Press release

TI Reports 2Q06 Financial Results

Revenue Up 11% Sequentially and 24% from a Year Ago, Including $70 Million for Royalty Settlement
  • $0.47 EPS from Continuing Operations, Up 42% Sequentially and 34% from a Year Ago
  • $1.50 EPS from Continuing and Discontinued Operations, Including Gain on Sale
  •    Download Financials in MS Excel Format (58KB)
       Non-GAAP Financial Measures 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 (July 24, 2006) – Texas Instruments Incorporated (TI) (NYSE: TXN) today reported revenue of $3.70 billion for the second quarter of 2006. Revenue was 11 percent higher sequentially and 24 percent higher than the same quarter a year ago as demand for the company’s semiconductors continued to strengthen. Sequential growth also benefited from seasonal demand for graphing calculators as retailers began to stock for the upcoming back-to-school season. As previously announced, the company received a $70 million royalty settlement in the quarter that was included in revenue.

    Earnings per share (EPS) from continuing operations were $0.47, up 42 percent sequentially and 34 percent from a year ago. EPS included an expense of $0.03 from stock-based compensation, a benefit of $0.03 from a sales tax refund and a benefit of $0.02 from the royalty settlement. The company began expensing stock options in the third quarter of 2005 and, therefore, equivalent stock-based compensation expense was not reflected in the year-ago quarter, when the company earned $0.35 per share from continuing operations.

    “This was another excellent quarter for Texas Instruments,” said Rich Templeton, president and chief executive officer. “All regions of the world showed strong revenue growth from a year ago. Revenue from our wireless semiconductors grew 27 percent, including more than 70 percent growth in 3G; revenue from high-performance analog semiconductors grew 32 percent; and revenue from our DLP® picture technology grew 34 percent.

    “Strategically, our focus on open wireless standards was reinforced by the actions of operators around the world, who are accelerating their infrastructure transitions to GSM because of its cost effectiveness and the wide range of choices it offers,” Templeton said.

    “Going into the third quarter, our backlog of orders is up, and our outlook is for seasonal growth. As always, we will pay close attention to the world’s economies and to our inventory in the various market channels.”

    Gross Profit

    TI’s gross profit was $1.91 billion, or 51.6 percent of revenue. This was an increase of $235 million from the prior quarter and an increase of $481 million from the year-ago quarter. The increases over both periods reflect higher revenue in the company’s two segments, Semiconductor and Education Technology (E&PS).

    Operating Expenses
    Research and development (R&D) expense was $536 million, or 14.5 percent of revenue. R&D increased $3 million from the prior quarter and $51 million from the year-ago quarter. The increases were due to higher spending for development of new semiconductor devices, particularly associated with wireless applications.

    Selling, general and administrative (SG&A) expense was $418 million, or 11.3 percent of revenue. This expense decreased $3 million from the prior quarter and was up $79 million from the year-ago quarter. The increase from a year ago was primarily due to the combination of stock-based compensation expense and higher spending for consumer advertising of the company’s DLP semiconductors used in high-definition televisions.

    Operating Profit
    Operating profit was $953 million, or 25.8 percent of revenue. This was an increase of $235 million from the prior quarter primarily due to higher gross profit in both of the company’s segments. It was also an increase of $351 million from the year-ago quarter due to higher gross profit in the Semiconductor segment. Total stock-based compensation expense of $84 million, or 2.3 percent of revenue, was included in Corporate in the second quarter of 2006.

    Other Income (Expense) Net (OI&E)
    OI&E of $88 million increased $36 million from the prior quarter and $32 million from the year-ago quarter due to a sales tax refund and higher interest income.

    Net Income
    Income from continuing operations was $739 million, or $0.47 per share.

    Net income, which includes income from continuing and discontinued operations, was $2.39 billion, or $1.50 per share. This 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 $3.91 billion. This was an increase of $302 million from the prior quarter and an increase of $767 million from the year-ago quarter. Both increases were primarily due to higher demand for the company’s semiconductor products.

    Cash
    Cash flow from operations was $667 million. This was an increase of $145 million from the prior quarter and a decrease of $97 million from the year-ago quarter.

    At the end of the second quarter, total cash (cash and cash equivalents plus short-term investments) was $5.67 billion, up $2.01 billion from the end of the prior quarter and up $1.20 billion from the end of the year-ago quarter. These increases were primarily due to the $2.98 billion of cash from the sale of the company’s Sensors & Controls business as well as income from continuing operations, partially offset by the cash used for stock repurchases. During the second quarter of 2006, the company repurchased 33 million shares of TI common stock for $1.04 billion and paid $47 million in dividends. Also in the quarter, $275 million of variable-rate bank notes were prepaid.

    Capital Spending and Depreciation
    Capital expenditures were $374 million. This was a decrease of $34 million from the prior quarter and an increase of $127 million from the year-ago quarter. TI’s capital expenditures in the second quarter were primarily for equipment used in the assembly and test of semiconductors.

    Depreciation was $267 million, a decrease of $3 million from the prior quarter and a decrease of $70 million from the year-ago quarter.

    Accounts Receivable and Inventories
    Accounts receivable were $1.93 billion. This was an increase of $131 million from the prior quarter due to seasonally higher receivables for calculators in the E&PS segment, and an increase of $191 million from the year-ago quarter reflecting higher revenue. Days sales outstanding were 47 at the end of the second quarter compared with 49 at the end of the prior quarter and 53 at the end of the year-ago quarter.

    Inventory was $1.34 billion at the end of the second quarter. This was an increase of $89 million from the prior quarter as the company built inventory to support expected product shipments in the second half of the year. Compared with the year-ago quarter, inventory increased $219 million. Days of inventory at the end of the second quarter were 67 compared with 67 at the end of the prior quarter and 65 at the end of the year-ago quarter.

    Outlook

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


    For the third quarter of 2006, TI expects revenue from continuing operations to be in the following ranges:

    • Total TI, $3.63 billion to $3.95 billion;
    • Semiconductor, $3.45 billion to $3.75 billion; and
    • Educational & Productivity Solutions, $180 million to $200 million.

    TI expects earnings per share from continuing operations to be in the range of $0.42 to $0.48.

    The effective tax rate for continuing operations in 2006 is expected to be about 30 percent, unchanged from the prior estimate. This tax rate is based on current tax law and does not assume reinstatement of the federal research tax credit, which expired at the end of 2005. Additionally in 2006 for continuing operations, TI still expects expense for R&D to be about $2.2 billion and capital expenditures to be about $1.3 billion. Depreciation is expected to be about $1.05 billion, up slightly from the prior estimate.
                   TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
                          Consolidated Statements of Income
                   (Millions of dollars, except per-share amounts)
    
    
                                                     For Three Months Ended
                                                  June 30,    Mar. 31,  June 30,
                                                    2006       2006       2005
    
        Net revenue                               $ 3,697    $ 3,334    $ 2,971
        Cost of revenue (COR)                       1,790      1,662      1,545
        Gross profit                                1,907      1,672      1,426
          Gross profit % of revenue                  51.6%      50.1%      48.0%
        Research and development (R&D)                536        533        485
          R&D % of revenue                           14.5%      16.0%      16.3%
        Selling, general and administrative (SG&A)    418        421        339
          SG&A % of revenue                          11.3%      12.6%      11.4%
            Total operating costs and expenses      2,744      2,616      2,369
        Profit from operations                        953        718        602
          Operating profit % of revenue              25.8%      21.5%      20.3%
        Other income (expense) net                     88         52         56
        Interest expense on loans                       2          3          2
        Income from continuing operations before
         income taxes                               1,039        767        656
        Provision for income taxes                    300        225         72
        Income from continuing operations             739        542        584
        Income from discontinued operations,
         net of income taxes                        1,648         43         44
        Net income                                $ 2,387    $   585    $   628
    
        Basic earnings per common share:
          Income from continuing operations       $   .48    $   .34    $   .36
          Net income                              $  1.54    $   .37    $   .38
    
        Diluted earnings per common share:
          Income from continuing operations       $   .47    $   .33    $   .35
          Net income                              $  1.50    $   .36    $   .38
    
        Average shares outstanding (millions):
          Basic                                     1,553      1,585      1,633
          Diluted                                   1,586      1,618      1,669
    
        Cash dividends declared per share of
         common stock                             $  .030    $  .030    $  .025
    
        Stock-based compensation expense
         included in continuing operations:
    
        COR                                            16         18        ---
        R&D                                            25         28        ---
        SG&A                                           43         45          5
        Profit from operations                         84         91          5
          % of revenue                                2.3%       2.7%       0.2%
    
    
    
                   TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
                             Consolidated Balance Sheets
                     (Millions of dollars, except share amounts)
    
                                                  June 30,    Mar. 31,  June 30,
                                                    2006        2006      2005
        Assets
        Current assets:
          Cash and cash equivalents               $ 1,678    $   722    $ 2,128
          Short-term investments                    3,992      2,942      2,345
          Accounts receivable, net of
           allowances of ($28), ($32) and
           ($34)                                    1,929      1,798      1,738
    
          Raw materials                               108         91         75
          Work in process                             818        819        686
          Finished goods                              409        336        355
          Inventories                               1,335      1,246      1,116
          Deferred income taxes                       632        626        597
          Prepaid expenses and other current
           assets                                     215        248        224
          Assets of discontinued operations            11        516        452
          Total current assets                      9,792      8,098      8,600
        Property, plant and equipment at cost       8,406      8,442      8,798
          Less accumulated depreciation            (4,422)    (4,574)    (5,172)
          Property, plant and equipment, net        3,984      3,868      3,626
        Equity and debt investments                   253        240        265
        Goodwill                                      792        793        677
        Acquisition-related intangibles               117        131         84
        Deferred income taxes                         428        390        568
        Capitalized software licenses, net            197        222        285
        Prepaid retirement costs                      219        184        232
        Other assets                                  146        112        149
        Total assets                              $15,928    $14,038    $14,486
    
        Liabilities and Stockholders'
         Equity
        Current liabilities:
          Loans payable and current portion
           of long-term debt                      $    43    $   ---    $   306
          Accounts payable                            788        720        575
          Accrued expenses and other
           liabilities                                994        895        811
          Income taxes payable                        870        280        248
          Accrued profit sharing and retirement        77         43         62
          Liabilities of discontinued operations       11        157        115
          Total current liabilities                 2,783      2,095      2,117
        Long-term debt                                ---        318         55
        Accrued retirement costs                      103        116        526
        Deferred income taxes                          15         17         36
        Deferred credits and other liabilities        239        254        289
        Total liabilities                           3,140      2,800      3,023
    
    
    
        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:
           June 30, 2006 -- 1,739,086,194;
           March 31, 2006 -- 1,739,070,044;
           June 30, 2005 -- 1,738,514,238           1,739      1,739      1,739
          Paid-in capital                             779        744        611
          Retained earnings                        16,271     13,930     12,197
          Less treasury common stock at cost:
            Shares: June 30, 2006 --
             206,501,103; March 31, 2006 --
             181,032,577; June 30, 2005 --
             115,461,457                           (5,911)    (5,092)    (2,908)
    
          Accumulated other comprehensive income
           (loss):
            Minimum pension liability                 (66)       (65)      (163)
            Unrealized gains (losses) on
             available-for-sale investments           (23)       (17)       (11)
          Unearned compensation                        (1)        (1)        (2)
          Total stockholders' equity               12,788     11,238     11,463
        Total liabilities and stockholders'
         equity                                   $15,928    $14,038    $14,486
    
    
    
                   TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
                        Consolidated Statements of Cash Flows
                                (Millions of dollars)
    
                                                      For Three Months Ended
                                                  June 30,   Mar. 31,   June 30,
                                                    2006       2006       2005
        Cash flows from operating activities:
          Net income                              $ 2,387    $   585    $   628
          Adjustments to reconcile net income
           to cash provided by operating
           activities of continuing operations:
            Less income from discontinued
             operations                            (1,648)       (43)       (44)
            Depreciation                              267        270        337
            Stock-based compensation                   84         91          5
            Amortization of capitalized software       29         30         31
            Amortization of acquisition-related
             intangibles                               15         16         15
            Deferred income taxes                     (41)       (36)      (174)
          Increase/(decrease) from changes in:
            Accounts receivable                      (138)      (144)      (220)
            Inventories                               (89)       (57)        40
            Prepaid expenses and other current
             assets                                    26       (111)       112
            Accounts payable and accrued expenses     129       (106)        11
            Income taxes payable                     (334)       151         12
            Accrued profit sharing and retirement      35        (78)        29
            Noncurrent accrued retirement costs       (45)        (6)         5
          Other                                       (10)       (40)       (23)
        Net cash provided by operating activities
         of continuing operations                     667        522        764
    
        Cash flows from investing activities:
          Additions to property, plant and
           equipment                                 (374)      (408)      (247)
          Proceeds from sales of assets             2,982          4        ---
          Purchases of cash investments            (3,063)    (1,153)      (248)
          Sales and maturities of cash
           investments                              1,983      2,341      1,192
          Purchases of equity investments             (17)        (5)        (6)
          Sales of equity and debt investments          2          7        ---
          Acquisition of businesses,
           net of cash acquired                       (28)      (177)       ---
        Net cash provided by investing
         activities of continuing operations        1,485        609        691
    
        Cash flows from financing activities:
          Payments on loans and long-term debt       (275)      (311)       (10)
          Dividends paid on common stock              (47)       (48)       (41)
          Sales and other common stock
           transactions                               137        142        116
          Excess tax benefit from stock
           option exercises                            57          7        ---
          Stock repurchases                        (1,037)    (1,440)    (1,292)
        Net cash used in financing activities
         of continuing operations                  (1,165)    (1,650)    (1,227)
    
        Cash flows from discontinued operations:
          Operating activities                        (28)        35         62
          Investing activities                         (6)       (10)       (22)
        Net cash provided by (used in)
         discontinued operations                      (34)        25         40
    
        Effect of exchange rate changes on cash         3          2          9
        Net increase/(decrease) in cash and
         cash equivalents                             956       (492)       277
        Cash and cash equivalents,
         beginning of period                          722      1,214      1,851
        Cash and cash equivalents,
         end of period                            $ 1,678    $   722    $ 2,128
    
    

    Certain amounts in the prior periods' financial statements have been reclassified to conform to the current presentation.

    
                             Business Segment Net Revenue
                               (In millions of dollars)
    
                                                      For Three Months Ended
                                                  June 30,   Mar. 31,   June 30,
                                                    2006       2006       2005
    
        Semiconductor                             $ 3,505    $ 3,262    $ 2,791
        Education Technology          192         74        181
        Intersegment eliminations                     ---         (2)        (1)
    
        Total net revenue                         $ 3,697    $ 3,334    $ 2,971
    
    
    
                            Business Segment Profit (Loss)
                               (In millions of dollars)
    
                                                      For Three Months Ended
                                                  June 30,   Mar. 31,   June 30,
                                                    2006       2006       2005
    
        Semiconductor*                            $ 1,032    $   883    $   597
        Education Technology           84         13         79
        Corporate**                                  (163)      (178)       (74)
    
        Profit from operations                    $   953    $   718    $   602
    

    * Semiconductor profit from operations includes a benefit of $57 for a state sales tax refund and $60 from the royalty settlement in the second quarter of 2006.

    ** Corporate includes stock-based compensation expense of $84, $91 and $5 respectively.

    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 second quarter was $3.51 billion. This was an increase of 7 percent from the prior quarter primarily due to demand for the company’s analog products and a $70 million royalty settlement received in the second quarter from Conexant Systems, Inc. It was also an increase of 26 percent from the year-ago quarter primarily due to demand for the company’s DSP and analog products.
      • Analog revenue was up 8 percent from the prior quarter and increased 23 percent from the year-ago quarter primarily due to demand for the company’s high-performance analog products and analog products used in broadband applications. Revenue from high-performance analog products grew 5 percent from the prior quarter and 32 percent from a year ago.
      • DSP revenue was about even with the prior quarter, and was up 24 percent from the year-ago quarter primarily due to higher demand from the wireless market.
      • TI’s remaining Semiconductor revenue increased 17 percent from the prior quarter and 31 percent from a year ago due to the royalty settlement and broad-based growth in demand for DLP products, RISC microprocessors, standard logic products and microcontrollers.
    • Gross profit was $1.82 billion, or 51.8 percent of revenue. This was an increase of $157 million from the prior quarter and an increase of $490 million from the year-ago quarter. The increases over both periods were due to higher revenue.
    • Operating profit was $1.03 billion, or 29.4 percent of revenue. This was an increase of $149 million from the prior quarter and an increase of $435 million from the year-ago quarter. The increases over both periods were due to higher gross profit.
    • Semiconductor orders were $3.75 billion. This was an increase of 10 percent from the prior quarter primarily due to demand for analog products, and an increase of 26 percent from a year ago due to strong demand for analog and DSP products.

    Semiconductor Highlights

    • TI is increasing its wireless design presence in India with a new R&D center in Chennai, focusing on a platform of open-standard technologies that span TI’s wireless product portfolio.
    • TI unveiled details of its 45-nanometer manufacturing process that uses immersion lithography to double the number of chips per wafer, increase performance by 30 percent and reduce power consumption by 40 percent, providing customers early access to faster, smaller and lower power products.
    • TI began volume production of a high-performance analog power management chip that extends battery life in smartphones, digital still cameras and other single-cell lithium-ion-powered portable multimedia devices, by delivering 96 percent efficiency over a wide range of input voltages.

    Educational & Productivity Solutions

    • Revenue in the second quarter was $192 million. This was an increase of $118 million from the prior quarter as retailers began to stock product in preparation for the upcoming back-to-school season. It was also an increase of $11 million from the year-ago quarter due to higher demand from instructional dealers that supply school districts.
    • Gross profit was $119 million, or 61.9 percent of revenue. Gross profit increased $78 million from the prior quarter and $8 million from the year-ago quarter primarily due to higher revenue.
    • Operating profit was $84 million, or 43.9 percent of revenue. This was an increase of $71 million from the prior quarter and $5 million from the year-ago quarter. The increases were due to higher gross profit.

    ###

    “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:
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    Other trademarks are the property of their respective owners.