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TEXAS INSTRUMENTS INC - 10-Q - Management's discussion and analysis of financial condition and results of operations.(Edgar Glimpses Via Acquire Media NewsEdge) The following should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. All dollar amounts in the tables in this discussion are stated in millions of U.S. dollars, except per-share amounts. Overview We design and make semiconductors that we sell to electronics designers and manufacturers all over the world. We began operations in 1930. We are incorporated in Delaware, headquartered in Dallas, Texas, and have design, manufacturing or sales operations in 35 countries. We have three segments: Analog, Embedded Processing and Other. We expect Analog and Embedded Processing to be our primary growth engines in the years ahead, and we therefore focus our resources on these segments. Product information Semiconductors are electronic components that serve as the building blocks inside modern electronic systems and equipment. Semiconductors come in two basic forms: individual transistors and integrated circuits (generally known as "chips") that combine multiple transistors on a single piece of material to form a complete electronic circuit. Our products, more than 100,000 orderable parts, are integrated circuits that are used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution. This broad portfolio includes products that are integral to almost all electronic equipment. We sell catalog and application-specific standard semiconductor products, both of which we market to multiple customers. Catalog products are designed for use by many customers and/or many applications and are sold through both distribution and direct channels. The vast majority of our catalog products are differentiated. We also sell catalog commodity products, but they account for a small percentage of our revenue. The life cycles of catalog products generally span multiple years, with some products continuing to sell for decades after their initial release. Application-specific standard products (ASSPs) are designed for use by a smaller number of customers and are targeted to a specific application. The life cycles of ASSPs are generally determined by end-equipment upgrade cycles and can be as short as 12 to 24 months, although some can be used across multiple generations of customers' products. Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels, and how management allocates resources and measures results. Additional information regarding each segment's products follows. Analog Analog semiconductors change real-world signals - such as sound, temperature, pressure or images - by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors. Analog semiconductors are also used to manage power in every electronic device, whether plugged into a wall or running off a battery. We estimate that we sell our Analog products to more than 100,000 customers. Our Analog products are used in many markets, particularly personal electronics and industrial. Sales of our Analog products generated about 60 percent of our revenue in 2013. According to external sources, the worldwide market for analog semiconductors was about $40 billion in 2013. Our Analog segment's revenue in 2013 was $7.2 billion, or about 18 percent of this fragmented market, the leading position. We believe that we are well positioned to increase our market share over time. Our Analog segment includes the following major product lines: High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA). HVAL products: These include high-volume integrated analog products for specific applications and high-volume catalog products. HVAL products support applications like automotive safety devices, touch screen controllers, low voltage motor drivers and integrated motor controllers. Power products: These include both catalog products and ASSPs that help customers manage power in electronic systems. Our broad portfolio of Power products is designed to enhance the efficiency of powered devices using battery management solutions, portable power conversion devices, power supply controls and point-of-load products. 20-------------------------------------------------------------------------------- HPA products: These include catalog analog products that we market to many different customers who use them in manufacturing a wide range of products. HPA products include high-speed data converters, amplifiers, sensors, high reliability products, interface products and precision analog products that are typically used in systems that require high performance. HPA products generally have long life cycles, often more than 10 years. SVA products: These include a broad portfolio of power management, data converter, interface and operational amplifier catalog analog products used in manufacturing a wide range of products. SVA products support applications like video and data interface products, electrical fault/arc detection systems and mobile lighting and display systems. SVA products generally have long life cycles, often more than 10 years. SVA consists primarily of products that we acquired through our purchase of National Semiconductor Corporation (National) in 2011. Embedded Processing Embedded Processing products are the "brains" of many electronic devices. Embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. The devices vary from simple, low-cost products used in electric toothbrushes to highly specialized, complex devices used in communications infrastructure equipment. Our Embedded Processing products are used in many markets, particularly industrial and automotive. 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 many customers prefer to re-use software from one product generation to the next. Sales of Embedded Processing products generated about 20 percent of our revenue in 2013. According to external sources, the worldwide market for embedded processors was about $17 billion in 2013. Our Embedded Processing segment's revenue in 2013 was $2.4 billion. This was the number two position and represented about 14 percent of this fragmented market. We believe we are well positioned to increase our market share over time. Our Embedded Processing segment includes the following major product lines: Processors, Microcontrollers and Connectivity. Processor products: These include digital signal processors (DSPs) and applications processors. DSPs perform mathematical computations almost instantaneously to process or improve digital data. Applications processors are typically tailored for a specific class of applications such as communications infrastructure, automotive (infotainment and advanced driver assistance systems) and broad industrial applications. Microcontroller products: Microcontrollers are self-contained systems with a processor core, memory and peripherals that are designed to control a set of specific tasks for electronic equipment. Microcontrollers tend to have minimal requirements for memory and program length, with no operating system and low software complexity. Analog components that control or interface with sensors and other systems are often integrated into microcontrollers. Connectivity products: Connectivity products enable electronic devices to seamlessly connect and transfer data, and the requirements for speed, data capability, distance and power vary depending on the application. Our Connectivity products support many wireless technologies to meet these requirements, including low-power wireless network standards like Zigbee® and other technologies like Bluetooth®, WiFi and GPS. Our Connectivity products are usually designed into customer devices alongside our processor and microcontroller products, enabling data to be collected, transmitted and acted upon. Other Other includes revenue from our smaller product lines, such as DLP® (primarily used in projectors to create high-definition images), certain custom semiconductors known as application-specific integrated circuits (ASICs) and calculators. It 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. We also include revenue from our baseband products and from our OMAPTM applications processors and connectivity products sold into smartphones and consumer tablets, all of which are product lines that we previously announced we are exiting and are collectively referred to as "legacy wireless products." Revenue from legacy wireless products declined throughout 2013, and our exit from these products is complete. Other generated $2.6 billion of revenue in 2013. 21 -------------------------------------------------------------------------------- We also include in Other restructuring charges and certain acquisition-related charges, as these charges are not used in evaluating the results of or in allocating resources to our segments. Acquisition-related 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 expenses, environmental costs, insurance proceeds, and assets and liabilities associated with our centralized operations, such as our worldwide manufacturing, facilities and procurement operations. Product cycle The global semiconductor market is characterized by constant, though generally incremental, advances in product designs and manufacturing processes. Semiconductor prices and manufacturing costs tend to decline over time as manufacturing processes and product life cycles mature. Market cycle The "semiconductor cycle" is an important concept that refers to the ebb and flow of supply and 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. These are typically referred to as upturns and downturns in the semiconductor cycle. The semiconductor cycle is affected by the significant time and money required to build and maintain semiconductor manufacturing facilities. Seasonality Our revenue is subject to some seasonal variation. Our semiconductor revenue tends to be weaker in the first and fourth quarters when compared to the second and third quarters. Calculator revenue is tied to the U.S. back-to-school season and is therefore at its highest in the second and third quarters. Manufacturing Semiconductor manufacturing begins with a sequence of photo-lithographic and chemical processing steps that fabricate a number of semiconductor devices on a thin silicon wafer. Each device on the wafer is tested, the wafer is cut into individual units and each unit is assembled into a package that then is usually retested. The entire process takes place in highly specialized facilities and requires an average of 12 weeks, with most products completing within 8 to 16 weeks. The cost and lifespan of the equipment and processes we use to manufacture semiconductors vary by technology. Our Analog products and most of our Embedded Processing products can be manufactured using mature and stable, and therefore less expensive, equipment than is needed for manufacturing advanced logic products, such as some of our processor products. We own and operate semiconductor manufacturing facilities in North America, Asia, Japan and Europe. These include both wafer fabrication and assembly/test facilities. Our facilities require substantial investment to construct and are largely fixed-cost assets once in operation. Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed. In general, these fixed costs do not decline with a decrease in factory loadings, potentially lowering our profit margins. Conversely, as factory loadings increase, the fixed costs are spread over increased output, potentially benefiting our profit margins. We expect to maintain sufficient internal manufacturing capacity to meet the vast majority of our production needs. To supplement our manufacturing capacity and maximize our responsiveness to customer demand and return on capital, we utilize the capacity of outside suppliers, commonly known as foundries, and subcontractors. In 2013, we sourced about 20 percent of our total wafers from external foundries and about 35 percent of our assembly/test services from subcontractors. In 2013, we closed older wafer fabrication facilities in Hiji, Japan, and Houston, Texas. In December 2013, we acquired an assembly/test facility in the Hi-Tech Zone of Chengdu, China, adjacent to our existing fabrication facility in Chengdu. 22 --------------------------------------------------------------------------------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 application-specific products. Additionally, we sometimes maintain product inventory in unfinished wafer form, as well as higher finished-goods inventory of low-volume catalog products, allowing greater flexibility in periods of high demand. We also have consignment inventory programs in place for our largest customers and some distributors. 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 by jurisdiction and taxing authority. As a result, during any particular reporting period we may reflect in our financial statements one or more tax refunds or assessments, or changes to tax liabilities, involving one or more taxing authorities. Results of operations Our third-quarter revenue was $3.50 billion, net income was $826 million and earnings per share (EPS) were $0.76 cents. Revenue for the quarter was solidly in the upper half of our expected range and earnings were at the top of the range, marking another quarter of strong progress and execution. We delivered 8 percent year-over-year revenue growth. Analog and Embedded Processing comprised 82 percent of third-quarter revenue. Gross margin of 58.4 percent, a new record, reflects the quality of our portfolio of Analog and Embedded Processing products as well as the efficiency of our manufacturing strategy. Our cash flow from operations once again reflects the strength of our business model. Free cash flow for the trailing twelve-month period was up 20 percent from a year ago to $3.5 billion or 27 percent of revenue. This represents an improvement of 3 percentage points from a year ago and is consistent with our targeted range of 20-30 percent of revenue. We returned $4.2 billion to shareholders in the past twelve months through stock repurchases and dividends paid. In the quarter, we announced a dividend increase of 13 percent, resulting in an annualized rate of $1.36 per share. Our strategy to return to shareholders all free cash flow not needed for net debt retirement, and to return proceeds from exercises of equity compensation, reflects our confidence in the long-term sustainability of our business model. Our balance sheet remains strong, with $3.2 billion of cash and short-term investments at the end of the quarter, 81 percent of which was owned by the company's U.S. entities. Inventory days were 108, consistent with our model of 105-115 days. Free cash flow is a non-GAAP financial measure. For a reconciliation to GAAP and an explanation of the purpose for providing this non-GAAP measure, see the Non-GAAP financial information section in this MD&A. 23 -------------------------------------------------------------------------------- Summary of Selected Financial Data Three Months Ended Nine Months Ended September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013 Revenue $ 3,501 $ 3,244 $ 9,776 $ 9,177 Gross profit 2,044 1,779 5,532 4,724 Research and development (R&D) 332 368 1,047 1,176 Selling, general and administrative (SG&A) 463 465 1,414 1,397 Acquisition charges 83 86 248 257 Restructuring charges/other (9) 16 (24) (251) Operating profit 1,175 844 2,847 2,145 Net income $ 826 $ 629 $ 1,996 $ 1,651 Diluted earnings per common share $ .76 $ .56 $ 1.81 $ 1.45 Percentage of revenue: Gross Profit 58.4% 54.8% 56.6% 51.5% R&D 9.5% 11.3% 10.7% 12.8% SG&A 13.2% 14.4% 14.5% 15.2% Operating profit 33.6% 26.0% 29.1% 23.4% Our exit from legacy wireless products and the elimination (effective January 1, 2013) of the Wireless segment resulted in changes to our corporate-level expense allocations, which negatively affected Analog and Embedded Processing profitability in the year ended December 31, 2013. We expect a similar, although less significant, effect through the end of 2014. We allocate our corporate-level expenses, which are largely fixed, among our product lines in proportion to the operating expenses directly generated by them. Because we stopped investing in legacy wireless products, the corporate-level expenses allocated to them were proportionately lower, and the corporate-level expenses allocated to the remaining product lines were proportionately higher. This allocation change affects the profitability of each of our segments, but does not impact operating expense or profitability trends at the consolidated level. Throughout the following discussion of our results of operations, unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are evidenced by fluctuations in shipment volumes. New products tend not to have a significant impact on our results in any given period because our revenue is derived from such a large number of products. From time to time, our revenue and gross profit are affected by changes in demand for higher-priced or lower-priced products, which we refer to as changes in the "mix" of products shipped. Third-quarter 2014 compared with third-quarter 2013 For the third quarter of 2014, we report the following: Revenue was $3.50 billion, an increase of $257 million, or 8 percent, from the year-ago quarter due to higher revenue from Analog and Embedded Processing. Analog and Embedded Processing comprised 82 percent of revenue compared with 80 percent in the year-ago quarter. Gross profit was $2.04 billion, or 58.4 percent of revenue, an increase of $265 million from the year-ago quarter primarily due to higher revenue and, to a lesser extent, a more favorable mix of products shipped. Operating expenses were $332 million for R&D and $463 million for SG&A. R&D expense decreased $36 million, or 10 percent, from the year-ago quarter due about equally to cost savings from previously-announced restructuring actions and other efforts across the company to align costs with growth opportunities. SG&A expense was about even compared with the year-ago quarter as higher variable compensation costs were offset by savings from previously-announced restructuring actions and other cost alignment efforts. 24 -------------------------------------------------------------------------------- Acquisition charges associated with our 2011 acquisition of National are recorded in Other and were $83 million in the current quarter compared with $86 million in the year-ago quarter. These Acquisition charges were from the ongoing amortization of intangible assets. See Note 2 to the financial statements for detailed information. Restructuring charges/other was a net credit of $9 million compared with charges of $16 million in the year-ago quarter. The net credit in the third quarter of 2014 included gains from sales of assets. These items are included in Other for segment reporting purposes. For details on the types of costs incurred and the amounts associated with each restructuring action, see Note 3 to the financial statements. Operating profit was $1.18 billion, or 33.6 percent of revenue, compared with $844 million, or 26.0 percent of revenue, in the year-ago quarter. Quarterly income taxes are calculated using the estimated annual effective tax rate. At the end of the third quarter, our estimated annual effective tax rate for 2014 is about 28 percent. The tax rate is based on current tax law and does not include the effect of the federal research tax credit, which expired at the end of 2013. Our annual effective tax rate benefits from lower tax rates (compared to the U.S. statutory rate) applicable to our operations in many of the jurisdictions in which we operate and from U.S. tax benefits. These lower non-U.S. tax rates are generally statutory in nature, without expiration and available to companies that operate in those taxing jurisdictions. See Note 4 to the financial statements for detailed information. Our tax provision was $329 million compared with $187 million in the year-ago quarter. The increase was primarily due to an increase in income before income taxes, and to a lesser extent, the expiration of the federal research tax credit at the end of 2013. Net income was $826 million compared with $629 million in the year-ago quarter. EPS was $0.76 compared with $0.56 in the year-ago quarter. Third-quarter 2014 segment results Our segment results compared with the year-ago quarter are as follows: Analog 3Q14 3Q13 Change Revenue $ 2,149 $ 1,931 11% Operating profit 802 583 38% Operating profit % of revenue 37.3% 30.2% Analog revenue increased in all product lines. Revenue from Power grew the most, followed by revenue from HVAL, HPA and SVA. Operating profit increased primarily due to higher revenue and associated gross profit. Embedded Processing 3Q14 3Q13 Change Revenue $ 711 $ 668 6% Operating profit 114 83 37% Operating profit % of revenue 16.0% 12.4% Embedded Processing revenue increased due to higher revenue from Microcontrollers, Connectivity and Processors, each of which grew by about the same amount. Revenue increased due to increased shipments, except Processors revenue, which increased due to a more favorable mix of products shipped. Operating profit increased due to higher gross profit and, to a lesser extent, lower operating expenses. 25-------------------------------------------------------------------------------- Other 3Q14 3Q13 Change Revenue $ 641 $ 645 -1% Operating profit* 259 178 46% Operating profit % of revenue 40.4% 27.6% *Includes Acquisition charges and Restructuring charges/other Other revenue was about even as lower revenue from legacy wireless products was mostly offset by higher revenue from DLP products. Operating profit increased due to, in decreasing order, higher gross profit resulting from a more favorable mix of products shipped, lower Restructuring charges/other and lower operating expenses. First nine months of 2014 compared with first nine months of 2013 For the first nine months of 2014, we report the following: Revenue was $9.78 billion, an increase of $599 million, or 7 percent, primarily due to higher revenue from Analog and Embedded Processing, which more than offset lower revenue from legacy wireless products. Analog and Embedded Processing comprised 82 percent of revenue compared with 78 percent in the year-ago period. Gross profit was $5.53 billion, an increase of $808 million, or 17 percent, primarily due to higher revenue and, to a lesser extent, a more favorable mix of products shipped. R&D expense of $1.05 billion decreased $129 million, or 11 percent, due to savings from ongoing efforts across the company to align costs with growth opportunities, including previously-announced actions such as the wind-down of our legacy wireless products and the restructuring actions in Embedded Processing and Japan. SG&A expense of $1.41 billion was about even, as higher variable compensation costs were offset by savings from our cost alignment efforts. Acquisition charges were $248 million compared with $257 million in the year-ago period. These charges were from the ongoing amortization of intangible assets. See Note 2 to the financial statements for detailed information. Restructuring charges/other was a net credit of $24 million compared with a net credit of $251 million in the year-ago period. The 2014 net credit included $44 million of gains on sales of assets partially offset by restructuring charges. The net credit in 2013 included a $315 million gain from the transfer of wireless connectivity technology to a customer in the second quarter partially offset by restructuring charges. See Note 3 to the financial statements for detailed information. Operating profit was $2.85 billion, or 29.1 percent of revenue, compared with $2.14 billion, or 23.4 percent of revenue, in the year-ago period. The tax provision was $791 million compared with $421 million in the year-ago period. The increase was primarily due to higher income before income taxes, and to a lesser extent, the impact of the federal research tax credit, which included a $65 million discrete tax benefit in the first quarter of 2013. The federal research tax credit expired at the end of 2013. See Note 4 to the financial statements for detailed information. Net income was $2.00 billion compared with $1.65 billion in the year-ago period. EPS was $1.81 compared with $1.45 in the year-ago period. 26 -------------------------------------------------------------------------------- Year-to-date segment results Our segment results compared with the year-ago period are as follows: Analog YTD 2014 YTD 2013 Change Revenue $ 5,981 $ 5,325 12% Operating profit 1,964 1,298 51% Operating profit % of revenue 32.8% 24.4% Analog revenue increased due to higher revenue from, in decreasing order, Power, HPA, HVAL and SVA. Operating profit increased primarily due to higher revenue and associated gross profit. Embedded Processing YTD 2014 YTD 2013 Change Revenue $ 2,070 $ 1,846 12% Operating profit 270 144 88% Operating profit % of revenue 13.0% 7.8% Embedded Processing revenue increased due to higher revenue from, in decreasing order, Microcontrollers, Processors, and Connectivity. Revenue increased due to increased shipments, except Processors revenue, which increased due to a more favorable mix of products shipped. Operating profit increased due to higher revenue and associated gross profit. Other YTD 2014 YTD 2013 Change Revenue $ 1,725 $ 2,006 -14% Operating profit* 613 703 -13% Operating profit % of revenue 35.5% 35.0% *Includes Acquisition and Restructuring charges/other. Other revenue decreased due to lower revenue from legacy wireless products. Operating profit decreased primarily due to the non-recurrence of the gain on the technology transfer partially offset by lower operating expenses resulting from the legacy wireless wind-down. Financial condition At the end of the third quarter of 2014, total cash (Cash and cash equivalents plus Short-term investments) was $3.19 billion, with 81 percent owned by our U.S. entities. Accounts receivable were $1.48 billion at the end of the third quarter. This was an increase of $274 million from the end of 2013 as a result of higher revenue at the end of the third quarter compared with the end of the year. Days sales outstanding were 38 at the end of the third quarter compared with 36 at the end of 2013. Inventory was $1.75 billion at the end of the third quarter, an increase of $20 million from the end of 2013. Days of inventory at the end of the third quarter were 108 compared with 112 at the end of 2013, consistent with our target range of 105 to 115 days. Liquidity and capital resources Our primary source of liquidity is cash flow from operations. Additional sources of liquidity are our Cash and cash equivalents, Short-term investments and a revolving credit facility. Cash flows from operating activities for the first nine months of 2014 was $2.62 billion, an increase of $435 million from the year-ago period, primarily due to higher net income. We had $1.31 billion of Cash and cash equivalents and $1.88 billion of Short-term investments as of September 30, 2014. 27 -------------------------------------------------------------------------------- We have a variable-rate revolving credit facility with a consortium of investment-grade banks that allows us to borrow up to $2 billion through March 2019. This credit facility also serves as support for the issuance of commercial paper. As of September 30, 2014, our credit facility was undrawn and we had no commercial paper outstanding. For the first nine months of 2014, investing activities provided cash of $114 million compared with $120 million in the year-ago period. Proceeds from sales of short-term investments, net of purchases, provided cash of $321 million compared with $387 million in the year-ago period. Capital expenditures in the first nine months of 2014 totaled $260 million compared with $305 million in the year-ago period. These expenditures were primarily for semiconductor manufacturing equipment. We also received $46 million of cash proceeds from sales of assets in the first nine months of 2014 compared with $21 million in the year-ago period. Net cash used in financing activities was $3.06 billion for the first nine months of 2014 compared with $2.29 billion in the year-ago period. In March 2014, we issued $500 million principal amount of debt, receiving net proceeds of $498 million. This compares with May 2013, when we issued $1.0 billion principal amount of debt, receiving net proceeds of $986 million. We used the net proceeds from these issuances to repay maturing debt of $1.0 billion in the first nine months of 2014 and $1.5 billion in the year-ago period. In the first nine months of 2014, we paid dividends of $967 million compared with $849 million in the year-ago period, a result of a higher dividend rate. We also used $2.13 billion in the first nine months of 2014 to repurchase 46.8 million shares of our common stock. In the same period last year, we used $2.13 billion to repurchase 59.8 million shares of our common stock. Employee exercises of stock options are also reflected in cash from financing activities. In the first nine months of 2014, these exercises provided cash proceeds of $476 million compared with $1.15 billion in the year-ago period. See Note 8 for detailed information on debt outstanding. In September 2014, we announced a 13 percent increase in our quarterly cash dividend, which increased from $0.30 to $0.34 per share. This dividend will be payable November 17, 2014, to stockholders of record on October 31, 2014. We believe we have the necessary financial resources and operating plans to fund our working capital needs, capital expenditures, dividend and debt-related payments, and other business requirements for at least the next 12 months. Non-GAAP financial information Free cash flow and associated ratios This MD&A includes references to free cash flow and ratios based on that measure. These are financial measures that were not prepared in accordance with generally accepted accounting principles in the United States (GAAP). Free cash flow was calculated by subtracting Capital expenditures from the most directly comparable GAAP measure, Cash flows from operating activities (also referred to as cash flow from operations). We believe that free cash flow and the associated ratios provide insight into our liquidity, our cash-generating capability and the amount of cash potentially available to return to investors, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures. Reconciliation to the most directly comparable GAAP-based measures is provided in the table below. For Twelve Months Ended September 30, 2014 2013 Change Cash flow from operations (GAAP) $ 3,819 $ 3,270 17% Capital expenditures (367) (402) Free cash flow (non-GAAP) $ 3,452 $ 2,868 20% Revenue $ 12,804 $ 12,155 Cash flow from operations as a percent of revenue (GAAP) 30% 27% Free cash flow as a percent of revenue (non-GAAP) 27% 24% 28-------------------------------------------------------------------------------- Long-term contractual obligations In addition to the long-term debt obligations described in the long-term contractual obligations chart on page 47 of Exhibit 13 to our Form 10-K for the year ended December 31, 2013: in March 2014 we issued $250 million principal amount of 0.875% notes maturing in 2017 and $250 million principal amount of 2.750% notes maturing in 2021, and in May 2014 we repaid $1.0 billion of debt that was maturing. Changes in accounting standards See Note 1 to the financial statements for detailed information regarding the status of new accounting and reporting standards. ITEM 4. Controls and Procedures. An evaluation as of the end of the period covered by this report was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures were effective. In addition, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 29-------------------------------------------------------------------------------- |