Texas Instruments 2012 Annual Report Download - page 43

ANNUAL
REPORT
TEXAS INSTRUMENTS 2012 ANNUAL REPORT • 41
Embedded Processing
Our Embedded Processing products include our DSPs and microcontrollers. DSPs perform mathematical computations almost
instantaneously to process or improve digital data. Microcontrollers are designed to control a set of specific tasks for electronic
equipment. Sales of Embedded Processing products generated about 15 percent of our revenue in 2012. According to external sources,
the worldwide market for embedded processors was about $17 billion in 2012. Our Embedded Processing segment’s revenue in 2012
was about $2.0 billion. This was the number two position and represented about 12 percent of this fragmented market. We believe we
are well positioned to increase our market share over time.
An important characteristic of our Embedded Processing products is that our customers often invest their own research and
development (R&D) to write software that operates on our products. This investment tends to increase the length of our customer
relationships because customers prefer to re-use software from one product generation to the next. We make and sell catalog
Embedded Processing products used in many different applications and application-specific Embedded Processing products used in
communications infrastructure equipment and automotive applications.
Wireless
During 2012, our Wireless products consisted of OMAP™ applications processors, connectivity products and baseband products. We
concentrated our Wireless investments on OMAP applications processors and connectivity products for the smartphone and consumer
tablet markets. Sales of Wireless products generated about $1.4 billion, or about 11 percent, of our revenue for 2012, of which OMAP
and connectivity products represented about $1.1 billion. We had $0.3 billion in revenue from baseband products, a product line that we
have previously announced we are exiting.
In November 2012, we announced that we would restructure our Wireless business to focus investments on embedded markets
with greater potential for sustainable growth. Specifically, we now focus our OMAP applications processors and connectivity products
on embedded applications with long life cycles instead of on the smartphone and consumer tablet markets, where large customers
are increasingly developing their own custom chips. These changes will result in lower resource and investment demands and, as we
have previously announced, elimination of the Wireless segment. As a result of the Wireless restructuring, we recorded a $351 million
charge in the fourth quarter of 2012, of which $245 million was for severance and benefit costs and $106 million was for non-cash
items, which includes a non-tax deductible goodwill impairment of $90 million. We expect about 1,700 jobs to be eliminated and about
$450 million in annualized cost savings to be realized by the time this action is completed in 2013.
Embedded OMAP applications processors, which often use a standard operating system such as Android, Linux, QNX or Windows,
are used in applications that are multi-function, need a graphically intensive user interface and often are connected to the Internet.
Embedded connectivity products include low-power wireless network standards like Zigbee®, and other technologies such as
Bluetooth®, WiFi, GPS and Near Field Communications. Both of these product lines have many of the same characteristics as those in
our Embedded Processing segment and will be reported in that segment beginning with our first-quarter 2013 financial report. In 2012,
sales of these products were about $150 million.
We expect our revenue from OMAP and connectivity products sold into smartphone and consumer tablet applications to decline
rapidly in 2013 and to substantially cease by the end of the year. We also expect baseband revenue to be essentially zero in 2013.
Beginning with our first-quarter 2013 financial report, financial results for Wireless products for the smartphone and consumer tablet
markets will be included in Other.
Other
Other includes revenue from our smaller product lines, such as DLP® (primarily used in projectors to create high-definition images),
custom semiconductors known as application-specific integrated circuits (ASICs) and calculators. It also includes royalties received
for our patented technology that we license to other electronics companies and revenue from transitional supply agreements related
to acquisitions and divestitures. Other generated about $2.5 billion, or about 19 percent of our revenue, in 2012. We also include in
Other certain acquisition-related charges that are not used in evaluating results of and allocating resources to our Analog, Embedded
Processing and Wireless segments. These charges include certain fair-value adjustments, restructuring charges, transaction expenses,
acquisition-related retention bonuses and amortization of intangible assets. Other also includes certain corporate-level items, such as
litigation and environmental costs, insurance proceeds, and assets and liabilities associated with our centralized operations, such as our
worldwide manufacturing, facilities and procurement operations.
Inventory
Our inventory practices differ by product, but we generally maintain inventory levels that are consistent with our expectations of
customer demand. Because of the longer product life cycles of catalog products and their inherently lower risk of obsolescence, we
generally carry more inventory of those products than custom products. Additionally, we sometimes maintain catalog-product inventory
in unfinished wafer form, as well as higher finished-goods inventory of low-volume products, allowing greater flexibility in periods of
high demand. We also have consignment inventory programs in place for our largest customers and some distributors.