EXHIBIT 13
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Portions of Registrant's 1998 Annual Report to Stockholder Incorporated by
Reference in this Report
Financial Highlights
To understand why, let's take a closer look at TI's 1998 financial
performance. Total revenues for the year were $8460 million, down 13 percent
from 1997, due primarily to lower prices in DRAMs and, to a lesser extent, to
the absence of revenue due to the sale of the memory business. Excluding
special charges, operating margins were 10.9 percent, earnings per share
totaled $1.79, and income for the year was $719 million, down from $809
million in 1997. TI orders were $8069 million compared with $9796 million the
year before.
These company results were affected primarily by a near-collapse in the
global market for memory chips. This had an impact on the company's financial
performance. Loss from memory operations was $498 million.
It's not the first time the memory market has experienced such volatility,
and it probably won't be the last. That's why we've been working to reduce
TI's exposure to this commodity-type business for a number of years -investing
instead in differentiated products such as our market-leading portfolios of
digital signal processors (DSPs) and analog chips.
We completed this transformation on September 30, 1998, with the sale of our
memory business to Micron Technology, Inc. This sale is a critical component
of our efforts to increase TI's financial stability.
Excluding losses in memory chips, our 1998 financial performance looks
considerably brighter. In the fourth quarter of 1998, the initial quarter
without memory operations, operating margins increased to 16.0 percent,
compared with 9.6 percent in the third quarter of the year.
Perhaps most significant from a strategic standpoint is the growth we
achieved in the DSP category. We not only maintained our DSP leadership,
we increased it. Our DSP revenues surged 29 percent in 1998, significantly
faster than the growth rate of the DSP market overall. This strong performance
is important on two counts:
-DSP was one of the few strong areas in a generally weak market for
semiconductor chips in 1998.
-TI is #1 in DSP, both in terms of dollar sales and breadth of product
portfolio.
In other words, we're not just targeting one of the fastest-growing portions
of the semiconductor business. We're actually driving its growth, with
important wins in the marketplace.
Leadership in this market is important in its own right, because the DSP
category is expected to triple in size during the next five years - driven by
demand for end-equipment devices such as wireless phones, digital cameras,
modems and computer networking gear, as well as by the increased use of
digital components in automobiles, home appliances, manufacturing equipment
and other "embedded" systems.
At the same time, a strong position in DSP helps to pull through sales of
TI's other semiconductor products - primarily our ever-expanding portfolio of
analog chips. We're convinced that our DSP and analog franchises can and will
combine with our other operations to create a solid foundation for near-and
long-term improvements in value, growth and financial stability.
Semiconductor
TI's Semiconductor Group - our largest business - was led by the stellar
performance of our DSP product line in 1998. DSP revenues increased to a
record level, led by wireless. Collectively, TI's remaining semiconductor
product areas saw revenues down moderately from 1997, primarily due to overall
semiconductor weakness. DSP and analog products made up 59 percent of total
semiconductor revenue in the fourth quarter of 1998.
Materials & Controls
Revenues declined 1 percent versus 1997 due to the weak Asian markets, but
this business unit continued to make exceptional progress in cost-control,
leading to operating margins of 15.0 percent.
Educational & Productivity Solutions
TI's calculator business showed a rise in operating margins of 3.4
percentage points to 16.6 percent. Through an extraordinary focus on the needs
of teachers and students, this business unit has earned a commanding share of
the calculator market in the U.S., and is now pursuing a similar business
development strategy in other world markets.
Digital Imaging
TI's emerging Digital Imaging business achieved greater than 50 percent
revenue growth in 1998 and continued to make headway in the ultra-portable
projector market.
Building a Real Time Advantage
Beyond wins in the marketplace, TI reached another important milestone in
1998. We largely completed the work we set out to do two years ago, to
restructure TI into a company focused primarily on differentiated technologies
such as the two drivers of the digital age of electronics - DSPs and analog
chips.
Along with selling our memory business, TI underwent a major restructuring
to increase efficiencies and reduce costs. We also made a number of
acquisitions to strengthen our expertise in our core technologies. These
included Spectron Microsystems, GO DSP, Oasix and Arisix corporations, and
the assets of the high-end hard disk drive operation of Adaptec, Inc.
Consolidated Financial Statements (millions of dollars, except per-share
amounts)
Income
For the Years Ended December 31, 1998 1997 1996
----------------------------------------------------------------------------
Net revenues $ 8,460 $ 9,750 $ 9,940
----------------------------------------------------------------------------
Operating costs and expenses:
Cost of revenues 5,394 6,067 7,146
Research and development 1,206 1,536 1,181
Marketing, general and administrative 1,461 1,532 1,639
----------------------------------------------------------------------------
Total 8,061 9,135 9,966
----------------------------------------------------------------------------
Profit (loss) from operations 399 615 (26)
Other income (expense) net 293 192 76
Interest on loans 75 94 73
----------------------------------------------------------------------------
Income (loss) from continuing operations
before provision for income taxes
and extraordinary item 617 713 (23)
Provision for income taxes 210 411 23
----------------------------------------------------------------------------
Income (loss) from continuing operations
before extraordinary item 407 302 (46)
Discontinued operations:
Income from operations -- 52 109
Gain on sale -- 1,473 --
----------------------------------------------------------------------------
Income before extraordinary item 407 1,827 63
Extraordinary item: extinguishment of debt -- (22) --
----------------------------------------------------------------------------
Net income $ 407 $ 1,805 $ 63
============================================================================
Diluted earnings (loss) per common share:
Continuing operations before extraordinary
item $ 1.02 $ .76 $ (.12)
Discontinued operations:
Income from operations -- .13 .29
Gain on sale -- 3.70 --
Extraordinary item -- (.05) --
----------------------------------------------------------------------------
Net income $ 1.02 $ 4.54 $ .17
============================================================================
Basic earnings (loss) per common share:
Continuing operations before extraordinary
item $ 1.04 $ .78 $ (.12)
Discontinued operations:
Income from operations -- .14 .29
Gain on sale -- 3.82 --
Extraordinary item -- (.05) --
----------------------------------------------------------------------------
Net income $ 1.04 $ 4.69 $ .17
============================================================================
See accompanying notes.
14
Consolidated Financial Statements (millions of dollars, except per-share
amounts)
Balance Sheet
15
Consolidated Financial Statements (millions of dollars, except per-share
amounts)
Cash Flows
16
See accompanying notes.
17
Consolidated Financial Statements (millions of dollars, except per-share
amounts)
Stockholders' Equity
18
Notes to
Financial Statements
Accounting Policies And Practices
The company adopted SFAS No. 130 in the first quarter of 1998. It required
disclosure of comprehensive income, i.e., net income plus direct adjustments
to stockholders' equity such as equity, debt and cash investment adjustments
and pension liability adjustments. Also in 1998, the company adopted SFAS
No. 132, which mandated changes in disclosures for pension and retiree health
care plans. In 1997, the company adopted SFAS No. 128, which required
disclosure of two new earnings per share amounts (diluted and basic) and
elimination of prior earnings per share amounts. Also in 1997, the company
adopted SFAS No. 131, which required a new basis of determining reportable
business segments, i.e., the management approach. Disclosures under these
1997 and 1998 standards were provided on a retroactive basis. None affected
reported net income.
Accounting standard SFAS No. 133 was issued in 1998 and is effective in
2000. It requires that all derivatives be marked-to-market on an ongoing
basis. This applies whether the derivatives are stand-alone instruments, such
as forward currency exchange contracts and interest rate swaps, or embedded
derivatives, such as call options contained in convertible debt investments.
Along with the derivatives, the underlying hedged items are also to be
marked-to-market on an ongoing basis. These market value adjustments are to
be included either in the income statement or stockholders' equity, depending
on the nature of the transaction. The company expects to adopt the standard
in the first quarter of 2000 on a cumulative basis. Based on analysis to
date, the company expects the most significant impact of this standard will
be the cumulative, as well as ongoing mark-to-market, adjustment through the
income statement of the embedded call option on Micron Technology, Inc.
(Micron) common shares contained in the convertible note received from Micron
in connection with TI's 1998 sale of its memory business. The value of this
option can be volatile given its sensitivity to changes in the value of
Micron common shares. For example, at September 30, 1998, the estimated
value of the option was $82 million; at December 31, 1998, it was $192
million. Under SFAS No. 133, this change in value of $110 million would be
included in the income statement. Under current accounting principles, the
change in value of the Micron convertible note, including the embedded call,
is an adjustment to stockholders' equity.
Accounting standard SOP 98-1 was issued in 1998 and is effective in 1999.
It requires capitalization of the development costs of software to be used
internally, e.g., for manufacturing or administrative processes. The
company, which currently capitalizes significant development costs for
internal-use software, expects to adopt the standard in the first quarter of
1999 for developmental costs incurred in that quarter and thereafter. The
effect is not expected to be material. Accounting standard SOP 98-5 was
issued in 1998 and is effective in 1999. It requires expensing, rather than
capitalizing, the cost of start-up activities. The company currently
expenses such amounts as incurred and therefore expects no material effect
from adoption of this standard.
The consolidated financial statements include the accounts of all
subsidiaries. The preparation of financial statements requires the use of
estimates from which final results may vary. Intercompany balances and
transactions have been eliminated. Certain amounts in prior years' financial
statements and related notes have been reclassified to conform to the 1998
presentation. The U.S. dollar is the functional currency for financial
reporting. With regard to accounts recorded in currencies other than U.S.
dollars, current assets (except inventories), deferred income taxes, other
assets, current liabilities and long-term liabilities are remeasured at
exchange rates in effect at year-end. Inventories, property, plant and
equipment and depreciation thereon are remeasured at historic exchange rates.
Revenue and expense accounts other than depreciation for each month are
remeasured at the appropriate month-end rate of exchange. Net currency
exchange gains and losses from remeasurement and forward currency exchange
contracts to hedge net balance sheet exposures are charged or credited on a
current basis to other income (expense) net. Gains and losses from forward
currency exchange contracts to hedge specific transactions are deferred and
included in the measurement of the related transactions. Gains and losses
from interest rate swaps are included on the accrual basis in interest
expense. Gains and losses from terminated forward currency exchange
contracts and interest rate swaps are deferred and recognized consistent with
the terms of the underlying transaction.
As discussed in the Divestitures note, the consolidated financial
statements include the effect of two significant divestitures: the sale of
the company's memory business and related joint venture interests to Micron
in September 1998, which was accounted for as a sale of a business, and the
sale of the defense business to Raytheon Company in July 1997, which was
accounted for as a discontinued operation.
Inventories are stated at the lower of cost or estimated realizable value.
Cost is generally computed on a currently adjusted standard (which
approximates current average costs) or average basis.
19
Notes to
Financial Statements
Revenues are generally recognized as products are shipped. Royalty revenue
is recognized by the company upon fulfillment of its contractual obligations
and determination of a fixed royalty amount or, in the case of ongoing
royalties, upon sale by the licensee of royalty-bearing products, as
estimated by the company.
Depreciation is computed by either the declining-balance method (primarily
150 percent declining method) or the sum-of-the-years-digits method. Fully
depreciated assets are written off against accumulated depreciation.
Advertising costs are expensed as incurred. Advertising expense was $100
million in 1998, $128 million in 1997 and $124 million in 1996.
Computation of earnings per common share (EPS) amounts for income (loss)
from continuing operations before extraordinary item is as follows (millions,
except per-share amounts):
The EPS computation for 1996 excludes 4.8 million shares for stock
options/compensation plans and 5.0 million shares for convertible debentures
because their effect would have been antidilutive.
Cash Equivalents and Short-Term Investments
Debt securities with original maturities within three months are considered
cash equivalents. Debt securities with original maturities beyond three months
have remaining maturities within 13 months and are considered short-term
investments. These cash equivalent and short-term investment debt securities
are available for sale and stated at fair value, which approximates their
specific amortized cost. As of December 31, 1998, these debt securities
consisted primarily of the following types: corporate ($1092 million) and
asset-backed commercial paper ($679 million). At December 31, 1997, these
debt securities consisted primarily of the following types: corporate ($1943
million) and asset-backed commercial paper ($623 million). Gross realized and
unrealized gains and losses for each of these security types were immaterial
in 1998, 1997 and 1996. Proceeds from sales of these cash equivalent and
short-term investment debt securities in 1998, 1997 and 1996 were $647
million, $859 million and $10 million.
Inventories
Millions of Dollars
---------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------
Raw materials and purchased parts $ 77 $ 105
Work in process 354 364
Finished goods 165 273
------ ------
Inventories $ 596 $ 742
===========================================================================
Prior to the sale of its memory business to Micron in 1998, TI participated in
DRAM manufacturing joint ventures. TI held minority interests in, and had
long-term inventory purchase commitments with, each joint venture. Under the
agreements, TI purchased the output of the ventures at prices based upon
percentage discounts from TI's average selling prices. Inventory purchases
from the ventures aggregated $416 million in 1998, $977 million in 1997 and
$1176 million in 1996. Receivables from and payables to the ventures were
$135 million and $69 million at December 31, 1997. TI amortized its cost of
the ventures over the expected initial output period of three to five years,
and recognized its share of any cumulative venture net losses in excess of
amortization. The related expense charged to operations was $40 million in
1998, $88 million in 1997 and $33 million in 1996.
Property, Plant and Equipment at Cost
Millions of Dollars
---------------------------------------------------------------------------
Depreciable Lives 1998 1997
---------------------------------------------------------------------------
Land $ 88 $ 94
Buildings and
improvements 5-40 years 2,297 2,583
Machinery and
equipment 3-10 years 3,994 4,737
---------------------------------------------------------------------------
Total $6,379 $7,414
===========================================================================
Authorizations for property, plant and equipment expenditures in future years
were approximately $541 million at December 31, 1998, and $1105 million at
December 31, 1997.
20
Investments
At year-end 1998, equity investments primarily consisted of 28,933,092 Micron
common shares, along with several other publicly traded investments. Debt
investments consisted of 6.5% Micron convertible and subordinated notes. The
convertible note (convertible into 12,333,358 Micron common shares at $60 per
share) and the subordinated note have face amounts of $740 million and $210
million. The notes, which mature in 2005, have a weighted-average imputed
interest rate of 8.7%. The Micron securities were received in 1998 in
connection with TI's sale of its memory business.
TI Ventures is an externally managed venture fund which invests in the
development of new markets. As of year-end 1998, it had invested in 14
companies focused on next-generation applications of digital signal
processors.
Other investments consist of mutual funds that are acquired to generate
returns that offset changes in certain liabilities related to deferred
compensation arrangements. The mutual funds hold a variety of debt and equity
investments.
Following is information on the investments:
Millions of Dollars
-----------------------------------------------------------------------
Unrealized
Fair ---------------------------
Value Gains (Losses) Net Cost
-----------------------------------------------------------------------
1998
Equity investments $1,516 $643 $ (51) $592 $ 924
Debt investments 978 139 -- 139 839
TI Ventures 37 5 -- 5 32
Other investments 33 5 (5) -- 33
-----------------------------------------------------------------------
Total $2,564 $792 $ (56) $736 $1,828
=======================================================================
1997
Equity investments $53 $50 $(36) $ 14 $39
TI Ventures 10 -- -- -- 10
Other investments 6 5 -- 5 1
-----------------------------------------------------------------------
Total $69 $55 $(36) $ 19 $50
=======================================================================
Investments are stated at fair value, which is based on market quotes,
current interest rates or management estimates, as appropriate. Adjustments
to fair value of the equity and debt investments, which are classified as
available-for-sale, are recorded as an increase or decrease in stockholders'
equity. Adjustments to fair value of the venture fund are recorded in other
income (expense) net. Adjustments to fair value of the other investments,
which are classified as trading, are recorded in operating expense. Cost or
amortized cost, as appropriate, was determined on a specific identification
basis. Proceeds from sales of equity and debt investments were zero in 1998,
$26 million in 1997 and zero in 1996. There were no gross realized gains or
losses from sales of equity and debt investments in 1998 and 1996, and there
was a $16 million gain in 1997.
Accounts Payable and Accrued Expenses
Millions of Dollars
---------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------
Accounts payable $ 510 $ 698
Accrued salaries, wages, severance
and vacation pay 320 405
Other accrued expenses and liabilities 752 979
---------------------------------------------------------------------------
Total $1,582 $2,082
===========================================================================
Debt and Lines of Credit
---------------------------------------------------------------------------
Millions of Dollars
---------------------------------------------------------------------------
Long-Term Debt 1998 1997
---------------------------------------------------------------------------
6.75% notes due 1999 $ 200 $ 200
6.875% notes due 2000 200 200
9.0% notes due 2001 55 55
6.65% notes, due in installments through 2001 159 204
9.25% notes due 2003 104 104
6.125% notes due 2006 300 300
8.75% notes due 2007 43 43
3.80% to 6.10% lira notes
(9% swapped for 1.60% U.S. dollar obligation) 184 190
Other 49 57
---------------------------------------------------------------------------
1,294 1,353
Less current portion long-term debt 267 67
---------------------------------------------------------------------------
Total $1,027 $1,286
===========================================================================
The coupon rates for the notes due 2006 have been swapped for LIBOR-based
variable rates through 2006, for an effective interest rate of approximately
4.6% and 5.1% as of December 31, 1998 and 1997. The lira notes, and related
swaps, are due in installments through 2005.
As a result of a 1997 tender offer for any or all of the company's 9.0%,
9.25% and 8.75% notes, an aggregate of $248 million of debt principal was
tendered at a cash price of $280 million. This resulted in an extraordinary
charge of $22 million in the fourth quarter of 1997, after elimination of
deferred issuance costs and recognition of an income tax effect of $12
million.
21
Notes to
Financial Statements
Interest incurred on loans in 1998, 1997 and 1996 was $85 million, $114
million and $108 million. Of these amounts, $10 million in 1998, $20 million
in 1997 and $35 million in 1996 were capitalized as a component of capital
asset construction costs. Interest paid on loans (net of amounts capitalized)
was $75 million in 1998, $94 million in 1997 and $54 million in 1996.
Aggregate maturities of long-term debt due during the four years subsequent
to December 31, 1999, are as follows:
Millions of Dollars
-------------------------------------------------------------------------
2000 $ 312
2001 136
2002 27
2003 161
The company maintains lines of credit to support commercial paper borrowings
and to provide additional liquidity. These lines of credit totaled $669
million at December 31, 1998, and $651 million at December 31, 1997. Of these
amounts, at December 31, 1998 and 1997, $600 million existed to support
outstanding commercial paper borrowings or short-term bank loans.
Financial Instruments and Risk Concentration
Financial Instruments: In addition to the swaps discussed in the preceding
note, as of December 31, 1998, the company had forward currency exchange
contracts outstanding of $756 million to hedge net balance sheet exposures
(including $161 million to sell yen, $132 million to buy lira and $105 million
to buy deutsche marks). At December 31, 1997, the company had forward
currency exchange contracts outstanding of $275 million to hedge net balance
sheet exposures (including $101 million to buy lira, $73 million to buy
deutsche marks and $24 million to buy Singapore dollars). As of December 31,
1998 and 1997, the carrying amounts and current market settlement values of
these swaps and forward contracts were not significant.
The company uses forward currency exchange contracts, including the lira
note currency swaps, to minimize the adverse earnings impact from the effect
of exchange rate fluctuations on the company's non-U.S. dollar net balance
sheet exposures. The interest rate swaps for the company's notes due 2006 are
used to change the characteristics of the interest rate stream on the debt
from fixed rates to short-term variable rates in order to achieve a mix of
interest rates that, over time, is expected to moderate financing costs. The
effect of these interest rate swaps was to reduce interest expense by $3
million and $2 million in 1998 and 1997, and increase interest expense by $2
million in 1996.
In order to minimize its exposure to credit risk, the company limits its
counterparties on the forward currency exchange contracts and interest rate
swaps to investment-grade rated financial institutions.
As of December 31, 1998 and 1997, the fair value of long-term debt, based on
current interest rates, was approximately $1346 million and $1390 million,
compared with the historical cost amount of $1294 million and $1353 million.
Risk Concentration: Financial instruments that potentially subject the
company to concentrations of credit risk are primarily cash investments,
accounts receivable and noncurrent investments. The company places its cash
investments in investment-grade, short-term debt securities and limits the
amount of credit exposure to any one commercial issuer. Concentrations of
credit risk with respect to the receivables are limited due to the large
number of customers in the company's customer base and their dispersion across
different industries and geographic areas. The company maintains an allowance
for losses based upon the expected collectibility of accounts receivable. The
company's noncurrent investments at year-end 1998 have an aggregate fair value
of $2564 million. The investments are in high-technology companies and are
subject to price volatility and other uncertainties. They include a
significant concentration of Micron debt (fair value of $978 million) and
equity instruments (fair value of $1463 million). The company adjusts the
carrying amounts of the investments to fair value each quarter.
Stockholders' Equity
The company is authorized to issue 10,000,000 shares of preferred stock. None
is currently outstanding.
Each outstanding share of the company's common stock carries a stock
purchase right. Under certain circumstances, each right may be exercised to
purchase one one-thousandth of a share of the company's participating
cumulative preferred stock for $200. Under certain circumstances following
the acquisition of 20% or more of the company's outstanding common stock by an
acquiring person (as defined in the rights agreement), each right (other than
rights held by an acquiring person) may be exercised to purchase common stock
of the company or a successor company with a market value of twice the $200
exercise price. The rights, which are redeemable by the company at 1 cent per
right, expire in June 2008.
22
Changes in other comprehensive income are as follows:
Millions of Dollars
----------------------------------------------------------------------------
Equity, Debt and
Pension Liability Cash Investments
Adjustment Adjustment Total
----------------------------------------------------------------------------
Balance, December 31, 1995 $ (45) $ -- $ (45)
Annual adjustments 6 43 49
Tax effect of above -- (15) (15)
---------------------------------------------------------------------------
Balance, December 31, 1996 (39) 28 (11)
Annual adjustments (24) (12) (36)
Tax effect of above -- 4 4
Reclassification of
realized transactions,
net of tax of $6 million -- (10) (10)
---------------------------------------------------------------------------
Balance, December 31, 1997 (63) 10 (53)
Annual adjustments (117) 717 600
Tax effect of above -- (251) (251)
---------------------------------------------------------------------------
Balance, December 31, 1998 $(180) $ 476 $ 296
===========================================================================
Research and Development Expense
Research and development expense, which totaled $1206 million in 1998, $1536
million in 1997 and $1181 million in 1996, included a charge in 1998 of $25
million for the value of acquired in-process research and development from two
business acquisitions. Research and development expense for 1997 included a
charge of $461 million for the value of acquired in-process research and
development as a result of the acquisition of Amati Communications Corporation
(Amati). The company acquired Amati as a result of an all-cash tender offer
in fourth quarter 1997 through which approximately 78% of Amati's outstanding
common shares were acquired for an aggregate of $306 million. As
contractually required, the company then acquired the balance of the Amati
shares through a second-step merger transaction for an aggregate of $91
million. In addition to these stock purchase costs, the company incurred
approximately $117 million of additional acquisition costs, which included $50
million for the value of TI common stock options contractually required to be
issued to replace outstanding Amati employee stock options. Research and
development expense for 1996 included a charge of $192 million for the value
of acquired in-process research and development in connection with the 1996
acquisition of Silicon Systems, Inc. (SSi) for $557 million. There was
essentially no tax offset associated with these acquired in-process research
and development charges.
Status at year-end 1998 of the acquired Amati and SSi research projects:
The Amati research projects, which relate to digital subscriber line (DSL)
system designs for Internet and other uses, were essentially completed on
schedule. The first product has now been released and, although the DSL market
has developed more slowly than expected, TI expects improvement in the near
term in Internet-related demand. As this occurs, TI will be one of a very few
suppliers who have demonstrated interoperability and standards compliance.
Thus, TI does not anticipate material adverse effects regarding its operating
results, financial condition or investment return as a result of these delays.
The SSi research projects, which relate to analog technology for hard disk
drives and removable storage devices, were essentially completed on schedule.
TI expects to meet or exceed its original return expectations.
Other Income (Expense) Net
Millions of Dollars
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Interest income $ 166 $ 146 $ 62
Other income (expense) net 127 46 14
---------------------------------------------------------------------------
Total $ 293 $ 192 $ 76
===========================================================================
Other income included gains of $83 million in 1998 from the sale of TI's
interest in the TI-Acer joint venture to Acer Corporation and $66 million in
1997 from the sale of three divested activities, primarily software.
Stock Options
The company has stock options outstanding to participants under the Texas
Instruments 1996 Long-Term Incentive Plan, approved by stockholders on
April 18, 1996. Options are also outstanding under the 1988 Stock Option Plan
and the Texas Instruments Long-Term Incentive Plan; however, no further
options may be granted under these plans. Under all these stockholder-
approved plans, unless the options are acquisition-related replacement
options, the option price per share may not be less than 100 percent of the
fair market value on the date of the grant. Substantially all the options
have a 10-year term. Options granted subsequent to 1996 generally vest
ratably over four years. Options granted prior to that are fully vested.
23
Notes to
Financial Statements
Under the 1996 Long-Term Incentive Plan, the company may grant stock
options, including incentive stock options; restricted stock and restricted
stock units; performance units; and other stock-based awards. The plan
provides for the issuance of 37,000,000 shares of the company's common stock
(plus shares subject to acquisition-related replacement options); in addition,
if any award under the 1988 Stock Option Plan or the Long-Term Incentive Plan
terminates, then any unissued shares subject to the terminated award become
available for granting awards under the 1996 Long-Term Incentive Plan. No
more than 4,000,000 shares of common stock may be awarded as restricted stock,
restricted stock units or other stock-based awards under the plan. In 1998,
1997 and 1996, 117,000, 201,500 and 110,028 shares of restricted stock units,
which vest over one to five years, were granted (weighted-average award-date
value of $51.80, $37.78 and $22.65 per share). In addition, in 1998, 1997 and
1996, zero, 5,700 and 69,812 previously unissued shares were issued as Annual
Incentive Plan stock awards (weighted-average award-date value of zero, $22.94
and $23.28 per share). Compensation expense for restricted stock units and
annual stock awards totaled $3.9 million, $3.5 million and $1.6 million in
1998, 1997 and 1996.
The company also has stock options outstanding under the Employee Stock
Purchase Plan approved by stockholders in 1997. The plan provides for options
to be offered semiannually to all eligible employees in amounts based on a
percentage of the employee's compensation. The option price per share may not
be less than 85 percent of the fair market value on the date of grant. If the
optionee authorizes and does not cancel payroll deductions that will be equal
to or greater than the purchase price, options granted become exercisable
seven months, and expire not more than 13 months, from date of grant. There
are no options outstanding under the 1988 Employee Stock Option Purchase Plan,
the predecessor to the Employee Stock Purchase Plan.
Under the Stock Option Plan for Non-Employee Directors adopted in April
1998, the company will grant stock options to each non-employee director, once
a year, in the period beginning January 1999 and extending through 2003. Each
grant will be an option to purchase 5,000 shares with an option price equal to
fair market value on the date of grant. The option will vest ratably over
four years.
Stock option transactions during 1998, 1997 and 1996 were as follows:
*Excludes options offered but not accepted.
**Includes previously unissued shares and treasury shares of 2,039,118 and
3,608,010; 5,324,348 and 37,271; and 1,641,644 and zero for 1998, 1997
and 1996.
***Aggregate value of $52 million for two acquisitions.
In accordance with the terms of APB No. 25, the company records no
compensation expense for its stock option awards. As required by SFAS
No. 123, the company provides the following disclosure of hypothetical values
for these non-acquisition-related awards. The weighted-average grant-date
value of options granted during 1998, 1997 and 1996 was estimated to be
$22.15, $15.72 and $9.24 under the Long-Term Incentive Plans and the 1988
Stock Option Plan (Long-Term Plans) and $13.34, $13.47 and $6.05 under the
Employee Stock and Stock Option Purchase Plans (Employee Plans). These values
were estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1998, 1997 and 1996: expected dividend
yields of .71%, .93% and 1.48% (Long-Term Plans) and .74%, .70% and 1.21%
(Employee Plans); expected volatility of 43%, 39% and 39%; risk-free interest
rates of 5.47%, 5.76% and 5.42% (Long-Term Plans) and 5.32%, 5.69% and 6.15%
(Employee Plans); and expected lives of 6 years (Long-Term Plans) and .8
years, .8 years and 1.5 years (Employee Plans). Had compensation expense been
recorded based on these hypothetical values, the company's
24
1998 net income would have been $328 million, or diluted earnings per share of
$0.81. A similar computation for 1997 and 1996 would have resulted in net
income of $1764 million and $40 million, or diluted earnings per share of
$4.43 and $0.11. Because options vest over several years and additional
option grants are expected, the effects of these hypothetical calculations are
not likely to be representative of similar future calculations.
Summarized information about stock options outstanding under the Long-Term
Plans at December 31, 1998, is as follows:
At December 31, 1998, the stock options outstanding under the Employee Plans
have exercise prices of $43.04 and $49.30, depending on the date of grant, and
a remaining contractual life of three or nine months. Of the total
outstanding options, 280,229 are exercisable at year-end 1998.
At year-end 1998, 21,861,771 shares were available for future grants under
the 1996 Long-Term Incentive Plan and 7,518,268 shares under the Employees
Stock Purchase Plan. As of year-end 1998, 50,047,468 shares were reserved for
issuance under the company's stock option and incentive plans and 8,667,092
shares were reserved for issuance under the Employee Stock Purchase Plan.
In 1997, the company began a stock repurchase program with the goal of
neutralizing the dilutive effect of shares to be issued upon the exercise of
stock options under the Employee Stock Purchase Plan and Long-Term Plans.
Treasury shares acquired in connection with this repurchase program and other
stock transactions in 1998, 1997 and 1996 were 4,463,283 shares, 754,511
shares and 7,730 shares. Previously unissued common shares issued under the
Long-Term Plans and the Annual Incentive Plan in 1998, 1997 and 1996 were
33,848 shares, 30,174 shares and 98,072 shares. Treasury shares issued under
the Texas Instruments Restricted Stock Unit Plan for Directors in 1998, 1997
and 1996 were zero shares, zero shares and 2,334 shares.
Retirement and Incentive Plans
The company provides various retirement plans for employees including pension,
savings and deferred profit sharing plans. Incentive plans include profit
sharing payments and annual performance awards.
U.S. retirement plans: Effective January 1, 1998, for U.S. employees hired on
or after December 1, 1997, the company provides a defined contribution plan
whereby the company contributes 2% of an employee's earnings, and a matched
savings program whereby an employee's contribution, up to 4% of the employee's
earnings, is matched by the company at a dollar-per-dollar rate. The
contributions may be invested in several investment funds including TI common
stock. During a selection period in 1997, employees employed prior to
December 1, 1997, irrevocably elected whether to choose this plan or remain in
the savings and defined benefit programs described below. Approximately 36%
chose this plan.
For U.S. employees hired prior to December 1, 1997, the company provides a
matched savings program whereby an employee's contribution, up to 4% of the
employee's earnings (subject to statutory limitations), is matched by the
company at the rate of 50 cents per dollar. Available investments are the
same as above. Also provided is a defined benefit plan with benefits based on
years of service and employee's compensation. The plan is a career-average-
pay plan which has been amended periodically in the past to produce
approximately the same results as a final-pay type plan. The board of
directors of the company has expressed an intent to make such amendments in
the future, circumstances permitting, and the expected effects of such
amendments have been considered in calculating U.S. pension expense.
Certain of the profit sharing plans worldwide provide that, depending on the
individual plan, a portion of the profit sharing earned by employees is
contributed to a deferred plan. For U.S. employees, 50% of profit sharing
amounts are deferred. Several investment options are available, including TI
common stock. While the board of directors of the company has authorized the
issuance of 9,233,836 shares of previously unissued TI common shares for
deferred profit sharing and savings plans worldwide, none have been issued in
the three years ended December 31, 1998. Instead, the trustees of these plans
worldwide have purchased outstanding TI common shares: 3,753,084 shares in
1998, 3,535,471 shares in 1997 and 3,123,905 shares in 1996.
The company's aggregate expense for U.S. employees under the defined
contribution, deferred profit sharing and matched savings
25
plans was $56 million in 1998, $55 million in 1997 and $17 million in 1996.
The company's U.S. employees are currently eligible to receive, during
retirement, specified company-paid medical benefits. The plan is contributory
and premiums are adjusted annually. For employees retiring on or after
January 5, 1993, the company has specified a maximum annual amount per
retiree, based on years of service, that it will pay toward retiree medical
premiums. For employees who retired prior to that date, the company maintains
a consistent level of cost sharing between the company and the retiree.
Effective January 1, 1998, new employees are eligible for this benefit when
they reach 20 years of service, regardless of age. For a 15-year transition
period, current employees qualify for eligibility under either the 20-year
rule or the previous requirement, which was based upon retirement eligibility
under the defined benefit pension plan. Coverage eligibility under the 20-
year rule is only available at termination, i.e., no subsequent election to
participate is allowable.
Expense of the U.S. defined benefit and retiree health care benefit plans
was as follows:
Millions of Dollars
-----------------------------------------------------------------------------
Retiree
Defined Benefit Health Care
---------------------------------------------------------- -----------------
1998 1997 1996 1998 1997 1996
-------------------------------------------------------- ----------------
Service cost $36 $36 $40 $ 3 $ 3 $ 4
Interest cost 48 48 51 21 20 22
Expected return on plan assets (38) (33) (41) -- -- --
Amortization of prior service cost 2 3 3 -- -- --
Amortization of transition obligation (5) (5) (8) -- -- --
Recognized net actuarial loss 1 2 3 -- -- --
-------------------------------------------------------- ---------------
Total $44 $51 $48 $24 $23 $26
======================================================== ===============
Settlement and curtailment gains (losses) of the U.S. defined benefit plan
recognized in 1998, 1997 and 1996 were zero and $(6) million; $3 million and
$18 million; and $5 million and zero. For the retiree health care benefit
plan they were zero and $1 million; zero and $1 million; and zero.
Obligation data for the U.S. defined benefit and retiree health care benefit
plans and asset data for the U.S. defined benefit plan at December 31 were as
follows:
Millions of Dollars
-----------------------------------------------------------------------------
Retiree
Defined Benefit Health Care
1998 1997 1998 1997
------------------------------------------------------------ ------------
Change in benefit obligation
------------------------------------------------------------ ------------
Benefit obligation at beginning of year $ 688 $ 819 $ 319 $ 312
Service cost 36 36 3 3
Interest cost 48 48 21 20
Plan participant's contributions -- -- 6 5
Benefits paid (38) (202) (25) (22)
Actuarial loss 50 36 22 --
Settlements (84) (28) -- --
Curtailments 9 (24) 6 1
Special termination benefit 9 3 -- --
Divestiture (11) -- -- --
------------------------------------------------------------ ------------
Benefit obligation at end of year 707 688 352 319
------------------------------------------------------------ ------------
Change in plan assets
------------------------------------------------------------
Fair value of plan assets at beginning of year 543 611
Actual return on plan assets 88 114
Employer contribution 26 42
Benefits paid (28) (196)
Settlements (84) (28)
Divestiture (14) --
------------------------------------------------------------
Fair value of plan assets at
end of year 531 543
------------------------------------------------------------ ------------
Funded status (176) (145) (352) (319)
Unrecognized net actuarial (gain) (29) (29) (5) (33)
Unrecognized prior service cost 6 8 (2) (2)
Unrecognized transition obligation (10) (16) - -
------------------------------------------------------------ ------------
Accrued retirement at December 31 (209) (182) (359) (354)
Less current portion 27 40 23 19
---------------------------------------------------- ----- ------------
Accrued U.S. retirement costs $(182) $(142) $(336) $(335)
============================================================ ============
26
The U.S. defined benefit and retiree health care obligations for 1998 and
1997 were determined using assumed discount rates of 6.75% and 7.0%. The
assumed average long-term pay progression rate was 4.25%. The assumed long-
term rate of return on plan assets was 9.0%. The retiree health care benefit
obligation was determined using health care cost trend rates of 6.0% for 1999
decreasing to 5.0% by 2000. Increasing (decreasing) the health care cost
trend rates by 1% would have increased (decreased) the retiree health care
benefit obligation at December 31, 1998, by $15 million/$(15) million and 1998
plan expense by $1 million/$(1) million.
Non-U.S. retirement plans: Retirement coverage for non-U.S. employees of the
company is provided, to the extent deemed appropriate, through separate plans.
Defined retirement benefits are based on years of service and employee's
compensation, generally during a fixed number of years immediately prior to
retirement.
Certain non-U.S. locations provide for deferral of profit sharing amounts
with contributions generally invested in TI common stock. The related expense
for these contributions was $3 million in 1998, $6 million in 1997 and zero in
1996.
Expense of the non-U.S. defined benefit plans was as follows:
Millions of Dollars
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Service cost $ 53 $ 59 $ 64
Interest cost 31 35 34
Expected return on plan assets (40) (38) (35)
Amortization of prior service cost (1) 1 1
Amortization of transition obligation 2 2 2
Recognized net actuarial loss 12 9 10
---------------------------------------------------------------------------
Total $ 57 $ 68 $ 76
===========================================================================
Settlement and curtailment gains (losses) of the non-U.S. defined benefit
plans recognized in 1998 and 1997 were $(5) million and zero; and $(3) million
and zero. There were no such items in 1996.
Obligation and asset data for the non-U.S. defined benefit plans at
September 30 were as follows:
Millions of Dollars
---------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------
Change in benefit obligation
---------------------------------------------------------------------
Benefit obligation at beginning of year $ 999 $ 940
Service cost 53 59
Interest cost 31 35
Benefits paid (20) (19)
Actuarial gain (83) (16)
---------------------------------------------------------------------
Benefit obligation at end of year ........... 980 999
---------------------------------------------------------------------
Change in plan assets
---------------------------------------------------------------------
Fair value of plan assets at beginning of year 543 500
Actual return on plan assets 21 59
Employer contribution 36 38
Benefits paid (20) (19)
Actuarial gain (40) (35)
---------------------------------------------------------------------
Fair value of plan assets at end of year .... 540 543
---------------------------------------------------------------------
Funded status (440) (456)
Unrecognized net actuarial loss 250 252
Unrecognized prior service cost 8 9
Unrecognized transition obligation 9 13
Adjustments from Sept. 30 to Dec. 31 (4) 4
---------------------------------------------------------------------
Net non-U.S. amount recognized .............. $(177) $(178)
=====================================================================
Amounts recognized in the balance sheet
consist of:
Accrued retirement, current $ (2) $ (3)
Accrued retirement, noncurrent (377) (254)
Prepaid benefit cost 14 10
Intangible asset 8 6
Accumulated other comprehensive income 180 63
---------------------------------------------------------------------
Total $(177) $(178)
=====================================================================
The range of assumptions used for the non-U.S. defined benefit plans
reflects the different economic environments within the various countries.
The defined benefit obligations were determined as of September 30 using a
range of assumed discount rates of 2.5% to 7.0% and a range of assumed average
long-term pay progression rates of 3.0% to 6.0%. The range of assumed long-
term rates of return on plan assets was 7.0% to 8.0%. Accrued retirement at
September 30, 1998 and 1997 includes projected benefit obligations of $841
million and $883 million and accumulated benefit obligations of $630 million
and $636 million, versus plan assets of $395 million and $408 million, for
three plans whose obligations exceed their assets.
27
Notes to
Financial Statements
Special actions: In the second quarter of 1998, the company announced that,
as a result of the various business divestitures over the past several years,
the pending sale of its memory business and weakness in the current
semiconductor market environment, it was implementing a
severance/manufacturing efficiency program in order to more closely match the
size and cost of its support functions with the company's overall size and to
further combine manufacturing resources for more efficient operations. The
plan, which primarily affected the company's corporate activities and
semiconductor business, included the elimination of 3,441 jobs around the
world through voluntary programs, attrition, outsourcing and layoffs, as well
as the closing of several facilities. As a result, the company took a pretax
charge of $233 million in the second quarter, of which $126 million was
included in marketing, general and administrative expense and $107 million in
cost of revenues. Of the $233 million charge, $161 million was for severance,
$55 million for asset write-downs and $17 million for vendor cancellation and
lease charges. The asset write-downs were primarily to adjust fixed assets in
Singapore and inventory in the United States to their actual sale value. At
year-end 1998, the program had essentially been completed, with most severance
costs paid except for $49 million, which will primarily be paid in 1999. Of
the 3,441 jobs, 3,260 had been eliminated, and 181 will be eliminated in 1999.
In the fourth quarter of 1998, the company took further steps to enhance
manufacturing efficiency including the announced closing of a semiconductor
assembly operation and sale of a materials & controls manufacturing operation,
both in Europe. The sale was completed on December 31, 1998. The assembly
operation closing, which is ongoing, affected 740 employees. As a result of
these actions, the company took a fourth-quarter 1998 pretax charge of $72
million, of which $27 million was included in cost of revenues, $24 million in
other income (expense) net and $21 million in marketing, general and
administrative expense. Of this $72 million charge, $35 million was for
severance, $35 million for other cash-related costs and $2 million for asset
write-downs, primarily to adjust fixed assets in the European materials &
controls operation to actual sale value. Of the $35 million severance charge,
$19 million had been paid by year-end 1998 and $16 million will be paid in
1999.
In the first quarter of 1997, the company sold its mobile computing
business and terminated its digital imaging printing development program. As
a result of these divestitures, the company took a first-quarter pretax charge
of $56 million, of which $28 million was included in cost of revenues and $28
million in marketing, general and administrative expense. Of this $56 million
charge, $27 million was for severance for involuntary reductions worldwide.
These severance actions were essentially completed by the end of the quarter
and affected approximately 1,045 employees. The balance of $29 million was
for other costs associated with the business sale and program termination,
including vendor cancellation and lease charges. Essentially all costs were
paid in 1998. In the fourth quarter of 1997, the company took a pretax charge
of $42 million, of which $30 million was included in cost of revenues and $12
million in marketing, general and administrative expense, primarily for
severance costs related to cost-reduction actions by the materials & controls
business. These actions, which are expected to be completed in first-quarter
1999, affected approximately 260 employees. Costs of $13 million were paid by
year-end 1998, with the balance to be paid by the end of 1999.
In the fourth quarter of 1996, the company took a pretax charge of $208
million, of which $169 million was included in cost of revenues and $39
million was included in marketing, general and administrative expense. Of the
$208 million, $91 million was for severance for employment reduction actions
in the United States and selected reductions worldwide. These actions, which
primarily involved the semiconductor business as well as divested activities,
was essentially completed by year-end 1996 and affected approximately 2,600
employees. Of the severance cost of $91 million, $34 million was paid in 1996
and $57 million was paid in 1997. The balance of this charge, $117 million,
was for vendor cancellation and other cash-related costs of $47 million and
asset write-downs of $70 million on several product lives, primarily mobile
computing, an operation divested in first-quarter 1997. The asset write-downs
were to adjust inventory and fixed assets to actual sale value.
28
Following is an analysis of the related accrual:
Millions of Dollars
-------------------------------------------------------------------------
Balance, December 31, 1995 $ 15
1996 actions:
Severance costs for employment reductions,
primarily for semiconductor and
divested activities 91
Mobile computing and other charges:
Cash-related costs 47
Asset write-downs 70
Other actions 7
Non-cash write-downs of assets (70)
Severance, vendor and other cash-related payments (41)
Adjustment--reversal to income (3)
-------------------------------------------------------------------------
Balance, December 31, 1996 116
1997 actions:
Severance, vendor and other cash-related
costs for the divestiture of mobile computing
and termination of the digital imaging printing
development program 56
Severance and other cash-related costs,
primarily for materials & controls
cost reductions 42
Other - primarily cash-related cost reserves
against 1997 gains on sales of businesses 54
Severance, vendor, and other
cash-related payments (116)
-------------------------------------------------------------------------
Balance, December 31, 1997 152
1998 actions:
Severance, vendor, and other cash-related costs
for corporate and semiconductor actions 178
Asset write-downs in Singapore and the U.S. 55
Cash-related costs for closing of a semiconductor
assembly operation and sale of a materials &
controls operation 70
Asset write-downs for sale of a materials &
controls operation 2
Other actions 7
Non-cash write-downs of assets (57)
Severance, vendor and
other cash-related payments (228)
Adjustment--reversal to income (16)
-------------------------------------------------------------------------
Balance, December 31, 1998 $163
=========================================================================
Business Segment and Geographic Area Data
Texas Instruments develops, manufactures and sells a variety of products used
in the commercial electronic and electrical equipment industry, primarily for
industrial and consumer markets. The company's principal businesses are based
on TI's broad semiconductor technology and application of this technology to
digital solutions for the networked society.
TI has three principal businesses: Semiconductor, Materials & Controls and
Educational & Productivity Solutions. Each of these is a business segment,
with its respective financial performance detailed in this report.
Semiconductor consists of digital signal processors, analog chips, standard
logic, application-specific integrated circuits, reduced instruction-set
computing microprocessors and microcontrollers. These semiconductors are sold
primarily to original-equipment manufacturers and through distributors.
Materials & Controls consists primarily of electrical and electronic control
devices, electronic connectors and clad metals. They are sold primarily to
original-equipment manufacturers and through distributors.
Educational & Productivity Solutions, which includes educational and
graphing calculators, are marketed primarily through retailers and to schools
through instructional dealers.
Operating profits of the three principal businesses include the effects of
profit sharing and exclude the effects of special charges and gains. The
results for semiconductor include the effects of all royalty revenues from
semiconductor-related cross-license agreements. Business assets are the owned
or allocated assets used by each business.
Included in corporate activities are general corporate expenses, elimination
of intersegment transactions (which are generally intended to approximate
market prices), results for TI's emerging digital imaging operation and
royalty revenues from computer-related cross-license agreements. Assets of
corporate activities include unallocated cash, short-term investments,
noncurrent investments and deferred income taxes.
Divested activities include the historical operating results and assets of
memory (sold in 1998), mobile computing and software (both sold in 1997),
custom manufacturing services and printers (both sold in 1996) and other
smaller divestitures.
29
Notes to
Financial Statements
Business Segment Net Revenues
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Semiconductor
Trade $ 6,267 $ 6,490 $ 5,340
Intersegment 23 24 45
-----------------------------------------------------------------------------
6,290 6,514 5,385
-----------------------------------------------------------------------------
Materials & Controls
Trade 943 950 887
Intersegment 1 4 3
-----------------------------------------------------------------------------
944 954 890
-----------------------------------------------------------------------------
Educational & Productivity Solutions
Trade 456 447 422
Corporate activities 140 154 91
Divested activities 630 1,681 3,152
-----------------------------------------------------------------------------
Total $ 8,460 $ 9,750 $ 9,940
=============================================================================
Business Segment Profit (Loss)
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Semiconductor $1,439 $1,546 $1,012
Materials & Controls 142 123 90
Educational & Productivity Solutions 76 59 56
Corporate activities (235) (273) (312)
Special charges and gains (466) (532) (400)
Interest on loans/other income (expense) net,
excluding 1998 and 1997 net gains of
$59 million and $66 million included above 159 32 3
Divested activities (498) (242) (472)
-----------------------------------------------------------------------------
Income (loss) from continuing operations
before provision for income taxes
and extraordinary item $ 617 $ 713 $ (23)
=============================================================================
Details of special charges and gains are as follows:
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Severance/manufacturing efficiency program $ (233) $ -- $ --
Closing of a semiconductor operation and
sale of a materials & controls operation,
of which $(24) million was included in other
income (expense) net (72) -- --
Discontinuance of TI-Hitachi joint venture (219) -- --
Sale of interest in TI-Acer joint venture 83 -- --
Acquired in-process R&D charge (25) (461) (192)
Severance and other costs, primarily
from the divestiture of mobile
computing -- (56) --
Other income: gain on sale of three
divested activities, primarily
software -- 66 --
Termination of Thailand joint venture
agreements -- (44) --
Severance and other costs, primarily
for materials & controls cost
reductions -- (42) --
Asset write-downs and other costs,
primarily mobile computing -- -- (117)
Severance costs for employment reductions,
primarily for semiconductor and
divested activities -- -- (91)
Other -- 5 --
-----------------------------------------------------------------------------
Total $ (466) $ (532) $ (400)
=============================================================================
Business Segment Assets
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Semiconductor $ 4,710 $ 4,798 $ 4,763
Materials & Controls 397 391 380
Educational & Productivity Solutions 117 151 141
Corporate activities 5,932 4,309 2,197
Divested activities 94 1,200 1,350
Net assets of discontinued operations -- -- 529
-----------------------------------------------------------------------------
Total $11,250 $10,849 $ 9,360
=============================================================================
30
Business Segment Property, Plant and Equipment
Millions of Dollars
-----------------------------------------------------------------------------
Depreciation 1998 1997 1996
-----------------------------------------------------------------------------
Semiconductor $ 913 $ 853 $ 655
Materials & Controls 47 46 41
Educational & Productivity Solutions 1 1 --
Corporate activities 49 58 56
Divested activities 134 151 152
-----------------------------------------------------------------------------
Total $ 1,144 $ 1,109 $ 904
=============================================================================
Millions of Dollars
-----------------------------------------------------------------------------
Additions 1998 1997 1996
-----------------------------------------------------------------------------
Semiconductor $ 731 $ 858 $ 1,633
Materials & Controls 49 49 53
Educational & Productivity Solutions 1 1 --
Corporate activities 32 147 225
Divested activities 218 183 152
-----------------------------------------------------------------------------
Total $ 1,031 $ 1,238 $ 2,063
=============================================================================
The following geographic area data include trade revenues, based on product
shipment destination and royalty payor location, and property, plant and
equipment based on physical location:
Geographic Area Net Trade Revenues
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
United States $ 2,722 $ 3,216 $ 3,548
Japan 1,619 1,971 1,832
Singapore 798 1,110 866
Rest of world 3,321 3,453 3,694
-----------------------------------------------------------------------------
Total $ 8,460 $ 9,750 $ 9,940
=============================================================================
Geographic Area Property, Plant and Equipment (Net)
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
United States $ 2,440 $ 2,640 $ 2,619
Japan 417 478 519
Rest of world 516 1,062 1,024
-----------------------------------------------------------------------------
Total $ 3,373 $ 4,180 $ 4,162
=============================================================================
Income Taxes
----------------------------------------------------------------------------
Income (Loss) from Continuing Operations before Provision for Income Taxes and
Extraordinary Item
Millions of Dollars
---------------------------------------------------------------
U.S. Non-U.S. Total
---------------------------------------------------------------
1998 $ 201 $ 416 $ 617
---------------------------------------------------------------
1997 93 620 713
---------------------------------------------------------------
1996 (529) 506 (23)
---------------------------------------------------------------
Provision (Credit) for Income Taxes
Millions of Dollars
-----------------------------------------------------------------------------
U.S. Federal Non-U.S. U.S. State Total
-----------------------------------------------------------------------------
1998 Current $ 4 $ 263 $ (7) $ 260
Deferred (13) (36) (1) (50)
-----------------------------------------------------------------------------
Total $ (9) $ 227 $ (8) $ 210
=============================================================================
1997 Current $ 112 $ 286 $ 4 $ 402
Deferred 51 (44) 2 9
-----------------------------------------------------------------------------
Total $ 163 $ 242 $ 6 $ 411
=============================================================================
1996 Current $(125) $ 202 $ (3) $ 74
Deferred (44) (6) (1) (51)
-----------------------------------------------------------------------------
Total $(169) $ 196 $ (4) $ 23
=============================================================================
Principal reconciling items from income tax computed at the statutory
federal rate follow.
Millions of Dollars
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
Computed tax at statutory rate $ 216 $ 249 $ (8)
Effect of acquired in-process R&D 4 161 67
Effect of non-U.S. rates 76 (11) (3)
Research and experimentation tax credits (20) (30) (11)
Effect of U.S. state income taxes (14) 4 (3)
Effect of joint venture costs (48) 31 12
Other (4) 7 (31)
----------------------------------------------------------------------------
Total provision for income taxes $ 210 $ 411 $ 23
============================================================================
Included in the effect of non-U.S. rates for 1996 is a $4 million benefit from
tax loss carryforward utilization reduced by certain non-U.S. taxes and losses
for which no benefit was recognized. Provision has been made for deferred
taxes on undistributed earnings of non-U.S. subsidiaries to the extent that
dividend payments from such companies are expected to result in additional tax
liability. The remaining undistributed earnings (approximately $620 million
at December 31, 1998) have been indefinitely reinvested; therefore, no
31
Notes to
Financial Statements
provision has been made for taxes due upon remittance of these earnings.
Determination of the amount of unrecognized deferred tax liability on these
unremitted earnings is not practicable.
The primary components of deferred income tax assets and liabilities
at December 31 were as follows:
Millions of Dollars
----------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------
Deferred income tax assets:
Accrued retirement costs (pension and
retiree health care) $ 322 $ 221
Inventories and related reserves 242 216
Accrued expenses 251 195
Loss and credit carryforwards 49 80
Other 59 210
----------------------------------------------------------------------
923 922
----------------------------------------------------------------------
Less valuation allowance (173) (121)
----------------------------------------------------------------------
750 801
----------------------------------------------------------------------
Deferred income tax liabilities:
Investments (256) (5)
Property, plant and equipment (104) (165)
International earnings (19) (38)
Other (146) (170)
----------------------------------------------------------------------
(525) (378)
----------------------------------------------------------------------
Net deferred income tax asset $ 225 $ 423
======================================================================
As of December 31, 1998 and 1997, the net deferred income tax asset of $225
million and $423 million was presented in the balance sheet, based on tax
jurisdiction, as deferred income tax assets of $606 million and $711 million
and deferred income tax liabilities of $381 million and $288 million. The
valuation allowance shown above reflects the company's ongoing assessment
regarding the realizability of certain non-U.S. deferred income tax assets.
The balance of the deferred income tax assets is considered realizable based
on carryback potential, existing taxable temporary differences and expectation
of future income levels comparable to recent results. Such future income
levels are not assured because of the nature of the company's businesses,
which are generally characterized by rapidly changing technology and intense
competition.
The company has aggregate U.S. and non-U.S. tax loss carryforwards of
approximately $125 million. Of this amount, $117 million expires through the
year 2013, and $8 million of the loss carryforwards has no expiration.
Income taxes paid were $162 million, $1145 million and $240 million for
1998, 1997 and 1996.
Rental Expense and Lease Commitments
Rental and lease expense was $153 million in 1998, $168 million in 1997 and
$175 million in 1996. The company conducts certain operations in leased
facilities and also leases a portion of its data processing and other
equipment. The lease agreements frequently include purchase and renewal
provisions and require the company to pay taxes, insurance and maintenance
costs.
At December 31, 1998, the company was committed under noncancelable leases
with minimum rentals in succeeding years as follows:
Millions of Dollars
-------------------
1999 $86
2000 61
2001 34
2002 27
2003 26
Thereafter 129
Divestitures
In the first quarter of 1998 the company's DRAM manufacturing joint venture
with Hitachi, Ltd. was discontinued. As a result, TI incurred a first quarter
pretax charge of $219 million, included in cost of revenues. In the second
quarter of 1998, the company sold its interest in the TI-Acer DRAM
manufacturing joint venture to Acer Corporation for $120 million in cash.
This sale resulted in a pretax gain of $83 million. On September 30, 1998, TI
sold its memory business, including its remaining DRAM manufacturing joint
venture interests in TECH Semiconductor Singapore (TECH) and KTI Semiconductor
in Japan to Micron Technology, Inc. (Micron). As a result, TI received
28,933,092 Micron common shares, a $740 million note convertible into an
additional 12,333,358 Micron common shares and a $210 million subordinated
note. The market value of the seven year, 6.5% convertible and subordinated
notes was approximately $836 million at closing, with an average imputed
interest rate of 8.7%. In addition to TI's memory assets, Micron received
$550 million in cash from TI to
32
facilitate the deployment of Micron's technology throughout the acquired
business. In the fourth quarter of 1998, TI made an additional $130 million
payment to Micron as part of the contractually required working capital. TI
deferred the estimated pretax gain of $127 million on the sale until the
repayment of the TI-provided financing. The deferred gain is subject to
change to the extent actual transaction costs vary from estimates. In
connection with the sale, TI agreed to guarantee the payment obligations of
TECH under a newly syndicated $450 million principal amount credit facility
for debt maturing 2002. As of year-end 1998, TECH had borrowed $240 million
under the facility. As a result of the guarantee, TI was granted a security
interest in TECH's assets. In addition, the guarantee is partially offset by
certain contingent funding obligations of TECH's shareholders. In another
matter, approximately $300 million of grants from the Italian government to
TI's former memory operations in Italy are being reviewed in the ordinary
course by government auditors. TI understands that these auditors are
questioning whether some of the grants were applied to purposes outside the
scope of the grants. TI's deferred gain on the sale may be reduced to the
extent that any grants are determined to have been misapplied. Also, TI
understands that an Italian prosecutor is conducting a criminal investigation
concerning a portion of the grants relating to specified research and
development activities. TI believes that the grants were obtained and used in
compliance with applicable law and contractual obligations.
In July, 1997 the company sold its Defense Systems and Electronics business
(DSE) to Raytheon Company for $2.95 billion in cash. The net gain on sale of
this discontinued operation, after income taxes of $876 million, was $1473
million. The consolidated financial statements of TI present the DSE
operations as discontinued operations. Summarized results of discontinued
operations prior to the close were as follows:
Millions of Dollars
-------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------
Net revenues $ 812 $1,773
Income before provision for income taxes 84 175
Provision for income taxes 32 66
Income from discontinued operations 52 109
TI provided various ongoing services to DSE including, but not limited to,
facilities management, data processing, security, payroll and employee
benefits administration, insurance administration and duplicating and
telecommunications services. Their inclusion in discontinued operations was
based upon TI's intercorporate allocation procedures for such services. The
allocation basis of these expenses and all other central operating costs was
first on the basis of direct usage when identifiable, with the remainder
allocated among DSE and other TI businesses on the basis of their respective
revenues, head count or other measures. These expenses allocated to DSE
totaled $76 million in 1997 and $163 million in 1996. TI has agreements to
receive payments from Raytheon for continuing to provide certain of these
services on an ongoing basis and others on a transition basis to DSE.
33
Report of Ernst & Young LLP,
Independent Auditors
The Board of Directors
Texas Instruments Incorporated
We have audited the accompanying consolidated balance sheets of Texas
Instruments Incorporated and subsidiaries (the Company) at December 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Instruments Incorporated and subsidiaries at December 31, 1998 and 1997, and
the results of its operations and cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
January 19, 1999
34
Summary of Selected Financial Data
See Notes to Financial Statements and Management Discussion and Analysis of
Financial Condition and Results of Operations.
35
Supplemental Financial Information
Management Discussion and Analysis of Financial
Condition and Results of Operations
Note: Throughout this report, TI total financial results are reported with
the memory business. Semiconductor results are reported without memory. The
memory business was divested in the third quarter of 1998.
The management discussion and analysis consists of the information under the
headings Financial Highlights, Semiconductor, Materials & Controls,
Educational & Productivity Solutions, Digital Imaging and the first two
paragraphs under the heading Building a Real Time Advantage set forth on pages
3 and 4 of this report, and the following additional information.
1998 Results of Operations Compared with 1997
TI revenues for 1998 were $8460 million, down 13 percent from 1997, due
primarily to lower prices in dynamic random access memories (DRAMs), and to a
lesser extent, to the absence of revenue due to the sale of the memory
business. Operating margins were 10.9 percent, down from 12.4 percent in
1997, excluding special charges, primarily due to lower DRAM prices. TI
earnings per share were $1.79, compared with $2.03 for 1997, excluding special
items.
Income for the year was $719 million, down from $809 million in 1997,
excluding special items, primarily due to losses in memory. TI orders were
$8069 million for 1998, compared with $9796 million in 1997, primarily due to
declines in memory orders.
Including the effect of the special items for 1998, operating margins for
the year were 4.7 percent, earnings per share for the year were $1.02 and
income was $407 million.
During the fourth quarter, TI essentially completed the restructuring
announced in June of 1998. Annualized cost savings for the company are
estimated to be $270 million.
The results for the fourth quarter include special charges of $72 million,
substantially all of which was related to the closing of an assembly/test
joint venture with Samsung Electronica, Lda. in Portugal and the sale of the
Aversa, Italy, plant. Of the $72 million, $35 million was for severance, $35
million for other cash-related costs and $2 million for asset write-downs.
The year-ago quarter had a charge of $461 million for in-process R&D
associated with the acquisition of Amati Communications Corporation, along
with a pretax charge of $42 million for cost-reduction actions, primarily for
severance in the materials & controls business.
In addition to the fourth-quarter charges, 1998 earnings include special
charges of $477 million, of which $244 million was cash payments primarily for
discontinuing the memory-chip manufacturing joint venture with Hitachi, Ltd.,
and $233 million was for a worldwide restructuring of support functions and
consolidation of manufacturing operations. Of the $233 million, $161 million
was for severance, $55 million for asset write-downs and $17 million for other
cash-related charges. There was also an $83 million pretax gain in the year
on the sale of TI's shares in the TI-Acer joint venture to Acer Corporation.
In 1997, special pretax charges, in addition to those in the fourth quarter,
were $100 million, primarily related to the sale of TI's mobile computing
business and the termination of joint-venture agreements in Thailand. There
also was a $66 million special pretax gain for the sale of three businesses,
the largest of which was software.
Semiconductor: For 1998, semiconductor revenues and operating margins were
down slightly, and orders were down modestly, due to overall semiconductor
market weakness.
For the year, DSP revenues increased 29 percent to a record level, driven by
wireless. Analog revenues declined 4 percent for the year, as strength in
wireless was insufficient to offset weakness in other markets, particularly
hard disk drive (HDD). Collectively, TI's remaining semiconductor product
areas saw revenues down moderately from 1997, primarily due to overall
semiconductor market weakness.
In the fourth quarter, DSP and analog comprised 59 percent of TI's
semiconductor revenues.
TI expects modest sequential revenue growth in its semiconductor business in
the first quarter of 1999, leading to moderate growth for the year, based on
continuing strength in wireless and ongoing improvements in HDD and the mass
markets. The HDD market represents a growing opportunity for TI, due to its
market leadership and extensive portfolio across the primary HDD integrated
circuits (application-specific integrated circuits (ASICs), read channels,
pre-amps, and servo control).
TI expects that 1999 earnings will reflect continued improvement in
semiconductor markets and the ongoing benefit of TI's strategic positioning,
as well as the cost reductions realized from completion of restructuring
actions. In the first quarter, these improvements may be largely offset by
the transition to increased profit sharing, as the company moves to higher
operating margins. Profit-sharing expenses are accrued quarterly, based on
the company's full-year estimated operating profit margin.
36
Materials & Controls (M&C): For the full year, M&C revenues were down 1
percent due to weak Asian markets. Operating margins were up for the year to
15.0 percent, reflecting gains from the best-cost producer strategy. During
1998, plant closings took place in Canada and Michigan, restructuring and
early retirements took place in Holland and Japan and the Aversa, Italy, plant
was sold.
Educational & Productivity Solutions (E&PS): For the year, the E&PS business
showed a rise in operating margins of 3.4 percentage points to 16.6 percent,
as a result of cost improvements.
Digital Imaging: For 1998, the operation reduced its loss to one-half of the
1997 level and continues to make progress on product positioning and
operational performance.
Divested Activities: For 1998, memory revenues were down 60 percent and
orders were down 62 percent from 1997 levels, primarily due to lower DRAM
prices, with the balance due to the divestiture of the memory business in the
third quarter of 1998. Loss from memory operations was $498 million, versus a
loss of $192 million in 1997.
Financial Condition: During 1998, cash and cash equivalents plus short-term
investments decreased by $771 million to $2249 million. The discontinuance of
the joint venture with Hitachi and the acquisition of those operating assets
(which were subsequently included in the sale of the memory business) required
$281 million of cash in the first quarter. In addition, $91 million of cash
was used to purchase the remaining outstanding shares of Amati Communications
Corporation's common stock in the first quarter. Under the terms of the sale
of TI's memory business to Micron Technology, TI provided $550 million of cash
financing to Micron in the third quarter. At closing, TI deferred an
estimated pretax gain of $127 million on the sale until the repayment of the
TI-provided financing. In the fourth quarter, TI made an additional $130
million payment to Micron as part of the contractually required working
capital.
In the memory transaction, TI received approximately 28.9 million shares of
Micron common stock, $740 million face value of a 6.5 percent convertible note
and $210 million face value of a 6.5 percent subordinated note. These
securities were originally valued at $1717 million. At year-end, market value
was $2441 million. Market value changes, net of tax, are recorded as an
adjustment to stockholders' equity.
Approximately $300 million of grants from the Italian government to TI's
former memory operations in Italy are being reviewed in the ordinary course by
government auditors. TI understands that these auditors are questioning
whether some of the grants were applied to purposes outside the scope of the
grants. TI's deferred gain on the sale of its memory business may be reduced
to the extent that any grants are determined to have been misapplied. Also,
TI understands that an Italian prosecutor is conducting a criminal
investigation concerning a portion of the grants relating to specified
research and development activities. TI believes that the grants were
obtained and used in compliance with applicable law and contractual
obligations.
Cash flow from operating activities net of additions to property, plant and
equipment was $220 million in 1998.
Capital expenditures totaled $1031 million for 1998 versus $1238 million for
Depreciation was $1144 million for 1998 compared to $1109 million for 1997.
Authorizations for future capital expenditures were $541 million at December
31, 1998. TI's capital expenditures for 1999 are forecast to be level with
1998 at $1.0 billion. Depreciation for 1999 is expected to be $1.0 billion.
R&D is expected to be $1.1 billion, versus $1.2 billion in 1998.
The company maintains lines of credit to support commercial paper borrowings
and to provide additional liquidity. These lines of credit totaled $669
million at December 31, 1998. Of this amount, $600 million exists to support
commercial paper borrowings or short-term bank loans.
During 1998, TI repurchased approximately 4.5 million shares of common
stock, at a cost of $294 million, as a part of its previously stated intent to
neutralize the potential dilutive effect of shares to be issued under employee
stock options.
At the end of 1998, the debt-to-total-capital ratio was .17, compared to the
1997 year-end value of .19.
As previously announced, the timing of TI dividend declarations in 1998 was
moved, effective March 1998, from the third month of a quarter to the first
month of the following quarter. As a result of this one-time lag, 1998
contains three rather than four dividend declarations.
YEAR 2000: Since 1995, TI has been actively engaged in addressing Year 2000
(Y2K) issues. These result from the use of two-digit, rather than four-digit,
year dates in software, a practice which could cause date-sensitive systems to
malfunction or fail because they may not recognize or process date information
correctly.
State of Readiness: To manage its Y2K program, TI has divided its efforts
into four program areas:
Information Technology (computer hardware, software and electronic data
interchange (EDI) interfaces);
Physical Plant (manufacturing equipment and facilities);
Products (including product development); and
Extended Enterprise (suppliers and customers).
37
Supplemental Financial Information
Management Discussion and Analysis of Financial
Condition and Results of Operations
For each of these program areas, TI is using a four-step approach:
Ownership (creating awareness, assigning tasks);
Inventory (listing items to be assessed for Y2K readiness);
Assessment (prioritizing the inventoried items, assessing their Y2K
readiness, planning corrective actions, making initial contingency plans);
and
Corrective Action Deployment (implementing corrective actions, verifying
implementation, finalizing contingency plans).
At December 31, 1998, the Ownership, Inventory, and Assessment steps were
essentially complete for priority items in Information Technology, Physical
Plant and Products. TI's assessment activities for Extended Enterprise will
continue into 1999. TI considers priority items to be those that could
significantly disrupt TI's business operations. The target completion date for
priority items for the remaining step (Corrective Action Deployment) is June
1999 for all program areas.
As of December 31, 1998, the status for each program area is as follows:
Information Technology: Corrective actions have been deployed for
substantially all of TI's legacy business strategic information systems
(manufacturing, marketing, financial and human resources). In the ordinary
course of business, TI continues to install new business systems as
appropriate. Verification of Year 2000 readiness is incorporated into the
process of implementing these new systems. Assessment of infrastructure
hardware and software that support TI's enterprise-wide networks and servers
is essentially complete, and deployment of corrective actions is under way.
TI has also deployed an assessment tool and corrective action process for
desktop computers. The readiness of TI's EDI interfaces has been assessed,
and testing continues with major customers and suppliers.
Physical Plant: Assessment of manufacturing equipment and facilities is
substantially complete and corrective actions are under way.
Products: TI is essentially complete with the Year 2000 readiness
assessment of its products and is providing product status information on
its company web site. Divested product lines are not part of the assessment.
This effort includes semiconductor devices sold within the past five years.
TI's assessment indicates that the majority of semiconductor products either
have no date logic or are programmable devices that require customer
assessment of any software and firmware or other elements added by or at the
request of TI's customers. TI has identified date-related issues with
certain of TI's semiconductor application software development tools and is
providing corrective software patches. The company believes these
development tool issues are unlikely to cause significant problems for TI
customers. Assessment of products of the materials & controls and
educational & productivity solutions businesses indicates they are either
Year 2000 ready or have no date logic.
Extended Enterprise: TI's Y2K supplier program attempts to assess the
readiness of TI suppliers, focusing on those that could significantly
disrupt TI's business operations. TI began contacting its suppliers in 1997
to assess their readiness. This effort is ongoing and is expected to be
complete by June 1999. TI intends to finalize contingency plans by June
1999 on the basis of information gathered through the assessment process.
TI continues to discuss Y2K status with selected strategic customers.
Costs to Address Y2K Issues: TI's estimated aggregate costs for its Y2K
activities from 1995 through 2000 are expected to range from $70 million to
$90 million. Through December 31, 1998, TI has spent approximately $53
million.
Risks of Y2K Issues and Contingency Plans: TI continues to review Year 2000
issues relating to its information technology, physical plant, products,
suppliers and customers, as well as legal risks that may be associated with
discontinued products and divested product lines. TI's contingency planning
process is intended to mitigate worst-case business disruptions. The company
is preparing contingency plans to address worst-case issues such as delays in
delivery of product. As noted above, the company expects its contingency plans
to be complete by June 1999.
Market Risk Sensitive Instruments: The U.S. dollar is the functional
currency for financial reporting. In this regard, the company uses forward
currency exchange contracts, including lira note currency swaps, to minimize
the adverse earnings impact from the effect of exchange rate fluctuations on
the company's non-U.S. dollar net balance sheet exposures. For example, at
year-end 1998, the company had forward currency exchange contracts
outstanding of $756 million (including $161 million to sell yen, $132 million
to buy lira and $105 million to buy deutsche marks). Similar hedging
activities existed at year-end 1997. Because most of the aggregate non-U.S.
dollar balance sheet exposure is hedged by these exchange contracts and
swaps, a hypothetical 10% plus or minus fluctuation in non-U.S. currency
exchange rates would not be expected to have a material earnings impact,
e.g., based on year-end 1998 balances and rates, a pretax currency exchange
gain or loss of $6 million.
38
The company has interest rate swaps that change the characteristics of the
interest payments on its $300 million of 6.125% notes due 2006 from
fixed-rate payments to short-term LIBOR-based variable rate payments in order
to achieve a mix of interest rates on the company's long-term debt which,
over time, is expected to moderate financing costs. The effect of these
interest rate swaps was to reduce interest expense by $3 million in 1998.
The year-end 1998 effective interest rate for the $300 million of notes due
2006, including the effect of the swaps, was approximately 4.6% (5.1% at year-
end 1997). These swaps are sensitive to interest rate changes. For example,
if short-term interest rates increase (decrease) by one percentage point from
year-end 1998 rates, annual pretax interest expense would increase (decrease)
by $3 million.
The company's long-term debt has a fair value, based on current interest
rates, of approximately $1346 million at year-end 1998 ($1390 million at year-
end 1997). Fair value will vary as interest rates change. The following
table presents the aggregate maturities and historical cost amounts of the
debt principal and related weighted-average interest rates by maturity dates
at year-end 1998:
Millions of Dollars
---------------------------------------------------------------
U.S. Dollar Average Lira Average
Maturity Fixed-Rate Interest Fixed-Rate Interest
Date Debt Rate Debt Rate
---------------------------------------------------------------
1999 $ 235 6.74% $ 32 5.25%
2000 274 6.81% 38 5.09%
2001 105 7.90% 30 4.95%
2002 -- n/a 27 4.73%
2003 133 8.47% 28 4.74%
Thereafter 356 6.40% 36 4.53%
---------------------------------------------------------------
Total $1,103 6.97% $ 191 4.89%
Total long-term debt historical cost amount at year-end 1998 was $1294
million.
The company's cash equivalents and short-term investments are debt
securities with remaining maturities within three months (cash equivalents)
and beyond three months and within 13 months (short-term investments). Their
aggregate fair value and carrying amount was $1771 million at year-end 1998
($2566 million at year-end 1997). Fair value will vary as interest rates
change. The following table presents the aggregate maturities of cash
equivalents and short-term investments and related weighted-average interest
rates by maturity dates at year-end 1998:
Millions of Dollars
--------------------------------------------
Cash Equivalents Average
Maturity and Short-Term Interest
Date Investments Rate
--------------------------------------------
1999 $1,681 5.32%
2000 90 5.12
--------------------------------------------
Total $1,771 5.31%
The company's investments at year-end 1998 consisted of the following (amounts
at year-end 1997 were not material):
-Equity investments - primarily 28,933,092 Micron common shares acquired in
1998, along with several other publicly traded investments.
-Debt investments - 6.5% Micron convertible and subordinated notes acquired
in 1998. The convertible note (convertible into 12,333,358 Micron common
shares at $60 per share) and the subordinated note have face amounts of $740
million and $210 million. The notes, which mature 2005, have a weighted-
average imputed interest rate of 8.7%.
-TI Ventures - an externally managed venture fund that invests in the
development of new markets. As of year-end 1998, it had invested in 14
companies focused on next-generation applications of digital signal
processors.
-Other investments - consist of mutual funds that are acquired to generate
returns that offset changes in certain liabilities related to deferred
compensation arrangements. The mutual funds hold a variety of debt and
equity investments.
The equity investments (fair value of $1516 million) and venture fund (fair
value of $37 million) are sensitive to equity price changes. For example, if
prices of the equity investments increase or decrease 10%, the company would
record an increase or decrease in stockholders' equity of $152 million.
Similarly, if prices for the venture fund increase or decrease 10%, the
company would record an increase or decrease in other income (expense) of $4
million. Changes in prices of the other investments are expected to offset
related changes in deferred compensation liabilities such that a 10% increase
or decrease in investment prices would not affect operating results.
39
Supplemental Financial Information
Management Discussion and Analysis of Financial
Condition and Results of Operations
Fair value of the debt investments ($978 million) will vary as interest rates
change (and also for the convertible note, as the underlying equity share
price changes). The following table presents the aggregate historical cost
maturities of debt investments and related weighted-average interest rates by
maturity dates:
Millions of Dollars
--------------------------------------------------
Average
Maturity Debt Interest
Date Investments Rate
--------------------------------------------------
1999-2004 None N/A
2005 $839 8.7%
1997 Results of Operations Compared with 1996
------------------------------------------------------------------------
Change in Change in
Orders, Net Revenues,
Business 1997 vs. 1996 1997 vs. 1996
------------------------------------------------------------------------
Semiconductor up 25% up 21%
Material & Controls up 9% up 7%
Educational & Productivity Solutions up 5% up 6%
------------------------------------------------------------------------
Total TI up 6% down 2%
------------------------------------------------------------------------
Total TI excluding businesses sold up 22% up 19%
------------------------------------------------------------------------
UNLESS STATED OTHERWISE, THE FINANCIAL RESULTS THAT FOLLOW ARE FROM CONTINUING
OPERATIONS AND EXCLUDE SPECIAL ITEMS.
TI's orders in 1997 were $9796 million, compared with $9268 million in 1996.
Net revenues in 1997 were $9750 million, compared with $9940 million in 1996.
Financial results in 1997 and 1996 included revenues from TI businesses that
have been sold, primarily memory, software, mobile computing and printers.
Excluding these divested activities, TI orders were up 22 percent for the year
and revenues were up 19 percent, primarily due to growth in semiconductor.
Profit from operations in 1997 was $1213 million, up from $374 million in
1996. The increase was primarily from higher semiconductor profits and the
absence of losses in the sold businesses, primarily memory, software and
mobile computing. In 1996, these sold businesses lost $229 million more than
in 1997.
Results for the fourth quarter include a charge of $461 million for in-
process R&D associated with the acquisition of Amati Communications
Corporation, along with a pretax charge of $42 million for cost reduction
actions, primarily in the materials & controls business. In addition to the
fourth-quarter charges, the 1997 earnings include previously announced special
pretax charges of $56 million, primarily related to the sale of TI's mobile
computing business, and $44 million for the termination of joint-venture
agreements in Thailand.
Results for 1997 also include a $66 million gain for the sale of three
businesses, the largest of which was software. The total of the 1997 special
items is equivalent to $1.27 per share. In 1996, special charges were $400
million before taxes, with $208 million being in the fourth quarter. These
charges were equivalent to $0.86 per share for the year.
Income for the year was $809 million, compared with $281 million in 1996.
TI's diluted earnings per share in 1997 were $2.03, compared with $0.74 in
1996. Including the effect of the special items, income for the year was $302
million compared to a loss of $46 million in 1996, and earnings per share were
$0.76 compared with a loss per share of $0.12 in 1996.
Results for 1997 also included an accrual for profit sharing of $122
million, which was 7.82 percent of eligible payroll. There was no profit
sharing in 1996.
Including the effect of special items, net income for 1997 was $1805
million, which consisted of income from continuing operations of $302 million,
income from the discontinued defense business of $52 million, gain on sale of
the discontinued defense business of $1473 million, and an extraordinary
charge of $22 million associated with debt retirement. On a similar basis,
net income for 1996 was $63 million, which consisted of a loss from continuing
operations of $46 million and income from the discontinued defense business of
$109 million.
Royalty revenues in 1997 were essentially steady with 1996.
Interest income for 1997 was up $84 million from 1996, primarily as a result
of investment of net proceeds from the sale of the defense business to
Raytheon.
The income tax rate for 1997 was 35 percent.
TI's backlog of unfilled orders as of December 31, 1997, was $1623 million,
unchanged from year-end 1996.
R&D for 1997 was $1075 million, excluding the $461 million charge for in-
process R&D associated with the Amati acquisition, compared with $989 million
in 1996, excluding the $192 million charge for in-process R&D associated with
the SSi acquisition.
Capital expenditures were $1238 million in 1997, compared with $2063 million
in 1996. Depreciation for 1997 was $1109 million compared with $904 million
in 1996.
40
Semiconductor: Orders in semiconductor for 1997 were $6610 million, up 25
percent from $5267 million in 1996. The increase resulted from strong demand
for digital signal processing solutions (DSPS), as DSPS orders increased over
40 percent. Semiconductor revenues were $6514 million, up 21 percent from
$5385 million in 1996. The increase in semiconductor resulted from an
increase of more than 35 percent in DSPS revenues due to increased shipments.
For the fourth quarter, semiconductor revenues, which include royalties from
semiconductor patent licenses, represented about 71 percent of TI's revenues.
Digital signal processors plus mixed signal/analog represented about 54
percent of semiconductor. The remainder of semiconductor consists primarily
of a broad range of advanced products, including application-specific
integrated circuits, reduced instruction-set microprocessors, microcontrollers
and standard logic.
Revenues reached record levels for digital signal processing for both the
year and the fourth quarter. Mixed-signal/analog also had a strong year, with
record revenues for the year and fourth quarter, growing more than twice as
fast as the market in 1997.
TI's other semiconductor products, such as microcontrollers and application-
specific integrated circuits, made good progress in growth and profitability
in 1997.
Semiconductor profit from operations increased from $1012 million in 1996 to
$1546 million in 1997, and operating margins improved from 18.8 percent to
23.7 percent. Results particularly benefited from higher DSPS shipments.
Materials & Controls: Orders in Materials & Controls of $972 million were up
from $896 million in 1996, primarily due to TIRIS. Revenues of $954 million
were up $64 million from 1996 due primarily to the growing acceptance of TIRIS
in automotive applications. PFO increased from $90 million in 1996 to $123
million in 1997, with margins improving from 10.1 percent to 12.9 percent.
The increase was due primarily to manufacturing cost reduction.
Educational & Productivity Solutions: Orders in Educational & Productivity
Solutions were $448 million, up $22 million from 1996 as a result of continued
growth in instructional calculators. Revenues were $447 million, an increase
of $24 million from 1996 also as a result of growth in instructional
calculators. PFO increased from $56 million in 1996 to $59 million in 1997,
and operating margins remained flat at 13.2 percent.
Digital Imaging: TI's digital imaging business continued to make progress
throughout 1997, further focusing its strategy on key market opportunities.
Divested Activities: Revenues for memory decreased $400 million in 1997,
compared to 1996, as DRAM prices continued to decline sharply.
Common Stock Prices and Dividends
TI common stock is listed on the New York Stock Exchange and traded
principally in that market. The table below shows the high and low prices of
TI common stock on the composite tape as reported by The Wall Street Journal
and the dividends paid per common share for each quarter during the past two
years.
QUARTER
----------------------------------------------------------------------------
1st 2nd 3rd 4th
----------------------------------------------------------------------------
Stock prices:
1998 High $62.75 $67.00 $63.69 $90.44
Low 40.25 46.88 46.06 45.38
1997 High 43.63 48.19 71.00 71.25
Low 31.06 36.81 42.13 39.63
Dividends paid:
1998 $.085 $.085 $.085 $.085
1997 $.085 $.085 $.085 $.085
----------------------------------------------------------------------------
41
Quarterly Financial Data
42
Results for the first quarter of 1998 include a pretax charge of $219 million,
included in cost of revenues, for discontinuance of the TI-Hitachi joint
venture and a charge of $25 million for the value of acquired research and
development from two business acquisitions. The second quarter of 1998
includes a pretax operating charge of $233 million for a
severance/manufacturing efficiency program and a pretax gain of $83 million
for the company's sale of its interest in the TI-Acer joint venture. Fourth-
quarter 1998 results include a pretax operating charge of $72 million,
essentially all of which is for the disposition of two European operations.
In the first quarter of 1997, the company took a pretax charge of $56
million related to the sale of its mobile computing business and termination
of its digital imaging printing development program. Results for the second
quarter of 1997 include a pretax operating charge of $44 million for the
termination of agreements related to proposed Thailand joint ventures and a
$66 million pretax gain from the sale of three divested activities,
principally software. Results for the third quarter of 1997 reflect the sale
of TI's defense business, which was closed with Raytheon Company on July 11
for $2.95 billion in cash. The net gain from this sale, after income taxes of
$876 million, was $1473 million and was included in discontinued operations.
As a result of the 1997 acquisition of Amati Communications Corporation, the
company took a charge of $461 million in the fourth quarter for the value of
acquired in-process research and development. Also in the fourth quarter, the
company took a pretax charge of $42 million, primarily for severance costs
related to cost-reduction actions by the materials & controls business.
Diluted earnings (loss) per common share are based on average common and
dilutive potential common shares outstanding (402,230,699 shares and
389,695,136 shares for the fourth quarters of 1998 and 1997).
43
----------
Portions of Registrant's 1998 Annual Report to Stockholder Incorporated by
Reference in this Report
Financial Highlights
To understand why, let's take a closer look at TI's 1998 financial
performance. Total revenues for the year were $8460 million, down 13 percent
from 1997, due primarily to lower prices in DRAMs and, to a lesser extent, to
the absence of revenue due to the sale of the memory business. Excluding
special charges, operating margins were 10.9 percent, earnings per share
totaled $1.79, and income for the year was $719 million, down from $809
million in 1997. TI orders were $8069 million compared with $9796 million the
year before.
These company results were affected primarily by a near-collapse in the
global market for memory chips. This had an impact on the company's financial
performance. Loss from memory operations was $498 million.
It's not the first time the memory market has experienced such volatility,
and it probably won't be the last. That's why we've been working to reduce
TI's exposure to this commodity-type business for a number of years -investing
instead in differentiated products such as our market-leading portfolios of
digital signal processors (DSPs) and analog chips.
We completed this transformation on September 30, 1998, with the sale of our
memory business to Micron Technology, Inc. This sale is a critical component
of our efforts to increase TI's financial stability.
Excluding losses in memory chips, our 1998 financial performance looks
considerably brighter. In the fourth quarter of 1998, the initial quarter
without memory operations, operating margins increased to 16.0 percent,
compared with 9.6 percent in the third quarter of the year.
Perhaps most significant from a strategic standpoint is the growth we
achieved in the DSP category. We not only maintained our DSP leadership,
we increased it. Our DSP revenues surged 29 percent in 1998, significantly
faster than the growth rate of the DSP market overall. This strong performance
is important on two counts:
-DSP was one of the few strong areas in a generally weak market for
semiconductor chips in 1998.
-TI is #1 in DSP, both in terms of dollar sales and breadth of product
portfolio.
In other words, we're not just targeting one of the fastest-growing portions
of the semiconductor business. We're actually driving its growth, with
important wins in the marketplace.
Leadership in this market is important in its own right, because the DSP
category is expected to triple in size during the next five years - driven by
demand for end-equipment devices such as wireless phones, digital cameras,
modems and computer networking gear, as well as by the increased use of
digital components in automobiles, home appliances, manufacturing equipment
and other "embedded" systems.
At the same time, a strong position in DSP helps to pull through sales of
TI's other semiconductor products - primarily our ever-expanding portfolio of
analog chips. We're convinced that our DSP and analog franchises can and will
combine with our other operations to create a solid foundation for near-and
long-term improvements in value, growth and financial stability.
Semiconductor
TI's Semiconductor Group - our largest business - was led by the stellar
performance of our DSP product line in 1998. DSP revenues increased to a
record level, led by wireless. Collectively, TI's remaining semiconductor
product areas saw revenues down moderately from 1997, primarily due to overall
semiconductor weakness. DSP and analog products made up 59 percent of total
semiconductor revenue in the fourth quarter of 1998.
Materials & Controls
Revenues declined 1 percent versus 1997 due to the weak Asian markets, but
this business unit continued to make exceptional progress in cost-control,
leading to operating margins of 15.0 percent.
Educational & Productivity Solutions
TI's calculator business showed a rise in operating margins of 3.4
percentage points to 16.6 percent. Through an extraordinary focus on the needs
of teachers and students, this business unit has earned a commanding share of
the calculator market in the U.S., and is now pursuing a similar business
development strategy in other world markets.
Digital Imaging
TI's emerging Digital Imaging business achieved greater than 50 percent
revenue growth in 1998 and continued to make headway in the ultra-portable
projector market.
Building a Real Time Advantage
Beyond wins in the marketplace, TI reached another important milestone in
1998. We largely completed the work we set out to do two years ago, to
restructure TI into a company focused primarily on differentiated technologies
such as the two drivers of the digital age of electronics - DSPs and analog
chips.
Along with selling our memory business, TI underwent a major restructuring
to increase efficiencies and reduce costs. We also made a number of
acquisitions to strengthen our expertise in our core technologies. These
included Spectron Microsystems, GO DSP, Oasix and Arisix corporations, and
the assets of the high-end hard disk drive operation of Adaptec, Inc.
Consolidated Financial Statements (millions of dollars, except per-share
amounts)
Income
For the Years Ended December 31, 1998 1997 1996
----------------------------------------------------------------------------
Net revenues $ 8,460 $ 9,750 $ 9,940
----------------------------------------------------------------------------
Operating costs and expenses:
Cost of revenues 5,394 6,067 7,146
Research and development 1,206 1,536 1,181
Marketing, general and administrative 1,461 1,532 1,639
----------------------------------------------------------------------------
Total 8,061 9,135 9,966
----------------------------------------------------------------------------
Profit (loss) from operations 399 615 (26)
Other income (expense) net 293 192 76
Interest on loans 75 94 73
----------------------------------------------------------------------------
Income (loss) from continuing operations
before provision for income taxes
and extraordinary item 617 713 (23)
Provision for income taxes 210 411 23
----------------------------------------------------------------------------
Income (loss) from continuing operations
before extraordinary item 407 302 (46)
Discontinued operations:
Income from operations -- 52 109
Gain on sale -- 1,473 --
----------------------------------------------------------------------------
Income before extraordinary item 407 1,827 63
Extraordinary item: extinguishment of debt -- (22) --
----------------------------------------------------------------------------
Net income $ 407 $ 1,805 $ 63
============================================================================
Diluted earnings (loss) per common share:
Continuing operations before extraordinary
item $ 1.02 $ .76 $ (.12)
Discontinued operations:
Income from operations -- .13 .29
Gain on sale -- 3.70 --
Extraordinary item -- (.05) --
----------------------------------------------------------------------------
Net income $ 1.02 $ 4.54 $ .17
============================================================================
Basic earnings (loss) per common share:
Continuing operations before extraordinary
item $ 1.04 $ .78 $ (.12)
Discontinued operations:
Income from operations -- .14 .29
Gain on sale -- 3.82 --
Extraordinary item -- (.05) --
----------------------------------------------------------------------------
Net income $ 1.04 $ 4.69 $ .17
============================================================================
See accompanying notes.
14
Consolidated Financial Statements (millions of dollars, except per-share
amounts)
Balance Sheet
15
Consolidated Financial Statements (millions of dollars, except per-share
amounts)
Cash Flows
16
See accompanying notes.
17
Consolidated Financial Statements (millions of dollars, except per-share
amounts)
Stockholders' Equity
18
Notes to
Financial Statements
Accounting Policies And Practices
The company adopted SFAS No. 130 in the first quarter of 1998. It required
disclosure of comprehensive income, i.e., net income plus direct adjustments
to stockholders' equity such as equity, debt and cash investment adjustments
and pension liability adjustments. Also in 1998, the company adopted SFAS
No. 132, which mandated changes in disclosures for pension and retiree health
care plans. In 1997, the company adopted SFAS No. 128, which required
disclosure of two new earnings per share amounts (diluted and basic) and
elimination of prior earnings per share amounts. Also in 1997, the company
adopted SFAS No. 131, which required a new basis of determining reportable
business segments, i.e., the management approach. Disclosures under these
1997 and 1998 standards were provided on a retroactive basis. None affected
reported net income.
Accounting standard SFAS No. 133 was issued in 1998 and is effective in
2000. It requires that all derivatives be marked-to-market on an ongoing
basis. This applies whether the derivatives are stand-alone instruments, such
as forward currency exchange contracts and interest rate swaps, or embedded
derivatives, such as call options contained in convertible debt investments.
Along with the derivatives, the underlying hedged items are also to be
marked-to-market on an ongoing basis. These market value adjustments are to
be included either in the income statement or stockholders' equity, depending
on the nature of the transaction. The company expects to adopt the standard
in the first quarter of 2000 on a cumulative basis. Based on analysis to
date, the company expects the most significant impact of this standard will
be the cumulative, as well as ongoing mark-to-market, adjustment through the
income statement of the embedded call option on Micron Technology, Inc.
(Micron) common shares contained in the convertible note received from Micron
in connection with TI's 1998 sale of its memory business. The value of this
option can be volatile given its sensitivity to changes in the value of
Micron common shares. For example, at September 30, 1998, the estimated
value of the option was $82 million; at December 31, 1998, it was $192
million. Under SFAS No. 133, this change in value of $110 million would be
included in the income statement. Under current accounting principles, the
change in value of the Micron convertible note, including the embedded call,
is an adjustment to stockholders' equity.
Accounting standard SOP 98-1 was issued in 1998 and is effective in 1999.
It requires capitalization of the development costs of software to be used
internally, e.g., for manufacturing or administrative processes. The
company, which currently capitalizes significant development costs for
internal-use software, expects to adopt the standard in the first quarter of
1999 for developmental costs incurred in that quarter and thereafter. The
effect is not expected to be material. Accounting standard SOP 98-5 was
issued in 1998 and is effective in 1999. It requires expensing, rather than
capitalizing, the cost of start-up activities. The company currently
expenses such amounts as incurred and therefore expects no material effect
from adoption of this standard.
The consolidated financial statements include the accounts of all
subsidiaries. The preparation of financial statements requires the use of
estimates from which final results may vary. Intercompany balances and
transactions have been eliminated. Certain amounts in prior years' financial
statements and related notes have been reclassified to conform to the 1998
presentation. The U.S. dollar is the functional currency for financial
reporting. With regard to accounts recorded in currencies other than U.S.
dollars, current assets (except inventories), deferred income taxes, other
assets, current liabilities and long-term liabilities are remeasured at
exchange rates in effect at year-end. Inventories, property, plant and
equipment and depreciation thereon are remeasured at historic exchange rates.
Revenue and expense accounts other than depreciation for each month are
remeasured at the appropriate month-end rate of exchange. Net currency
exchange gains and losses from remeasurement and forward currency exchange
contracts to hedge net balance sheet exposures are charged or credited on a
current basis to other income (expense) net. Gains and losses from forward
currency exchange contracts to hedge specific transactions are deferred and
included in the measurement of the related transactions. Gains and losses
from interest rate swaps are included on the accrual basis in interest
expense. Gains and losses from terminated forward currency exchange
contracts and interest rate swaps are deferred and recognized consistent with
the terms of the underlying transaction.
As discussed in the Divestitures note, the consolidated financial
statements include the effect of two significant divestitures: the sale of
the company's memory business and related joint venture interests to Micron
in September 1998, which was accounted for as a sale of a business, and the
sale of the defense business to Raytheon Company in July 1997, which was
accounted for as a discontinued operation.
Inventories are stated at the lower of cost or estimated realizable value.
Cost is generally computed on a currently adjusted standard (which
approximates current average costs) or average basis.
19
Notes to
Financial Statements
Revenues are generally recognized as products are shipped. Royalty revenue
is recognized by the company upon fulfillment of its contractual obligations
and determination of a fixed royalty amount or, in the case of ongoing
royalties, upon sale by the licensee of royalty-bearing products, as
estimated by the company.
Depreciation is computed by either the declining-balance method (primarily
150 percent declining method) or the sum-of-the-years-digits method. Fully
depreciated assets are written off against accumulated depreciation.
Advertising costs are expensed as incurred. Advertising expense was $100
million in 1998, $128 million in 1997 and $124 million in 1996.
Computation of earnings per common share (EPS) amounts for income (loss)
from continuing operations before extraordinary item is as follows (millions,
except per-share amounts):
The EPS computation for 1996 excludes 4.8 million shares for stock
options/compensation plans and 5.0 million shares for convertible debentures
because their effect would have been antidilutive.
Cash Equivalents and Short-Term Investments
Debt securities with original maturities within three months are considered
cash equivalents. Debt securities with original maturities beyond three months
have remaining maturities within 13 months and are considered short-term
investments. These cash equivalent and short-term investment debt securities
are available for sale and stated at fair value, which approximates their
specific amortized cost. As of December 31, 1998, these debt securities
consisted primarily of the following types: corporate ($1092 million) and
asset-backed commercial paper ($679 million). At December 31, 1997, these
debt securities consisted primarily of the following types: corporate ($1943
million) and asset-backed commercial paper ($623 million). Gross realized and
unrealized gains and losses for each of these security types were immaterial
in 1998, 1997 and 1996. Proceeds from sales of these cash equivalent and
short-term investment debt securities in 1998, 1997 and 1996 were $647
million, $859 million and $10 million.
Inventories
Millions of Dollars
---------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------
Raw materials and purchased parts $ 77 $ 105
Work in process 354 364
Finished goods 165 273
------ ------
Inventories $ 596 $ 742
===========================================================================
Prior to the sale of its memory business to Micron in 1998, TI participated in
DRAM manufacturing joint ventures. TI held minority interests in, and had
long-term inventory purchase commitments with, each joint venture. Under the
agreements, TI purchased the output of the ventures at prices based upon
percentage discounts from TI's average selling prices. Inventory purchases
from the ventures aggregated $416 million in 1998, $977 million in 1997 and
$1176 million in 1996. Receivables from and payables to the ventures were
$135 million and $69 million at December 31, 1997. TI amortized its cost of
the ventures over the expected initial output period of three to five years,
and recognized its share of any cumulative venture net losses in excess of
amortization. The related expense charged to operations was $40 million in
1998, $88 million in 1997 and $33 million in 1996.
Property, Plant and Equipment at Cost
Millions of Dollars
---------------------------------------------------------------------------
Depreciable Lives 1998 1997
---------------------------------------------------------------------------
Land $ 88 $ 94
Buildings and
improvements 5-40 years 2,297 2,583
Machinery and
equipment 3-10 years 3,994 4,737
---------------------------------------------------------------------------
Total $6,379 $7,414
===========================================================================
Authorizations for property, plant and equipment expenditures in future years
were approximately $541 million at December 31, 1998, and $1105 million at
December 31, 1997.
20
Investments
At year-end 1998, equity investments primarily consisted of 28,933,092 Micron
common shares, along with several other publicly traded investments. Debt
investments consisted of 6.5% Micron convertible and subordinated notes. The
convertible note (convertible into 12,333,358 Micron common shares at $60 per
share) and the subordinated note have face amounts of $740 million and $210
million. The notes, which mature in 2005, have a weighted-average imputed
interest rate of 8.7%. The Micron securities were received in 1998 in
connection with TI's sale of its memory business.
TI Ventures is an externally managed venture fund which invests in the
development of new markets. As of year-end 1998, it had invested in 14
companies focused on next-generation applications of digital signal
processors.
Other investments consist of mutual funds that are acquired to generate
returns that offset changes in certain liabilities related to deferred
compensation arrangements. The mutual funds hold a variety of debt and equity
investments.
Following is information on the investments:
Millions of Dollars
-----------------------------------------------------------------------
Unrealized
Fair ---------------------------
Value Gains (Losses) Net Cost
-----------------------------------------------------------------------
1998
Equity investments $1,516 $643 $ (51) $592 $ 924
Debt investments 978 139 -- 139 839
TI Ventures 37 5 -- 5 32
Other investments 33 5 (5) -- 33
-----------------------------------------------------------------------
Total $2,564 $792 $ (56) $736 $1,828
=======================================================================
1997
Equity investments $53 $50 $(36) $ 14 $39
TI Ventures 10 -- -- -- 10
Other investments 6 5 -- 5 1
-----------------------------------------------------------------------
Total $69 $55 $(36) $ 19 $50
=======================================================================
Investments are stated at fair value, which is based on market quotes,
current interest rates or management estimates, as appropriate. Adjustments
to fair value of the equity and debt investments, which are classified as
available-for-sale, are recorded as an increase or decrease in stockholders'
equity. Adjustments to fair value of the venture fund are recorded in other
income (expense) net. Adjustments to fair value of the other investments,
which are classified as trading, are recorded in operating expense. Cost or
amortized cost, as appropriate, was determined on a specific identification
basis. Proceeds from sales of equity and debt investments were zero in 1998,
$26 million in 1997 and zero in 1996. There were no gross realized gains or
losses from sales of equity and debt investments in 1998 and 1996, and there
was a $16 million gain in 1997.
Accounts Payable and Accrued Expenses
Millions of Dollars
---------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------
Accounts payable $ 510 $ 698
Accrued salaries, wages, severance
and vacation pay 320 405
Other accrued expenses and liabilities 752 979
---------------------------------------------------------------------------
Total $1,582 $2,082
===========================================================================
Debt and Lines of Credit
---------------------------------------------------------------------------
Millions of Dollars
---------------------------------------------------------------------------
Long-Term Debt 1998 1997
---------------------------------------------------------------------------
6.75% notes due 1999 $ 200 $ 200
6.875% notes due 2000 200 200
9.0% notes due 2001 55 55
6.65% notes, due in installments through 2001 159 204
9.25% notes due 2003 104 104
6.125% notes due 2006 300 300
8.75% notes due 2007 43 43
3.80% to 6.10% lira notes
(9% swapped for 1.60% U.S. dollar obligation) 184 190
Other 49 57
---------------------------------------------------------------------------
1,294 1,353
Less current portion long-term debt 267 67
---------------------------------------------------------------------------
Total $1,027 $1,286
===========================================================================
The coupon rates for the notes due 2006 have been swapped for LIBOR-based
variable rates through 2006, for an effective interest rate of approximately
4.6% and 5.1% as of December 31, 1998 and 1997. The lira notes, and related
swaps, are due in installments through 2005.
As a result of a 1997 tender offer for any or all of the company's 9.0%,
9.25% and 8.75% notes, an aggregate of $248 million of debt principal was
tendered at a cash price of $280 million. This resulted in an extraordinary
charge of $22 million in the fourth quarter of 1997, after elimination of
deferred issuance costs and recognition of an income tax effect of $12
million.
21
Notes to
Financial Statements
Interest incurred on loans in 1998, 1997 and 1996 was $85 million, $114
million and $108 million. Of these amounts, $10 million in 1998, $20 million
in 1997 and $35 million in 1996 were capitalized as a component of capital
asset construction costs. Interest paid on loans (net of amounts capitalized)
was $75 million in 1998, $94 million in 1997 and $54 million in 1996.
Aggregate maturities of long-term debt due during the four years subsequent
to December 31, 1999, are as follows:
Millions of Dollars
-------------------------------------------------------------------------
2000 $ 312
2001 136
2002 27
2003 161
The company maintains lines of credit to support commercial paper borrowings
and to provide additional liquidity. These lines of credit totaled $669
million at December 31, 1998, and $651 million at December 31, 1997. Of these
amounts, at December 31, 1998 and 1997, $600 million existed to support
outstanding commercial paper borrowings or short-term bank loans.
Financial Instruments and Risk Concentration
Financial Instruments: In addition to the swaps discussed in the preceding
note, as of December 31, 1998, the company had forward currency exchange
contracts outstanding of $756 million to hedge net balance sheet exposures
(including $161 million to sell yen, $132 million to buy lira and $105 million
to buy deutsche marks). At December 31, 1997, the company had forward
currency exchange contracts outstanding of $275 million to hedge net balance
sheet exposures (including $101 million to buy lira, $73 million to buy
deutsche marks and $24 million to buy Singapore dollars). As of December 31,
1998 and 1997, the carrying amounts and current market settlement values of
these swaps and forward contracts were not significant.
The company uses forward currency exchange contracts, including the lira
note currency swaps, to minimize the adverse earnings impact from the effect
of exchange rate fluctuations on the company's non-U.S. dollar net balance
sheet exposures. The interest rate swaps for the company's notes due 2006 are
used to change the characteristics of the interest rate stream on the debt
from fixed rates to short-term variable rates in order to achieve a mix of
interest rates that, over time, is expected to moderate financing costs. The
effect of these interest rate swaps was to reduce interest expense by $3
million and $2 million in 1998 and 1997, and increase interest expense by $2
million in 1996.
In order to minimize its exposure to credit risk, the company limits its
counterparties on the forward currency exchange contracts and interest rate
swaps to investment-grade rated financial institutions.
As of December 31, 1998 and 1997, the fair value of long-term debt, based on
current interest rates, was approximately $1346 million and $1390 million,
compared with the historical cost amount of $1294 million and $1353 million.
Risk Concentration: Financial instruments that potentially subject the
company to concentrations of credit risk are primarily cash investments,
accounts receivable and noncurrent investments. The company places its cash
investments in investment-grade, short-term debt securities and limits the
amount of credit exposure to any one commercial issuer. Concentrations of
credit risk with respect to the receivables are limited due to the large
number of customers in the company's customer base and their dispersion across
different industries and geographic areas. The company maintains an allowance
for losses based upon the expected collectibility of accounts receivable. The
company's noncurrent investments at year-end 1998 have an aggregate fair value
of $2564 million. The investments are in high-technology companies and are
subject to price volatility and other uncertainties. They include a
significant concentration of Micron debt (fair value of $978 million) and
equity instruments (fair value of $1463 million). The company adjusts the
carrying amounts of the investments to fair value each quarter.
Stockholders' Equity
The company is authorized to issue 10,000,000 shares of preferred stock. None
is currently outstanding.
Each outstanding share of the company's common stock carries a stock
purchase right. Under certain circumstances, each right may be exercised to
purchase one one-thousandth of a share of the company's participating
cumulative preferred stock for $200. Under certain circumstances following
the acquisition of 20% or more of the company's outstanding common stock by an
acquiring person (as defined in the rights agreement), each right (other than
rights held by an acquiring person) may be exercised to purchase common stock
of the company or a successor company with a market value of twice the $200
exercise price. The rights, which are redeemable by the company at 1 cent per
right, expire in June 2008.
22
Changes in other comprehensive income are as follows:
Millions of Dollars
----------------------------------------------------------------------------
Equity, Debt and
Pension Liability Cash Investments
Adjustment Adjustment Total
----------------------------------------------------------------------------
Balance, December 31, 1995 $ (45) $ -- $ (45)
Annual adjustments 6 43 49
Tax effect of above -- (15) (15)
---------------------------------------------------------------------------
Balance, December 31, 1996 (39) 28 (11)
Annual adjustments (24) (12) (36)
Tax effect of above -- 4 4
Reclassification of
realized transactions,
net of tax of $6 million -- (10) (10)
---------------------------------------------------------------------------
Balance, December 31, 1997 (63) 10 (53)
Annual adjustments (117) 717 600
Tax effect of above -- (251) (251)
---------------------------------------------------------------------------
Balance, December 31, 1998 $(180) $ 476 $ 296
===========================================================================
Research and Development Expense
Research and development expense, which totaled $1206 million in 1998, $1536
million in 1997 and $1181 million in 1996, included a charge in 1998 of $25
million for the value of acquired in-process research and development from two
business acquisitions. Research and development expense for 1997 included a
charge of $461 million for the value of acquired in-process research and
development as a result of the acquisition of Amati Communications Corporation
(Amati). The company acquired Amati as a result of an all-cash tender offer
in fourth quarter 1997 through which approximately 78% of Amati's outstanding
common shares were acquired for an aggregate of $306 million. As
contractually required, the company then acquired the balance of the Amati
shares through a second-step merger transaction for an aggregate of $91
million. In addition to these stock purchase costs, the company incurred
approximately $117 million of additional acquisition costs, which included $50
million for the value of TI common stock options contractually required to be
issued to replace outstanding Amati employee stock options. Research and
development expense for 1996 included a charge of $192 million for the value
of acquired in-process research and development in connection with the 1996
acquisition of Silicon Systems, Inc. (SSi) for $557 million. There was
essentially no tax offset associated with these acquired in-process research
and development charges.
Status at year-end 1998 of the acquired Amati and SSi research projects:
The Amati research projects, which relate to digital subscriber line (DSL)
system designs for Internet and other uses, were essentially completed on
schedule. The first product has now been released and, although the DSL market
has developed more slowly than expected, TI expects improvement in the near
term in Internet-related demand. As this occurs, TI will be one of a very few
suppliers who have demonstrated interoperability and standards compliance.
Thus, TI does not anticipate material adverse effects regarding its operating
results, financial condition or investment return as a result of these delays.
The SSi research projects, which relate to analog technology for hard disk
drives and removable storage devices, were essentially completed on schedule.
TI expects to meet or exceed its original return expectations.
Other Income (Expense) Net
Millions of Dollars
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Interest income $ 166 $ 146 $ 62
Other income (expense) net 127 46 14
---------------------------------------------------------------------------
Total $ 293 $ 192 $ 76
===========================================================================
Other income included gains of $83 million in 1998 from the sale of TI's
interest in the TI-Acer joint venture to Acer Corporation and $66 million in
1997 from the sale of three divested activities, primarily software.
Stock Options
The company has stock options outstanding to participants under the Texas
Instruments 1996 Long-Term Incentive Plan, approved by stockholders on
April 18, 1996. Options are also outstanding under the 1988 Stock Option Plan
and the Texas Instruments Long-Term Incentive Plan; however, no further
options may be granted under these plans. Under all these stockholder-
approved plans, unless the options are acquisition-related replacement
options, the option price per share may not be less than 100 percent of the
fair market value on the date of the grant. Substantially all the options
have a 10-year term. Options granted subsequent to 1996 generally vest
ratably over four years. Options granted prior to that are fully vested.
23
Notes to
Financial Statements
Under the 1996 Long-Term Incentive Plan, the company may grant stock
options, including incentive stock options; restricted stock and restricted
stock units; performance units; and other stock-based awards. The plan
provides for the issuance of 37,000,000 shares of the company's common stock
(plus shares subject to acquisition-related replacement options); in addition,
if any award under the 1988 Stock Option Plan or the Long-Term Incentive Plan
terminates, then any unissued shares subject to the terminated award become
available for granting awards under the 1996 Long-Term Incentive Plan. No
more than 4,000,000 shares of common stock may be awarded as restricted stock,
restricted stock units or other stock-based awards under the plan. In 1998,
1997 and 1996, 117,000, 201,500 and 110,028 shares of restricted stock units,
which vest over one to five years, were granted (weighted-average award-date
value of $51.80, $37.78 and $22.65 per share). In addition, in 1998, 1997 and
1996, zero, 5,700 and 69,812 previously unissued shares were issued as Annual
Incentive Plan stock awards (weighted-average award-date value of zero, $22.94
and $23.28 per share). Compensation expense for restricted stock units and
annual stock awards totaled $3.9 million, $3.5 million and $1.6 million in
1998, 1997 and 1996.
The company also has stock options outstanding under the Employee Stock
Purchase Plan approved by stockholders in 1997. The plan provides for options
to be offered semiannually to all eligible employees in amounts based on a
percentage of the employee's compensation. The option price per share may not
be less than 85 percent of the fair market value on the date of grant. If the
optionee authorizes and does not cancel payroll deductions that will be equal
to or greater than the purchase price, options granted become exercisable
seven months, and expire not more than 13 months, from date of grant. There
are no options outstanding under the 1988 Employee Stock Option Purchase Plan,
the predecessor to the Employee Stock Purchase Plan.
Under the Stock Option Plan for Non-Employee Directors adopted in April
1998, the company will grant stock options to each non-employee director, once
a year, in the period beginning January 1999 and extending through 2003. Each
grant will be an option to purchase 5,000 shares with an option price equal to
fair market value on the date of grant. The option will vest ratably over
four years.
Stock option transactions during 1998, 1997 and 1996 were as follows:
*Excludes options offered but not accepted.
**Includes previously unissued shares and treasury shares of 2,039,118 and
3,608,010; 5,324,348 and 37,271; and 1,641,644 and zero for 1998, 1997
and 1996.
***Aggregate value of $52 million for two acquisitions.
In accordance with the terms of APB No. 25, the company records no
compensation expense for its stock option awards. As required by SFAS
No. 123, the company provides the following disclosure of hypothetical values
for these non-acquisition-related awards. The weighted-average grant-date
value of options granted during 1998, 1997 and 1996 was estimated to be
$22.15, $15.72 and $9.24 under the Long-Term Incentive Plans and the 1988
Stock Option Plan (Long-Term Plans) and $13.34, $13.47 and $6.05 under the
Employee Stock and Stock Option Purchase Plans (Employee Plans). These values
were estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1998, 1997 and 1996: expected dividend
yields of .71%, .93% and 1.48% (Long-Term Plans) and .74%, .70% and 1.21%
(Employee Plans); expected volatility of 43%, 39% and 39%; risk-free interest
rates of 5.47%, 5.76% and 5.42% (Long-Term Plans) and 5.32%, 5.69% and 6.15%
(Employee Plans); and expected lives of 6 years (Long-Term Plans) and .8
years, .8 years and 1.5 years (Employee Plans). Had compensation expense been
recorded based on these hypothetical values, the company's
24
1998 net income would have been $328 million, or diluted earnings per share of
$0.81. A similar computation for 1997 and 1996 would have resulted in net
income of $1764 million and $40 million, or diluted earnings per share of
$4.43 and $0.11. Because options vest over several years and additional
option grants are expected, the effects of these hypothetical calculations are
not likely to be representative of similar future calculations.
Summarized information about stock options outstanding under the Long-Term
Plans at December 31, 1998, is as follows:
At December 31, 1998, the stock options outstanding under the Employee Plans
have exercise prices of $43.04 and $49.30, depending on the date of grant, and
a remaining contractual life of three or nine months. Of the total
outstanding options, 280,229 are exercisable at year-end 1998.
At year-end 1998, 21,861,771 shares were available for future grants under
the 1996 Long-Term Incentive Plan and 7,518,268 shares under the Employees
Stock Purchase Plan. As of year-end 1998, 50,047,468 shares were reserved for
issuance under the company's stock option and incentive plans and 8,667,092
shares were reserved for issuance under the Employee Stock Purchase Plan.
In 1997, the company began a stock repurchase program with the goal of
neutralizing the dilutive effect of shares to be issued upon the exercise of
stock options under the Employee Stock Purchase Plan and Long-Term Plans.
Treasury shares acquired in connection with this repurchase program and other
stock transactions in 1998, 1997 and 1996 were 4,463,283 shares, 754,511
shares and 7,730 shares. Previously unissued common shares issued under the
Long-Term Plans and the Annual Incentive Plan in 1998, 1997 and 1996 were
33,848 shares, 30,174 shares and 98,072 shares. Treasury shares issued under
the Texas Instruments Restricted Stock Unit Plan for Directors in 1998, 1997
and 1996 were zero shares, zero shares and 2,334 shares.
Retirement and Incentive Plans
The company provides various retirement plans for employees including pension,
savings and deferred profit sharing plans. Incentive plans include profit
sharing payments and annual performance awards.
U.S. retirement plans: Effective January 1, 1998, for U.S. employees hired on
or after December 1, 1997, the company provides a defined contribution plan
whereby the company contributes 2% of an employee's earnings, and a matched
savings program whereby an employee's contribution, up to 4% of the employee's
earnings, is matched by the company at a dollar-per-dollar rate. The
contributions may be invested in several investment funds including TI common
stock. During a selection period in 1997, employees employed prior to
December 1, 1997, irrevocably elected whether to choose this plan or remain in
the savings and defined benefit programs described below. Approximately 36%
chose this plan.
For U.S. employees hired prior to December 1, 1997, the company provides a
matched savings program whereby an employee's contribution, up to 4% of the
employee's earnings (subject to statutory limitations), is matched by the
company at the rate of 50 cents per dollar. Available investments are the
same as above. Also provided is a defined benefit plan with benefits based on
years of service and employee's compensation. The plan is a career-average-
pay plan which has been amended periodically in the past to produce
approximately the same results as a final-pay type plan. The board of
directors of the company has expressed an intent to make such amendments in
the future, circumstances permitting, and the expected effects of such
amendments have been considered in calculating U.S. pension expense.
Certain of the profit sharing plans worldwide provide that, depending on the
individual plan, a portion of the profit sharing earned by employees is
contributed to a deferred plan. For U.S. employees, 50% of profit sharing
amounts are deferred. Several investment options are available, including TI
common stock. While the board of directors of the company has authorized the
issuance of 9,233,836 shares of previously unissued TI common shares for
deferred profit sharing and savings plans worldwide, none have been issued in
the three years ended December 31, 1998. Instead, the trustees of these plans
worldwide have purchased outstanding TI common shares: 3,753,084 shares in
1998, 3,535,471 shares in 1997 and 3,123,905 shares in 1996.
The company's aggregate expense for U.S. employees under the defined
contribution, deferred profit sharing and matched savings
25
plans was $56 million in 1998, $55 million in 1997 and $17 million in 1996.
The company's U.S. employees are currently eligible to receive, during
retirement, specified company-paid medical benefits. The plan is contributory
and premiums are adjusted annually. For employees retiring on or after
January 5, 1993, the company has specified a maximum annual amount per
retiree, based on years of service, that it will pay toward retiree medical
premiums. For employees who retired prior to that date, the company maintains
a consistent level of cost sharing between the company and the retiree.
Effective January 1, 1998, new employees are eligible for this benefit when
they reach 20 years of service, regardless of age. For a 15-year transition
period, current employees qualify for eligibility under either the 20-year
rule or the previous requirement, which was based upon retirement eligibility
under the defined benefit pension plan. Coverage eligibility under the 20-
year rule is only available at termination, i.e., no subsequent election to
participate is allowable.
Expense of the U.S. defined benefit and retiree health care benefit plans
was as follows:
Millions of Dollars
-----------------------------------------------------------------------------
Retiree
Defined Benefit Health Care
---------------------------------------------------------- -----------------
1998 1997 1996 1998 1997 1996
-------------------------------------------------------- ----------------
Service cost $36 $36 $40 $ 3 $ 3 $ 4
Interest cost 48 48 51 21 20 22
Expected return on plan assets (38) (33) (41) -- -- --
Amortization of prior service cost 2 3 3 -- -- --
Amortization of transition obligation (5) (5) (8) -- -- --
Recognized net actuarial loss 1 2 3 -- -- --
-------------------------------------------------------- ---------------
Total $44 $51 $48 $24 $23 $26
======================================================== ===============
Settlement and curtailment gains (losses) of the U.S. defined benefit plan
recognized in 1998, 1997 and 1996 were zero and $(6) million; $3 million and
$18 million; and $5 million and zero. For the retiree health care benefit
plan they were zero and $1 million; zero and $1 million; and zero.
Obligation data for the U.S. defined benefit and retiree health care benefit
plans and asset data for the U.S. defined benefit plan at December 31 were as
follows:
Millions of Dollars
-----------------------------------------------------------------------------
Retiree
Defined Benefit Health Care
1998 1997 1998 1997
------------------------------------------------------------ ------------
Change in benefit obligation
------------------------------------------------------------ ------------
Benefit obligation at beginning of year $ 688 $ 819 $ 319 $ 312
Service cost 36 36 3 3
Interest cost 48 48 21 20
Plan participant's contributions -- -- 6 5
Benefits paid (38) (202) (25) (22)
Actuarial loss 50 36 22 --
Settlements (84) (28) -- --
Curtailments 9 (24) 6 1
Special termination benefit 9 3 -- --
Divestiture (11) -- -- --
------------------------------------------------------------ ------------
Benefit obligation at end of year 707 688 352 319
------------------------------------------------------------ ------------
Change in plan assets
------------------------------------------------------------
Fair value of plan assets at beginning of year 543 611
Actual return on plan assets 88 114
Employer contribution 26 42
Benefits paid (28) (196)
Settlements (84) (28)
Divestiture (14) --
------------------------------------------------------------
Fair value of plan assets at
end of year 531 543
------------------------------------------------------------ ------------
Funded status (176) (145) (352) (319)
Unrecognized net actuarial (gain) (29) (29) (5) (33)
Unrecognized prior service cost 6 8 (2) (2)
Unrecognized transition obligation (10) (16) - -
------------------------------------------------------------ ------------
Accrued retirement at December 31 (209) (182) (359) (354)
Less current portion 27 40 23 19
---------------------------------------------------- ----- ------------
Accrued U.S. retirement costs $(182) $(142) $(336) $(335)
============================================================ ============
26
The U.S. defined benefit and retiree health care obligations for 1998 and
1997 were determined using assumed discount rates of 6.75% and 7.0%. The
assumed average long-term pay progression rate was 4.25%. The assumed long-
term rate of return on plan assets was 9.0%. The retiree health care benefit
obligation was determined using health care cost trend rates of 6.0% for 1999
decreasing to 5.0% by 2000. Increasing (decreasing) the health care cost
trend rates by 1% would have increased (decreased) the retiree health care
benefit obligation at December 31, 1998, by $15 million/$(15) million and 1998
plan expense by $1 million/$(1) million.
Non-U.S. retirement plans: Retirement coverage for non-U.S. employees of the
company is provided, to the extent deemed appropriate, through separate plans.
Defined retirement benefits are based on years of service and employee's
compensation, generally during a fixed number of years immediately prior to
retirement.
Certain non-U.S. locations provide for deferral of profit sharing amounts
with contributions generally invested in TI common stock. The related expense
for these contributions was $3 million in 1998, $6 million in 1997 and zero in
1996.
Expense of the non-U.S. defined benefit plans was as follows:
Millions of Dollars
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Service cost $ 53 $ 59 $ 64
Interest cost 31 35 34
Expected return on plan assets (40) (38) (35)
Amortization of prior service cost (1) 1 1
Amortization of transition obligation 2 2 2
Recognized net actuarial loss 12 9 10
---------------------------------------------------------------------------
Total $ 57 $ 68 $ 76
===========================================================================
Settlement and curtailment gains (losses) of the non-U.S. defined benefit
plans recognized in 1998 and 1997 were $(5) million and zero; and $(3) million
and zero. There were no such items in 1996.
Obligation and asset data for the non-U.S. defined benefit plans at
September 30 were as follows:
Millions of Dollars
---------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------
Change in benefit obligation
---------------------------------------------------------------------
Benefit obligation at beginning of year $ 999 $ 940
Service cost 53 59
Interest cost 31 35
Benefits paid (20) (19)
Actuarial gain (83) (16)
---------------------------------------------------------------------
Benefit obligation at end of year ........... 980 999
---------------------------------------------------------------------
Change in plan assets
---------------------------------------------------------------------
Fair value of plan assets at beginning of year 543 500
Actual return on plan assets 21 59
Employer contribution 36 38
Benefits paid (20) (19)
Actuarial gain (40) (35)
---------------------------------------------------------------------
Fair value of plan assets at end of year .... 540 543
---------------------------------------------------------------------
Funded status (440) (456)
Unrecognized net actuarial loss 250 252
Unrecognized prior service cost 8 9
Unrecognized transition obligation 9 13
Adjustments from Sept. 30 to Dec. 31 (4) 4
---------------------------------------------------------------------
Net non-U.S. amount recognized .............. $(177) $(178)
=====================================================================
Amounts recognized in the balance sheet
consist of:
Accrued retirement, current $ (2) $ (3)
Accrued retirement, noncurrent (377) (254)
Prepaid benefit cost 14 10
Intangible asset 8 6
Accumulated other comprehensive income 180 63
---------------------------------------------------------------------
Total $(177) $(178)
=====================================================================
The range of assumptions used for the non-U.S. defined benefit plans
reflects the different economic environments within the various countries.
The defined benefit obligations were determined as of September 30 using a
range of assumed discount rates of 2.5% to 7.0% and a range of assumed average
long-term pay progression rates of 3.0% to 6.0%. The range of assumed long-
term rates of return on plan assets was 7.0% to 8.0%. Accrued retirement at
September 30, 1998 and 1997 includes projected benefit obligations of $841
million and $883 million and accumulated benefit obligations of $630 million
and $636 million, versus plan assets of $395 million and $408 million, for
three plans whose obligations exceed their assets.
27
Notes to
Financial Statements
Special actions: In the second quarter of 1998, the company announced that,
as a result of the various business divestitures over the past several years,
the pending sale of its memory business and weakness in the current
semiconductor market environment, it was implementing a
severance/manufacturing efficiency program in order to more closely match the
size and cost of its support functions with the company's overall size and to
further combine manufacturing resources for more efficient operations. The
plan, which primarily affected the company's corporate activities and
semiconductor business, included the elimination of 3,441 jobs around the
world through voluntary programs, attrition, outsourcing and layoffs, as well
as the closing of several facilities. As a result, the company took a pretax
charge of $233 million in the second quarter, of which $126 million was
included in marketing, general and administrative expense and $107 million in
cost of revenues. Of the $233 million charge, $161 million was for severance,
$55 million for asset write-downs and $17 million for vendor cancellation and
lease charges. The asset write-downs were primarily to adjust fixed assets in
Singapore and inventory in the United States to their actual sale value. At
year-end 1998, the program had essentially been completed, with most severance
costs paid except for $49 million, which will primarily be paid in 1999. Of
the 3,441 jobs, 3,260 had been eliminated, and 181 will be eliminated in 1999.
In the fourth quarter of 1998, the company took further steps to enhance
manufacturing efficiency including the announced closing of a semiconductor
assembly operation and sale of a materials & controls manufacturing operation,
both in Europe. The sale was completed on December 31, 1998. The assembly
operation closing, which is ongoing, affected 740 employees. As a result of
these actions, the company took a fourth-quarter 1998 pretax charge of $72
million, of which $27 million was included in cost of revenues, $24 million in
other income (expense) net and $21 million in marketing, general and
administrative expense. Of this $72 million charge, $35 million was for
severance, $35 million for other cash-related costs and $2 million for asset
write-downs, primarily to adjust fixed assets in the European materials &
controls operation to actual sale value. Of the $35 million severance charge,
$19 million had been paid by year-end 1998 and $16 million will be paid in
1999.
In the first quarter of 1997, the company sold its mobile computing
business and terminated its digital imaging printing development program. As
a result of these divestitures, the company took a first-quarter pretax charge
of $56 million, of which $28 million was included in cost of revenues and $28
million in marketing, general and administrative expense. Of this $56 million
charge, $27 million was for severance for involuntary reductions worldwide.
These severance actions were essentially completed by the end of the quarter
and affected approximately 1,045 employees. The balance of $29 million was
for other costs associated with the business sale and program termination,
including vendor cancellation and lease charges. Essentially all costs were
paid in 1998. In the fourth quarter of 1997, the company took a pretax charge
of $42 million, of which $30 million was included in cost of revenues and $12
million in marketing, general and administrative expense, primarily for
severance costs related to cost-reduction actions by the materials & controls
business. These actions, which are expected to be completed in first-quarter
1999, affected approximately 260 employees. Costs of $13 million were paid by
year-end 1998, with the balance to be paid by the end of 1999.
In the fourth quarter of 1996, the company took a pretax charge of $208
million, of which $169 million was included in cost of revenues and $39
million was included in marketing, general and administrative expense. Of the
$208 million, $91 million was for severance for employment reduction actions
in the United States and selected reductions worldwide. These actions, which
primarily involved the semiconductor business as well as divested activities,
was essentially completed by year-end 1996 and affected approximately 2,600
employees. Of the severance cost of $91 million, $34 million was paid in 1996
and $57 million was paid in 1997. The balance of this charge, $117 million,
was for vendor cancellation and other cash-related costs of $47 million and
asset write-downs of $70 million on several product lives, primarily mobile
computing, an operation divested in first-quarter 1997. The asset write-downs
were to adjust inventory and fixed assets to actual sale value.
28
Following is an analysis of the related accrual:
Millions of Dollars
-------------------------------------------------------------------------
Balance, December 31, 1995 $ 15
1996 actions:
Severance costs for employment reductions,
primarily for semiconductor and
divested activities 91
Mobile computing and other charges:
Cash-related costs 47
Asset write-downs 70
Other actions 7
Non-cash write-downs of assets (70)
Severance, vendor and other cash-related payments (41)
Adjustment--reversal to income (3)
-------------------------------------------------------------------------
Balance, December 31, 1996 116
1997 actions:
Severance, vendor and other cash-related
costs for the divestiture of mobile computing
and termination of the digital imaging printing
development program 56
Severance and other cash-related costs,
primarily for materials & controls
cost reductions 42
Other - primarily cash-related cost reserves
against 1997 gains on sales of businesses 54
Severance, vendor, and other
cash-related payments (116)
-------------------------------------------------------------------------
Balance, December 31, 1997 152
1998 actions:
Severance, vendor, and other cash-related costs
for corporate and semiconductor actions 178
Asset write-downs in Singapore and the U.S. 55
Cash-related costs for closing of a semiconductor
assembly operation and sale of a materials &
controls operation 70
Asset write-downs for sale of a materials &
controls operation 2
Other actions 7
Non-cash write-downs of assets (57)
Severance, vendor and
other cash-related payments (228)
Adjustment--reversal to income (16)
-------------------------------------------------------------------------
Balance, December 31, 1998 $163
=========================================================================
Business Segment and Geographic Area Data
Texas Instruments develops, manufactures and sells a variety of products used
in the commercial electronic and electrical equipment industry, primarily for
industrial and consumer markets. The company's principal businesses are based
on TI's broad semiconductor technology and application of this technology to
digital solutions for the networked society.
TI has three principal businesses: Semiconductor, Materials & Controls and
Educational & Productivity Solutions. Each of these is a business segment,
with its respective financial performance detailed in this report.
Semiconductor consists of digital signal processors, analog chips, standard
logic, application-specific integrated circuits, reduced instruction-set
computing microprocessors and microcontrollers. These semiconductors are sold
primarily to original-equipment manufacturers and through distributors.
Materials & Controls consists primarily of electrical and electronic control
devices, electronic connectors and clad metals. They are sold primarily to
original-equipment manufacturers and through distributors.
Educational & Productivity Solutions, which includes educational and
graphing calculators, are marketed primarily through retailers and to schools
through instructional dealers.
Operating profits of the three principal businesses include the effects of
profit sharing and exclude the effects of special charges and gains. The
results for semiconductor include the effects of all royalty revenues from
semiconductor-related cross-license agreements. Business assets are the owned
or allocated assets used by each business.
Included in corporate activities are general corporate expenses, elimination
of intersegment transactions (which are generally intended to approximate
market prices), results for TI's emerging digital imaging operation and
royalty revenues from computer-related cross-license agreements. Assets of
corporate activities include unallocated cash, short-term investments,
noncurrent investments and deferred income taxes.
Divested activities include the historical operating results and assets of
memory (sold in 1998), mobile computing and software (both sold in 1997),
custom manufacturing services and printers (both sold in 1996) and other
smaller divestitures.
29
Notes to
Financial Statements
Business Segment Net Revenues
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Semiconductor
Trade $ 6,267 $ 6,490 $ 5,340
Intersegment 23 24 45
-----------------------------------------------------------------------------
6,290 6,514 5,385
-----------------------------------------------------------------------------
Materials & Controls
Trade 943 950 887
Intersegment 1 4 3
-----------------------------------------------------------------------------
944 954 890
-----------------------------------------------------------------------------
Educational & Productivity Solutions
Trade 456 447 422
Corporate activities 140 154 91
Divested activities 630 1,681 3,152
-----------------------------------------------------------------------------
Total $ 8,460 $ 9,750 $ 9,940
=============================================================================
Business Segment Profit (Loss)
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Semiconductor $1,439 $1,546 $1,012
Materials & Controls 142 123 90
Educational & Productivity Solutions 76 59 56
Corporate activities (235) (273) (312)
Special charges and gains (466) (532) (400)
Interest on loans/other income (expense) net,
excluding 1998 and 1997 net gains of
$59 million and $66 million included above 159 32 3
Divested activities (498) (242) (472)
-----------------------------------------------------------------------------
Income (loss) from continuing operations
before provision for income taxes
and extraordinary item $ 617 $ 713 $ (23)
=============================================================================
Details of special charges and gains are as follows:
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Severance/manufacturing efficiency program $ (233) $ -- $ --
Closing of a semiconductor operation and
sale of a materials & controls operation,
of which $(24) million was included in other
income (expense) net (72) -- --
Discontinuance of TI-Hitachi joint venture (219) -- --
Sale of interest in TI-Acer joint venture 83 -- --
Acquired in-process R&D charge (25) (461) (192)
Severance and other costs, primarily
from the divestiture of mobile
computing -- (56) --
Other income: gain on sale of three
divested activities, primarily
software -- 66 --
Termination of Thailand joint venture
agreements -- (44) --
Severance and other costs, primarily
for materials & controls cost
reductions -- (42) --
Asset write-downs and other costs,
primarily mobile computing -- -- (117)
Severance costs for employment reductions,
primarily for semiconductor and
divested activities -- -- (91)
Other -- 5 --
-----------------------------------------------------------------------------
Total $ (466) $ (532) $ (400)
=============================================================================
Business Segment Assets
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
Semiconductor $ 4,710 $ 4,798 $ 4,763
Materials & Controls 397 391 380
Educational & Productivity Solutions 117 151 141
Corporate activities 5,932 4,309 2,197
Divested activities 94 1,200 1,350
Net assets of discontinued operations -- -- 529
-----------------------------------------------------------------------------
Total $11,250 $10,849 $ 9,360
=============================================================================
30
Business Segment Property, Plant and Equipment
Millions of Dollars
-----------------------------------------------------------------------------
Depreciation 1998 1997 1996
-----------------------------------------------------------------------------
Semiconductor $ 913 $ 853 $ 655
Materials & Controls 47 46 41
Educational & Productivity Solutions 1 1 --
Corporate activities 49 58 56
Divested activities 134 151 152
-----------------------------------------------------------------------------
Total $ 1,144 $ 1,109 $ 904
=============================================================================
Millions of Dollars
-----------------------------------------------------------------------------
Additions 1998 1997 1996
-----------------------------------------------------------------------------
Semiconductor $ 731 $ 858 $ 1,633
Materials & Controls 49 49 53
Educational & Productivity Solutions 1 1 --
Corporate activities 32 147 225
Divested activities 218 183 152
-----------------------------------------------------------------------------
Total $ 1,031 $ 1,238 $ 2,063
=============================================================================
The following geographic area data include trade revenues, based on product
shipment destination and royalty payor location, and property, plant and
equipment based on physical location:
Geographic Area Net Trade Revenues
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
United States $ 2,722 $ 3,216 $ 3,548
Japan 1,619 1,971 1,832
Singapore 798 1,110 866
Rest of world 3,321 3,453 3,694
-----------------------------------------------------------------------------
Total $ 8,460 $ 9,750 $ 9,940
=============================================================================
Geographic Area Property, Plant and Equipment (Net)
Millions of Dollars
-----------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------
United States $ 2,440 $ 2,640 $ 2,619
Japan 417 478 519
Rest of world 516 1,062 1,024
-----------------------------------------------------------------------------
Total $ 3,373 $ 4,180 $ 4,162
=============================================================================
Income Taxes
----------------------------------------------------------------------------
Income (Loss) from Continuing Operations before Provision for Income Taxes and
Extraordinary Item
Millions of Dollars
---------------------------------------------------------------
U.S. Non-U.S. Total
---------------------------------------------------------------
1998 $ 201 $ 416 $ 617
---------------------------------------------------------------
1997 93 620 713
---------------------------------------------------------------
1996 (529) 506 (23)
---------------------------------------------------------------
Provision (Credit) for Income Taxes
Millions of Dollars
-----------------------------------------------------------------------------
U.S. Federal Non-U.S. U.S. State Total
-----------------------------------------------------------------------------
1998 Current $ 4 $ 263 $ (7) $ 260
Deferred (13) (36) (1) (50)
-----------------------------------------------------------------------------
Total $ (9) $ 227 $ (8) $ 210
=============================================================================
1997 Current $ 112 $ 286 $ 4 $ 402
Deferred 51 (44) 2 9
-----------------------------------------------------------------------------
Total $ 163 $ 242 $ 6 $ 411
=============================================================================
1996 Current $(125) $ 202 $ (3) $ 74
Deferred (44) (6) (1) (51)
-----------------------------------------------------------------------------
Total $(169) $ 196 $ (4) $ 23
=============================================================================
Principal reconciling items from income tax computed at the statutory
federal rate follow.
Millions of Dollars
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
Computed tax at statutory rate $ 216 $ 249 $ (8)
Effect of acquired in-process R&D 4 161 67
Effect of non-U.S. rates 76 (11) (3)
Research and experimentation tax credits (20) (30) (11)
Effect of U.S. state income taxes (14) 4 (3)
Effect of joint venture costs (48) 31 12
Other (4) 7 (31)
----------------------------------------------------------------------------
Total provision for income taxes $ 210 $ 411 $ 23
============================================================================
Included in the effect of non-U.S. rates for 1996 is a $4 million benefit from
tax loss carryforward utilization reduced by certain non-U.S. taxes and losses
for which no benefit was recognized. Provision has been made for deferred
taxes on undistributed earnings of non-U.S. subsidiaries to the extent that
dividend payments from such companies are expected to result in additional tax
liability. The remaining undistributed earnings (approximately $620 million
at December 31, 1998) have been indefinitely reinvested; therefore, no
31
Notes to
Financial Statements
provision has been made for taxes due upon remittance of these earnings.
Determination of the amount of unrecognized deferred tax liability on these
unremitted earnings is not practicable.
The primary components of deferred income tax assets and liabilities
at December 31 were as follows:
Millions of Dollars
----------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------
Deferred income tax assets:
Accrued retirement costs (pension and
retiree health care) $ 322 $ 221
Inventories and related reserves 242 216
Accrued expenses 251 195
Loss and credit carryforwards 49 80
Other 59 210
----------------------------------------------------------------------
923 922
----------------------------------------------------------------------
Less valuation allowance (173) (121)
----------------------------------------------------------------------
750 801
----------------------------------------------------------------------
Deferred income tax liabilities:
Investments (256) (5)
Property, plant and equipment (104) (165)
International earnings (19) (38)
Other (146) (170)
----------------------------------------------------------------------
(525) (378)
----------------------------------------------------------------------
Net deferred income tax asset $ 225 $ 423
======================================================================
As of December 31, 1998 and 1997, the net deferred income tax asset of $225
million and $423 million was presented in the balance sheet, based on tax
jurisdiction, as deferred income tax assets of $606 million and $711 million
and deferred income tax liabilities of $381 million and $288 million. The
valuation allowance shown above reflects the company's ongoing assessment
regarding the realizability of certain non-U.S. deferred income tax assets.
The balance of the deferred income tax assets is considered realizable based
on carryback potential, existing taxable temporary differences and expectation
of future income levels comparable to recent results. Such future income
levels are not assured because of the nature of the company's businesses,
which are generally characterized by rapidly changing technology and intense
competition.
The company has aggregate U.S. and non-U.S. tax loss carryforwards of
approximately $125 million. Of this amount, $117 million expires through the
year 2013, and $8 million of the loss carryforwards has no expiration.
Income taxes paid were $162 million, $1145 million and $240 million for
1998, 1997 and 1996.
Rental Expense and Lease Commitments
Rental and lease expense was $153 million in 1998, $168 million in 1997 and
$175 million in 1996. The company conducts certain operations in leased
facilities and also leases a portion of its data processing and other
equipment. The lease agreements frequently include purchase and renewal
provisions and require the company to pay taxes, insurance and maintenance
costs.
At December 31, 1998, the company was committed under noncancelable leases
with minimum rentals in succeeding years as follows:
Millions of Dollars
-------------------
1999 $86
2000 61
2001 34
2002 27
2003 26
Thereafter 129
Divestitures
In the first quarter of 1998 the company's DRAM manufacturing joint venture
with Hitachi, Ltd. was discontinued. As a result, TI incurred a first quarter
pretax charge of $219 million, included in cost of revenues. In the second
quarter of 1998, the company sold its interest in the TI-Acer DRAM
manufacturing joint venture to Acer Corporation for $120 million in cash.
This sale resulted in a pretax gain of $83 million. On September 30, 1998, TI
sold its memory business, including its remaining DRAM manufacturing joint
venture interests in TECH Semiconductor Singapore (TECH) and KTI Semiconductor
in Japan to Micron Technology, Inc. (Micron). As a result, TI received
28,933,092 Micron common shares, a $740 million note convertible into an
additional 12,333,358 Micron common shares and a $210 million subordinated
note. The market value of the seven year, 6.5% convertible and subordinated
notes was approximately $836 million at closing, with an average imputed
interest rate of 8.7%. In addition to TI's memory assets, Micron received
$550 million in cash from TI to
32
facilitate the deployment of Micron's technology throughout the acquired
business. In the fourth quarter of 1998, TI made an additional $130 million
payment to Micron as part of the contractually required working capital. TI
deferred the estimated pretax gain of $127 million on the sale until the
repayment of the TI-provided financing. The deferred gain is subject to
change to the extent actual transaction costs vary from estimates. In
connection with the sale, TI agreed to guarantee the payment obligations of
TECH under a newly syndicated $450 million principal amount credit facility
for debt maturing 2002. As of year-end 1998, TECH had borrowed $240 million
under the facility. As a result of the guarantee, TI was granted a security
interest in TECH's assets. In addition, the guarantee is partially offset by
certain contingent funding obligations of TECH's shareholders. In another
matter, approximately $300 million of grants from the Italian government to
TI's former memory operations in Italy are being reviewed in the ordinary
course by government auditors. TI understands that these auditors are
questioning whether some of the grants were applied to purposes outside the
scope of the grants. TI's deferred gain on the sale may be reduced to the
extent that any grants are determined to have been misapplied. Also, TI
understands that an Italian prosecutor is conducting a criminal investigation
concerning a portion of the grants relating to specified research and
development activities. TI believes that the grants were obtained and used in
compliance with applicable law and contractual obligations.
In July, 1997 the company sold its Defense Systems and Electronics business
(DSE) to Raytheon Company for $2.95 billion in cash. The net gain on sale of
this discontinued operation, after income taxes of $876 million, was $1473
million. The consolidated financial statements of TI present the DSE
operations as discontinued operations. Summarized results of discontinued
operations prior to the close were as follows:
Millions of Dollars
-------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------
Net revenues $ 812 $1,773
Income before provision for income taxes 84 175
Provision for income taxes 32 66
Income from discontinued operations 52 109
TI provided various ongoing services to DSE including, but not limited to,
facilities management, data processing, security, payroll and employee
benefits administration, insurance administration and duplicating and
telecommunications services. Their inclusion in discontinued operations was
based upon TI's intercorporate allocation procedures for such services. The
allocation basis of these expenses and all other central operating costs was
first on the basis of direct usage when identifiable, with the remainder
allocated among DSE and other TI businesses on the basis of their respective
revenues, head count or other measures. These expenses allocated to DSE
totaled $76 million in 1997 and $163 million in 1996. TI has agreements to
receive payments from Raytheon for continuing to provide certain of these
services on an ongoing basis and others on a transition basis to DSE.
33
Report of Ernst & Young LLP,
Independent Auditors
The Board of Directors
Texas Instruments Incorporated
We have audited the accompanying consolidated balance sheets of Texas
Instruments Incorporated and subsidiaries (the Company) at December 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Instruments Incorporated and subsidiaries at December 31, 1998 and 1997, and
the results of its operations and cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
January 19, 1999
34
Summary of Selected Financial Data
See Notes to Financial Statements and Management Discussion and Analysis of
Financial Condition and Results of Operations.
35
Supplemental Financial Information
Management Discussion and Analysis of Financial
Condition and Results of Operations
Note: Throughout this report, TI total financial results are reported with
the memory business. Semiconductor results are reported without memory. The
memory business was divested in the third quarter of 1998.
The management discussion and analysis consists of the information under the
headings Financial Highlights, Semiconductor, Materials & Controls,
Educational & Productivity Solutions, Digital Imaging and the first two
paragraphs under the heading Building a Real Time Advantage set forth on pages
3 and 4 of this report, and the following additional information.
1998 Results of Operations Compared with 1997
TI revenues for 1998 were $8460 million, down 13 percent from 1997, due
primarily to lower prices in dynamic random access memories (DRAMs), and to a
lesser extent, to the absence of revenue due to the sale of the memory
business. Operating margins were 10.9 percent, down from 12.4 percent in
1997, excluding special charges, primarily due to lower DRAM prices. TI
earnings per share were $1.79, compared with $2.03 for 1997, excluding special
items.
Income for the year was $719 million, down from $809 million in 1997,
excluding special items, primarily due to losses in memory. TI orders were
$8069 million for 1998, compared with $9796 million in 1997, primarily due to
declines in memory orders.
Including the effect of the special items for 1998, operating margins for
the year were 4.7 percent, earnings per share for the year were $1.02 and
income was $407 million.
During the fourth quarter, TI essentially completed the restructuring
announced in June of 1998. Annualized cost savings for the company are
estimated to be $270 million.
The results for the fourth quarter include special charges of $72 million,
substantially all of which was related to the closing of an assembly/test
joint venture with Samsung Electronica, Lda. in Portugal and the sale of the
Aversa, Italy, plant. Of the $72 million, $35 million was for severance, $35
million for other cash-related costs and $2 million for asset write-downs.
The year-ago quarter had a charge of $461 million for in-process R&D
associated with the acquisition of Amati Communications Corporation, along
with a pretax charge of $42 million for cost-reduction actions, primarily for
severance in the materials & controls business.
In addition to the fourth-quarter charges, 1998 earnings include special
charges of $477 million, of which $244 million was cash payments primarily for
discontinuing the memory-chip manufacturing joint venture with Hitachi, Ltd.,
and $233 million was for a worldwide restructuring of support functions and
consolidation of manufacturing operations. Of the $233 million, $161 million
was for severance, $55 million for asset write-downs and $17 million for other
cash-related charges. There was also an $83 million pretax gain in the year
on the sale of TI's shares in the TI-Acer joint venture to Acer Corporation.
In 1997, special pretax charges, in addition to those in the fourth quarter,
were $100 million, primarily related to the sale of TI's mobile computing
business and the termination of joint-venture agreements in Thailand. There
also was a $66 million special pretax gain for the sale of three businesses,
the largest of which was software.
Semiconductor: For 1998, semiconductor revenues and operating margins were
down slightly, and orders were down modestly, due to overall semiconductor
market weakness.
For the year, DSP revenues increased 29 percent to a record level, driven by
wireless. Analog revenues declined 4 percent for the year, as strength in
wireless was insufficient to offset weakness in other markets, particularly
hard disk drive (HDD). Collectively, TI's remaining semiconductor product
areas saw revenues down moderately from 1997, primarily due to overall
semiconductor market weakness.
In the fourth quarter, DSP and analog comprised 59 percent of TI's
semiconductor revenues.
TI expects modest sequential revenue growth in its semiconductor business in
the first quarter of 1999, leading to moderate growth for the year, based on
continuing strength in wireless and ongoing improvements in HDD and the mass
markets. The HDD market represents a growing opportunity for TI, due to its
market leadership and extensive portfolio across the primary HDD integrated
circuits (application-specific integrated circuits (ASICs), read channels,
pre-amps, and servo control).
TI expects that 1999 earnings will reflect continued improvement in
semiconductor markets and the ongoing benefit of TI's strategic positioning,
as well as the cost reductions realized from completion of restructuring
actions. In the first quarter, these improvements may be largely offset by
the transition to increased profit sharing, as the company moves to higher
operating margins. Profit-sharing expenses are accrued quarterly, based on
the company's full-year estimated operating profit margin.
36
Materials & Controls (M&C): For the full year, M&C revenues were down 1
percent due to weak Asian markets. Operating margins were up for the year to
15.0 percent, reflecting gains from the best-cost producer strategy. During
1998, plant closings took place in Canada and Michigan, restructuring and
early retirements took place in Holland and Japan and the Aversa, Italy, plant
was sold.
Educational & Productivity Solutions (E&PS): For the year, the E&PS business
showed a rise in operating margins of 3.4 percentage points to 16.6 percent,
as a result of cost improvements.
Digital Imaging: For 1998, the operation reduced its loss to one-half of the
1997 level and continues to make progress on product positioning and
operational performance.
Divested Activities: For 1998, memory revenues were down 60 percent and
orders were down 62 percent from 1997 levels, primarily due to lower DRAM
prices, with the balance due to the divestiture of the memory business in the
third quarter of 1998. Loss from memory operations was $498 million, versus a
loss of $192 million in 1997.
Financial Condition: During 1998, cash and cash equivalents plus short-term
investments decreased by $771 million to $2249 million. The discontinuance of
the joint venture with Hitachi and the acquisition of those operating assets
(which were subsequently included in the sale of the memory business) required
$281 million of cash in the first quarter. In addition, $91 million of cash
was used to purchase the remaining outstanding shares of Amati Communications
Corporation's common stock in the first quarter. Under the terms of the sale
of TI's memory business to Micron Technology, TI provided $550 million of cash
financing to Micron in the third quarter. At closing, TI deferred an
estimated pretax gain of $127 million on the sale until the repayment of the
TI-provided financing. In the fourth quarter, TI made an additional $130
million payment to Micron as part of the contractually required working
capital.
In the memory transaction, TI received approximately 28.9 million shares of
Micron common stock, $740 million face value of a 6.5 percent convertible note
and $210 million face value of a 6.5 percent subordinated note. These
securities were originally valued at $1717 million. At year-end, market value
was $2441 million. Market value changes, net of tax, are recorded as an
adjustment to stockholders' equity.
Approximately $300 million of grants from the Italian government to TI's
former memory operations in Italy are being reviewed in the ordinary course by
government auditors. TI understands that these auditors are questioning
whether some of the grants were applied to purposes outside the scope of the
grants. TI's deferred gain on the sale of its memory business may be reduced
to the extent that any grants are determined to have been misapplied. Also,
TI understands that an Italian prosecutor is conducting a criminal
investigation concerning a portion of the grants relating to specified
research and development activities. TI believes that the grants were
obtained and used in compliance with applicable law and contractual
obligations.
Cash flow from operating activities net of additions to property, plant and
equipment was $220 million in 1998.
Capital expenditures totaled $1031 million for 1998 versus $1238 million for
Depreciation was $1144 million for 1998 compared to $1109 million for 1997.
Authorizations for future capital expenditures were $541 million at December
31, 1998. TI's capital expenditures for 1999 are forecast to be level with
1998 at $1.0 billion. Depreciation for 1999 is expected to be $1.0 billion.
R&D is expected to be $1.1 billion, versus $1.2 billion in 1998.
The company maintains lines of credit to support commercial paper borrowings
and to provide additional liquidity. These lines of credit totaled $669
million at December 31, 1998. Of this amount, $600 million exists to support
commercial paper borrowings or short-term bank loans.
During 1998, TI repurchased approximately 4.5 million shares of common
stock, at a cost of $294 million, as a part of its previously stated intent to
neutralize the potential dilutive effect of shares to be issued under employee
stock options.
At the end of 1998, the debt-to-total-capital ratio was .17, compared to the
1997 year-end value of .19.
As previously announced, the timing of TI dividend declarations in 1998 was
moved, effective March 1998, from the third month of a quarter to the first
month of the following quarter. As a result of this one-time lag, 1998
contains three rather than four dividend declarations.
YEAR 2000: Since 1995, TI has been actively engaged in addressing Year 2000
(Y2K) issues. These result from the use of two-digit, rather than four-digit,
year dates in software, a practice which could cause date-sensitive systems to
malfunction or fail because they may not recognize or process date information
correctly.
State of Readiness: To manage its Y2K program, TI has divided its efforts
into four program areas:
Information Technology (computer hardware, software and electronic data
interchange (EDI) interfaces);
Physical Plant (manufacturing equipment and facilities);
Products (including product development); and
Extended Enterprise (suppliers and customers).
37
Supplemental Financial Information
Management Discussion and Analysis of Financial
Condition and Results of Operations
For each of these program areas, TI is using a four-step approach:
Ownership (creating awareness, assigning tasks);
Inventory (listing items to be assessed for Y2K readiness);
Assessment (prioritizing the inventoried items, assessing their Y2K
readiness, planning corrective actions, making initial contingency plans);
and
Corrective Action Deployment (implementing corrective actions, verifying
implementation, finalizing contingency plans).
At December 31, 1998, the Ownership, Inventory, and Assessment steps were
essentially complete for priority items in Information Technology, Physical
Plant and Products. TI's assessment activities for Extended Enterprise will
continue into 1999. TI considers priority items to be those that could
significantly disrupt TI's business operations. The target completion date for
priority items for the remaining step (Corrective Action Deployment) is June
1999 for all program areas.
As of December 31, 1998, the status for each program area is as follows:
Information Technology: Corrective actions have been deployed for
substantially all of TI's legacy business strategic information systems
(manufacturing, marketing, financial and human resources). In the ordinary
course of business, TI continues to install new business systems as
appropriate. Verification of Year 2000 readiness is incorporated into the
process of implementing these new systems. Assessment of infrastructure
hardware and software that support TI's enterprise-wide networks and servers
is essentially complete, and deployment of corrective actions is under way.
TI has also deployed an assessment tool and corrective action process for
desktop computers. The readiness of TI's EDI interfaces has been assessed,
and testing continues with major customers and suppliers.
Physical Plant: Assessment of manufacturing equipment and facilities is
substantially complete and corrective actions are under way.
Products: TI is essentially complete with the Year 2000 readiness
assessment of its products and is providing product status information on
its company web site. Divested product lines are not part of the assessment.
This effort includes semiconductor devices sold within the past five years.
TI's assessment indicates that the majority of semiconductor products either
have no date logic or are programmable devices that require customer
assessment of any software and firmware or other elements added by or at the
request of TI's customers. TI has identified date-related issues with
certain of TI's semiconductor application software development tools and is
providing corrective software patches. The company believes these
development tool issues are unlikely to cause significant problems for TI
customers. Assessment of products of the materials & controls and
educational & productivity solutions businesses indicates they are either
Year 2000 ready or have no date logic.
Extended Enterprise: TI's Y2K supplier program attempts to assess the
readiness of TI suppliers, focusing on those that could significantly
disrupt TI's business operations. TI began contacting its suppliers in 1997
to assess their readiness. This effort is ongoing and is expected to be
complete by June 1999. TI intends to finalize contingency plans by June
1999 on the basis of information gathered through the assessment process.
TI continues to discuss Y2K status with selected strategic customers.
Costs to Address Y2K Issues: TI's estimated aggregate costs for its Y2K
activities from 1995 through 2000 are expected to range from $70 million to
$90 million. Through December 31, 1998, TI has spent approximately $53
million.
Risks of Y2K Issues and Contingency Plans: TI continues to review Year 2000
issues relating to its information technology, physical plant, products,
suppliers and customers, as well as legal risks that may be associated with
discontinued products and divested product lines. TI's contingency planning
process is intended to mitigate worst-case business disruptions. The company
is preparing contingency plans to address worst-case issues such as delays in
delivery of product. As noted above, the company expects its contingency plans
to be complete by June 1999.
Market Risk Sensitive Instruments: The U.S. dollar is the functional
currency for financial reporting. In this regard, the company uses forward
currency exchange contracts, including lira note currency swaps, to minimize
the adverse earnings impact from the effect of exchange rate fluctuations on
the company's non-U.S. dollar net balance sheet exposures. For example, at
year-end 1998, the company had forward currency exchange contracts
outstanding of $756 million (including $161 million to sell yen, $132 million
to buy lira and $105 million to buy deutsche marks). Similar hedging
activities existed at year-end 1997. Because most of the aggregate non-U.S.
dollar balance sheet exposure is hedged by these exchange contracts and
swaps, a hypothetical 10% plus or minus fluctuation in non-U.S. currency
exchange rates would not be expected to have a material earnings impact,
e.g., based on year-end 1998 balances and rates, a pretax currency exchange
gain or loss of $6 million.
38
The company has interest rate swaps that change the characteristics of the
interest payments on its $300 million of 6.125% notes due 2006 from
fixed-rate payments to short-term LIBOR-based variable rate payments in order
to achieve a mix of interest rates on the company's long-term debt which,
over time, is expected to moderate financing costs. The effect of these
interest rate swaps was to reduce interest expense by $3 million in 1998.
The year-end 1998 effective interest rate for the $300 million of notes due
2006, including the effect of the swaps, was approximately 4.6% (5.1% at year-
end 1997). These swaps are sensitive to interest rate changes. For example,
if short-term interest rates increase (decrease) by one percentage point from
year-end 1998 rates, annual pretax interest expense would increase (decrease)
by $3 million.
The company's long-term debt has a fair value, based on current interest
rates, of approximately $1346 million at year-end 1998 ($1390 million at year-
end 1997). Fair value will vary as interest rates change. The following
table presents the aggregate maturities and historical cost amounts of the
debt principal and related weighted-average interest rates by maturity dates
at year-end 1998:
Millions of Dollars
---------------------------------------------------------------
U.S. Dollar Average Lira Average
Maturity Fixed-Rate Interest Fixed-Rate Interest
Date Debt Rate Debt Rate
---------------------------------------------------------------
1999 $ 235 6.74% $ 32 5.25%
2000 274 6.81% 38 5.09%
2001 105 7.90% 30 4.95%
2002 -- n/a 27 4.73%
2003 133 8.47% 28 4.74%
Thereafter 356 6.40% 36 4.53%
---------------------------------------------------------------
Total $1,103 6.97% $ 191 4.89%
Total long-term debt historical cost amount at year-end 1998 was $1294
million.
The company's cash equivalents and short-term investments are debt
securities with remaining maturities within three months (cash equivalents)
and beyond three months and within 13 months (short-term investments). Their
aggregate fair value and carrying amount was $1771 million at year-end 1998
($2566 million at year-end 1997). Fair value will vary as interest rates
change. The following table presents the aggregate maturities of cash
equivalents and short-term investments and related weighted-average interest
rates by maturity dates at year-end 1998:
Millions of Dollars
--------------------------------------------
Cash Equivalents Average
Maturity and Short-Term Interest
Date Investments Rate
--------------------------------------------
1999 $1,681 5.32%
2000 90 5.12
--------------------------------------------
Total $1,771 5.31%
The company's investments at year-end 1998 consisted of the following (amounts
at year-end 1997 were not material):
-Equity investments - primarily 28,933,092 Micron common shares acquired in
1998, along with several other publicly traded investments.
-Debt investments - 6.5% Micron convertible and subordinated notes acquired
in 1998. The convertible note (convertible into 12,333,358 Micron common
shares at $60 per share) and the subordinated note have face amounts of $740
million and $210 million. The notes, which mature 2005, have a weighted-
average imputed interest rate of 8.7%.
-TI Ventures - an externally managed venture fund that invests in the
development of new markets. As of year-end 1998, it had invested in 14
companies focused on next-generation applications of digital signal
processors.
-Other investments - consist of mutual funds that are acquired to generate
returns that offset changes in certain liabilities related to deferred
compensation arrangements. The mutual funds hold a variety of debt and
equity investments.
The equity investments (fair value of $1516 million) and venture fund (fair
value of $37 million) are sensitive to equity price changes. For example, if
prices of the equity investments increase or decrease 10%, the company would
record an increase or decrease in stockholders' equity of $152 million.
Similarly, if prices for the venture fund increase or decrease 10%, the
company would record an increase or decrease in other income (expense) of $4
million. Changes in prices of the other investments are expected to offset
related changes in deferred compensation liabilities such that a 10% increase
or decrease in investment prices would not affect operating results.
39
Supplemental Financial Information
Management Discussion and Analysis of Financial
Condition and Results of Operations
Fair value of the debt investments ($978 million) will vary as interest rates
change (and also for the convertible note, as the underlying equity share
price changes). The following table presents the aggregate historical cost
maturities of debt investments and related weighted-average interest rates by
maturity dates:
Millions of Dollars
--------------------------------------------------
Average
Maturity Debt Interest
Date Investments Rate
--------------------------------------------------
1999-2004 None N/A
2005 $839 8.7%
1997 Results of Operations Compared with 1996
------------------------------------------------------------------------
Change in Change in
Orders, Net Revenues,
Business 1997 vs. 1996 1997 vs. 1996
------------------------------------------------------------------------
Semiconductor up 25% up 21%
Material & Controls up 9% up 7%
Educational & Productivity Solutions up 5% up 6%
------------------------------------------------------------------------
Total TI up 6% down 2%
------------------------------------------------------------------------
Total TI excluding businesses sold up 22% up 19%
------------------------------------------------------------------------
UNLESS STATED OTHERWISE, THE FINANCIAL RESULTS THAT FOLLOW ARE FROM CONTINUING
OPERATIONS AND EXCLUDE SPECIAL ITEMS.
TI's orders in 1997 were $9796 million, compared with $9268 million in 1996.
Net revenues in 1997 were $9750 million, compared with $9940 million in 1996.
Financial results in 1997 and 1996 included revenues from TI businesses that
have been sold, primarily memory, software, mobile computing and printers.
Excluding these divested activities, TI orders were up 22 percent for the year
and revenues were up 19 percent, primarily due to growth in semiconductor.
Profit from operations in 1997 was $1213 million, up from $374 million in
1996. The increase was primarily from higher semiconductor profits and the
absence of losses in the sold businesses, primarily memory, software and
mobile computing. In 1996, these sold businesses lost $229 million more than
in 1997.
Results for the fourth quarter include a charge of $461 million for in-
process R&D associated with the acquisition of Amati Communications
Corporation, along with a pretax charge of $42 million for cost reduction
actions, primarily in the materials & controls business. In addition to the
fourth-quarter charges, the 1997 earnings include previously announced special
pretax charges of $56 million, primarily related to the sale of TI's mobile
computing business, and $44 million for the termination of joint-venture
agreements in Thailand.
Results for 1997 also include a $66 million gain for the sale of three
businesses, the largest of which was software. The total of the 1997 special
items is equivalent to $1.27 per share. In 1996, special charges were $400
million before taxes, with $208 million being in the fourth quarter. These
charges were equivalent to $0.86 per share for the year.
Income for the year was $809 million, compared with $281 million in 1996.
TI's diluted earnings per share in 1997 were $2.03, compared with $0.74 in
1996. Including the effect of the special items, income for the year was $302
million compared to a loss of $46 million in 1996, and earnings per share were
$0.76 compared with a loss per share of $0.12 in 1996.
Results for 1997 also included an accrual for profit sharing of $122
million, which was 7.82 percent of eligible payroll. There was no profit
sharing in 1996.
Including the effect of special items, net income for 1997 was $1805
million, which consisted of income from continuing operations of $302 million,
income from the discontinued defense business of $52 million, gain on sale of
the discontinued defense business of $1473 million, and an extraordinary
charge of $22 million associated with debt retirement. On a similar basis,
net income for 1996 was $63 million, which consisted of a loss from continuing
operations of $46 million and income from the discontinued defense business of
$109 million.
Royalty revenues in 1997 were essentially steady with 1996.
Interest income for 1997 was up $84 million from 1996, primarily as a result
of investment of net proceeds from the sale of the defense business to
Raytheon.
The income tax rate for 1997 was 35 percent.
TI's backlog of unfilled orders as of December 31, 1997, was $1623 million,
unchanged from year-end 1996.
R&D for 1997 was $1075 million, excluding the $461 million charge for in-
process R&D associated with the Amati acquisition, compared with $989 million
in 1996, excluding the $192 million charge for in-process R&D associated with
the SSi acquisition.
Capital expenditures were $1238 million in 1997, compared with $2063 million
in 1996. Depreciation for 1997 was $1109 million compared with $904 million
in 1996.
40
Semiconductor: Orders in semiconductor for 1997 were $6610 million, up 25
percent from $5267 million in 1996. The increase resulted from strong demand
for digital signal processing solutions (DSPS), as DSPS orders increased over
40 percent. Semiconductor revenues were $6514 million, up 21 percent from
$5385 million in 1996. The increase in semiconductor resulted from an
increase of more than 35 percent in DSPS revenues due to increased shipments.
For the fourth quarter, semiconductor revenues, which include royalties from
semiconductor patent licenses, represented about 71 percent of TI's revenues.
Digital signal processors plus mixed signal/analog represented about 54
percent of semiconductor. The remainder of semiconductor consists primarily
of a broad range of advanced products, including application-specific
integrated circuits, reduced instruction-set microprocessors, microcontrollers
and standard logic.
Revenues reached record levels for digital signal processing for both the
year and the fourth quarter. Mixed-signal/analog also had a strong year, with
record revenues for the year and fourth quarter, growing more than twice as
fast as the market in 1997.
TI's other semiconductor products, such as microcontrollers and application-
specific integrated circuits, made good progress in growth and profitability
in 1997.
Semiconductor profit from operations increased from $1012 million in 1996 to
$1546 million in 1997, and operating margins improved from 18.8 percent to
23.7 percent. Results particularly benefited from higher DSPS shipments.
Materials & Controls: Orders in Materials & Controls of $972 million were up
from $896 million in 1996, primarily due to TIRIS. Revenues of $954 million
were up $64 million from 1996 due primarily to the growing acceptance of TIRIS
in automotive applications. PFO increased from $90 million in 1996 to $123
million in 1997, with margins improving from 10.1 percent to 12.9 percent.
The increase was due primarily to manufacturing cost reduction.
Educational & Productivity Solutions: Orders in Educational & Productivity
Solutions were $448 million, up $22 million from 1996 as a result of continued
growth in instructional calculators. Revenues were $447 million, an increase
of $24 million from 1996 also as a result of growth in instructional
calculators. PFO increased from $56 million in 1996 to $59 million in 1997,
and operating margins remained flat at 13.2 percent.
Digital Imaging: TI's digital imaging business continued to make progress
throughout 1997, further focusing its strategy on key market opportunities.
Divested Activities: Revenues for memory decreased $400 million in 1997,
compared to 1996, as DRAM prices continued to decline sharply.
Common Stock Prices and Dividends
TI common stock is listed on the New York Stock Exchange and traded
principally in that market. The table below shows the high and low prices of
TI common stock on the composite tape as reported by The Wall Street Journal
and the dividends paid per common share for each quarter during the past two
years.
QUARTER
----------------------------------------------------------------------------
1st 2nd 3rd 4th
----------------------------------------------------------------------------
Stock prices:
1998 High $62.75 $67.00 $63.69 $90.44
Low 40.25 46.88 46.06 45.38
1997 High 43.63 48.19 71.00 71.25
Low 31.06 36.81 42.13 39.63
Dividends paid:
1998 $.085 $.085 $.085 $.085
1997 $.085 $.085 $.085 $.085
----------------------------------------------------------------------------
41
Quarterly Financial Data
42
Results for the first quarter of 1998 include a pretax charge of $219 million,
included in cost of revenues, for discontinuance of the TI-Hitachi joint
venture and a charge of $25 million for the value of acquired research and
development from two business acquisitions. The second quarter of 1998
includes a pretax operating charge of $233 million for a
severance/manufacturing efficiency program and a pretax gain of $83 million
for the company's sale of its interest in the TI-Acer joint venture. Fourth-
quarter 1998 results include a pretax operating charge of $72 million,
essentially all of which is for the disposition of two European operations.
In the first quarter of 1997, the company took a pretax charge of $56
million related to the sale of its mobile computing business and termination
of its digital imaging printing development program. Results for the second
quarter of 1997 include a pretax operating charge of $44 million for the
termination of agreements related to proposed Thailand joint ventures and a
$66 million pretax gain from the sale of three divested activities,
principally software. Results for the third quarter of 1997 reflect the sale
of TI's defense business, which was closed with Raytheon Company on July 11
for $2.95 billion in cash. The net gain from this sale, after income taxes of
$876 million, was $1473 million and was included in discontinued operations.
As a result of the 1997 acquisition of Amati Communications Corporation, the
company took a charge of $461 million in the fourth quarter for the value of
acquired in-process research and development. Also in the fourth quarter, the
company took a pretax charge of $42 million, primarily for severance costs
related to cost-reduction actions by the materials & controls business.
Diluted earnings (loss) per common share are based on average common and
dilutive potential common shares outstanding (402,230,699 shares and
389,695,136 shares for the fourth quarters of 1998 and 1997).
43