TI Reports 3Q06 Financial Results
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.
“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.”
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.
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 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.
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.
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 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.
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
- 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.
- 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.
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