AGM 2014

Apr 17, 2014

Excuse me. Excuse me, ladies and gentlemen. If you get seated, we'll start the meeting. I'll point out that in the case of an emergency, we have two exits in the back of the room and one exit to my right. Mr. Chairman? Joe, thank you. Good morning, everybody. The 2014 annual meeting of stockholders of Texas Instruments Incorporated is hereby called to order. I'm Rich Templeton, Chairman, President, and Chief Executive Officer, and it's my pleasure to welcome you to this year's meeting. First on our agenda today is the election of directors, which will be followed by the consideration of four proposals, an advisory vote on executive compensation, or as it is more commonly known, say on pay, the ratification of independent auditors, approval of the TI Employees' 2014 Stock Purchase Plan, and re-approval of the material terms of the performance goals under Texas Instruments' 2009 Long-Term Incentive Plan. 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 questions or comments until that time, as they may be covered during the course of the meeting. Before we begin, I want to introduce several special guests who are with us today. First, Margaret McDermott and Mary McDermott Cook, wife and daughter of TI founder Eugene McDermott. Margaret and Mary, would you please stand or wave to the audience? We're also pleased to have with us the former director of TI, Jim Adams. Jim, would you please stand? We're also pleased to have with us the former director of TI, Jerry Junkins. Jerry, would you please stand? 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 at 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 Ron Kirk were elected at last year's annual meeting. As I introduce the nominees, I ask that they please stand and remain standing. Ron Kirk is new to our board. I'll take a moment to tell you about him. Ron Kirk served as United States Trade Representative from 2009 to 2013. Prior to that, he served as the mayor of the City of Dallas from 1995 to 2002. He now is Senior Counsel at the law firm of Gibson, Dunn & Crutcher. Ron Kirk's knowledge of global economic activity, international trade policies and strategies, and workings with foreign governments, combined with his proven leadership, make him a valuable addition to the TI board. In addition to Ron Kirk and myself, the nominees are Ralph Babb, Mark Blinn, Dan Carp, Carrie Cox, Pam Patsley, Robert Sanchez, Wayne Sanders, Ruth Simmons, and Christine Whitman. Each of these nominees and their qualifications as directors are listed in our proxy statement. Thanks, Gail. TI's bylaws require advance notice of proposed nominations. Since no notice of other nominations have been submitted in accordance with the bylaws, the nominations are closed. We'll now consider the four board proposals. The board of directors recommends that stockholders cast an advisory vote for the proposal approving executive compensation for 2013 as disclosed in our proxy statement, and that stockholders ratify the appointment of E&Y as the company's independent registered public accounting firm for 2014, approve the employees' 2014 Stock Purchase Plan, and re-approve the material terms of the performance goals under Texas Instruments' 2009 Long-Term Incentive Plan. 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 three minutes. 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 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 the internet, you may change your vote by submitting a ballot. Please raise your hand if you need a ballot. After voting, please return your ballot. While votes are being tabulated, I will take a few moments to share my thoughts with you about our strategic direction and the progress that we're making. When we met here a year ago, I told you about our vision for building a stronger TI. This is a company grounded in semiconductor technologies that are at the heart of tomorrow's electronics. A company that is more diverse in the markets and the customers that it serves. A company rich in innovation that makes our world healthier, greener, safer, and yes, even more fun. A company that provides superior returns to you, its shareholders. And that is indeed what we've been working on. Our ability to build a stronger TI is based on strong positions in Analog and Embedded Processing semiconductors. I'd like to remind you why we find these markets so appealing. Plainly said, there are really four important adjectives that describe the attractiveness of Analog and Embedded: large, diverse, long-lived, and rewarding. First, a large market. Virtually every electronic product needs at least one Analog chip, and probably 60% of these applications need an Embedded Processing. This translates to a market of almost $60 billion in 2013. While our $10 billion of revenue in 2013 makes us number one in this combined space, with just over 15% share, we have ample room to still grow. Second, diverse. We like the diversity of Analog and Embedded Processing that offers in the markets. It offers it relative to our customers as well as in the products. Today, our largest customer is only a single-digit percentage of our revenue. Further, no sector of any market is more than 8% of our revenue. We have over 100,000 products, and we enjoy revenue from about 100,000 customers. This diversity means that TI is not exposed to the ups and downs of any one thing, which we believe translates into higher long-term growth. This may seem counterintuitive, meaning many people assume that high exposure to the latest and hottest products result in higher growth. We've learned that diverse positions let us produce foundations of revenue upon which we can continuously build. Diverse markets also have less competitive turbulence since the concentration of revenue per customer is lower. Third adjective is long-lived. It is reasonably logical that if a product lives for a long time, five, maybe 10 years, its returns will be higher than a product that lives for only 18 months. The same applies to design wins at our customers and also to our manufacturing investments. Our Analog and Embedded focus gives us long-lived positions, which in turn means higher returns on our investment. Fourth, rewarding. The bottom line is that we like the growth, the sustainability, the differentiation, and the strong long-term returns that Analog and Embedded Processing intrinsically provide. That is why we have methodically and deliberately positioned TI to focus on these technologies and markets. Just as important as where we've chosen to focus is how we manage our business. While we're a technology company and we love innovation, we try to base our approach to business on just a few important principles. First is investing in the best opportunities. Second, maximize the growth of free cash flow, especially on a per-share basis. This is the most important driver to increase shareholder value over the long term. Third, recognize that free cash flow will only be valued if it's wisely invested or returned to shareholders for them to invest. The combination of doing these well will result in superior returns for our shareholders. A year ago, we introduced our capital management story. In many ways, it connected these three principles and also reflected what we had already been doing for a number of years. By formalizing it, we gave investors more insight into our thought process and also reinforced our belief that these elements were sustainable into the future. That belief is just as certain a year later. It may be helpful to offer a few examples of how we've applied these principles. The first example is our decision to focus the company on Analog and Embedded. As I described earlier, our Analog and Embedded business gives us clear and sustainable advantages that have the ability to produce superior returns over time. While it is hard work to transition a company, it's also highly rewarding. The second example involves how we have invested in manufacturing equipment. As I described above, another benefit of Analog and Embedded is that manufacturing equipment that produce these chips has a very long life. We recognize that the depths of the 2009 recession, that we could purchase equipment at a steep discount to its original value, at about $0.10 on the dollar. Today, we continue to purchase capacity well in advance of our needs, which means we can still make our purchases selectively and at comparatively low prices. The net result of this strategy is that we are increasing our competitive technology advantages, at the same time enjoying lower manufacturing costs and lower capital expenditures. Our 300-millimeter wafer fab here in Richardson is testimony to all three. Our capital expenditures in 2013 were under 4% of revenue, yet we continue to expand our technology capability and our capacity to grow in the future. Our objective is to maximize long-term free cash flow, not short-term utilization. The final example is in the area of making the cash useful, either for productive investment or returning it to shareholders. In order for our cash to be useful, the majority of it needs to be held onshore, meaning it is owned by U.S. entities and is not stranded overseas like the cash of many of our technology peers. Our objective is to manage access to cash at the lowest possible tax rate, not just minimize our tax rates. We closed out 2013 with 82% of our cash onshore. This accessible cash means we can use it to invest in R&D, fund our pension plans, make acquisitions, and to pay dividends and repurchase stock. To this end, let's take a look at some of what TI delivered in 2013. We converted 24% of our revenue into free cash flow, ranking us in the top 15% of the S&P 500 companies. Because we generate more cash than we need to grow the business, we've been systematically returning to our shareholders through stock repurchases and higher dividends that cash that we don't need for new technology, manufacturing equipment, working capital, or acquisitions. We've done this in both up and down markets. In fact, in 2013, among S&P 500 companies, we ranked in the top 5% of cash returners. Few companies generate and return significant amounts of cash. When you combine these metrics, TI is in the top 4% of the S&P 500 firms for cash generation and return. We did make two updates to our capital management strategy just last month. First, our free cash flow margin has continued to expand as our business portfolio grows stronger, our manufacturing costs get lower, and a growing portion of our revenue is coming from long-lived markets such as industrial and automotive. Because we generate more cash than before, we increase the range at which we believe we will convert revenue to free cash flow now to 20%-30%. Second, we committed to return more cash to shareholders by updating the formula by which we determine how much to return. Our previous goal was to return 100% of free cash flow, less the amount used to retire debt. We are now also including the proceeds from exercises of employee stock options. Our objective is to reduce shares outstanding each year as long as we believe the intrinsic value of TI stock exceeds its market value. 2013 marked the ninth consecutive year in which we reduced shares outstanding through stock repurchases, and our total share count is down 37% over that period. Over that same time frame, we have also steadily increased our dividend, with 2013 also marking the 10th consecutive year of dividend increases. I'm excited by what I see ahead for us. Analog and Embedded Processing chips are showing up in more and more things, with large new markets like industrial and automotive still in their early stages of adoption. Our portfolio is improving at a faster pace than originally planned. As thrilled as I am about the strength and prospects of our company, the thing that continues to excite me most are the people I get to work with. Our technologists on the forefront of new innovation, our business managers and salesforce who are taking new products to new customers and markets every day, our manufacturing teams all over the world who are making and testing almost 30 billion chips each year, and our staff who make sure we have the best facilities for our work, hire great people, and launch great marketing plans. Collectively, we are focused on building a stronger TI for the long term, one that will remain an industry leader, one that builds upon our 84 years of history, one that is ever ready to make the changes required to stay strong. On behalf of all TI-ers, I thank you for being a shareholder in our company. Mr. Secretary, have you received the results of balloting? I have, Mr. Chairman. According to the report of our inspectors, the 11 persons nominated by the board have been elected. Over 97% of the shares cast were voted for the election of each of them. No more than 2% voted against, and about 1% abstained. On the advisory vote regarding executive compensation, about 96% of the shares cast were voted to approve executive compensation, 3% voted to disapprove, 1% abstained. The board of directors' proposal to ratify the appointment of EY as the company's independent registered public accounting firm was approved. Approximately 98% of the shares cast were voted in favor of the proposal, 1% voted against, and less than 1% abstained. The board's proposal to approve the TI employees' 2014 stock purchase plan was approved. Approximately 98% of the shares cast were voted in favor of the proposal, 1% against, 1% abstained. Finally, the board's proposal to approve the material terms of the performance goals under the TI 2009 Long-Term Incentive Plan was also approved. About 95% of the shares cast were voted in favor of the proposal, 4% against, and less than 1% abstained. Mr. Chairman, that concludes my report. 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 present or listening via webcast, our rules call for comments to be limited to five minutes per person, regardless of the number of topics you wish to address. Do we have any questions? If you have a question, please approach the mic, introduce yourself, and please state your question. My name is- Could you please approach the microphone right behind you? My name is Hugh Johnston. Is Ernst & Young public auditing firm representative here today, or could you point them out? Yes, they are here. Could you point them out? Okay. I'd like to catch a word with investor relations at MS 8657 regarding correspondence I had with them. Okay. I'd like to catch a word after the meeting with Mr. March, CFO, regarding some things I didn't understand in the Form 10-K annual report submitted to the SEC. For you, Mr. Templeton. You mentioned stock repurchases. I wanted to ask, the stock that's repurchased, what become of it? Is it in a stack? Is it dissolved, or is it reserved for future stock options? What's the purpose of repurchasing the stock? Is it to dissolve it or save it for future stock options or whatever? Could you enlighten me on why it is we continue to rebuy stock? One of my concerns is I'd rather put money in research and development than repurchases, I'll listen for your answers. Okay. As I described even in my prepared remarks, our focus is always investment in the business, research and development, plant and manufacturing, or then even are there wise acquisitions that would make sense with the cash flow from operations. After those choices have been made, we now have cash in excess of what's needed to grow and run the business, we return that to shareholders through a combination of stock buybacks and dividends. I mentioned the numbers of what we've done over time. The criteria on stock buybacks is very simple, that is if we believe by looking at our long-range view of what the company is worth, if that number is higher than what the stock is trading at, that is a smart decision to buy stock back. What it does for a shareholder is you now enjoy a higher percentage of the earnings that the company is generating each year. That's the objective behind that action. That means the stock that's been purchased is dissolved. It's a technical question you could ask Kevin March when you talk to him, our CFO, in terms of where it sits in treasury. For the intent of how many shares the earnings are divided across, it's essentially not in existence in the public market. Other questions? Okay. I want to emphasize that we are pleased to have you as stockholders of TI. We will stay focused on our markets, our customers, and as we work to make your investment in TI more valuable. Thank you for coming today. We are hereby adjourned.