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Texas Instruments Inc. - Shareholder/Analyst Call

Texas Instruments Inc. (TXN)

April 18, 2013 11:00 am ET


Richard K. Templeton - Chairman, Chief Executive Officer and Member of Special Committee

Joseph F. Hubach - Chief Compliance Officer, Senior Vice President, General Counsel and Secretary

Unknown Executive

Excuse me, ladies and gentlemen. If you would take your seats, we'll begin. And I'll remind you that in the unlikely event of an emergency, we have 3 emergency exits, one to my right, across that wall, and 2 across the back wall. Mr. Chairman?

Richard K. Templeton

Good morning. The 2013 Annual Meeting of Stockholders of Texas Instruments Inc. is hereby called to order. I'm Rich Templeton, Chairman, President and Chief Executive Officer, and it is my pleasure to be here to welcome you to this year's meeting.

First on our agenda today is the election of directors, followed by the consideration of 2 proposals, first is an advisory vote on executive compensation or it is more commonly known say-on-pay, and the ratification of independent auditors.

While the polls are open for voting on the directors and these proposals, I will review our strategic direction. The secretary's report on the voting will then follow, after which, questions or comments from the floor will be in order. If you would, please hold your questions or comments until that time, as they may be covered during the course of the meeting.

But before we begin, I want to introduce some special guests that are with us here today. First, Margaret McDermott and Mary McDermott Cook, wife and daughter of TI founder Eugene McDermott. Margaret and Mary, would you please either stand or wave to the audience.

We are also pleased to have with us Sally Jenkins, wife of former TI Chairman, President and CEO Jerry Junkins. Sally, would you please stand or wave?

We are also pleased to have with us the former Director of TI, Jim Adams. Jim, would you please stand?

We are pleased to have with us another former Director of TI, Gerry Fronterhouse. Gerry, would you please stand?

And finally, Haley Harris, wife of former TI Director Buddy Harris. Haley, would you please stand or wave to the audience?

Joe Hubach, Secretary of the company, will act as secretary of this meeting. The Board of Directors has appointed an independent inspector to conduct the vote of this meeting. Joe has advised me that holders of more than 89% of the outstanding common stock are represented at the meeting by proxy or in person, this constitutes a quorum.

At this time, I'm pleased to introduce the nominees for election to the TI board. All, except Mark Blinn, were elected at last year's annual meeting. As I introduce the nominees, I ask that they please stand and remain standing. Mark Blinn is new to our board, so I'll take a moment just to tell you about him. Mark joined Flowserve Corp. in 2004 as its Chief Financial Officer, and assumed responsibility for the company's Latin America operations in 2007. He became a member of their Board of Directors in 2009 and was named President and Chief Executive Officer later that year. Mark's knowledge of global industry -- industrial markets, his financial expertise and proven leadership make him a valuable addition to the TI board.

In addition to Mark and myself, the nominees are Ralph Babb, Dan Carp, Carrie Cox, Pam Patsley, Robert Sanchez, Wayne Sanders, Ruth Simmons and Christie Whitman. Each of these nominees and their qualifications as Director are listed in our proxy statement. Thank you.

TI bylaws require advance notice of proposed nominations. Since no other notice of other nominations have been submitted in accordance with the bylaws, the nominations are closed.

We'll now consider 2 board proposals, the Board of Director recommends that stockholders cast an advisory vote for the proposal approving executive compensation for 2012, as disclosed in our proxy statement, and that stockholders ratify the appointment of Ernst & Young as the company's independent registered public accounting firm for 2013. The text and related discussion of the board proposals are in our proxy statement, so I won't take additional time to describe the proposals. This would be an appropriate time for comment on the nominations and the board proposals. Please limit your comments to a total of 3 minutes. Do we have any comments? Okay.

We will now open the polls and take the vote on the election of directors and the board proposals. The polls will remain open for 10 minutes. The votes of the 401(k) participants and those of you who have sent in a proxy or used the telephone or Internet voting procedures have already been counted. If any stockholder of record has not submitted a proxy or voted by telephone or Internet and wishes to submit a ballot, you may do so now. The right to vote directly at this meeting is limited to stockholders of record and proxy holders. Also, if you have previously submitted a proxy or voted by telephone or Internet, you may change your vote by submitting a ballot. Please raise your hand if you have a need for a ballot.

Any others? Okay. While votes are being tabulated, I will take a few moments to share my thoughts with you about our strategic direction as a company and the progress that we're making.

So 2012 has been a busy year. We've been busy managing change, busy transitioning our product portfolio and busy developing a more diverse customer base and along the way, building a stronger and a better TI, one that can better serve our customers, our investors, our employees today and in the years ahead. 2012 marked a year where we completed the strategic journey of remaking TI into an Analog and an Embedded Processing company, and it's the year that we began some critical next steps in building a stronger TI for the years ahead. But we don't often take time to reflect on what we've accomplished, I would like to do that this morning and taking stock of what we did from 2006 through 2012, and more importantly, what this transformation has enabled us to become. We'll take a deeper look at just one example of a stronger TI and that's our recently announced capital management strategy. Then we'll lay down some broad brushstrokes of where we want to take TI over the next 5 years, building on a foundation that we've already put in place.

At the end of 2012, our company was firmly rooted in the technologies of Analog and Embedded Processing. More than 70% of our revenue comes from these portfolios. When we began this journey back in 2006, that number was hovering just south of 45%. I think it is important to remind everybody why this change really matters. Simply said, we view Analog and Embedded as the 2 best semiconductor markets in the world, these technologies are pervasive. Analog, for example, can be found in every electronic device there is. They offer us the opportunity for growth, solid profits, greater stability and compelling cash generation. Both Analog and Embedded Processing are very diversified, meaning there are tens of thousands of customers who use these technologies in a wide range of applications, from consumer to computing, industrial and automotive. That breadth is a good thing as it doesn't lead to us being dependent only on the next big thing. Instead, we can be a terrifically successful company, being involved in both the highly visible big things, but also a myriad of the smaller scale applications that you find across many markets and across thousands of customers. This translates into greater stability for TI in growth, as we're less likely to become overly dependent on a single customer or a single product. Our changing customer profile illustrates this point, with no single customer comprising more than a mid-single-digit percentage of our revenue. We now have a diversity and a breadth that bodes well for us in the future.

Analog and Embedded Processing also offer great opportunities for us to expand our position in industrial and automotive, end markets where we are underrepresented today and that echo many of the characteristics of the technologies that we value. There's lots of customers, many applications, and they have very long product life cycles.

Industrial has the added benefit of having semiconductor penetration still in its infancy, so there's lots of headroom to grow as customers transition from electromechanical to electronic solutions. And while this market isn't highly visible, it's breadth and diversity translates into great growth and great returns over the long term. The opportunities are enormous. Think of home thermostats that are not only smart, but they learn to manage energy inside a home based on your personal preferences, or a heating, ventilating and air-conditioning system with remote diagnostics enabled by wireless connectivity or motors that self adjust to the environment and use less energy in the process.

Similarly, the automotive market is transforming before our eyes, as infotainment and safety features make our cars smart and connected. New technology features are being rolled out with routine regularity. Features such as collision avoidance, lane changing or blind spot detection, parking assist systems are being added not only to high-end cars, but are quickly transitioning throughout the fleet to entry-level vehicles as well.

Our Analog and Embedded strategy enables us to work with literally every customer in every market, and not be overly dependent on any one thing, that drives higher growth and more consistent returns.

We've already seen the financial benefits of our Analog and Embedded business model, it's led to important increases in dividends and share repurchases, it's firmly in place and we have confidence in its sustainability. This confidence allowed us to be clear and precise about our plan for the value we will steadily return directly to you, our shareholders. Let me highlight just a few key points from what we call our capital management strategy.

First of all, our business model, based on Analog and Embedded Processing, generates a lot of cash. We will use some of these cash to increase our competitive advantage, things like new technology, manufacturing capacity, working capital and acquisitions. But our business model is strong enough that it generates more cash than we need, so we return it to shareholders through dividends and share repurchases. In fact, we believe TI can consistently generate between 20% and 25% of our revenue into free cash flow and then return 100% of that free cash flow, less any debt repayments, to you in the form of higher dividends and share buybacks.

As evidenced in 2012 we converted 23% of our revenue into free cash flow, which positions us well within the top quartile of all S&P 500 companies. In February, we increased our dividend to an annualized rate of $1.12. This 33% increase follows a 24% increase last September and marks the 10th consecutive year of dividend increases. It's worth noting that our dividend yield is also in the top quartile of S&P 500 companies.

We also authorized an additional $5 billion of share repurchases, continuing a practice that began in 2004, to reduce our outstanding shares. Our repurchases have resulted in a 36% reduction in shares since then, making every share you own worth more. This belief is imperative, and the imperative of returning cash to our shareholders is really nothing new for us. We've long employed tax policies that maximize the cash we bring back to headquarters instead of leaving it stranded overseas, so that we can use it and in fact also return it. In fact, over the past 5 years, we have returned 100% of our free cash flow to shareholders or about $12.5 billion.

Now what is new is that with the transition of our business model to Analog and Embedded, we can now tell you that we're confident in our ability to keep doing this for a very long time to come. This puts TI in a unique and a very small class of growing companies, especially in the technology field, a company that can both generate high levels of cash and return cash. Not many can make this claim.

So we've accomplished a lot, putting in place a sustainable business that will serve TI well for many years to come. But sitting still, especially in the technology business, is never an option. So what's next? Where do we go from here? How do we take what we built so far and make it stronger and better over the next 5 years? Well, we've got some plans on that.

First, we intend to grow the company, top line growth is an important priority and we want top line growth with high-quality positions. In fact, we have a good growth story if you look inside the business. We gain share in our core businesses of Analog and Embedded Processing consistently over the last several years, and now as the wind down of our Wireless business comes to an end, we should see this growth become more obvious, even to a casual observer.

Second, we believe stronger execution can differentiate TI and positively impact our customers as well, so we're riveted on making execution a competitive advantage. So how? It's simple. It's about focusing on the fundamentals, sweating the details, ratcheting up the discipline and consistency in which we do things. If we do this well, it will have direct implications across TI in how we innovate and how we create sustainable competitive advantage and how our customers value us and, ultimately, in how well we're able to reward our investors and employees.

Third, our portfolio work isn't done. We like what we've done so for -- so far, we just want more of it, that means more Analog and more Embedded Processing, more industrial and automotive penetration, more catalog and application-specific products and more power management. We want each of these to make up a heavier percentage of TI, 5 years from now. We've seen the benefits that can accrue with the higher percentage of our revenue from Analog and Embedded, and our goal is to push that number to 90% of the company over the next 5 years. We like what the industrial and automotive markets have to offer, diverse customers and applications numbering in the tens of thousands, with long product life cycles and long-term customer relationships.

Though we participate in these markets today, we want to heavy up our penetration. We know the catalog and application-specific products are keys to unlocking the doors of a multitude of customers. We want more of our portfolio focused on catalog and application-specific markets. We've seen the power of power and that's Power Management chip technology. It allows a strong Analog play into the mobile and connected world, but it's also much more than that. In talking with customers, they all want, and in fact they need, lower power consumption in their products. I cannot think of a market or an industry that doesn't want to use power -- less power in their applications in some form or fashion. It's a large market, we're good at it, and we intend to capitalize on our strengths.

Fourth, we've seen the benefit of focusing on many customers in many markets. We want even more customer diversity and more revenue beyond our largest customers. We have made progress in this area, but we think there's more we can do. For example, we can better leverage our online design tools like WEBENCH to offer a design environment that more customers want to use.

Finally, we want a model of innovation that foster solutions that are both unique and also highly valued over the long term across a broader set of customers and applications and markets.

So in conclusion, the thing that I like about Analog, and it is meered in Embedded Processing is that there is no single or one anything. There is not one customer, there is not one solution, there is not one technological advantage. As a result, the risk of a competitor who can swoop in and take it away from you is greatly diminished. Great business models that have performed well over time typically offer a number of advantages, and that's what TI has today, multiple layers of advantages with our Analog and Embedded Processing. I believe our world rewards 3 things: focus, execution and innovation. Not many chip companies do all of these well, but that is exactly our goal. I think we have the company focused on the best opportunities with Analog and Embedded Processing. Now we're working on bringing best-in-class execution and best-in-class innovation to comparable levels of strength. Good things will happen as we do this, and TI will be more highly valued over the long term. That's where we're putting our energies and putting our resources. It's also why I believe the next 5 years will be among the most exciting and the best that Texas Instruments has ever seen. Thank you.

Mr. Secretary, have you received the results of the balloting?

Joseph F. Hubach

I have, Mr. Chairman. According to the report of the inspectors, the 10 persons nominated by the board have been elected. Over 96% of the shares cast voted for the election of each of them, 3% voted against and approximately 1% abstained. On the advisory vote regarding executive compensation, approximately 95% of the shares cast were voted to approve this executive compensation, 4% voted to disapprove, 1% abstained. And finally, the Board of Directors' proposal to ratify the appointment of Ernst & Young as the company's independent registered public accounting firm was approved. Approximately 97% of the shares cast were voted in favor of the proposal, 2% voted against, 1% abstained. That concludes my report.

Richard K. Templeton

Thank you, Joe. The floor is now open. At this time, I would be pleased to take any questions or comments, regarding TI's business, from the floor. As a courtesy to all that are present or listening via the webcast, our rules call for comments to be limited to 5 minutes per person, regardless of the number of topics you wish to address. Could you please approach the microphone and introduce yourself?

Question-and-Answer Session

Unknown Shareholder

My name is Wilson Tatum [ph], I'm a long-term shareholder. I'm disappointed that the laying off of 1,700 of our employees, approximately 5%, was not mentioned. Any time we give pink slips to people who are our employees, I think we should look at the pay toward executives as well, and I do think we ought to think about such terms as justice and being fair with everyone who works here, executives and employees included. I do have a question about the unused vacation time that is given to our executives. I think you received around $10,000 for unused vacation time. Does that represent a week of vacation? Hours? How much vacation time did you not use? I have asked about Ms. Whitman's income tax situation, and I don't understand that completely, but you're welcome to respond. I'm limited to 3 minutes. Those are some of my concerns. The chart that shows the long-term performance of our company is flat, and I do appreciate the dividends. I've been in meetings before where the executive said that the dividend is going to stay here and then it's been cut, so I do salute you for that. But these are some of the things that I'm concerned about.

Richard K. Templeton

Well, Wilson, specifically on vacation, it's the unused portion, I don't know the exact timing. Joe, do you want to comment on the income tax issue?

Joseph F. Hubach

Yes. Thank you for your question. On Ms. Whitman's tax situation, the issue was a mistake on the administrator's part. There was unvested restricted stock that was not intended, not designed to vest until Ms. Whitman's retirement from the board that was mistakenly vested, she incurred tax as a result of that. And as with any other executive or employee of the company where we make a mistake and unintended tax is incurred, we made Ms. Whitman toll on that. That's the explanation related to that.

Richard K. Templeton

Any other questions? Please approach the microphone and introduce yourself.

Unknown Shareholder

Yes. I'm Shawn Lamb [ph], and I have been a long-term holder of Texas Instruments for the past 20 years, never attend, and this is the first time. My question here is related to the strategy that TI has in terms of its repurchase of shares. And can someone tell me what is the result? You have said in the past number of years, I see that if TI has been repurchasing shares and sometimes those strategy would not work, and especially when you take a look at the number of share that have been repurchased. And so I just want to know what would be the strategy, the timing of it? Or we just have a pretty much a uniform across the board? Is there any strategy there?

Richard K. Templeton

There is certainly a strategy there, and the belief is very simple, and that is as long as our buying back of stock represents an opportunity, compared to the value of the corporation that we calculate by looking at the discounted cash flow, that is a wise choice after we have invested in R&D and manufacturing and the other uses of cash. So as I commented in my remarks, we've reduced the share count by 36% over the past, really, 9 years now, and that, in turn, makes every share that's outstanding worth more in terms of the earnings accrued to that share. Are there any other questions?

Okay. As I close the meeting, I want to emphasize that we are pleased to have you as stockholders of Texas Instruments, that we will stay focused on our markets and on our customers as we work to make your investment in TI more valuable. I thank everybody for coming today. We are hereby adjourned.

Unknown Shareholder

Mr. Chairman.

Richard K. Templeton

Could you introduce yourself?

Unknown Shareholder

My name is Hugh Knoll, K-N-O-L-L, for the minutes. Mr. Chairman, can you recognize the public audit providers, Ernst & Young? Could you recognize them in the meeting today?

Richard K. Templeton

We can. I saw Chris is here.

Unknown Shareholder

I've been a stockholder of Texas Instruments since 1959 -- 1958, correction. For the last 3 years, after this annual meeting, all of the duly elected members of the Board of Directors have gotten up and rapidly exited the room, past 3 years. The previous time since 1958, and I've only missed one meeting since then, the Board of Directors -- elected Board of Directors, the officers and others would be in the room where us, stockholders, could talk to our elected representatives. What I mean by that is, I look at stockholders -- pardon me, I look at the Board of Directors as people that have been elected to represent me, okay. So I'd like to ask this. Could you allow the elected members of the Board of Directors to remain in the room -- to remain in this room for a few minutes after the conclusion of this meeting? That's a question.

Richard K. Templeton

Yes. We will be conducting a meeting following this. But certainly, if you have a question, we'd be willing to take that, which is why we have time with an open mic now.

Unknown Shareholder

Okay. If your schedule does not allow them to remain in the room after the conclusion of this meeting, if your schedule is such that they can't remain, would you consider, Mr. Chairman, next year, one year from now, rearranging the schedule so that the elected members of the Board of Directors can remain in the room for 10, 15, 20 minutes after the conclusion of the meeting, as they always did for the past history of Texas Instruments, except the last 3 years? That's a question.

Richard K. Templeton

Well we will certainly take that into consideration.

Unknown Shareholder

You will take that into consideration before the meeting next year.

Richard K. Templeton

Yes, sir.

Unknown Shareholder

And if I understand you correctly, your schedule today would not allow them, the elected members of the Board of Directors, to remain in a meeting in the room after the meeting, do I understand that correct?

Richard K. Templeton

That is correct, sir.

Unknown Shareholder

Your schedule is so tight that they can't remain after that meeting? Is that correct?

Richard K. Templeton

Okay, and that is why we -- that is correct, and that's also why we have an open mic if you've got questions.

Unknown Shareholder

Okay. I understand what you're saying. And for the minutes, be sure to get that in there that you're going to consider this at the next annual meeting. Okay. After the meeting today, I'd like to have a quick word with Ms. Simmons for 2 minutes. I'd like to meet a member of the Human Resources Department represented by -- here, after the meeting. And I'd like to talk to any high-tech TI employee that's in the room after the completion of the meeting. Thank you.

Richard K. Templeton

Thank you very much, and we will adjourn the meeting again.

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