Texas Instruments 2008 Annual Report Download - page 41

TEXAS INSTRUMENTS 2008 ANNUAL REPORT [ 39 ]
assets once in operation. Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed. In
general, these costs do not decline with reductions in customer demand or utilization of capacity and can adversely affect our profit
margins as a result. Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over increased
output, potentially benefiting our profit margins.
Most of our Analog semiconductors require a lower level of capital investment in manufacturing and equipment than is needed for
equivalent production levels of our Embedded Processing and Wireless semiconductors, which are manufactured using advanced logic
wafer manufacturing equipment. While analog chips benefit from unique, proprietary wafer manufacturing processes, these processes
can be applied using older, less expensive equipment. In addition, these processes and equipment remain usable for much longer than
the manufacturing processes and equipment required for advanced logic wafer manufacturing.
To supplement our internal advanced logic wafer fabrication capacity, maximize our responsiveness to customer demand and
minimize our overall capital expenditures, our wafer manufacturing strategy utilizes the capacity of outside suppliers, commonly known
as foundries. Our strategy involves installing internal wafer fabrication capacity to a level we believe will remain fully utilized over the
equipment’s useful lifetime and then outsourcing remaining capacity needs to foundries. In 2008, external foundries provided about
50 percent of the fabricated wafers for our advanced logic manufacturing needs, but during the fourth quarter of 2008, we significantly
reduced our foundry purchases. We expect the proportion of our advanced logic wafers provided by foundries will increase over time.
We expect to maintain sufficient internal wafer fabrication capacity to meet substantially all our analog production needs.
In addition to using foundries to supplement our wafer fabrication capacity, we selectively use subcontractors to supplement our
assembly/test capacity. We generally use subcontractors for assembly/test of products that would be less cost-efficient to complete
in-house (e.g., relatively low-volume products that are unlikely to keep internal equipment fully utilized), or in the event demand
temporarily exceeds our internal capacity. We believe we often have a cost advantage in maintaining internal assembly/test capacity.
Accordingly, we have nearly completed an environmentally efficient assembly/test facility in the Philippines, and the facility is in the
initial stages of production.
This internal/external manufacturing strategy is designed to reduce the level of our required capital expenditures, and thereby
reduce our subsequent levels of depreciation. Expected end results include less fluctuation in our profit margins due to changing
product demand, and lower cash requirements for expanding and updating our manufacturing capabilities. As our internal
manufacturing efforts shift to a higher percentage of analog products, an increasing proportion of our capital expenditures is devoted to
assembly/test facilities and equipment. This is primarily due to the lower capital needs of analog wafer manufacturing equipment.
Product cycle
The global semiconductor market is characterized by constant, though generally incremental, advances in product designs and
manufacturing methods. Chip prices and manufacturing costs tend to decline over time as manufacturing methods and product life
cycles mature. Typically, new chips are produced in limited quantities at first and then ramp to high-volume production over time.
Consequently, new products tend not to have a significant impact on revenue for one or more quarters after they are introduced. In the
discussion below, changes in our shipments are caused by changing demand for our products unless otherwise noted.
Market cycle
The “semiconductor cycle” is an important concept that refers to the ebb and flow of supply, with relatively stable demand. The
semiconductor market historically has been characterized by periods of tight supply caused by strengthening demand and/or insufficient
manufacturing capacity, followed by periods of surplus inventory caused by weakening demand and/or excess manufacturing capacity.
This cycle is affected by the significant time and money required to build and maintain semiconductor manufacturing facilities.
Seasonality
Our revenue and operating results are subject to some seasonal variation. Sales of our semiconductor products are seasonally weaker
in the first quarter than in other quarters, particularly for products sold into cell phones and consumer electronics applications that have
stronger sales later in the year as manufacturers prepare for the holiday selling season. Calculator revenue is tied to the U.S. back-to-
school season and, as a result, is at its highest in the second and third quarters. Royalty revenue is not always uniform or predictable, in
part due to the performance of our licensees and in part due to the timing of new license agreements or the expiration and renewal of
existing agreements.
Tax considerations
We operate in a number of tax jurisdictions and are subject to several types of taxes including those that are based on income, capital,
property and payroll, as well as sales and other transactional taxes. The timing of the final determination of our tax liabilities varies
among the various jurisdictions and their taxing authorities. As a result, during any particular reporting period, we might reflect in our
financial statements one or more tax refunds or assessments, or changes to tax liabilities, involving one or more taxing authorities.