically to JPI, and the government of Japan is responsible for future benefit payments relating to the substitutional portion.
During the third quarter of 2012, our EPF received final approval for such a separation and transferred the obligations and assets of its substitutional portion to the government of Japan. On a pre-tax basis, this resulted in a net gain of $144 million recorded in Restructuring charges/other on our Consolidated statements of income and included in Other. This net gain of $144 million consisted of two parts - a gain of $337 million, representing the difference between the fair values of the obligations settled ($533 million) and the assets transferred from the pension trust to the government of Japan ($196 million), offset by a settlement loss of $193 million related to the recognition of previously unrecognized actuarial losses included in AOCI.
| |
8. | Debt and lines of credit |
Short-term borrowings
We maintain a line of credit to support commercial paper borrowings, if any, and to provide additional liquidity through bank loans. As of September 30, 2013, we have a variable-rate revolving credit facility from a consortium of investment-grade banks that allows us to borrow up to $2 billion through March 2018. The interest rate on borrowings under this credit facility, if drawn, is indexed to the applicable London Interbank Offered Rate (LIBOR). As of September 30, 2013, our credit facility was undrawn and we had no commercial paper outstanding.
Long-term debt
In May 2013, we issued an aggregate principal amount of $1.0 billion of fixed-rate long-term debt, with $500 million due in 2018 and $500 million due in 2023. The proceeds of the offering were $986 million net of the original issuance discount and were used toward the repayment of $1.5 billion of maturing debt, including floating-rate notes. In connection with this repayment, we settled the associated interest rate swap. We also incurred $6 million of issuance and other related costs that are being amortized to Interest and debt expense over the term of the debt.
In August 2012, we issued an aggregate principal amount of $1.5 billion of fixed-rate long-term debt, with $750 million due in 2015 and $750 million due in 2019. The proceeds of the offering were $1.492 billion, net of the original issuance discount. We also incurred $7 million of issuance costs that are being amortized to Interest and debt expense over the term of the debt.
The following table summarizes the total long-term debt outstanding as of September 30, 2013 and December 31, 2012:
|
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
Floating-rate notes due 2013 (swapped to a 0.922% fixed rate) | $ | — |
| | $ | 1,000 |
|
Notes due 2013 at 0.875% | — |
| | 500 |
|
Notes due 2014 at 1.375% | 1,000 |
| | 1,000 |
|
Notes due 2015 at 3.95% (assumed with National acquisition) | 250 |
| | 250 |
|
Notes due 2015 at 0.45% | 750 |
| | 750 |
|
Notes due 2016 at 2.375% | 1,000 |
| | 1,000 |
|
Notes due 2017 at 6.60% (assumed with National acquisition) | 375 |
| | 375 |
|
Notes due 2018 at 1.00% | 500 |
| | — |
|
Notes due 2019 at 1.65% | 750 |
| | 750 |
|
Notes due 2023 at 2.25% | 500 |
| | — |
|
| 5,125 |
| | 5,625 |
|
Add net unamortized premium | 36 |
| | 61 |
|
Less current portion of long-term debt | (1,000 | ) | | (1,500 | ) |
Total long-term debt | $ | 4,161 |
| | $ | 4,186 |
|
Interest incurred on debt, net of the amortization of the debt premium and other debt issuance costs, was $24 million and $21 million for the three months ($71 million and $62 million for the nine months) ended September 30, 2013 and 2012, respectively. Capitalized interest was not material.
Indemnification guarantees
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.
Warranty costs/product liabilities
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 of 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.
General
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. From time to time, we also negotiate contingent consideration payment arrangements associated with certain acquisitions, which are recorded at fair value.
Discontinued operations indemnity
In connection with the 2006 sale of the former Sensors & Controls (S&C) business, we have agreed to indemnify Sensata Technologies, Inc., for specified litigation matters and certain liabilities, including environmental liabilities. In a settlement with a third party, we have agreed to indemnify that party for certain events relating to S&C products, which events we consider remote. We believe our total remaining potential exposure from both of these indemnities will not exceed $200 million. As of September 30, 2013, we believe future payments related to these indemnity obligations will not have a material effect on our financial condition, results of operations or liquidity.
| |
10. | Supplemental financial information |
In conformance with ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, the table below details where reclassifications of recognized transactions out of AOCI are recorded on the Consolidated statements of income.
|
| | | | | | | | | | | | | | | | | | |
| | For Three Months Ended September 30, | | For Nine Months Ended September 30, | | |
Details About AOCI Components | | 2013 | | 2012 | | 2013 | | 2012 | | Related Statement of Income Line |
Net actuarial gains (losses) of defined benefit plans (a) | | $ | 24 |
| | $ | 211 |
| | $ | 71 |
| | $ | 249 |
| | Pension expense (b) |
Taxes | | (11 | ) | | (83 | ) | | (25 | ) | | (98 | ) | | Provision for income taxes |
Reclassification of recognized transactions, net of taxes | | $ | 13 |
| | $ | 128 |
| | $ | 46 |
| | $ | 151 |
| | Net income |
| | | | | | | | | | |
Prior service cost of defined benefit plans (c) | | $ | (2 | ) | | $ | — |
| | $ | (5 | ) | | $ | — |
| | Pension expense (b) |
Taxes | | 1 |
| | — |
| | 2 |
| | — |
| | Provision for income taxes |
Reclassification of recognized transactions, net of taxes | | $ | (1 | ) | | $ | — |
| | $ | (3 | ) | | $ | — |
| | Net income |
| | | | | | | | | | |
Derivative instruments | | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | Interest and debt expense |
Taxes | | — |
| | — |
| | (1 | ) | | — |
| | Provision for income taxes |
Reclassification of recognized transactions, net of taxes | | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | Net income |
(a) Net actuarial gains (losses) of defined benefit plans is equal to the sum of Recognized net actuarial loss and Settlement loss as detailed in Note 7. This also includes the settlement loss of $193 million associated with the transfer of the Japan substitutional pension in 2012.
(b) This AOCI component is included in the computation of total employee benefit cost which is allocated to COR, R&D, SG&A and Restructuring charges/other in the Consolidated statements of income.
(c) Prior service cost of defined benefit plans is equal to the sum of Amortization of prior service cost (credit) and Curtailment gain as detailed in Note 7.
See Note 1 for a detailed description of our reportable segments. Prior period segment presentations have been revised to conform to our new reporting structure.
|
| | | | | | | | | | | | | | | |
| For Three Months Ended September 30, | | For Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Segment Revenue: | | | | | | | |
Analog | $ | 1,931 |
| | $ | 1,843 |
| | $ | 5,325 |
| | $ | 5,329 |
|
Embedded Processing | 668 |
| | 591 |
| | 1,846 |
| | 1,711 |
|
Other | 645 |
| | 956 |
| | 2,006 |
| | 2,806 |
|
Total revenue | $ | 3,244 |
| | $ | 3,390 |
| | $ | 9,177 |
| | $ | 9,846 |
|
|
| | | | | | | | | | | | | | | |
| For Three Months Ended September 30, | | For Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Segment Operating Profit: | | | | | | | |
Analog | $ | 583 |
| | $ | 460 |
| | $ | 1,298 |
| | $ | 1,231 |
|
Embedded Processing | 83 |
| | 60 |
| | 144 |
| | 147 |
|
Other | 178 |
| | 320 |
| | 703 |
| | 456 |
|
Total operating profit | $ | 844 |
| | $ | 840 |
| | $ | 2,145 |
| | $ | 1,834 |
|
We use centralized manufacturing and facilities organizations to provide products and support to our operating segments.
Costs incurred by these organizations, including depreciation, are charged to the segments on a per-unit basis. Consequently, depreciation expense is not an independently identifiable component within the segments’ results and therefore is not provided.
In September 2013, we announced a 7 percent increase in our quarterly cash dividend rate, which increased from $0.28 to $0.30 per share. This dividend will be payable November 18, 2013, to stockholders of record on October 31, 2013.
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 35 countries. We have three segments: Analog, Embedded Processing 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 2012 as measured by revenue, according to industry data from an external source.
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 products, more than 100,000 orderable parts, are integrated circuits that 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. This broad portfolio includes products that are integral to almost all electronic equipment.
We sell catalog and, to a lesser extent, custom semiconductor products. Catalog products are designed for use by many customers and/or many applications and are sold through both distribution and direct channels. The majority of our catalog products are proprietary, but some are commodity products. The life cycles of catalog products generally span multiple years, with some products continuing to sell for decades after their initial release. 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.
Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels, and how management allocates resources and measures results. 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 in every electronic device, whether plugged into a wall or running off a battery. We estimate that we sell our Analog products to more than 100,000 customers. These sales generated about 55 percent of our revenue in 2012. According to external sources, the worldwide market for analog semiconductors was about $39 billion in 2012. Our Analog segment's revenue in 2012 was about $7.0 billion, or about 18 percent of this fragmented market, the leading position. We believe that we are well positioned to increase our market share over time.
Our Analog segment includes the following major product lines: High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA).
HVAL products: These include both high-volume analog and logic products. High-volume analog includes integrated analog products for specific applications, including custom products. End markets for high-volume analog products include communications, automotive, computing and many consumer electronics products. Logic includes some commodity products marketed to many different customers for many different applications.
Power products: These include both catalog and application-specific products 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 basestations and high-voltage industrial equipment).
HPA products: These include catalog analog products, such as amplifiers, data converters and interface semiconductors, 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. HPA products generally have long life cycles, often more than 10 years.
SVA products: These include power management, data converter, interface and operational amplifier catalog analog products. This portfolio of thousands of products is marketed to many different customers who use them in manufacturing a wide range of products sold in many end markets. SVA products generally have long life cycles, often more than 10 years.
Embedded Processing
Embedded Processing products are the “brains” of many electronic devices. Compared with general purpose microprocessors that perform many different tasks, embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. The devices vary from simple, low-cost products used in electric toothbrushes to highly specialized, complex devices used in wireless basestation communications infrastructure equipment. Our Embedded Processing products are used in many end markets, particularly industrial, automotive and communications infrastructure.
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 many customers prefer to re-use software from one product generation to the next.
Sales of Embedded Processing products generated about 18 percent of our revenue in 2012. According to external sources, the worldwide market for embedded processors was about $17 billion in 2012. Our Embedded Processing segment's revenue in 2012 was about $2.3 billion. This was the number two position and represented about 13 percent of this fragmented market. We believe we are well positioned to increase our market share over time.
Our Embedded Processing segment includes the following major product lines: Processors, Microcontrollers and Connectivity.
Processor products: These include DSPs and applications processors. DSPs perform mathematical computations almost instantaneously to process or improve digital data. Applications processors like our embedded OMAPTM and SitaraTM products run an industry-standard operating system and perform multiple complex tasks, often communicating with other systems.
Microcontroller products: Microcontrollers are self-contained systems with a processor core, memory and peripherals that are designed to control a set of specific tasks for electronic equipment. Microcontrollers tend to have minimal requirements for memory and program length, with no operating system and low software complexity. Analog components that control or interface with sensors and other systems are often integrated into microcontrollers. Microcontroller products also include radio frequency identification (RFID) products, which are frequently used in automotive applications and sold along with our microcontroller products.
Connectivity products: Connectivity products enable electronic devices to seamlessly connect and transfer data, and the requirements for speed, data capability, distance and power vary depending on the application. Our Connectivity products support many wireless technologies to meet these requirements, including low-power wireless network standards like Zigbee® and other technologies like Bluetooth®, WiFi, GPS and Near Field Communications. Our Connectivity products are usually designed into customer devices alongside our processor and microcontroller products, enabling data to be collected, transmitted and acted upon.
Other
Other includes revenue from our smaller product lines, such as DLP® (primarily used in projectors to create high-definition images), custom semiconductors known as application-specific integrated circuits (ASICs) and calculators. It includes royalties received for our patented technology that we license to other electronics companies and revenue from transitional supply agreements related to acquisitions and divestitures. We also include revenue, about $1.2 billion in 2012, from our baseband products and from our OMAP applications processors and connectivity products sold into smartphone and consumer tablet applications, all of which are product lines that we have previously announced we are exiting and are collectively
referred to as “legacy wireless products.” We expect this revenue to substantially cease by the end of 2013. Other generated about $3.6 billion of revenue in 2012.
We also include in Other restructuring charges and certain acquisition-related charges that are not used in evaluating results of and allocating resources to our Analog and Embedded Processing segments. These acquisition-related charges include certain fair-value adjustments, restructuring charges, transaction expenses, acquisition-related retention bonuses and amortization of intangible assets. Other also includes certain non-recurring and corporate-level items, such as litigation and environmental costs, insurance proceeds, and assets and liabilities associated with our centralized operations, such as our worldwide manufacturing, facilities and procurement operations.
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 catalog products and their inherently lower risk of obsolescence, we generally carry more inventory of those products than custom products. Additionally, we sometimes maintain catalog-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, the wafer is cut into individual units and each unit is assembled into a package that then is usually retested. The entire process takes place in highly specialized facilities and requires an average of 12 weeks, with most products completing within 8 to 16 weeks.
The cost and lifespan of the equipment and processes we use to manufacture semiconductors vary by technology. Our Analog products and most of our Embedded Processing products can be manufactured using mature and stable, and therefore less expensive, equipment than is needed for manufacturing advanced CMOS logic products, such as our OMAP products.
We own and operate semiconductor manufacturing facilities in North America, Asia, Japan and Europe. These include both 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.
We expect to maintain sufficient internal wafer fabrication capacity to meet the vast majority of our production needs. 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, and subcontractors. In 2012, we sourced about 20 percent of our total wafers and about 75 percent of our advanced CMOS logic needs from external foundries.
In 2011, we initiated closure of an older wafer fabrication facility in Hiji, Japan, and another in Houston, Texas. We expect to complete these plant closures in 2013.
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.
Market cycle
The “semiconductor cycle” is an important concept that refers to the ebb and flow of supply and demand. The semiconductor market 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. These are typically referred to as upturns and downturns in the semiconductor cycle. The semiconductor cycle is affected by the significant time and money required to build and maintain semiconductor manufacturing facilities.
Seasonality
Our revenue is subject to some seasonal variation. Our semiconductor revenue tends to be weaker in the first and fourth quarters when compared to the second and third quarters. Calculator revenue is tied to the U.S. back-to-school season and is therefore at its highest in the second and third quarters.
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 may reflect in our financial statements one or more tax refunds or assessments, or changes to tax liabilities, involving one or more taxing authorities.
Third-Quarter 2013 results
Our third-quarter revenue was $3.24 billion, net income was $629 million and earnings per share (EPS) were $0.56.
Our third-quarter performance reflects the positive structural changes we have made over the past few years as we have focused on Analog and Embedded Processing. Our revenue in the quarter was up 6 percent sequentially. Excluding the legacy wireless products, revenue grew 10 percent sequentially. Our book-to-bill ratio was 0.97, consistent with an expected seasonal revenue decline in the fourth quarter.
Analog and Embedded Processing are now 80 percent of TI’s revenue, eight points higher than a year ago. The combined revenue from these two businesses grew 10 percent sequentially and 7 percent from a year ago. Our legacy wireless products declined to less than 2 percent of revenue.
Earnings per share were higher than expected due to better revenue and gross profit, tight expense control and discrete tax items. Gross margin of 54.8 percent was an all-time high for TI, exceeding the prior record set in the third quarter of 2010, even though both revenue and factory utilization were lower. We believe this reflects the increased quality of revenue that comes from our focus on Analog and Embedded Processing and the efficiency of our manufacturing strategy.
Our business model continues to generate strong cash flow from operations. Free cash flow for the trailing 12 months was almost $3 billion, up 4 percent compared with a year ago. Free cash flow was 24 percent of revenue, consistent with our target of 20-25 percent.
We returned $1.0 billion to shareholders through dividends and stock repurchases in the quarter. For the trailing 12 months, the return to shareholders totaled $3.8 billion or 133 percent of free cash flow. In the quarter, we announced a dividend increase, our second in 2013. In total, we have increased our dividend by 43 percent this year, resulting in an annualized rate of $1.20 per share. Our strategy to return to shareholders all of our free cash flow not needed for debt repayment reflects our confidence in the long-term sustainability of our Analog and Embedded Processing business model.
Our balance sheet remains strong, with $3.6 billion of cash and short-term investments at the end of the quarter, 82 percent owned by the company’s U.S. entities. Inventory days were 106, up from 101 a year ago, and consistent with our model of 105-115 days.
Free cash flow and revenue excluding legacy wireless are non-GAAP financial measures. For reconciliation to GAAP and an explanation for the purpose of providing these non-GAAP measures, see the Non-GAAP financial information section after the Liquidity and Capital Resources section.
Consolidated Statements of Income
(Millions of dollars, except share and per-share amounts)
|
| | | | | | | | | | | | | | |
| For Three Months Ended |
| Sept. 30, 2013 | | Sept. 30, 2012 | | June 30, 2013 |
Revenue | $ | 3,244 |
| | | $ | 3,390 |
| | | $ | 3,047 |
| |
Cost of revenue | 1,465 | | | | 1,650 | | | | 1,477 | | |
Gross profit | 1,779 | | | | 1,740 | | | | 1,570 | | |
Research and development (R&D) | 368 | | | | 463 | | | | 389 | | |
Selling, general and administrative (SG&A) | 465 | | | | 453 | | | | 471 | | |
Acquisition charges | 86 | | | | 106 | | | | 86 | | |
Restructuring charges/other | 16 | | | | (122 | ) | | | (282 | ) | |
Operating profit | 844 | | | | 840 | | | | 906 | | |
Other income (expense), net (OI&E) | (4 | ) | | | 24 | | | | — | | |
Interest and debt expense | 24 | | | | 21 | | | | 24 | | |
Income before income taxes | 816 | | | | 843 | | | | 882 | | |
Provision for income taxes | 187 | | | | 59 | | | | 222 | | |
Net income | $ | 629 |
| | | $ | 784 |
| | | $ | 660 |
| |
| | | | | |
Earnings per common share: | | | | | |
Basic | $ | .56 |
| | | $ | .68 |
| | | $ | .59 |
| |
Diluted | $ | .56 |
| | | $ | .67 |
| | | $ | .58 |
| |
| | | | | |
Average shares outstanding (millions): | | | | | |
Basic | 1,096 | | | | 1,130 | | | | 1,103 | | |
Diluted | 1,111 | | | | 1,141 | | | | 1,117 | | |
| | | | | |
Cash dividends declared per share of common stock | $ | .28 |
| | | $ | .17 |
| | | $ | .28 |
| |
| | | | | |
Percentage of revenue: | | | | | |
Gross profit | 54.8 | | % | | 51.3 | | % | | 51.5 | | % |
R&D | 11.3 | | % | | 13.6 | | % | | 12.8 | | % |
SG&A | 14.4 | | % | | 13.4 | | % | | 15.5 | | % |
Operating profit | 26.0 | | % | | 24.8 | | % | | |