Press release

TI Reports 3Q06 Financial Results

TI Revenue Grows to $3.76 Billion
  • $0.45 EPS from Continuing Operations
  • High-Performance Analog Revenue Up 37% from a Year Ago
  • Strong Profitability at 51.4% Gross Margin, 24.7% Operating Margin
  •    Download Financials in MS Excel Format (56KB)
       Non-GAAP Financial Measure Reconciliation

    Except as noted, financial results are for continuing operations. The sale of TI’s former Sensors & Controls business was completed on April 27, 2006, and that business is reported as a discontinued operation.

    DALLAS (October 23, 2006) – Texas Instruments Incorporated (TI) (NYSE: TXN) today reported third-quarter 2006 revenue of $3.76 billion. Revenue grew 2 percent compared with the second quarter, which included a $70 million royalty settlement, and increased 13 percent from the same quarter a year ago. The increases were primarily due to continued strong demand for the company’s high-performance analog and DSP products.

    Earnings per share (EPS) from continuing operations were $0.45. Second-quarter EPS of $0.47 included a benefit of $0.03 from a sales tax refund and a benefit of $0.02 from a royalty settlement. EPS grew 25 percent from $0.36 in the year-ago quarter. EPS in each of these periods included an expense of $0.03 for stock-based compensation.

    “The third quarter was one of the best in TI’s history,” said Rich Templeton, TI president and chief executive officer. “Our revenue once again set an all-time record as our share continued to climb in our core markets. Our strong gross and operating margins reflected the value of our product portfolio, rich in analog and DSP products.

    “At the same time, orders declined, leading us to expect that fourth-quarter Semiconductor growth will be below the seasonal average. A couple of factors are influencing this. First, we believe customers have broadly replenished their own inventory and are confident in operating with lower backlog now that chip supply has improved. The second factor is wireless, where we expect that unit mix will be more weighted toward low-priced cell phones and inventory correction will continue in Japan. Even with a less-than-seasonal fourth quarter, we expect the growth rate of our Semiconductor business to be in the upper teens for the year,” Templeton said.

    “In the near term, we are managing inventory and tightening expenses. We have a responsive manufacturing model and we believe distributor inventory levels remain lean, both of which should serve us well. We are competing from a position of strength with leading products and with customers who are gaining share.”

    Gross Profit
    TI’s gross profit was $1.93 billion, or 51.4 percent of revenue. This was an increase of $25 million from the prior quarter and an increase of $242 million from the year-ago quarter. The increases were due to higher revenue in the company’s Semiconductor segment.

    Operating Expenses
    Research and development (R&D) expense was $570 million, or 15.2 percent of revenue. R&D expense was $34 million higher than the prior quarter primarily because the second quarter included a sales tax refund. R&D expense increased $49 million from the year-ago quarter due to higher investment in new semiconductor technology, particularly for wireless applications.

    Selling, general and administrative (SG&A) expense was $432 million, or 11.5 percent of revenue. SG&A expense increased $14 million from the prior quarter. This expense was $24 million higher than a year ago primarily because of increased consumer advertising of DLP® technology for high-definition televisions.

    Operating Profit
    Operating profit was $930 million, or 24.7 percent of revenue. This was a decrease of $23 million from the prior quarter, which included a $117 million operating profit benefit associated with a royalty settlement and a sales tax refund. Operating profit increased $169 million from the year-ago quarter due to higher gross profit in the Semiconductor segment.

    Total stock-based compensation expense of $79 million, or 2.1 percent of revenue, was included in Corporate in the third quarter. This was about the same as in the comparison periods.

    Other Income (Expense) Net (OI&E)
    OI&E of $55 million decreased $33 million from the prior quarter, which included a $20 million benefit from a sales tax refund. OI&E increased $6 million from the year-ago quarter.

    Net Income
    Income from continuing operations was $686 million, or $0.45 per share.

    Net income of $702 million includes income from continuing and discontinued operations. In the prior quarter, net income included $1.65 billion from discontinued operations, almost all of which was a gain on the sale of the company’s former Sensors & Controls business.

    Orders
    TI orders were $3.43 billion. This was a decrease of $478 million from the prior quarter and a decrease of $41 million from the year-ago quarter. The decreases were due to lower orders in the company’s Semiconductor segment.

    Cash
    Cash flow from operations was $419 million. This was a decline of $248 million from the prior quarter.

    At the end of the third quarter, total cash (cash and cash equivalents plus short-term investments) was $4.18 billion, down $1.49 billion from the end of the prior quarter. During the third quarter, the company used $1.69 billion to repurchase 56 million shares and paid $46 million in dividends. During the past four quarters, the company used $5.04 billion to repurchase 163 million shares, reducing shares outstanding by more than 8 percent.

    Capital Spending and Depreciation
    Capital expenditures were $276 million. This was a decrease of $98 million from the prior quarter and a decrease of $164 million from the year-ago quarter. TI’s capital expenditures in the third quarter were primarily for equipment used in the assembly and test of semiconductors.

    Depreciation was $266 million, about the same as the prior quarter. Depreciation decreased $66 million from the year-ago quarter.

    Accounts Receivable and Inventories
    Accounts receivable were $2.09 billion. This was an increase of $160 million from the prior quarter primarily due to higher revenue in the month of September versus the month of June. Accounts receivable increased $333 million from the year-ago quarter primarily due to higher revenue. Days sales outstanding were 50 at the end of the third quarter compared with 47 at the end of the prior and the year-ago quarters.

    Inventory of $1.49 billion at the end of the third quarter was above desired levels. This was an increase of $156 million from the prior quarter as the company built inventory to support expected product shipments, especially for cell phones. To a lesser degree, the company also began to rebuild needed work-in-process inventory that previously had been depleted for catalog product lines such as high-performance analog. Compared with the year-ago quarter, when inventory was below desired levels, inventory increased $417 million. Days of inventory at the end of the third quarter were 73 compared with 67 at the end of the prior quarter and 59 at the end of the year-ago quarter.

    Outlook

    TI intends to provide a mid-quarter update to its financial outlook on December 11, 2006, by issuing a press release and holding a conference call. Both will be available on the company’s web site.


    For the fourth quarter of 2006, TI expects revenue from continuing operations to be in the following ranges:
    • Total TI, $3.46 billion to $3.75 billion;
    • Semiconductor, $3.39 billion to $3.66 billion; and
    • Educational & Productivity Solutions, $70 million to $90 million.

    TI expects earnings per share from continuing operations to be in the range of $0.40 to $0.46.

    In 2006 for continuing operations, TI expects: the annual effective tax rate to be about 29 percent compared with its prior expectation of about 30 percent; expense for R&D to be about $2.2 billion; capital expenditures to be about $1.3 billion; and depreciation to be about $1.05 billion.
    
                     TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
                            Consolidated Statements of Income
                     (Millions of dollars, except per-share amounts)
    
                                                     For Three Months Ended
                                                Sept. 30,    June 30,    Sept. 30,
                                                   2006        2006        2005
    
        Net revenue                              $ 3,761     $ 3,697     $ 3,339
        Cost of revenue (COR)                      1,829       1,790       1,649
        Gross profit                               1,932       1,907       1,690
          Gross profit % of revenue                 51.4%       51.6%       50.6%
        Research and development (R&D)               570         536         521
          R&D % of revenue                          15.2%       14.5%       15.6%
        Selling, general and administrative (SG&A)   432         418         408
          SG&A % of revenue                         11.5%       11.3%       12.2%
            Total operating costs and expenses     2,831       2,744       2,578
        Profit from operations                       930         953         761
          Operating profit % of revenue             24.7%       25.8%       22.8%
        Other income (expense) net                    55          88          49
        Interest expense on loans                      1           2           2
        Income from continuing operations
         before income taxes                         984       1,039         808
        Provision for income taxes                   298         300         212
        Income from continuing operations            686         739         596
        Income from discontinued operations,
         net of income taxes                          16       1,648          35
        Net income                               $   702     $ 2,387     $   631
    
        Basic earnings per common share:
          Income from continuing operations      $   .46     $   .48     $   .37
          Net income                             $   .47     $  1.54     $   .39
    
        Diluted earnings per common share:
          Income from continuing operations      $   .45     $   .47     $   .36
          Net income                             $   .46     $  1.50     $   .38
    
        Average shares outstanding (millions):
          Basic                                    1,506       1,553       1,624
          Diluted                                  1,537       1,586       1,663
    
        Cash dividends declared per share
         of common stock                         $  .030     $  .030     $  .025
    
        Stock-based compensation expense
         included in continuing operations:
    
        COR                                      $    15     $    16     $    15
        R&D                                           24          25          26
        SG&A                                          40          43          39
        Profit from operations                   $    79     $    84     $    80
          % of revenue                               2.1%        2.3%        2.4%
    
    
    
                     TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
                               Consolidated Balance Sheets
                       (Millions of dollars, except share amounts)
    
                                                 Sept. 30,   June 30,   Sept. 30,
                                                   2006        2006        2005
        Assets
        Current assets:
          Cash and cash equivalents              $ 1,430     $ 1,678     $ 1,941
          Short-term investments                   2,754       3,992       3,305
          Accounts receivable, net of
           allowances of ($29), ($28) and ($42)    2,089       1,929       1,756
    
          Raw materials                              117         108          74
          Work in process                            946         818         705
          Finished goods                             428         409         295
          Inventories                              1,491       1,335       1,074
          Deferred income taxes                      666         632         581
          Prepaid expenses and other
           current assets                            190         215         166
          Assets of discontinued operations            1          11         449
          Total current assets                     8,621       9,792       9,272
        Property, plant and equipment at cost      7,890       8,406       8,661
          Less accumulated depreciation           (3,901)     (4,422)     (4,929)
          Property, plant and equipment, net       3,989       3,984       3,732
        Equity and debt investments                  270         253         234
        Goodwill                                     792         792         677
        Acquisition-related intangibles              131         117          72
        Deferred income taxes                        411         428         413
        Capitalized software licenses, net           175         197         259
        Prepaid retirement costs                     308         219         210
        Other assets                                  88         146         115
        Total assets                             $14,785     $15,928     $14,984
    
        Liabilities and Stockholders' Equity
        Current liabilities:
          Loans payable and current
           portion of long-term debt             $    43     $    43     $   303
          Accounts payable                           744         788         755
          Accrued expenses and other liabilities   1,066         994         906
          Income taxes payable                       458         870          81
          Accrued profit sharing and retirement      118          77          92
          Liabilities of discontinued operations     ---          11         116
          Total current liabilities                2,429       2,783       2,253
        Long-term debt                               ---         ---          55
        Accrued retirement costs                      67         103         503
        Deferred income taxes                         14          15          33
        Deferred credits and other liabilities       248         239         267
        Total liabilities                          2,758       3,140       3,111
    
    
        Stockholders' equity:
          Preferred stock, $25 par value.
           Authorized -- 10,000,000 shares.
           Participating cumulative preferred.
           None issued.                              ---         ---         ---
          Common stock, $1 par value.
           Authorized -- 2,400,000,000 shares.
           Shares issued:  September 30, 2006 --
           1,739,102,544; June 30, 2006 --
           1,739,086,194; September 30, 2005 --
           1,738,650,318                           1,739       1,739       1,739
          Paid-in capital                            820         779         674
          Retained earnings                       16,927      16,271      12,787
          Less treasury common stock at cost:
           Shares:  September 30, 2006 --
            255,218,212; June 30, 2006 --
            206,501,103; September 30, 2005 --
            120,597,527                           (7,413)     (5,911)     (3,152)
    
          Accumulated other comprehensive
           income (loss):
            Minimum pension liability                (33)        (66)       (158)
            Unrealized gains (losses) on
             available-for-sale investments          (12)        (23)        (15)
          Unearned compensation                       (1)         (1)         (2)
          Total stockholders' equity              12,027      12,788      11,873
        Total liabilities and stockholders'
         equity                                  $14,785     $15,928     $14,984
    
    
    
                     TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
                          Consolidated Statements of Cash Flows
                                  (Millions of dollars)
    
                                                     For Three Months Ended
                                                 Sept. 30,   June 30,   Sept. 30,
                                                   2006        2006        2005
        Cash flows from operating activities:
          Net income                             $   702     $ 2,387     $   631
          Adjustments to reconcile net income
           to cash provided by operating activities
           of continuing operations:
            Less income from discontinued operations (16)     (1,648)        (35)
            Depreciation                             266         267         332
            Stock-based compensation                  79          84          80
            Amortization of capitalized software      26          29          33
            Amortization of acquisition-related
             intangibles                              15          15          12
            Deferred income taxes                    (46)        (41)        110
          Increase/(decrease) from changes in:
            Accounts receivable                     (149)       (138)        (19)
            Inventories                             (156)        (89)         42
            Prepaid expenses and other current
             assets                                   (4)         26          57
            Accounts payable and accrued expenses     82         129         247
            Income taxes payable                    (377)       (334)       (148)
            Accrued profit sharing and retirement     41          56          29
            Noncurrent accrued retirement costs      (65)        (68)         12
          Other                                       21          (8)         81
        Net cash provided by operating activities
         of continuing operations                    419         667       1,464
    
        Cash flows from investing activities:
          Additions to property, plant
           and equipment                            (276)       (374)       (440)
          Proceeds from sales of assets              ---       2,982         ---
          Purchases of cash investments           (1,330)     (3,063)     (2,095)
          Sales and maturities of
           cash investments                        2,585       1,983       1,147
          Purchases of equity investments            (11)        (17)         (5)
          Sales of equity and debt investments       ---           2          39
          Acquisition of businesses,
           net of cash acquired                      ---         (28)        ---
        Net cash provided by (used in) investing
         activities of continuing operations         968       1,485      (1,354)
    
        Cash flows from financing activities:
          Payments on loans and long-term debt       ---        (275)        ---
          Dividends paid on common stock             (46)        (47)        (41)
          Sales and other common stock transactions   89         137         160
          Excess tax benefit from stock option
           exercises                                  21          57          42
          Stock repurchases                       (1,695)     (1,037)       (496)
        Net cash used in financing activities
         of continuing operations                 (1,631)     (1,165)       (335)
    
        Cash flows from discontinued operations:
          Operating activities                       ---         (28)         63
          Investing activities                       ---          (6)        (23)
        Net cash provided by (used in)
         discontinued operations                     ---         (34)         40
    
        Effect of exchange rate changes on cash       (4)          3          (2)
        Net increase/(decrease) in cash
         and cash equivalents                       (248)        956        (187)
        Cash and cash equivalents,
         beginning of period                       1,678         722       2,128
        Cash and cash equivalents,
         end of period                           $ 1,430     $ 1,678     $ 1,941
    
    
    
                               Business Segment Net Revenue
                                  (Millions of dollars)
    
                                                     For Three Months Ended
                                                 Sept. 30,   June 30,   Sept. 30,
                                                   2006        2006        2005
    
        Semiconductor                            $ 3,579     $ 3,505     $ 3,162
        Education Technology         182         192         177
        Total net revenue                        $ 3,761     $ 3,697     $ 3,339
    
    
    
                              Business Segment Profit (Loss)
                                  (Millions of dollars)
    
                                                     For Three Months Ended
                                                Sept. 30,    June 30,   Sept. 30,
                                                   2006        2006        2005
    
        Semiconductor*                           $ 1,008     $ 1,032     $   837
        Education Technology          83          84          79
        Corporate                                   (161)       (163)       (155)
    
        Profit from operations                   $   930     $   953     $   761
    
    
         *  Semiconductor includes a benefit of $57 for a state sales tax refund
            and $60 from the royalty settlement in the second quarter of 2006.
    
    		
    The royalty settlement and sales tax refund benefit included in TI's
    second-quarter 2006 results are detailed as follows.  All items are in the
    Semiconductor segment results except the $20 million in Other income (expense)
    net, which is in Corporate.
    
    
                                            Royalty Settlement    Sales Tax Refund
          Orders                                  $  70                $  ---
          Net revenue                                70                   ---
          Cost of revenue                            10                   (31)
          Gross profit                               60                    31
          R&D                                       ---                   (21)
          SG&A                                      ---                    (5)
          Profit from operations                     60                    57
          Other income (expense) net                ---                    20
          Income from continuing operations
           before income taxes                       60                    77
    
    

    Semiconductor

    • Revenue in the third quarter was $3.58 billion. This was an increase of 2 percent from the prior quarter, which included a $70 million royalty settlement. Compared with a year ago, revenue increased 13 percent primarily due to higher demand for the company’s high-performance analog and DSP products.
      • Analog revenue was up 5 percent from the prior quarter and increased 15 percent from the year-ago quarter primarily due to demand for the company’s high-performance analog products. Revenue from high-performance analog products grew 14 percent from the prior quarter and 37 percent from a year ago.
      • DSP revenue was up 5 percent from the prior quarter and increased 12 percent from the year-ago quarter primarily due to higher demand from the wireless market.
      • TI’s remaining Semiconductor revenue was 6 percent lower than the prior quarter due to the royalty settlement that was included in the second quarter. Additionally, demand was lower for RISC microprocessors in the third quarter. TI’s remaining Semiconductor revenue increased 12 percent from a year ago due to stronger demand for standard logic products, microcontrollers, DLP products and RISC microprocessors that more than offset lower royalties.
    • Gross profit was $1.84 billion, or 51.5 percent of revenue. This was an increase of $29 million from the prior quarter and $240 million from the year-ago quarter. The increases over both periods were due to higher revenue.
    • Operating profit was $1.01 billion, or 28.2 percent of revenue. This was a decline of $24 million from the prior quarter, which included a $117 million operating profit benefit associated with a royalty settlement and a sales tax refund. Operating profit increased $171 million from the year-ago quarter due to higher gross profit.
    • Semiconductor orders were $3.31 billion. This was a decrease of 12 percent from the prior quarter due to lower demand across a broad range of products, and was about even with the year-ago quarter.

    Semiconductor Highlights

    • LG Electronics selected TI’s OMAP-Vox™ platform for a new series of EDGE cell phones.
    • ARCHOS selected a new TI DaVinci™ technology dual-core processor for its latest generation of portable multimedia players.
    • TI introduced a high-performance analog power management chip with stackable features that enable designers to develop a high-density power supply that easily scales up to 320 amps of output yet maintains maximum power efficiency.
    • TI customers demonstrated upcoming models of slim DLP high-definition televisions, which reduce the television cabinet depth to about 10 inches and offer a very light weight, enabling flexible installation options. Samsung has announced availability of the first slim DLP high-definition televisions for later this year.

    Educational & Productivity Solutions

    • Revenue in the third quarter was $182 million. This was a decrease of $10 million from the prior quarter reflecting the end of the back-to-school season. It was an increase of $5 million from the year-ago quarter due to stronger demand for graphing calculators.
    • Gross profit was $116 million, or a record 63.8 percent of revenue. Gross profit decreased $3 million from the prior quarter, and increased $6 million from the year-ago quarter primarily due to lower manufacturing costs and higher revenue.
    • Operating profit was $83 million, or a record 45.9 percent of revenue. This was about even with the prior quarter and an increase of $4 million from the year-ago quarter.

    ###

    “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: This release includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as TI or its management “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of similar import. Similarly, statements in this release that describe the Company’s business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in forward-looking statements.

    We urge you to carefully consider the following important factors that could cause actual results to differ materially from the expectations of the Company or its management:

    • Market demand for semiconductors, particularly for analog chips and digital signal processors in key markets such as communications, entertainment electronics and computing;
    • TI’s ability to maintain or improve profit margins, including its ability to utilize its manufacturing facilities at sufficient levels to cover its fixed operating costs, in an intensely competitive and cyclical industry;
    • TI’s ability to develop, manufacture and market innovative products in a rapidly changing technological environment;
    • TI’s ability to compete in products and prices in an intensely competitive industry;
    • TI’s ability to maintain and enforce a strong intellectual property portfolio and obtain needed licenses from third parties;
    • Expiration of license agreements between TI and its patent licensees, and market conditions reducing royalty payments to TI;
    • Economic, social and political conditions in the countries in which TI, its customers or its suppliers operate, including security risks, health conditions, possible disruptions in transportation networks and fluctuations in foreign currency exchange rates;
    • Natural events such as severe weather and earthquakes in the locations in which TI, its customers or its suppliers operate;
    • Availability and cost of raw materials, utilities and critical manufacturing equipment;
    • Changes in the tax rate applicable to TI as the result of changes in tax law, the jurisdictions in which profits are determined to be earned and taxed, the outcome of tax audits and the ability to realize deferred tax assets;
    • Losses or curtailments of purchases from key customers and the timing and amount of distributor and other customer inventory adjustments;
    • Customer demand that differs from company forecasts;
    • The financial impact of inadequate or excess TI inventories to meet demand that differs from projections;
    • Product liability or warranty claims, or recalls by TI customers for a product containing a TI part;
    • TI’s ability to recruit and retain skilled personnel; and
    • Timely implementation of new manufacturing technologies, installation of manufacturing equipment and the ability to obtain needed third-party foundry and assembly/test subcontract services.

    For a more detailed discussion of these factors, see the text under the heading “Risk Factors” in Item 1A of the Company’s most recent Form 10-K. The forward-looking statements included in this release are made only as of the date of publication, and the Company undertakes no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

    Texas Instruments Incorporated provides innovative DSP and analog technologies to meet our customers’ real world signal processing requirements. In addition to Semiconductor, the company includes the Educational & Productivity Solutions business. TI is headquartered in Dallas, Texas, and has manufacturing, design or sales operations in more than 25 countries.

    Texas Instruments is traded on the New York Stock Exchange under the symbol TXN. More information is located on the World Wide Web at www.ti.com.

    TI Trademarks:
    DLP
    OMAP-Vox
    DaVinci

    Other trademarks are the property of their respective owners.