TI Reports 2Q06 Financial Results
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.
“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.”
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).
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 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.
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.
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 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.
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
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
- 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.
- 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.
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