Form 10-Q for Third Quarter 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 30, 2006
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from
to
Commission
File Number 001-03761
TEXAS
INSTRUMENTS INCORPORATED
(Exact
Name of Registrant as Specified in Its Charter)
|
|
Delaware
|
75-0289970
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification
No.)
|
|
|
12500
TI Boulevard, P.O. Box 660199, Dallas, Texas
|
75266-0199
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code 972-995-3773
Indicate
by check mark whether the Registrant (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was
required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes S No ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer S |
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the Exchange Act).
Yes
¨
No
S
1,483,884,332
Number
of
shares of Registrant’s common stock outstanding as of
September
30, 2006
PART
I - FINANCIAL INFORMATION
ITEM
1. Financial Statements.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Income
(Millions
of dollars, except per-share amounts)
|
|
For
Three Months Ended Sept. 30,
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
3,761
|
|
$
|
3,339
|
|
$
|
10,792
|
|
$
|
9,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
1,829
|
|
|
1,649
|
|
|
5,281
|
|
|
4,652
|
|
Research
and development (R&D)
|
|
|
570
|
|
|
521
|
|
|
1,639
|
|
|
1,493
|
|
Selling,
general and administrative (SG&A)
|
|
|
432
|
|
|
408
|
|
|
1,271
|
|
|
1,067
|
|
Total
|
|
|
2,831
|
|
|
2,578
|
|
|
8,191
|
|
|
7,212
|
|
Profit
from operations
|
|
|
930
|
|
|
761
|
|
|
2,601
|
|
|
1,799
|
|
Other
income (expense) net
|
|
|
55
|
|
|
49
|
|
|
194
|
|
|
153
|
|
Interest
expense on loans
|
|
|
1
|
|
|
2
|
|
|
6
|
|
|
6
|
|
Income
from continuing operations before income taxes
|
|
|
984
|
|
|
808
|
|
|
2,789
|
|
|
1,946
|
|
Provision
for income taxes
|
|
|
298
|
|
|
212
|
|
|
821
|
|
|
395
|
|
Income
from continuing operations
|
|
|
686
|
|
|
596
|
|
|
1,968
|
|
|
1,551
|
|
Income
from discontinued operations, net of income taxes
|
|
|
16
|
|
|
35
|
|
|
1,705
|
|
|
118
|
|
Net
income
|
|
$
|
702
|
|
$
|
631
|
|
$
|
3,673
|
|
$
|
1,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.46
|
|
$
|
.37
|
|
$
|
1.27
|
|
$
|
.94
|
|
Net
income
|
|
$
|
.47
|
|
$
|
.39
|
|
$
|
2.37
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.45
|
|
$
|
.36
|
|
$
|
1.24
|
|
$
|
.92
|
|
Net
income
|
|
$
|
.46
|
|
$
|
.38
|
|
$
|
2.32
|
|
$
|
.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,506
|
|
|
1,624
|
|
|
1,548
|
|
|
1,652
|
|
Diluted
|
|
|
1,537
|
|
|
1,663
|
|
|
1,580
|
|
|
1,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share of common stock
|
|
$
|
.030
|
|
$
|
.025
|
|
$
|
.090
|
|
$
|
.075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income
(Millions
of dollars)
|
|
For
Three Months Ended Sept. 30,
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations
|
|
$
|
686
|
|
$
|
596
|
|
$
|
1,968
|
|
$
|
1,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment,
net of tax expense of: 2006
- ($24) and ($23); 2005 - ($3) and ($11)
|
|
|
33
|
|
|
5
|
|
|
32
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment,
net of tax benefit (expense) of:
2006
- ($6) and ($2); 2005 - $3 and $1
|
|
|
11
|
|
|
(6)
|
|
|
4
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of recognized transactions, net of tax expense
of: 2006
- $0 and $0; 2005 - ($1) and ($1)
|
|
|
--
|
|
|
2
|
|
|
--
|
|
|
2
|
|
Total
|
|
|
44
|
|
|
1
|
|
|
36
|
|
|
10
|
|
Total
from continuing operations
|
|
|
730
|
|
|
597
|
|
|
2,004
|
|
|
1,561
|
|
Net
income from discontinued operations
|
|
|
16
|
|
|
35
|
|
|
1,705
|
|
|
118
|
|
Total
comprehensive income
|
|
$
|
746
|
|
$
|
632
|
|
$
|
3,709
|
|
$
|
1,679
|
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Balance Sheets
(Millions
of dollars, except share amounts)
|
|
Sept.
30,
|
|
Dec.
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,430
|
|
$
|
1,214
|
|
Short-term
investments
|
|
|
2,754
|
|
|
4,116
|
|
Accounts
receivable, net of allowances of ($29) and ($34)
|
|
|
2,089
|
|
|
1,648
|
|
Raw
materials
|
|
|
117
|
|
|
83
|
|
Work
in process
|
|
|
946
|
|
|
813
|
|
Finished
goods
|
|
|
428
|
|
|
289
|
|
Inventories
|
|
|
1,491
|
|
|
1,185
|
|
Deferred
income taxes
|
|
|
666
|
|
|
619
|
|
Prepaid
expenses and other current assets
|
|
|
190
|
|
|
135
|
|
Assets
of discontinued operations
|
|
|
1
|
|
|
495
|
|
Total
current assets
|
|
|
8,621
|
|
|
9,412
|
|
Property,
plant and equipment at cost
|
|
|
7,890
|
|
|
8,374
|
|
Less
accumulated depreciation
|
|
|
(3,901
|
)
|
|
(4,644
|
)
|
Property,
plant and equipment, net
|
|
|
3,989
|
|
|
3,730
|
|
Equity
and debt investments
|
|
|
270
|
|
|
236
|
|
Goodwill
|
|
|
792
|
|
|
677
|
|
Acquisition-related
intangibles
|
|
|
131
|
|
|
60
|
|
Deferred
income taxes
|
|
|
411
|
|
|
393
|
|
Capitalized
software licenses, net
|
|
|
175
|
|
|
243
|
|
Prepaid
retirement costs
|
|
|
308
|
|
|
199
|
|
Other
assets
|
|
|
88
|
|
|
113
|
|
Total
assets
|
|
$
|
14,785
|
|
$
|
15,063
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Loans
payable and current portion of long-term debt
|
|
$
|
43
|
|
$
|
301
|
|
Accounts
payable
|
|
|
744
|
|
|
702
|
|
Accrued
expenses and other liabilities
|
|
|
1,066
|
|
|
948
|
|
Income
taxes payable
|
|
|
458
|
|
|
154
|
|
Accrued
profit sharing and retirement
|
|
|
118
|
|
|
121
|
|
Liabilities
of discontinued operations
|
|
|
--
|
|
|
151
|
|
Total
current liabilities
|
|
|
2,429
|
|
|
2,377
|
|
Long-term
debt
|
|
|
--
|
|
|
329
|
|
Accrued
retirement costs
|
|
|
67
|
|
|
136
|
|
Deferred
income taxes
|
|
|
14
|
|
|
23
|
|
Deferred
credits and other liabilities
|
|
|
248
|
|
|
261
|
|
Total
liabilities
|
|
|
2,758
|
|
|
3,126
|
|
|
|
|
|
|
|
|
|
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: 2006 - 1,739,102,544; 2005 - 1,738,780,512
|
|
|
1,739
|
|
|
1,739
|
|
Paid-in
capital
|
|
|
820
|
|
|
742
|
|
Retained
earnings
|
|
|
16,927
|
|
|
13,394
|
|
Less
treasury common stock at cost:
Shares:
2006 - 255,218,212; 2005 - 142,190,707
|
|
|
(7,413
|
)
|
|
(3,856
|
)
|
Accumulated
other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
Minimum
pension liability
|
|
|
(33
|
)
|
|
(65
|
)
|
Unrealized
gains (losses) on available-for-sale investments
|
|
|
(12
|
)
|
|
(16
|
)
|
Unearned
compensation
|
|
|
(1
|
)
|
|
(1
|
)
|
Total
stockholders’ equity
|
|
|
12,027
|
|
|
11,937
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
14,785
|
|
$
|
15,063
|
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Millions
of dollars)
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,673
|
|
$
|
1,669
|
|
Adjustments
to reconcile net income to cash provided by operating activities
of
continuing operations:
|
|
|
|
|
|
|
|
Less
income from discontinued operations
|
|
|
(1,705
|
)
|
|
(118
|
)
|
Depreciation
|
|
|
803
|
|
|
1,010
|
|
Stock-based
compensation
|
|
|
254
|
|
|
90
|
|
Amortization
of capitalized software
|
|
|
85
|
|
|
93
|
|
Amortization
of acquisition-related intangibles
|
|
|
46
|
|
|
42
|
|
Deferred
income taxes
|
|
|
(123
|
)
|
|
(101
|
)
|
Increase
(decrease) from changes in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(431
|
)
|
|
(232
|
)
|
Inventories
|
|
|
(302
|
)
|
|
88
|
|
Prepaid
expenses and other current assets
|
|
|
(89
|
)
|
|
81
|
|
Accounts
payable and accrued expenses
|
|
|
105
|
|
|
278
|
|
Income
taxes payable
|
|
|
(560
|
)
|
|
(64
|
)
|
Accrued
profit sharing and retirement
|
|
|
(2
|
)
|
|
(155
|
)
|
Noncurrent
accrued retirement costs
|
|
|
(116
|
)
|
|
24
|
|
Other
|
|
|
(30
|
)
|
|
23
|
|
Net
cash provided by operating activities of continuing operations
|
|
|
1,608
|
|
|
2,728
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(1,058
|
)
|
|
(954
|
)
|
Proceeds
from sales of assets
|
|
|
2,986
|
|
|
42
|
|
Purchases
of cash investments
|
|
|
(5,546
|
)
|
|
(3,161
|
)
|
Sales
and maturities of cash investments
|
|
|
6,909
|
|
|
3,543
|
|
Purchases
of equity investments
|
|
|
(33
|
)
|
|
(13
|
)
|
Sales
of equity and debt investments
|
|
|
9
|
|
|
39
|
|
Acquisition
of businesses, net of cash acquired
|
|
|
(205
|
)
|
|
--
|
|
Net
cash provided by (used in) investing activities of continuing
operations
|
|
|
3,062
|
|
|
(504
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Payments
on loans and long-term debt
|
|
|
(586
|
)
|
|
(10
|
)
|
Dividends
paid on common stock
|
|
|
(141
|
)
|
|
(125
|
)
|
Sales
and other common stock transactions
|
|
|
368
|
|
|
333
|
|
Excess
tax benefit from stock option exercises
|
|
|
85
|
|
|
42
|
|
Stock
repurchases
|
|
|
(4,172
|
)
|
|
(3,281
|
)
|
Net
cash used in financing activities of continuing operations
|
|
|
(4,446
|
)
|
|
(3,041
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
7
|
|
|
136
|
|
Investing
activities
|
|
|
(16
|
)
|
|
(43
|
)
|
Net
cash provided by (used in) by discontinued operations
|
|
|
(9
|
)
|
|
93
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
1
|
|
|
2
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
216
|
|
|
(722
|
)
|
Cash
and cash equivalents , January 1
|
|
|
1,214
|
|
|
2,663
|
|
Cash
and cash equivalents, September 30
|
|
$
|
1,430
|
|
$
|
1,941
|
|
See
accompanying notes.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Notes
to Financial Statements
1. |
Description
of Business and Significant Accounting Policies and
Practices. Texas
Instruments
(TI or the Company) makes,
markets and sells high-technology components; more than 50,000
customers
all over the world buy TI products.
|
Acquisitions
- In
January 2006, we acquired 100 percent of the equity of Chipcon Group ASA
(Chipcon), a leading company in the design of short-range, low-power wireless
radio frequency semiconductors, based in Oslo, Norway, for $183 million
in cash.
The acquisition will enhance our ability to offer customers complete short-range
wireless solutions for consumer, home and building automation applications.
The
acquisition was accounted for as a purchase business combination and the
results
of operations of this business have been included in the Semiconductor
segment
of our consolidated statements of income from the date of acquisition.
Pro forma
information has not been presented as it would not be materially different
from
amounts reported. As a result of the acquisition, we recorded a $5 million
charge for in-process R&D in Corporate. We also recognized $115 million of
goodwill and $86 million of other acquisition-related intangible assets,
acquired $6 million of cash and assumed $29 million of other net liabilities.
The following table contains a summary of the other intangible assets
acquired:
Acquired
Intangible Assets
|
|
Amount
|
|
Amortization
Period
|
|
Developed
technology
|
|
$
|
65
|
|
|
5
years
|
|
Non-compete
agreements
|
|
|
6
|
|
|
2
years
|
|
Customer
relationships
|
|
|
13
|
|
|
5
years
|
|
Trademark/trade
name
|
|
|
2
|
|
|
3
years
|
|
In
the
second quarter of 2006 we also made an acquisition, which was not material,
that
was integrated into the Semiconductor business segment.
Dispositions
- In
January 2006, we entered into a definitive agreement to sell substantially
all
of our Sensors & Controls segment, excluding the radio frequency
identification (RFID) systems operations that had been operated as a part
of
that segment, to an affiliate of Bain Capital, LLC, a leading global private
equity investment firm, for $3 billion in cash. The sale was completed
on April
27, 2006. The operations and cash flows of the former Sensors & Controls
business have been eliminated from the ongoing operations of TI and we
have no
significant continuing involvement in the operations of the sold business.
Beginning in the first quarter of 2006, the former Sensors & Controls
business is presented as a discontinued operation and the RFID operations
retained are included within the Semiconductor business segment. Prior
period
financial statements, including segment information, have been reclassified
to
reflect these changes for all periods presented (see Note 2 for detailed
information on discontinued operations and Note 6 for restated segment
information).
Change
in Capitalization - During
the second quarter of 2006, TI's Japan subsidiary prepaid $275 million
of
variable-rate bank notes. A portion of this debt had been due in 2008 and
the
remainder had been due in 2010.
Basis
of Presentation - The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the U.S. (US GAAP) and, except
for
the adoption of a change in depreciation method in the first quarter of
2006 and
the presentation of discontinued operations, on the same basis as the audited
financial statements included in our annual report on Form 10-K for the
year
ended December 31, 2005. The consolidated statements of income, statements
of
comprehensive income and statements of cash flows for the periods ended
September 30, 2006 and 2005, and the balance sheet as of September 30,
2006, are
not audited but reflect all adjustments that are of a normal recurring
nature
and are necessary for a fair statement of the results of the periods shown.
The
consolidated balance sheet at December 31, 2005, was derived from the audited
consolidated balance sheet at that date and restated to reflect the former
Sensors & Controls business as a discontinued operation. Certain
amounts in the prior periods' financial statements have been reclassified
to
conform to the current period presentation. Certain
information and note disclosures normally included in annual consolidated
financial statements have been omitted pursuant to the rules and regulations
of
the U.S. Securities and Exchange Commission (SEC). Because the consolidated
interim financial statements do not include all of the information and
notes
required by US GAAP for a complete set of financial statements, they should
be
read in conjunction with the audited consolidated financial statements
and notes
included in our annual report on Form 10-K for the year ended December
31, 2005.
The results for the nine-month period are not necessarily indicative of
a full
year's results.
The
consolidated financial statements include the accounts of all subsidiaries.
All
intercompany balances and transactions have been eliminated in consolidation.
All dollar amounts in the financial statements and tables in the notes,
except
share and per-share amounts, are stated in millions of U.S. dollars unless
otherwise indicated.
Effective
January 1, 2006, as a result of a study made of the pattern of usage of
our
long-lived depreciable assets, we adopted the straight-line method of
depreciation for all property, plant and equipment. Under the provisions
of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 154, “Accounting
Changes and Error Corrections,”
which
became effective as of January 1, 2006, a change in depreciation method
is
treated on a prospective basis as a change in estimate. Prior period results
have not been restated. The effect of the change in depreciation method
for the
three months and nine months ended September 30, 2006, was to reduce
depreciation expense by about $42 million and about $111 million, and increase
both income from continuing operations and net income by about $25 million
($0.02 per share) and about $50 million ($.03 per share),
respectively.
Changes
in Accounting Standards - Beginning
January 1, 2006, we implemented SFAS No. 151, “Inventory
Costs, an Amendment of ARB No. 43, Chapter 4.”
The
primary impact to our inventory valuation methodology was to change how
the
fixed production overhead costs included in inventory are calculated. The
effect
of this change for the nine months ended September 30, 2006, on inventory
and
net income was not material.
In
June
2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3,
“How
Taxes Collected from Customers and Remitted to Governmental Authorities
Should
Be Presented in the Income Statement (That Is, Gross Versus Net
Presentation).”
This
standard allows companies to present in their statements of income any
taxes
assessed by a governmental authority that are directly imposed on
revenue-producing transactions between a seller and a customer, such as
sales,
use, value-added and some excise taxes, on either a gross (included in
revenue
and costs) or a net (excluded from revenue) basis. This standard will be
effective for us in interim periods and fiscal years beginning after December
15, 2006. We present these transactions on a net basis, and therefore the
adoption of this standard will have no impact on our financial position
and
results of operations.
In
July
2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting
for Uncertainty in Income Taxes—An Interpretation of FASB Statement
No. 109”
(FIN
48). This Interpretation clarifies the accounting for uncertainty in income
taxes recognized in a company’s financial statements. FIN 48 requires companies
to determine whether it is “more likely than not” that a tax position will be
sustained upon examination by the appropriate taxing authorities before
any part
of the benefit can be recorded in the financial statements. It also provides
guidance on the recognition, measurement and classification of income tax
uncertainties, along with any related interest and penalties. FIN 48 will
also
require significant additional disclosures. This Interpretation will be
effective for fiscal years beginning after December 15, 2006. We will
implement this Interpretation in the first quarter of 2007 on a prospective
basis. We are currently evaluating the potential impact this Interpretation
will
have on our financial position and results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements”
(SFAS
157),
which
provides guidance on how to measure assets and liabilities that use fair
value.
SFAS 157 will apply whenever another US GAAP standard requires (or permits)
assets or liabilities to be measured at fair value but does not expand
the use
of fair value to any new circumstances. This standard also will require
additional disclosures in both annual and quarterly reports. SFAS 157 will
be
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and will be adopted by us beginning in the first quarter
of
2008. We are currently evaluating the potential impact this standard may
have on
our financial position and results of operations, but do not believe the
impact
of the adoption will be material.
In
September 2006, the SEC staff issued Staff Accounting Bulletin
(SAB)
No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements
in
Current Year Financial Statements”
(SAB
108). SAB 108 was issued in order to eliminate the diversity of practice
in how
public companies quantify misstatements of financial statements, including
misstatements that were not material to prior years’ financial statements. We
will initially apply the provisions of SAB 108 in connection with the
preparation of our annual financial statements for the year ending December
31,
2006. We have evaluated the potential impact SAB 108 may have on our financial
position and results of operations and do not believe the impact of the
application of this guidance will be material.
In
September 2006, the FASB issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,
an
amendment of FASB Statements No. 87, 88, 106, and 132(R)”
(SFAS
158). Part of this Statement will be effective as of December 31, 2006,
and
requires companies that have defined benefit pension plans and other
postretirement benefit plans to recognize the funded status of those plans
on
the balance sheet on a prospective basis from the effective date. The funded
status of these plans is determined as of the plans’ measurement dates and
represents the difference between the amount of the obligations owed to
participants under
each
plan
(including the effects of future salary increases for defined benefit plans)
and
the fair value of each plan’s assets dedicated to paying those obligations. To
record the funded status of those plans, unrecognized prior service costs
and
net actuarial losses experienced by the plans will be recorded in the Other
Comprehensive Income (OCI) section of shareholders’ equity on the balance sheet.
We are currently evaluating the potential impact this standard may have
on our
financial position and results of operations, but because certain of our
defined
benefit plans and retiree health care plans have an excess of obligations
over
plan assets, we expect this will result in a reduction of OCI in shareholders’
equity.
In
addition, SFAS 158 requires that companies using a measurement date for
their
defined benefit pension plans and other postretirement benefit plans other
than
their fiscal year end, change the measurement date effective for fiscal
years
ending after December 15, 2008. We currently use a September 30 measurement
date
for our non-U.S. defined benefit plans and are evaluating whether to adopt
the
FAS 158 measurement date change earlier than the mandated effective date.
We do
not believe the impact of the application of this part of the standard
will be
material to our financial position and results of operations.
2. |
Discontinued
Operations.
On
January 9, 2006, we announced a definitive agreement to sell substantially
all of the Sensors & Controls segment, excluding the RFID systems
operations, to an affiliate of Bain Capital, LLC, for $3 billion
in cash.
The sale was completed on April 27, 2006. The former Sensors &
Controls business acquired by Bain Capital, LLC was renamed Sensata
Technologies, Inc. (Sensata).
|
The
results of operations of the former Sensors & Controls business are being
presented as discontinued operations. The
following summarizes results from the discontinued operations of the former
Sensors & Controls business for the periods ended September 30, 2006 and
2005, included in the consolidated statements of income:
|
|
For
Three Months Ended Sept. 30,
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
--
|
|
$
|
251
|
|
$
|
375
|
|
$
|
789
|
|
Operating
costs and expenses
|
|
|
12
|
|
|
197
|
|
|
324
|
|
|
607
|
|
Income
(loss)
from discontinued operations before income taxes
|
|
|
(12)
|
|
|
54
|
|
|
51
|
|
|
182
|
|
Provision
(benefit)
for income taxes
|
|
|
(3)
|
|
|
19
|
|
|
21
|
|
|
64
|
|
Income
(loss)
from discontinued operations, net of income taxes
|
|
|
(9)
|
|
|
35
|
|
|
30
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of discontinued operations
|
|
|
5
|
|
|
--
|
|
|
2,554
|
|
|
--
|
|
Provision
(benefit) for income taxes
|
|
|
(20)
|
|
|
--
|
|
|
879
|
|
|
--
|
|
Gain
on sale of discontinued operations, net of income taxes
|
|
|
25
|
|
|
--
|
|
|
1,675
|
|
|
--
|
|
Total
income from discontinued operations
|
|
$
|
16
|
|
$
|
35
|
|
$
|
1,705
|
|
$
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
1.10
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
1.08
|
|
$
|
0.07
|
|
Earnings
per share (EPS) amounts from continuing and discontinued operations may
not add
to net income per share due to rounding.
Loss
from
discontinued operations net of income taxes in the third quarter of 2006
reflects U.S. pension settlement expenses recognized at the time of transfer
of
the pension assets to Sensata. Gain on sale of discontinued operations
net of
income taxes in the third quarter of 2006 includes an income tax benefit
related
to a favorable tax classification of the sale of one non-U.S. subsidiary
and
adjustments based on final determination of transferred working capital
balances.
As
of
September 30, 2006, the remaining assets of the former Sensors & Controls
business, included in assets of discontinued operations, are attributable
to
pension obligations in our Japan subsidiary that are expected to be settled
by
the first quarter of 2007.
Continuing
Involvement
-
Upon
closing of the sales transaction, we entered into a Transition Services
Agreement (TSA) with Sensata to provide various temporary support services
that are reasonably necessary to facilitate the continuation of
the
normal conduct of business of the former Sensors & Controls business such as
finance and accounting, human resources, information technology, warehousing
and
logistics, and records retention and storage. Such services are expected
to be
provided for approximately six to twelve months from the closing date,
although
certain information technology-related services may be provided for up
to two
years. The fees for these services will be generally equivalent to our
cost. In
addition, we entered into certain cross-license agreements to allow each
party
to continue to use the associated technology and intellectual property
in the
conduct of their respective business. However, these cross-license agreements
generally do not involve the receipt or payment of any royalties and therefore
are not considered to be a component of continuing involvement.
Although
the services provided under the TSA generate continuing cash flows between
us
and Sensata, the amounts are not considered to be significant to the ongoing
operations of either entity. In addition, we have no contractual ability
through
the TSA or any other agreement to significantly influence the operating
or
financial policies of Sensata. Under the provisions of EITF Issue No. 03-13,
“Applying
the Conditions of Paragraph 42 of FASB Statement No. 144 in Determining
Whether
to Report Discontinued Operations,”
we
therefore have no significant continuing involvement in the operations
of the
former Sensors & Controls business and have classified the historical
results of that business as discontinued operations.
3. |
Earnings
per Share. Computation of earnings per common share for income from
continuing operations, and a reconciliation between the basic
and diluted
basis, for the periods ending September 30, are as follows (in
millions,
except per-share amounts):
|
|
|
|
For
Three Months Ended Sept. 30, 2006
|
|
For
Three Months Ended Sept. 30, 2005
|
|
|
|
|
Income
|
|
Shares
|
|
EPS
|
|
Income
|
|
Shares
|
|
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
686
|
|
|
1,506
|
|
$
|
.46
|
|
$
|
596
|
|
|
1,624
|
|
$
|
.37
|
|
|
Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
|
-- |
|
|
31 |
|
|
|
|
|
-- |
|
|
39 |
|
|
|
|
|
Diluted
EPS
|
|
$
|
686
|
|
|
1,537
|
|
$
|
.45
|
|
$
|
596
|
|
|
1,663
|
|
$
|
.36
|
|
|
|
|
For
Nine Months Ended Sept. 30, 2006
|
|
For
Nine Months Ended Sept. 30, 2005
|
|
|
|
|
Income
|
|
Shares
|
|
EPS
|
|
Income
|
|
Shares
|
|
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
1,968
|
|
|
1,548
|
|
$
|
1.27
|
|
$
|
1,551
|
|
|
1,652
|
|
$
|
.94
|
|
|
Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
|
-- |
|
|
32 |
|
|
|
|
|
-- |
|
|
30 |
|
|
|
|
|
Diluted
EPS
|
|
$
|
1,968
|
|
|
1,580
|
|
$
|
1.24
|
|
$
|
1,551
|
|
|
1,682
|
|
$
|
.92
|
|
4. |
Stock-based
Compensation. We have several stock-based employee compensation
plans,
which are more fully described in Note 13 in our 2005 annual
report on
Form 10-K. Prior to July 1, 2005, we accounted for awards
granted under
those plans following the recognition and measurement principles
of
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock
Issued to Employees,” and related interpretations. No compensation cost
was reflected in net income for stock options, as all options
granted
under the plans have an exercise price equal to the market
value of the
underlying common stock on the date of the grant (except
options granted
under employee stock purchase plans and acquisition-related
stock option
awards). Compensation cost has previously been recognized
for restricted
stock units (RSUs).
|
Effective
July 1, 2005, we adopted the fair value recognition provisions of SFAS No.
123(R), “Share-Based Payments,” (SFAS 123(R)) using the modified
prospective application method. Under this transition method, compensation
cost
recognized for the periods ended September 30, 2006, includes the applicable
amounts of: (a) compensation cost of all stock-based payments granted prior
to,
but not yet vested as of July 1, 2005 (based on the grant-date fair value
estimated in accordance with the original provisions of SFAS 123 and previously
presented in pro forma footnote disclosures), and (b) compensation cost for
all
stock-based payments granted subsequent to July 1, 2005 (based on the grant-date
fair value estimated in accordance with the new provisions of SFAS 123(R)).
Results for periods prior to July 1, 2005, have not been restated.
The
amounts of stock-based compensation expense recognized in the periods presented
are as follows:
|
|
|
For
Three Months Ended Sept. 30,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense recognized:
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$
|
15
|
|
$
|
15
|
|
|
R&D
|
|
|
24
|
|
|
26
|
|
|
SG&A
|
|
|
40
|
|
|
39
|
|
|
Total
|
|
$
|
79
|
|
$
|
80
|
|
|
|
|
For
Nine Months Ended Sept. 30,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense recognized:
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$
|
49
|
|
$
|
15
|
|
|
R&D
|
|
|
77
|
|
|
26
|
|
|
SG&A
|
|
|
128
|
|
|
49
|
|
|
Total
|
|
$
|
254
|
|
$
|
90
|
|
The
amounts above include the impact of recognizing compensation expense related
to
RSUs, nonqualified stock options and stock options offered under the employee
stock purchase plan. For the periods before implementation of SFAS 123(R)
on July 1, 2005, only compensation expense related to RSUs was recognized and
included in SG&A. Stock-based compensation expense has not been allocated to
the various segments, but is reflected in Corporate.
Under
the
modified prospective application method, results for periods prior to July
1,
2005, have not been restated to reflect the effects of implementing
SFAS 123(R). The following pro forma information, as required by SFAS No.
148, “Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123,”
is
presented for comparative purposes and illustrates the pro forma effect on
income from continuing operations and related per-share amounts for the
nine-month period ended September 30, 2005, as if we had applied the fair value
recognition provisions of SFAS 123 to stock-based compensation for that
period:
|
|
For Nine
Months Ended
Sept.
30, 2005
|
|
|
|
|
|
|
Income
from continuing operations, as reported
|
|
$
|
1,551
|
|
Add:
Stock-based compensation expense included in reported income, net
of ($29)
tax
|
|
|
61
|
|
Deduct:
Total stock-based compensation expense determined under fair value-based
method for all awards, net of $93 tax
|
|
|
(195
|
)
|
Deduct:
Adjustment for retirement-eligible employees, net of $49
tax
|
|
|
(93
|
)
|
Adjusted
income from continuing operations
|
|
$
|
$
1,324
|
|
|
|
|
|
|
Earnings per
common share:
|
|
|
|
|
Basic
- as reported
|
|
$
|
.94
|
|
Basic
- as adjusted for stock-based compensation expense
|
|
$
|
.80
|
|
Diluted
- as reported
|
|
$
|
.92
|
|
Diluted
- as adjusted for stock-based compensation expense
|
|
$
|
.79
|
|
In
the
first quarter of 2005, we reduced the attribution period used for certain grants
of nonqualified stock options to recognize fair value-based compensation expense
for pro forma disclosure purposes for those stock option recipients who are
retirement eligible or become retirement eligible following the grant of the
awards. Our nonqualified stock options have 10-year terms and generally vest
over a four-year service period from the date of grant. Effective
January
1,
2005,
stock-based compensation expense for retirement-eligible employees is now
recognized over a six-month period, and for non-retirement-eligible employees,
over the shorter of the period from grant date to the date they become
retirement eligible (but not less than the six-month required service period)
or
the normal four-year vesting period. As a result, we included in our first
quarter 2005 pro forma footnote disclosures a $93 million ($0.05 per share)
inception-to-date adjustment of fair value-based compensation expense for both
retirement-eligible employees and employees who became retirement eligible
since
the date of grants, to reflect the reduced attribution period.
5. Post-employment
Benefit Plans.
Components of net periodic employee benefit cost (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Defined
Benefit
|
|
U.S.
Retiree
Health Care
|
|
Non-U.S. Defined
Benefit
|
|
For
Three Months Ended Sept. 30,
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Service
cost
|
|
$
|
6
|
|
$
|
7
|
|
$
|
1
|
|
$
|
1
|
|
$
|
11
|
|
$
|
11
|
|
Interest
cost
|
|
|
12
|
|
|
10
|
|
|
6
|
|
|
5
|
|
|
11
|
|
|
12
|
|
Expected
return on assets
|
|
|
(12
|
)
|
|
(11
|
)
|
|
(5
|
)
|
|
(5
|
)
|
|
(17
|
)
|
|
(13
|
)
|
Amortization
of prior service cost
|
|
|
--
|
|
|
--
|
|
|
1
|
|
|
1
|
|
|
(1
|
)
|
|
(2
|
)
|
Recognized
net actuarial loss
|
|
|
5
|
|
|
6
|
|
|
1
|
|
|
2
|
|
|
3
|
|
|
6
|
|
Net
periodic benefit cost
|
|
$
|
11
|
|
$
|
12
|
|
$
|
4
|
|
$
|
4
|
|
$
|
8
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Defined
Benefit
|
|
U.S.
Retiree
Health Care
|
|
Non-U.S.
Defined
Benefit
|
|
For
Nine Months Ended Sept. 30,
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Service
cost
|
|
$
|
20
|
|
$
|
20
|
|
$
|
3
|
|
$
|
3
|
|
$
|
32
|
|
$
|
36
|
|
Interest
cost
|
|
|
34
|
|
|
30
|
|
|
18
|
|
|
17
|
|
|
34
|
|
|
39
|
|
Expected
return on assets
|
|
|
(35
|
)
|
|
(33
|
)
|
|
(16
|
)
|
|
(15
|
)
|
|
(49
|
)
|
|
(42
|
)
|
Amortization
of prior service cost
|
|
|
--
|
|
|
--
|
|
|
2
|
|
|
2
|
|
|
(2
|
)
|
|
(6
|
)
|
Recognized
net actuarial loss
|
|
|
15
|
|
|
16
|
|
|
5
|
|
|
5
|
|
|
11
|
|
|
22
|
|
Net
periodic benefit cost
|
|
$
|
34
|
|
$
|
33
|
|
$
|
12
|
|
$
|
12
|
|
$
|
26
|
|
$
|
49
|
|
In
addition, settlement charges of $14 million relating to our U.S. qualified
pension plan were recorded in the third quarter of 2006.
Discretionary
contributions of $96 million were made to our U.S. and Japan post-employment
benefit plans during the third quarter of 2006. For the nine months ended
September 30, 2006, $193 million has been contributed to these plans. It is
expected that additional contributions of about $100 million will be made in
the
fourth quarter of 2006.
6. |
Business
Segment Data. As a result of the agreement to sell the former Sensors
& Controls business, excluding the RFID operations, we now have
two
reportable operating business segments: Semiconductor and Educational
& Productivity Solutions (E&PS). The former Sensors & Controls
business has been reflected as discontinued operations (see Notes
1 and
2). Segment results for prior periods presented have been restated
to
reflect the addition of the RFID operations retained within the
Semiconductor business
segment.
|
Business
segment information for continuing operations follows:
|
|
For
Three Months Ended Sept. 30,
|
|
For
Nine Months Ended Sept. 30,
|
|
Business
Segment Net Revenues
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Semiconductor
|
|
$
|
3,579
|
|
$
|
3,162
|
|
$
|
10,345
|
|
$
|
8,571
|
|
Educational
& Productivity Solutions
|
|
|
182
|
|
|
177
|
|
|
447
|
|
|
440
|
|
Total
net revenues
|
|
$
|
3,761
|
|
$
|
3,339
|
|
$
|
10,792
|
|
$
|
9,011
|
|
|
|
For
Three Months Ended Sept. 30,
|
|
For
Nine Months Ended Sept. 30,
|
|
Business
Segment Profit (Loss)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Semiconductor*
|
|
$
|
1,008
|
|
$
|
837
|
|
$
|
2,923
|
|
$
|
1,896
|
|
Educational
& Productivity Solutions
|
|
|
83
|
|
|
79
|
|
|
181
|
|
|
178
|
|
Corporate
**
|
|
|
(161
|
)
|
|
(155
|
)
|
|
(503
|
)
|
|
(275
|
)
|
Profit
from operations
|
|
$
|
930
|
|
$
|
761
|
|
$
|
2,601
|
|
$
|
1,799
|
|
*
Year-to-date 2006 Semiconductor profit from operations includes a benefit of
$60
million from a royalty settlement in the second quarter of 2006 (see Note 8)
and
a benefit of $57 million from a $77 million net sales tax refund that was due
to
the settlement of an audit of Texas sales taxes paid on various purchases over
a
nine-year period. The $57 million effect on profit from operations is reflected
as $31 million in cost of revenue, $21 million in R&D and $5 million in
SG&A. The remaining $20 million of the net sales tax refund is reflected in
Other income (expense) net.
**
Corporate profit from operations includes stock-based compensation expense
of
$79 million, $80 million, $254 million and $90 million respectively. Also
included in year-to-date 2005 results is a gain of $23 million in the first
quarter on sales of assets related primarily to the disposition of a sales
facility and the sale of our commodity liquid crystal driver product
line.
7. |
Income
Taxes. Federal income taxes for continuing operations for the interim
periods presented have been included in the accompanying financial
statements on the basis of an estimated annual rate. As of September
30,
2006, the estimated annual effective tax rate for 2006, which by
definition does not include discrete tax items, is about 29 percent.
The
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.
The primary
reasons the effective annual tax rate for continuing operations
for 2006
differs from the 35 percent statutory corporate tax rate are the
effects
of non-U.S. tax rates and the expected utilization of various tax
benefits
such as the deduction for export sales, the exclusion of tax-exempt
interest income and the deduction for U.S.
manufacturing.
|
8. |
Contingencies.
Italian government auditors have substantially completed a review,
conducted in the ordinary course, of approximately $250 million of
grants
from the Italian government to TI’s former memory operations in Italy for
13 separate projects. The auditors have raised a number of issues
relating
to compliance with grant requirements and the eligibility of specific
expenses for the grants. As of September 30, 2006, the auditors have
issued audit reports on all of the projects. The Ministry of Industry
is
responsible for reviewing the auditors’ findings. Depending on the
Ministry’s decision, the review may result in a demand from the Italian
government that we repay a portion of the grants. We believe that
the
grants were obtained and used in compliance with applicable law and
contractual obligations. As of September 30, 2006, the Ministry has
published final decrees on 12 of the projects representing approximately
$175 million of grants. We do not expect the outcome to have a material
adverse impact on our financial condition, results of operations
or
liquidity.
|
We
routinely sell products with a limited intellectual property indemnification
included in the terms of sale. Historically, we have had only minimal and
infrequent losses associated with these indemnities. Consequently, any future
liabilities brought about by the intellectual property indemnities cannot
reasonably be estimated or accrued.
We
accrue
for known product-related claims if a loss is probable and can be reasonably
estimated. During the periods presented, there have been no material accruals
or
payments regarding product warranty or product liability, and historically
we
have experienced a low rate of payments on product claims. Consistent with
general industry practice, we enter into formal contracts with certain customers
in which the parties define warranty remedies. Typically, our warranty for
semiconductor products covers three years, an obligation to repair, replace
or
refund, and a maximum payment obligation tied to the price paid for our
products. In some cases, product claims may be disproportionate to the price
of
our products.
On
February 6, 2006, a jury in the U.S. District Court for the District of New
Jersey determined that GlobespanVirata (Globespan), a subsidiary of Conexant
Systems, Inc. (Conexant), had infringed two TI patents and one Stanford
University (Stanford) patent relating to digital subscriber line (DSL)
technology. The jury awarded $112 million in damages to TI. In June 2003, before
Globespan's merger with Conexant, Globespan had sued TI and Stanford claiming
that the TI and Stanford patents were invalid and not being infringed by
Globespan, and alleging violations of the antitrust law. In response, TI and
Stanford brought counterclaims of patent infringement against Globespan. On
May
5, 2006, the companies reached a settlement resolving this litigation. Under
the
settlement, Conexant paid TI $70 million and TI granted Conexant a license
to
essential patents relating to DSL technology.
Indemnification
- In
connection with the sale of the former Sensors & Controls business, we have
agreed to indemnify Sensata for certain specified litigation matters, as well
as
other liabilities, including environmental liabilities. Our indemnification
obligations with respect to breaches of representations and warranties and
the
specified litigation matters are, generally, subject to a total deductible
of
$30 million and our maximum potential exposure is limited to $300
million.
As of
September 30, 2006, there were no significant liabilities recorded under these
indemnification obligations.
We
are
subject to various other legal and administrative proceedings. Although it
is
not possible to predict the outcome of these matters, we believe that the
results of these proceedings will not have a material adverse effect upon our
financial condition, results of operations or liquidity.
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The
following should be read in conjunction with the condensed consolidated
financial statements and the related notes that appear elsewhere in this
document. Except as noted, financial results are for continuing operations.
Our
former Sensors & Controls business is reported as discontinued operations.
The divestiture of this business closed on April 27, 2006.
Overview
Texas
Instruments makes, markets and sells high-technology components; more than
50,000 customers all over the world buy our products. We have two separate
business segments: Semiconductor and Educational & Productivity Solutions
(E&PS). Semiconductor is by far the largest of these business segments. It
accounted for 96 percent of our revenue from continuing operations in 2005,
and
historically it averages a higher growth rate than E&PS, although the
semiconductor market is characterized by wide swings in growth rates from year
to year. We were the world’s third-largest semiconductor company in 2005 as
measured by revenue, according to iSuppli Corporation, an industry
analyst.
In
our
Semiconductor segment, we focus primarily on technologies that make it possible
for a variety of consumer and industrial electronic equipment to process both
analog and digital signals in real time. These technologies are known as analog
semiconductors and digital signal processors, or DSPs, and together they account
for about three-fourths of our Semiconductor revenue. Almost all of today’s
digital electronic equipment requires some form of analog or digital signal
processing.
Analog
semiconductors process “real world” inputs, such as sound, temperature, pressure
and visual images, conditioning them, amplifying them and converting them into
digital signals. They also assist in the management of power distribution and
consumption, aspects critical to today’s portable electronic devices. Generally,
analog products require less capital-intensive factories to manufacture than
digital products.
Our
analog semiconductors consist of custom products and standard products. Custom
products are designed for specific applications for specific customers. Standard
products include application-specific standard products (designed for a specific
application and usable by multiple customers) and high-performance standard
catalog products (usable in multiple applications by multiple customers). These
standard products are characterized by differentiated features and
specifications, as well as relatively high margins. Standard analog products
tend to have long life spans. Many custom and standard products are proprietary
and difficult for competitors to imitate. Analog products also include commodity
products, which are sold in high volume and into a broad range of applications,
and generally are differentiated by price and availability. We are the world’s
largest supplier of analog semiconductors.
DSPs
use
complex algorithms and compression techniques to alter and improve a data
stream. These products are ideal for applications that require precise,
real-time processing of real-world signals that have been converted into digital
form. Their power efficiency is important for battery-powered
devices.
Our
DSP
portfolio includes custom, application-specific and standard products. Custom
products are designed for specific customers with very high volumes in
established markets. Application-specific products are implementations crafted
for specific applications like wireless infrastructure, VoIP (Voice over
Internet Protocol) gateways, digital still cameras and residential gateways,
to
name a few. Our standard DSP products are sold into a broad range of
applications and seed the next generation of signal-processing innovation.
We
are the world’s largest supplier of DSPs.
We
own
and operate semiconductor manufacturing sites in the Americas, Japan, Europe
and
Asia. Our facilities require substantial investment to construct and are largely
fixed-cost assets once in operation. Because we own most of our manufacturing
capacity, a significant portion of our operating costs is fixed. In general,
these costs do not decline with reductions in customer demand or our utilization
of our manufacturing capacity, and can adversely affect profit margins as a
result. Conversely, as product demand rises and factory utilization increases,
the fixed costs are spread over increased output, which should improve profit
margins.
As
part
of our manufacturing strategy, we outsource a portion of our product
manufacturing to outside suppliers (foundries and assembly/test subcontractors),
which reduces both the amount of capital expenditures and subsequent
depreciation required to meet customer demands, and fluctuations in profit
margins. Outside foundries provided about 20 percent of our total wafers
produced in 2005. (A wafer is a thin slice of silicon on which an array of
semiconductor devices has been fabricated.)
The
semiconductor market is characterized by constant and typically incremental
innovation in product design and manufacturing technologies. We make significant
investments in research and development (R&D). Typically, products resulting
from our R&D investments in the current period do not contribute materially
to revenue in that period, but should benefit us in future years. In general,
new semiconductor products are shipped in limited quantities initially and
will
then ramp into high volumes over time. Prices and manufacturing costs tend
to
decline over time.
Our
E&PS segment is a leading supplier of graphing handheld calculators. It also
provides our customers with business and scientific calculators and a wide
range
of advanced classroom tools and professional development that enables students
and teachers to interactively explore math and science. Our products are
marketed primarily through retailers and to schools through instructional
dealers. This business segment represented 4 percent of our revenue from
continuing operations in 2005. Prices of E&PS products tend to be
stable.
In
the
third quarter of 2005, we implemented the Financial Accounting Standards Board’s
Statement of Financial Accounting Standard (SFAS) No. 123(R), “Share-Based
Payments.”
The
financial results of 2005 include the effects of adopting this new accounting
rule for stock options effective from July 1, 2005. Before July 1, 2005,
our financial results include the expense of restricted stock units, but not
other stock-based compensation. Consequently, our financial results for the
year-to-date periods after July 1, 2005, are not fully comparable to our prior
year-to-date financial results. Third-quarter results are presented on a
comparable basis. For the first nine months of 2006, the total stock-based
compensation expense was $254 million, or 2.4 percent of revenue. The
distribution of this expense was $128 million to selling, general and
administrative (SG&A) expense, $77 million to R&D expense and $49
million to cost of revenue. This compares with a total stock-based compensation
expense of $90 million for the first nine months of 2005. See Note 4 to the
Financial Statements for additional information.
As
a
result of a study of the pattern of usage of long-lived depreciable assets,
we
adopted the straight-line method of depreciation for all property, plant and
equipment on a prospective basis effective January 1, 2006, as allowed for
under SFAS No. 154, “Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3.”
See
Financial
Condition
below
and Note 1 to the Financial Statements for additional information.
We
operate in a number of tax jurisdictions and are subject to several types of
taxes including taxes based on income, capital, property and payroll, and sales
and other transactional taxes. The timing of the final determination of our
tax
liabilities varies among these jurisdictions and their taxing authorities.
As a
result, during any particular reporting period, we might reflect (in either
income before income taxes, the provision for income taxes or both) one or
more
tax refunds or assessments, or changes to tax liabilities, involving one or
more
taxing authorities.
Discontinued
Operations
On
January 9, 2006, we announced a definitive agreement to sell substantially
all
of the Sensors & Controls segment, excluding the RFID systems operations, to
an affiliate of Bain Capital, LLC, for $3 billion in cash. The sale was
completed on April 27, 2006. The former Sensors & Controls business acquired
by Bain Capital, LLC was renamed Sensata Technologies (Sensata). The RFID
operations retained are now included in the Semiconductor business
segment.
Third
Quarter 2006 Results
Our
third-quarter 2006 revenue was $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 higher shipments resulting from continued strong demand for
our
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 our history. 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, Semiconductor orders declined from $3.75 billion in the second
quarter of 2006 to $3.31 billion in the third quarter, 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 an 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.
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.
TEXAS
INSTRUMENTS INCORPORATED AND SUBSIDIARIES
Consolidated
Statements of Income—Selected Items
(Millions
of dollars, except per-share amounts)
|
|
For
Three Months Ended
|
|
|
|
Sept.
30,
2006
|
|
June
30,
2006
|
|
Sept.
30,
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
|
%
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.45
|
|
$
|
.47
|
|
$
|
.36
|
|
Net
income
|
|
$
|
.46
|
|
$
|
1.50
|
|
$
|
.38
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
Details
of Financial Results
(Please
note that the following discussion reflects receipt in the second quarter of
2006 of a royalty settlement of $70 million and a $77 million net sales tax
refund. Similar to other royalties, the royalty settlement was included in
Semiconductor revenue. See Note 8 to the Financial Statements for
additional information. The net sales tax refund was due to the settlement
of an
audit of Texas sales taxes paid on various purchases over a nine-year period
and
was reflected as a reduction to operating costs and expenses and a benefit
in
Other income (expense) net (OI&E). See Note 6 to the Financial
Statements for additional information.)
Our
gross
profit for the third quarter of 2006 was $1.93 billion, or 51.4 percent of
revenue. This was an increase of $25 million from the second quarter of 2006
and
an increase of $242 million from the year-ago quarter due to higher revenue
in
our Semiconductor segment.
R&D
expense for the third quarter was $570 million, or 15.2 percent of revenue.
R&D expense was $34 million higher than the second quarter of 2006 primarily
because the earlier quarter included the effect of the sales tax refund.
R&D
expense increased $49 million from the year-ago quarter primarily due to
higher
investment in new semiconductor technology, particularly for wireless
applications.
SG&A
expense was $432 million, or 11.5 percent of revenue. SG&A expense increased
$14 million from the second quarter of 2006. This expense was $24 million
higher
than the year-ago quarter, primarily because of increased consumer advertising
of DLP®
technology for high-definition televisions (HDTVs).
Operating
profit was $930 million, or 24.7 percent of revenue. This was a decrease
of $23
million from the second quarter of 2006, which included a $117 million operating
profit benefit associated with the royalty settlement and the 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.
OI&E
for the third quarter of 2006 of $55 million decreased $33 million from the
second quarter of 2006, which included a $20 million benefit from the sales
tax
refund. OI&E increased $6 million from the year-ago quarter due to higher
interest income.
As
of
September 30, 2006, the effective annual tax rate for continuing operations
in
2006 is expected to be about 29 percent. This rate is lower than the prior
estimate of about 30 percent primarily due to an expected higher tax deduction
for export sales. 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. See Note 7 to the Financial Statements for additional
information.
Quarterly
income taxes are calculated using an estimate of the effective tax rate for
the
full year. The calculation of the effective tax rate, by definition, does
not
include discrete tax items. The tax provision for the quarter reflects the
estimated annual effective tax rate and includes, when applicable, the impact
of
changes from the prior estimated rate and discrete tax items.
The
tax
provision for continuing operations for the quarter was $298 million, about
even
with the second quarter. The impact of the decrease in the estimated annual
effective tax rate and lower income before income taxes was offset by an
increase in discrete tax items in the third quarter, primarily related
to a
transaction between two non-U.S. subsidiaries.
Compared
with the year-ago quarter, the tax provision increased by $86 million. This
increase is primarily due to higher income before income taxes and, to a
lesser
extent, the expiration of the federal research tax credit.
Income
from continuing operations was $686 million, or $0.45 per share, compared
with
$739 million or $0.47 per share in the second quarter, and $596 million or
$0.36
per share for the year-ago quarter.
Discontinued
operations in the third quarter of 2006 includes adjustments of $25 million
to
the gain recognized on the sale of the former Sensors & Controls business
and also includes U.S. pension settlement expenses. See Note 2 to the Financial
Statements for additional information.
Net
income of $702 million for the third quarter includes income from continuing
and
discontinued operations. In the second quarter of 2006, net income of $2.39
billion included $1.65 billion from discontinued operations, almost all of
which
was a gain on the sale of the former Sensors & Controls business.
Orders
were $3.43 billion. This was a decrease of $478 million from the second quarter
of 2006 and a decrease of $41 million from the year-ago quarter. The decreases
were due to lower orders in our Semiconductor segment.
Semiconductor
Semiconductor
revenue in the third quarter of 2006 was $3.58 billion. This was an increase
of
2 percent from the second quarter of 2006, which included the $70 million
royalty settlement. Compared with the year-ago quarter, revenue
increased
13
percent primarily due to increased shipments resulting from higher demand
for
our high-performance analog and for DSP products.
Analog
revenue was up 5 percent from the second quarter of 2006 and increased 15
percent from the year-ago quarter primarily due to increased shipments resulting
from demand for our high-performance analog products. Revenue from
high-performance analog products grew 14 percent from the second quarter
of 2006
and 37 percent from the year-ago quarter due to broad-based demand.
DSP
revenue was up 5 percent from the second quarter of 2006 and increased 12
percent from the year-ago quarter primarily due to increased shipments resulting
from higher demand from the wireless market.
Our
remaining Semiconductor revenue was 6 percent lower than the second quarter
of
2006 due to the royalty settlement that was included in the second quarter.
Additionally, shipments were reduced as demand was lower for reduced instruction
set computing (RISC) microprocessors in the third quarter. Our remaining
Semiconductor revenue increased 12 percent from the year-ago quarter due
to
increased shipments resulting from stronger demand for, in decreasing order,
standard logic products, microcontrollers, DLP products and RISC microprocessors
that more than offset lower royalties.
Royalty
revenue unrelated to the second-quarter 2006 settlement was about even from
the
second to third quarters of 2006, but was lower than the year-ago quarter
reflecting the expiration of several licenses. We have signed new licenses
with some of the licensees whose agreements had expired and we are currently
in
active negotiations with others. We are unable to predict the results of
these
negotiations. As licenses are executed, we have often received catch-up payments
to cover some or all of the license period prior to execution.
On
an
end-equipment basis, revenue from wireless products in the third quarter
was up
4 percent sequentially and up 14 percent from the year-ago quarter. As we
had
expected, growth was negatively affected by a decline in OMAP™ application
processor revenue due to an inventory correction of 3G handsets in Japan.
As we
explained last quarter, this was associated with an operator that had
proactively built inventory in the first half of the year as part of their
strategy for the transition to number portability that began in that market
in
October. Despite this inventory correction, 3G revenue grew almost 50 percent
from the year-ago quarter and was up slightly on a sequential
basis.
Finally,
in DLP products, revenue increased 11 percent sequentially and grew 6 percent
from the year-ago quarter. Shipments of products for HDTVs were the biggest
factor in the sequential growth on a percentage basis, although shipments
of
products for front projectors contributed almost as much dollar
growth.
Semiconductor
gross profit for the third quarter was $1.84 billion, or 51.5 percent of
revenue. This was an increase of $29 million from the second quarter of 2006
and
$240 million from the year-ago quarter. The increases over both periods were
due
to higher revenue. In addition, gross profit in the second quarter included
$91
million of benefit associated with the royalty settlement and sales tax
refund.
Semiconductor
operating profit for the third quarter was $1.01 billion, or 28.2 percent
of
revenue. This was a decline of $24 million from the second quarter of 2006,
which included a $117 million operating profit benefit associated with the
royalty settlement and the sales tax refund. Operating profit increased $171
million from the year-ago quarter due to higher gross profit.
Semiconductor
orders for the third quarter were $3.31 billion. This was a decrease of 12
percent from the second quarter of 2006 due to lower demand across a broad
range
of products, and was about even with the year-ago quarter.
Educational
& Productivity Solutions
E&PS
revenue in the third quarter was $182 million. This was a decrease of $10
million from the second quarter of 2006 reflecting the end of the back-to-school
season. It was an increase of $5 million from the year-ago quarter due to
higher
shipments resulting from stronger demand for graphing calculators.
E&PS
gross profit was $116 million, or a record 63.8 percent of revenue. Gross
profit
decreased $3 million from the second quarter of 2006, and increased $6 million
from the year-ago quarter primarily due to lower manufacturing costs and,
to a
lesser extent, higher revenue.
Operating
profit for the third quarter was $83 million, or a record 45.9 percent of
revenue. This was about even with the second quarter of 2006 and an increase
of
$4 million from the year-ago quarter.
First
Nine Months of 2006 Results
For
the
first nine months of 2006, we report the following:
Revenue
of $10.79 billion increased $1.78 billion or 20 percent from the year-ago
period
primarily due to increased shipments resulting from higher demand for our
DSP
products and, to a lesser extent, our analog products.
Gross
profit for the first nine months of 2006 was $5.51 billion compared with
$4.36
billion in the year-ago period. The increase in gross profit was due to higher
revenue in the Semiconductor segment. Gross profit margin was 51.1 percent
of
revenue compared with 48.4 percent in the year-ago period.
Stock-based
compensation expense for the first nine months of 2006 was $254 million compared
with $90 million for the same period a year ago. We began to recognize
compensation expense for all stock-based compensation as of July 1, 2005.
We had
previously recognized compensation expense just on restricted stock units.
R&D
expense for the first nine months of $1.64 billion increased $146 million
or 10
percent from the year-ago period, primarily due to increased product development
costs, principally for wireless and, to a lesser extent, stock-based
compensation expense. R&D expense as a percent of revenue was 15.2 percent
compared with 16.6 percent in the year-ago period.
SG&A
expense for the first nine months of $1.27 billion increased $204 million,
or 19
percent, from the year-ago period primarily due to the combination of increased
marketing expenses, especially for consumer advertising for DLP products,
and
higher stock-based compensation expense. SG&A expense as a percent of
revenue was 11.8 percent, unchanged from the year-ago period.
Operating
profit for the first nine months of $2.60 billion, or 24.1 percent of revenue,
increased $802 million or 45 percent from the year-ago period due to higher
gross profit.
OI&E
for the first nine months was $194 million, an increase of $41 million from
the
year-ago period, primarily due to higher interest income.
The
effective tax rate for continuing operations for the first nine months of
2006,
which by definition does not include the effect of discrete tax items, is
about
29 percent. This compares with 25 percent for the first nine months of 2005.
The
increase in the effective tax rate from the year-ago period is due to, in
decreasing order, higher income before income taxes, the expiration of the
federal research tax credit and the effect of non-U.S. tax rates.
The
provision for income taxes for the first nine months of 2006 contained
net
discrete tax charge items of $11 million. The provision
for
income taxes for the first nine months of 2005 contained net discrete tax
benefit items of $83 million, primarily an adjustment to tax reserves associated
with favorable developments on certain outstanding income tax matters,
partially
offset by an accrual for taxes on dividends from earnings that were repatriated
from our non-U.S. subsidiaries under the American Jobs Creation Act of
2004.
Income
from continuing operations for the first nine months was $1.97 billion compared
with $1.55 billion for 2005. Earnings per share from continuing operations
were
$1.24 per share compared with $0.92 per share in the year-ago period.
Income
from discontinued operations for the first nine months of 2006, which includes
the $1.67 billion gain from the sale of the former Sensors & Controls
business, was $1.71 billion.
Net
income was $3.67 billion, an increase of $2.00 billion from the year-ago
period.
Orders
of
$10.94 billion were up 17 percent from the year-ago period, reflecting strong
demand for Semiconductor products.
Semiconductor
Semiconductor
revenue in the first nine months of 2006 was $10.35 billion compared with
$8.57
billion for the year-ago period, primarily due to increased shipments resulting
from the combination of higher demand for our DSP products and, to a lesser
extent, our analog products.
Gross
profit for the first nine months was $5.32 billion, or 51.4 percent of revenue,
compared with $4.13 billion, or 48.1 percent of revenue, in the year-ago
period.
The increase in gross profit was due to higher revenue.
Semiconductor
operating profit for the first nine months was $2.92 billion, or 28.3 percent
of
revenue, up from $1.90 billion, or 22.1 percent of revenue, in the year-ago
period due to higher gross profit.
Educational
& Productivity Solutions
E&PS
revenue for the first nine months of 2006 was $447 million, compared with
$440
million for the year-ago period.
Gross
profit for the first nine months was $276 million, or 61.7 percent of revenue,
up from $265 million, or 60.3 percent of revenue, in the year-ago period
primarily due to manufacturing cost reductions.
Operating
profit for the first nine months was $181 million, or 40.5 percent of revenue,
an increase of two percent from the year-ago period, as higher gross profit
was
partially offset by higher operating expenses.
Discontinued
Operations
Revenue
from the former Sensors & Controls business was $375 million in 2006
compared with $789 million in the first nine months of 2005. Results for
the
first nine months of 2006 cover the period up to the date of the sale of
that
business (April 27, 2006). Income from discontinued operations, net of tax,
was
$1.71 billion for the first nine months of 2006 compared with $118 million
in
the year-ago period. The gain from the sale of this business was $1.67 billion,
net of tax. See Note 2 to the Financial Statements for additional
information.
Financial
Condition
At
the
end of the third quarter, total cash (cash and cash equivalents plus short-term
investments) was $4.18 billion, down $1.15 billion from the end of 2005.
Capital
expenditures for the first nine months of 2006 were $1.06 billion, an increase
of $104 million from the year-ago period. Our capital expenditures in 2006
were
primarily for equipment used in the assembly and test of semiconductors
and,
to a
lesser extent, advanced 65- and 45-nanometer wafer fabrication
equipment.
Depreciation
for the first nine months of 2006 was $803 million, a decrease of $207 million
from the year-ago period. Our
change from an accelerated to a straight-line method of depreciation beginning
in the first quarter of 2006 lowered year-to-date depreciation by about $111
million. See Note 1 to the Financial Statements for a discussion of the effect
of adopting the change in depreciation method.
Accounts
receivable at the end of the third quarter were $2.09 billion. This was an
increase of $441 million from year-end 2005, primarily due to a combination
of
higher revenue and, to a lesser extent, higher Semiconductor shipments in
the
last month of the quarter versus the last month of 2005. Days sales outstanding
were 50 at the end of the third quarter compared with 45 at year-end
2005.
Inventory
of $1.49 billion at the end of the third quarter was above desired levels.
Inventory increased $156 million from the second quarter of 2006 as we built
inventory to support expected product shipments, especially for cell phones.
To
a lesser degree, we also began to rebuild needed work-in-process inventory
for
catalog product lines such as high-performance analog. Compared with year-end
2005, inventory increased $306 million. Days of inventory at the end of the
third quarter were 73 compared with 67 at the end of the second quarter of
2006
and 64 at the end of 2005.
Liquidity
and Capital Resources
Cash
flow
from continuing operations for the first nine months of 2006 was $1.61 billion
compared with $2.73 billion for the year-ago period. Higher levels of cash
flows
provided by income from continuing operations for the first nine months of
2006
compared with the same period of 2005 were more than offset by increased
working
capital requirements, particularly for income taxes related to the sale of
the
former Sensors & Controls business and inventory.
Net
cash
provided by investing activities was $3.06 billion for the first nine months
of
2006 compared with net cash used in investing activities of $504 million
for the
same period a year ago. We received cash proceeds from the sale of the former
Sensors & Controls business of $2.99 billion in 2006, which together with
the cash flows received from sales and maturities of cash investments, net
of
purchases, were partially offset by higher capital expenditures and payment
for acquisitions. For the first nine months of 2005, sales and maturities
of
cash investments, net of purchases were more than offset by capital
expenditures.
For
the
first nine months of 2006, net cash used in financing activities was $4.45
billion compared with $3.04 billion in the year-ago period as we continued
our
common stock repurchases and retired debt. We used $4.17 billion of cash
to
repurchase 135 million shares of common stock in the first nine months of
2006
compared with $3.28 billion used to repurchase 125 million shares of common
stock in the year-ago period. The $141 million in dividends paid on our common
stock in the first nine months of 2006, compared with $125 million in the
year-ago period, reflected a higher dividend rate, partially offset by a
lower
number of shares outstanding.
In
the
third quarter, we announced that our Board of Directors increased our quarterly
cash dividend (to $0.04 per share from $0.03 per share). Our Board of Directors
declared a dividend at the new quarterly rate on October 19,
2006.
In
2006
for continuing operations, we expect:
the annual effective tax rate to be about 29 percent compared with our prior
expectation of about 30 percent; the
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.
We
believe we have the necessary financial resources to fund our working capital
needs, capital expenditures, stock repurchases, dividend payments and other
business requirements for at least the next 12 months.
ITEM
3. Quantitative and Qualitative Disclosures About Market Risk.
Information
concerning market risk is contained on pages 59 and 60 of Exhibit 13 to
Registrant’s Form 10-K for the year ended December 31, 2005, and is incorporated
by reference to such exhibit.
ITEM
4. Controls and Procedures.
An
evaluation as of the end of the period covered by this report was carried
out
under the supervision and with the participation of TI's management, including
its Chief Executive Officer and Chief Financial Officer, of the effectiveness
of
the design and operation of TI’s disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that those disclosure controls and procedures were effective
in providing reasonable assurance that information required to be disclosed
by
TI in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission’s rules and forms. In addition, there has been no change in the
Registrant’s internal control over financial reporting (as defined in Rule
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred
during the period covered by this report that has materially affected, or
is
reasonably likely to materially affect, the Registrant’s internal control over
financial reporting.
PART
II - OTHER INFORMATION
ITEM
2. Unregistered Sales of Equity Securities and Use of Proceeds.
The
following table contains information regarding the Registrant’s purchase of its
common stock during the quarter.
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price Paid
per
Share
|
|
Total Number
of
Shares
Purchased
as
Part
of
Publicly
Announced
Plans
or
Programs
|
|
Approximate
Dollar Value of Shares that
May
Yet Be
Purchased
Under
the
Plans
or
Programs
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
1 through July 31, 2006
|
|
|
20,700,000
|
|
$
|
29.00
|
|
|
20,700,000
|
|
$
|
2,671,265,031
|
|
August
1 through August 31, 2006
|
|
|
18,392,000
|
|
$
|
31.25
|
|
|
18,392,000
|
|
$
|
2,096,459,436
|
|
September
1 through September 30, 2006
|
|
|
15,000,000
|
|
$
|
32.11
|
|
|
15,000,000
|
|
$
|
6,614,828,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
54,092,000
|
|
$
|
30.63
|
|
|
54,092,000
|
(2)
|
$
|
6,614,828,786
|
(2)
|
(1) |
All
purchases during the quarter were made under the authorization from
our
Board of Directors to purchase up to $5 billion of additional shares
of TI
common stock announced on January 23, 2006. An additional authorization
from our Board of Directors to purchase up to $5 billion of additional
shares of TI common stock was announced on September 21, 2006. No
expiration date has been specified for either of these
authorizations.
|
(2) |
All
purchases during the quarter were made through open-market purchases.
The
total number of shares purchased includes the purchase of
2,250,000 shares
for which trades were settled in the first three business days of
October
2006 for $75 million. The table does not include the purchase of
3,851,000
shares pursuant to orders placed in the second quarter, for which
trades
were settled in the first three business days of the third quarter
for
$113 million. The purchase of these shares was reflected in this
item in
the company’s report on Form 10-Q for the quarter ended June 30,
2006.
|
ITEM
6. Exhibits.
|
|
Designation
of Exhibits in This Report
|
Description
of Exhibit
|
31.1
|
Certification
of Chief Executive Officer of Periodic Report Pursuant to Rule
13a-15(e)
or Rule 15d-15(e).
|
31.2
|
Certification
of Chief Financial Officer of Periodic Report Pursuant to Rule
13a-15(e)
or Rule 15d-15(e).
|
32.1
|
Certification
by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350.
|
32.2
|
Certification
by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350.
|
“Safe
Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
This
report 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 herein that describe TI’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 TI or its
management:
·
|
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 Risk Factors discussion
in
Item 1A of the Company’s most recent Form 10-K. The forward-looking statements
included in this quarterly report on Form 10-Q are made only as of the date
of
this report, and the Company undertakes no obligation to update the
forward-looking statements to reflect subsequent events or circumstances.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned,
thereunto
duly authorized.
TEXAS
INSTRUMENTS INCORPORATED |
|
BY:
/s/ Kevin P.
March
|
Kevin
P. March
|
Senior
Vice President and
|
Chief
Financial Officer
|
Date:
October 29, 2006