TXN

Business Context and Reporting Period

Company: Texas Instruments Incorporated (TI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Key Event: On September 30, 1998, TI completed the sale of its memory business (including DRAM manufacturing joint ventures) to Micron Technology, Inc. This transaction significantly altered the company's revenue mix and segment reporting for the period.

Key Financial Metrics

Note: Q3 1997 Net Income includes a $1,473 million gain from the sale of the defense business (discontinued operations). Q3 1998 results exclude this gain.

Material Changes vs. Prior Period

• Revenue Decline: Q3 1998 revenues decreased 15% year-over-year to $2,113 million, primarily driven by a 52% drop in memory business revenues due to sharply lower DRAM prices. Excluding memory, semiconductor revenues were down 8% due to weakness in hard-disk drive and modem markets.
• Profitability Impact: Operating margins for the full company dropped to 9.6% in Q3 1998 from 14.3% in Q3 1997. The memory business incurred a $155 million operating loss in Q3 1998.
• Restructuring Charges: In Q2 1998, TI recorded a $233 million pretax restructuring charge (severance, asset write-offs, lease charges) to align costs with reduced operations. Q1 1998 included a $219 million charge for discontinuing the Hitachi DRAM joint venture.
• Divestitures: The sale of the memory business to Micron resulted in a deferred pre-tax gain of $127 million. TI received Micron stock, convertible notes, and a subordinated note, while providing $550 million in cash financing to Micron.

Guidance, Outlook, and Risks

Management Commentary & Outlook

• Q4 1998: TI expects generally stable performance from its ongoing semiconductor business despite market weakness. The wireless market is growing at record levels, with revised 1998 shipment estimates of over 140 million digital cellular phones.
• 1999 Visibility: Limited visibility into 1999 growth due to uncertain global economies and the timing of recovery in modem and hard-disk drive markets. Long-term outlook remains positive for Digital Signal Processing (DSP) and analog markets.
• Cost Savings: The restructuring program is on schedule, with estimated annualized cost savings of $270 million from reduced G&A and operating costs.

Risks and Contingencies

• Year 2000 (Y2K): TI estimates total Y2K costs between $70 million and $90 million, with approximately $50 million spent to date. Contingency plans are being finalized to address potential supply chain disruptions.
• Legal Proceedings: Ongoing patent infringement litigation with Hyundai Electronics Industries Co., Ltd. regarding DRAM manufacturing and sales in multiple jurisdictions.
• Market Risk: Continued weakness in the semiconductor market, specifically in modems and hard-disk drives, poses a risk to revenue stability.

Investor Verification Checklist

• Memory Business Exit: Verify the final accounting treatment of the Micron transaction, specifically the $127 million deferred gain and the valuation of the Micron stock and notes received.
• Restructuring Progress: Confirm the realization of the projected $270 million in annualized cost savings and the timeline for facility closures.
• Y2K Compliance: Assess the status of the "Assessment" and "Corrective Action Deployment" phases for suppliers and physical plant, given the June 1999 target completion date.
• Legal Exposure: Monitor the status of the patent litigation with Hyundai, as outcomes could impact future licensing revenue or require injunctions.
• Segment Performance: Analyze the divergence between the struggling memory/divested segments and the growing DSP/wireless segments to understand the true trajectory of the remaining core business.