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Quantitative and Qualitative Disclosures about Market Risk
The U.S. dollar is the functional currency for financial reporting. In this regard, we use forward currency exchange
contracts to minimize the adverse earnings impact from the effect of exchange rate fluctuations on our non-U.S. dollar
net balance sheet exposures. For example, at year-end 2005, we had forward currency exchange contracts outstanding
of $191 million to hedge net balance sheet exposures (including $67 million to sell euros, $41 million to sell Japanese yen
and $17 million to buy Korean won). Similar hedging activities existed at year-end 2004. Because most of the aggregate
non-U.S. dollar balance sheet exposure is hedged by these exchange contracts, a hypothetical 10 percent plus or minus
fluctuation in non-U.S. currency exchange rates would not be expected to have a material earnings impact, e.g., based
on year-end 2005 balances and rates, a pre-tax currency exchange gain or loss of less than $1 million.
Our long-term debt has a fair value, based on current interest rates, of approximately $665 million at year-end 2005
($394 million at year-end 2004). Fair value will vary as interest rates change. The following table presents the aggregate
maturities and historical cost amounts of the debt principal and related weighted-average interest rates by maturity dates
at year-end 2005:
Maturity
Date
U.S. Dollar
Fixed-Rate
Debt
Average
Interest
Rate
U.S. Dollar
Floating Rate
Debt
Average
Pay
Rate
Average
Receive
Rate
2006 ................................................. $ 300 6.12% $ 1 4.25% 6.86%
2007 ................................................. 43 8.75% — — —
2008 ................................................. — — 115 4.64% —
2009 ................................................. — — — — —
2010 ................................................. — — 160 4.64% —
Thereafter ........................................... 11 6.20% — — —
$ 354 6.44% $ 276 4.64% 6.86%
Total long-term debt historical cost amount at year-end 2005, excluding the Attleboro capital lease of $31 million, was
$630 million and year-end 2004 was $379 million.
We had interest rate swaps that changed the characteristics of the interest payments on the underlying
notes ($50 million of 7.0% notes which matured on August 15, 2004, $300 million of 6.125% notes due 2006 and $43 million
of 8.75% notes due 2007) from fixed-rate payments to short-term LIBOR-based variable rate payments in order to achieve
a mix of interest rates on our long-term debt which, over time, is expected to moderate financing costs. The effect of
these interest rate swaps was to decrease interest expense by $11 million in 2005 and $19 million in 2004. The year-end
2005 effective interest rates for the notes, including the effect of the swaps, was approximately 3.61% for the $300 million
of notes due 2006 and 8.27% for the $43 million of notes due 2007.
Our cash equivalents are debt securities with original maturities equal to or less than three months. Short-term
investments are debt securities, including auction-rate securities, with original maturities greater than three months (see
Note 2 to Financial Statements). Their aggregate fair value and carrying amount were $5.10 billion at year-end 2005 (fair
value and carrying amount were each $6.12 billion at year-end 2004). Fair value will vary as interest rates change.
Equity investments at year-end 2005 consisted of the following (types of investments at year-end 2004 were similar,
although we also had a convertible debt security at that date):
•Equity investments – include marketable (publicly traded) and non-marketable (private investments, including
various venture funds) equity investments.
•Mutual funds and other investments – consist of mutual funds that were selected to generate returns that offset
changes in certain liabilities related to deferred compensation arrangements. The mutual funds hold a variety of
debt and equity investments.
Marketable equity and debt investments are stated at fair value and marked-to-market through stockholders’ equity, net
of tax. Impairments deemed to be other than temporary are expensed in the Statement of Income. Changes in prices of
59
TEXAS INSTRUMENTS 2005 ANNUAL REPORT