Texas Instrument

Group 3

Brent HagenRussell Carr

Billy WatkinsLakeda EdwardsCuong NguyenDidier Nguyen

Table of Contents

Background Information……………………………………………………………3

Board of Directors…………………………………………………………………..5

Industry and Company Breakdown…………………………………………………6

Free Cash Flow and Cost of Equity…………………………………………………7

Financial Ratios……………………………………………………………………..8

Stock Information and Holding Period of Return…………………………………..10

Analysis of Backed Out Method and Discounted Cash Flow………………….…..11

Market Efficiency…………………………………………………………………..12

Beta and K(CAPM)..……………………………………………………………….14

Cost of Capital and Weighted Cost of Capital (MM).……………………………...15

Capital Structure…………………………………………………………………….16

Group Decision……………………………………………………………………..17

Evaluation…………………………………………………………………………...18

Background Information:

Texas Instruments provides innovative DSP and analog technologies to meet customer’s real world signal processing

requirements. In 1930, Clarence “Doc” Karcher and Eugene McDermott started Geophysical Services (company’s original name)

using seismology to find oil. For more than seventy years, Texas Instruments has created products and services that have changed the

world. In the 50s, it produced the first silicon transistor for the mass markets and designed the world’s first radio; Jack Kilby, a future

Noble Peace Prize winner and Texas Instruments inventor, invented the first integrated circuit that provided digital advancement. In

the following decade the company branched out to Europe, South America, Asia, and Japan, and invented the first electronic hand-

held calculator. Its products helped land the first man on the moon in 1969.In later years it introduced the first single chip speech

synthesizer that allows everything from toys to greeting cards to make sounds. Today Texas Instruments, Inc. is one of the largest

semiconductor and other related components manufacturers in the world.

The three principal business segments include Semiconductor, Sensors and Controls, and Educational and Productivity

Solutions. The semiconductor market is intensely competitive, subject to rapid technological change and pricing pressures, and

requires high rates of investment. Texas Instruments faces strong competition in all of its semiconductor product lines. It competes

with several large and small companies, both U.S-based and international ranking third in the semiconductor industry. The

semiconductor business comprised 83% of TI’s 2002 revenue. The company’s semiconductor products are used in a diverse range of

electronic systems, including cellular telephones, personal computers, servers, communications infrastructure equipment, digital

cameras, digital audio players, motor controls, automobiles and digital imaging systems, including projector and television systems.

Its semiconductor patent portfolio has been established as an ongoing contributor to semiconductor revenue. In 2002, sales to

distributors accounted for approximately 27% of semiconductor revenue.

Sensors and Controls consist primarily of sensors, electrical and electronic controls, and radio frequency identification systems

for automotive and industrial markets. They are sold to OEMs (original equipment manufacturers) and distributors. In 2002 Sensors

and Controls was responsible for 11% of TI’s revenue.

Educational and Productivity Solutions includes graphing and other educational calculators, which are marketed primarily

through retailers and to schools through instructional dealers. In 2002, 6% of Texas Instruments’ revenues were earned through this

segment.

The company is also a world leader in the design and manufacturing of other semiconductor products which include standard

logic devices, application-specific integrated circuits, reduced instruction-set computing microprocessors, micro controllers and digital

imaging devices. Texas Instruments is headquartered in Dallas, Texas and has manufacturing, design or sales operations in more than

25 countries. Its largest geographic markets are in the United States, Asia, Japan and Europe. Within these global markets, Texas

Instruments employs 34,400. In assessing its future success, Texas Instruments focuses on Digital Solutions for the Networked

Society.

Board of Directors:

Director AgeDirector Since

Common Stock Ownership at December 31, 2002 %

James R. Adams

63 1989 633,83511.9%

David L. Boren

61 1995 48,8800.9%

James B. Busey IV

70 1992 69,5971.3%

Daniel A. Carp

54 1997 43,6640.8%

Thomas J. Engibous

50 1996 4,340,54881.3%

Gerald W. Fronterhouse

66 1986 79,089

1.5%David R. Goode

62 1996 48,6320.9%

Wayne R. Sanders

55 1997 50,2000.9%

Ruth J. Simmons

57 1999 23,0000.4%

5,337,445 100.0%

After reviewing the Board of Directors for Texas Instruments it can be seen that the board lacks in both gender and ethnic diversification. The board’s ratio of men to women is 7:1, and the only woman representative is also the only African-American on the Texas Instrument’s executive board, which illustrates their lack of diversification. TI needs to consider expanding its board to better represent all ethnic groups and genders. It is possible that the company could increase its interests among these various groups and also thereby improve the company’s total image. Also, from the list above, Mr. Busey is no longer a part of the board since reaching the age of 70 and according to company by-laws could no run for re-election to the board in 2003. In addition, CEO, Thomas J. Engibous, owns less than 1% of total company stock outstanding.(Source: www.ti.com)

Top 10 Companies for Semiconductors

Ranked by Market Capitalization# Ticker Company Mkt Cap P/E % Change Volume

1. INTC Intel Corporation 162.8B 46.6 +3.92% 52,639,016

2. TSM Taiwan Semiconductor Manufacturing Company Ltd. 39.5B 63.5 -0.10% 6,042,100

3. TXN Texas Instruments Incorporated 33.0B N/A +1.49% 10,817,000

4. AMAT Applied Materials, Inc. 32.0B 250.6 +2.12% 20,640,864

5. QCOM QUALCOMM Incorporated 30.0B 42.4 +1.72% 8,274,413

6. STM STMicroelectronics N.V. 19.7B 43.9 +2.64% 2,009,000

7. SHCAY.PK Sharp Corporation 15.4B 57.5 +1.07% 3,500

8. ADI Analog Devices, Inc. 13.9B 73.1 +2.83% 2,521,500

9. UMC United Microelectronics Corporation 13.1B 60.3 +0.47% 2,714,900

10. MXIM Maxim Integrated Products, Inc. 12.3B 43.8 +1.33% 5,139,752

Free Cash Flow and Cost of Equity:

2002 2001 2000 1999

NI -344 -201 3,058 1,406

(+)Deprecitaion 1,574 1,599 1,216 1,005

(-)Capital Expenditures 802 1,790 2,762 1,398

(-)∆ in working capital -3 -1,107 1,875 3,427

(+) ∆ in long-term debt   -378 -5 119 70

FCFE 53 710 -244 -2,344

(Mil) (Mil) (Mil)

Note:

Capital Expenditures 802 1,790 2,762 1398

Additions to property, plant, and equipment 802 1,790 2,762 1398

(-) Disposition of property and equipment 0 0 0 0

∆ in working capital = [(CA 02)-(CA01)]-[(CL02)-(CL01)] -3 -1,107 1,875 3,427

CA 6,126 5775 8,115 6,055

CL 1,934 1,580 2,813 2,628

∆ in long-term debt =LTD02-LTD01 -378 -5 119 70

LTD   833 1,211 1,216 1,097 1,027

Financial Ratios

Growth Rates % Compan

y Industr

y S&P 500

Sales (Qtr vs year ago qtr) 20 7.4 4.7EPS (YTD vs YTD) NA -44.3 30.4EPS (Qtr vs year ago qtr) NA -44.3 30.4Sales (5-Year Annual Avg.) -1.65 5.39 6.09EPS (5-Year Annual Avg.) NA NA -5.77Dividends (5-Year Annual Avg.) -5.99 5.29 -1.38

Texas Instrument’s sales are high compared to the Industry and very high compared to the S&P; this result could be from the large market share of the semi-conductor industry that TI holds. However, Sales for the 5 yr. annual avg. show TI’s sales as a negative ratio compared to the two positive ratios of the industry and S&P; this could indicate a change in products or and internal change to regain sales of the current year. WEAKNESS

Price Ratios Compan

y Industr

y S&P 500

Current P/E Ratio NA NA 37.7P/E Ratio 5-Year High NA NA 65.1P/E Ratio 5-Year Low NA NA 25.7Price/Sales Ratio 3.78 4.5 1.49Price/Book Value 3.08 3.56 3Price/Cash Flow Ratio 22.8 21.1 16.7

The P/E ratios are not available which can indicate a weakness but further information would have to be sought to draw a definite conclusion. As far as the other price ratios are concerned they are all above the S&P and very near the Industry ratios indicating that everything is satisfactory. WEAKNESS/SATISFACTORY

Profit Margins % Compan

y Industr

y S&P 500

Gross Margin 56.7 60.7 48.1Pre-Tax Margin -1.6 2.8 7.7Net Profit Margin -2.2 0 4.15Yr Gross Margin (5-Year Avg.) 55.8 61 47.55Yr PreTax Margin (5-Year Avg.) 13.9 18 95Yr Net Profit Margin (5-Year Avg.) 9.4 11.8 5.5

The gross profit margin for TI lies just below the Industry level but is very good compared to the S&P. However, the Net Profit Margin for TI is a negative ratio which represents a major weakness for the company. WEAKNESS

Financial Condition Compan

y Industr

y S&P 500

Debt/Equity Ratio 0.08 0.16 1.27Current Ratio 3.6 3 1.5Quick Ratio 2.6 2.3 1.1Interest Coverage -1.6 3.9 2.4Leverage Ratio 1.3 1.4 6.3Book Value/Share 6.2 6.16 10.67

The current ratio is excellent compared to S&P and still stands above the industry standard. The debt to equity ratio shows that TI has very little debt, which allows them if necessary to borrow funds for additional projects. The small amount of debt the company has can be covered by their assets without having to use up their inventory. This is shown by their high quick ratio. These numbers prove to be a strong indication of the company’s overall wealth. STRENGTH Investment Returns %

 Company

 Industry

 S&P 500

Return On Equity NA 0 8.2Return On Assets -1.3 0 1.3Return On Capital NA 0 3.6Return On Equity (5-Year Avg.) 8.5 11 12.1Return On Assets (5-Year Avg.) 5.8 7.5 2Return On Capital (5-Year Avg.) 7.7 9.6 5.8

The current return on assets is negative which indicates a weakness. On the 5-yr. avg. investment return ratios the company is below the industry which indicates that TI’s management is not making a high enough return on equity, assets, and capital. WEAKNESS/SATISFACTORY

Management Efficiency Compan

y Industr

y S&P 500

Income/Employee -5,000 0 12,000Revenue/Employee 253,000 235,000 289,000Receivable Turnover 6.7 7.1 5.8Inventory Turnover 4.6 3.7 7.6Asset Turnover 0.6 0.6 0.3

TI has a high inventory turnover rate next to the industry but low when compared to the S&P. Texas Instrument’s asset turnover is

above the S&P and even with the industry average. TI wants these rates as low as possible but both seem comparable to the industry

and S&P when looked at all together. Also, TI has a high revenue per employee compared to the industry, but the income per

employee is a negative number. This shows that TI spends very little on their employees but is still able to gain a great deal of

revenue with them. STRENTH SATISFACTORY

(Source: www.msn.com)

Stock Information:

The company’s current share price is $19.09/share. This is significantly less than the year-end price of 1999 and 2000, which was

$48.3125/share and $43.375/share respectively. The share price is however up from 2002’s price of $15.01/share. The average daily

trading volume is 13.45 million and its market capitalization is approximately 33.22 billion. This illustrates Texas Instrument’s

tremendous influence on the semi-conductor industry. The Holding Periods of Returns are shown below and is projected to show a

positive return for the first time in four yearsin the year 2003. The three previous years have all been negative because of a steady

decrease in share price.

(source: www.msn.com)

Holding Period of Return:

2003 2002 2001 2000 1999

. HPR = Ending Price – Beginning Price + Distributions 0.388407728 -0.431785714Beginning Price

Dividend 0.9 0.9 0.9 0.9 0.9

Price 20.00 15.01 28 43.375 48.32HPR 0.392405063 -0.431785714 -0.333717579 -0.08374119  

(expected) (source www.msn.com and the 10K filing)

Backed Out Estimate:

The backed out estimate is unrealistic for numerous reasons. It is not reasonable to assume that a company will really achieve constant growth. A company’s growth will instead fluctuate over time. The method also fails because FCFE and the shares used in the formula

are from the preceding year while the price is current and the growth is estimated for the current year. In order to be accurate the variables should all be from the same year.

Discounted Cash Flow Model:

P=(FCFE/Shares)/K-G FCFE 53,000,000 53,000,000 710,000,000 -244,000,000

ke=[(FCFE/shares)/P] +G shares outstanding 1,740,360,197 1,740,360,197 1,740,329,364 2,400,000,000

G (2003) 0.6727 -0.925352113 -3.909836066 -0.895904437

P 19.09 15.01 28 47.375

K(required return on equity) 0.674295258 -0.923323234 -3.895265753 -0.898050435

Po=D1/(ke-G)=>Ke=(D1/Po) +G 0.059960027 0.032142857 0.02074928

Market Efficiency:

Non-Company Specific News

STMICROELECTRONICS AND TEXAS INSTRUMENTS TEAM UP TO ESTABLISH AN OPEN STANDARD FOR WIRELESS APPLICATIONS

OMAPI(SM) Standard Interfaces Will Spur Rapid Development of Mobile Products and Services

DALLAS AND GENEVA (December 12, 2002) --Texas Instruments Incorporated (NYSE:TXN) (TI) and STMicroelectronics (NYSE:STM) (ST) today announced a significant initiative to jointly define and promote an open standard for wireless application processor interfaces. The two companies expect the new OMAPI(SM) Standard will promote faster and broader deployment of multimedia-enhanced mobile devices and applications. ST and TI also intend to invite companies such as operating system (OS) vendors, middleware vendors, software application developers, hardware peripheral manufacturers and other industry players to embrace the new standard.

The new OMAPI Standard provides the Open Mobile Application Processor Interfaces for application processors targeting 2.5G and 3G mobile phones, PDAs and other portable and multimedia products. The OMAPI Standard will be comprised of a set of software interfaces to the operating system and a set of hardware interfaces defining common application peripherals. The initiative builds on both the market success and wide acceptance of TI's OMAP™ platform and its position as the worldwide leading supplier of wireless ICs and ST's position as the worldwide number one supplier of digital multimedia processing chips and its expertise in low-power System-on-Chip (SoC) design. Details of the new standard are expected to be made public in the first quarter of 2003.

Market Efficiency: The stock price does not fit any of the three models, growth, semi-growth and weak.

(Source:www.ti.com)

Company Specific News

TI Sells Portion of Its Micron Holdings

Sale Will Add $230 Million to Net Income in Third QuarterDALLAS (July 9, 2003) - Texas Instruments Incorporated (NYSE: TXN) sold 24.7 million shares of Micron Technology, Inc. (NYSE: MU) common stock today. TI will recognize a pre-tax gain in accordance with generally accepted accounting principles of $106 million from this sale, which will be recorded in other income (expense) net (OI&E) in TI's third-quarter results. TI also will recognize a previously reserved tax benefit of $162 million in its third quarter, which is attributable to the realization of a tax loss carryback due to the sale. The combined effect of the gain and the tax benefit will be an increase of $230 million to the company’s net income for the third quarter.

TI carries its public stock holdings at current market value on its balance sheet and records an impairment write-down against earnings if a stock’s value declines below its cost basis and the decline is deemed to be other than temporary. In the fourth quarter of 2002, TI recorded a write-down of its Micron common stock to $9.74 per share but fully reserved the tax benefit associated with the action at that time. The tax benefit was to expire at the end of 2003. The cost basis of the shares that were sold was $28.45 per share for tax purposes.

Prior to today’s transaction, TI held 57 million shares of Micron common stock, acquired in connection with TI's sale of its semiconductor memory business unit to Micron in 1998. The remaining 32.3 million shares that TI continues to hold have a cost basis of $15.22 per share for tax purposes. The company has no specific plans to sell the remaining shares at the current time and has agreed, as part of today’s transaction, not to sell any Micron shares for a 90-day period.

News: Texas Instruments is announcing the sale of 24.7 million share of Micron Technology. This move should greatly increase their net income, which could possibly lead to more buyers.

Market Efficiency: Does not match any of the three models.

(Source:www.ti.com)

Beta:

2003 2002 2001 2000

Beta TXN 1.7212 0.0799 0.0796 0.0639

Beta= COV(RIBM, RS&P500)/VAR(RS&P500)

Unlevered Beta 0.058517679 0.068923296 0.05012118

[Equity/(Equity +((1-T)Debt))]* BetaEquity=Beta_unlevered

Equity 10,734 11879 12588

Debt 3,945 3900 5132

Income form continuing operations before income taxes -346 -346 -426 4578

Provision for income tax -2 -2 -225 1491

Tax rate   0.005780347 0.528169014 0.325688073

K(CAPM):

2003 2002 2001 2000

.K (CAPM) Rf 0.01 0.0163 .0386 .0588

K= Rf + Beta(Rm-Rf) Rm-Rf 0.0606 -0.2291 -0.1495 -0.1685

Beta 1.7212 1.7544 1.7160 1.6953

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

K(required return on equity) 0.1143 -0.3783 -.2179 -.2269

The company is currently underpriced because K( DCF model) > K(CAPM); 0.6743 >.1143

K(required return on equity) .01417603 -.00201The company is currently underpriced because K(DCF model)>K(CAPM); .6743>.0142

Cost of Capital and Weighted Average Cost of Capital:

5. Cost of Capital and Optimal Capital Structure: 2002 2001 2000.WACC=We*Ke + Wd*kd*(1-T)+ Wp* KpWe= Equity/(Equity+Debt+Preferred Stock) 0.731248723 0.752836048 0.710383747Wd=Debt/(Equity+Debt+Preferred Stock) 0.268751277 0.247163952 0.289616253Wp=Preferrd stock/(Equity+Debt+Preferred Stock) 0 0 0Ke=div/price 0.0060 0.0032 .0019Kd=interes exp/long term debt 0.0684 0.0504 0.0617Kp 0 0 0

WACC   0.017419486 0.014866139 0.019219

WEIGHTED AVERAGE

The weighted average of cost of capital of Texas Instruments is very stable. In 2000, weighted average of cost of capital was

0.0192 and in 2001, the weighted average slightly decreased to 0.0149. Then in 2002, the WACC slightly increased to 0.0174. For

the graph calculated in 3-year period is neither model 1, model 2 or model 3.

Year 2002 2001 2000WACC 0.0174 0.0149 0.0192D/TA 0.2688 0.2472 0.2896

Capital Structure:

TI’ capital structure debt over equity is .3699 which mean it’s financial condition is strong. At the end of 2002, the debt is .27

This ratio reflects the company’s view that it is prudent to maintain a low debt level considering the volatile nature of the

semiconductor industry. The company’s equity investments at year-end 2002 is .73. Equity investments include publicly traded and

private investments, consisting primarily of 57 million Micron common shares. TI Ventures, a venture fund that invests in companies

involved in the development of new markets. As of year-end 2002, investments were held in companies focused on next-generation

applications of digital signal processors and other technologies and markets strategic to TI. 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.

Group Recomendation:

There are many factors an investor must examine when deciding whether or not to but, sell or hold a stock. The two main

features in that the investor should look at are risk and return. One way to examine the risk of a company is their debt to total asset

ratio. This shows a company’s ability to pay back their debt if the company hit bad times. Texas Instrument’s debt to total assets

looks extremely at 27%. There are numerous ways to project whether a company will bring the investor a positive return. One way of

examining return is by looking at the holding period of return. This will shows whether or not you can expect positive returns on an

investment if held for the entire year. Texas Instruments is positive for the first time in three years in 2003. Another way to look at

return is by comparing the expected return of the market to the expected return of the company. TI’s expected return exceeds that of

the market, largely do to their high projected growth rate. This is a very telling and positive feature of the stock. Another way of

making a decision on a stock is by examining the historical price, but as you can see from the graph below that is a very inexact

science. We would recommend Hold/Buy Texas Instruments.

(5 Yr price chart)

Evaluation:

Obvious areas of STRENGTH for Texas Instruments are as follows:

Maintaining a low debt-to total capital ratio

Ranks third within semiconductor industry

Increase in FCFE in last three years.

Growth ratio of sales are higher than industry and S&P 500

Current ratio is above industry standards and S&P 500

Areas of WEAKNESS for Texas Instruments are as follows:

No availability of 5 yr high and low Price/Equity Ratios

Negative Net Profit Margin, current Return on Assets and Income per employee figures

Holdings per share have been negative for the past three years due to the steady decrease in the share price.

Lack of diversity within the board of directors hinders the opportunity to attract and represent different socio-economic groups.