Texas Instruments 2006 Annual Report Download

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2006 ANNUAL REPORT

Table of contents

  • Page 1
    2006 ANNUAL REPORT

  • Page 2
    ... includes the Education Technology business. TI is headquartered in Dallas, Texas, and has manufacturing, design or sales operations in more than 25 countries. Except as noted, financial results are for continuing operations. Texas Instruments is traded on the New York Stock Exchange under the...

  • Page 3
    ... help our customers get to market faster with features few thought possible just a few years before. In addition, we invested in making ourselves available everywhere our customers are, opening new support locations in Asia and Eastern Europe and increasing the number of TI analog field applications...

  • Page 4
    2 TEXAS INSTRUMENTS 2006 ANNUAL REPORT SUMMARY OF OPERATIONS Financial Goals 2006 was a strong year for TI, with growing demand for TI analog and DSP products helping drive revenue to a record $14.25 billion, 16 percent higher than in 2005. This growth significantly exceeded that of the ...

  • Page 5
    ... TI has shipped more than 100 million of these processors, and in 2006 more than 50 new OMAP-based products came to market. In DLP® products, revenue increased 15 percent for the year. Growth occurred in all of the company's targeted markets for this product line - front projectors, high-definition...

  • Page 6
    4 TEXAS INSTRUMENTS 2006 ANNUAL REPORT ANALOG SNAPSHOT Digital Revolution Drives Analog Growth Analog is expected to become an increasingly important part of the company in the years ahead. Every electronics product requires analog technologies, even in the digital world. The great paradox is that...

  • Page 7
    ...Financial Condition - Liquidity and Capital Resources Quarterly Financial Data Common Stock Prices and Dividends Comparison of Total Shareholder Return Safe Harbor Statement Stock-based Compensation Postretirement Benefit Plans Profit Sharing and Savings Plans Segment and Geographic Area Data Income...

  • Page 8
    6 TEXAS INSTRUMENTS 2006 ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME (Millions of dollars, except share and per-share amounts) FOR THE YEARS ENDED DECEMBER 31, 2006 2005 2004 Net revenue ...Operating costs and expenses: Cost of revenue ...Research and development (R&D) ...Selling, general ...

  • Page 9
    ... of dollars) FOR THE YEARS ENDED DECEMBER 31, 2006 2005 2004 Income from continuing operations ...Other comprehensive income (loss): Change in minimum pension liability adjustment: Annual adjustment, net of tax benefit (expense) of ($33), ($79) and $7 ...Changes in available-for-sale investments...

  • Page 10
    8 TEXAS INSTRUMENTS 2006 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS (Millions of dollars, except share amounts) DECEMBER 31, 2006 2005 Assets Current assets: Cash and cash equivalents ...Short-term investments ...Accounts receivable, net of allowances ...Inventories ...Deferred income taxes ......

  • Page 11
    ...changes in: Accounts receivable ...Inventories ...Prepaid expenses and other current assets ...Accounts payable and accrued expenses ...Income taxes payable ...Accrued profit sharing and retirement ...Funding of retirement plans and accrued retirement costs ...Other ...Net cash provided by operating...

  • Page 12
    10 TEXAS INSTRUMENTS 2006 ANNUAL REPORT CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Millions of dollars, except per-share amounts) Accumulated Other Comprehensive Income (Loss) Common Stock Paid-in Capital Retained Earnings Treasury Common Stock Unearned Compensation Balance, December ...

  • Page 13
    ... Policies and Practices Business: Texas Instruments (TI) makes, markets and sells high-technology components; more than 50,000 customers all over the world buy TI products. We have two reportable operating segments: Semiconductor, which accounted for 96 percent of our revenue in 2006, and Education...

  • Page 14
    ... the terms of the sales order. Estimates of returns for product quality reasons and of price allowances (calculated based upon historical experience, analysis of product shipments and contractual arrangements with customers), are recorded when revenue is recognized. Allowances include discounts for...

  • Page 15
    ... 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...

  • Page 16
    ... and stock options offered under the TI Employees 2002 Stock Purchase Plan (both actual and pro forma) were estimated using the Black-Scholes option-pricing model with the weighted-average assumptions listed below. 2006 2005 2004 Long-term Plans (a) Weighted average grant date fair value, per share...

  • Page 17
    ... yields are based on the approved annual dividend rate in effect and the current market price of TI common stock at the time of grant. No assumption for a future dividend rate change has been included unless there is an approved plan to change the dividend in the near term. Inventories: Inventories...

  • Page 18
    ...benefit plans other than their fiscal year end, change to a fiscal year end measurement date effective for years ending after December 15, 2008. Our balance sheet as of December 31, 2006, has been adjusted to reflect the required recognition of the funded status for our defined benefit pension plans...

  • Page 19
    ...& 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 up to twelve months from the closing date, although certain information technology-related services...

  • Page 20
    18 TEXAS INSTRUMENTS 2006 ANNUAL REPORT 3. Cash Equivalents and Short-term Investments We generally invest cash in highly liquid debt securities that are classified as available for sale and are reflected in the balance sheet based on their maturity dates. Investments with serial maturities are ...

  • Page 21
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 19 4. Equity and Other Long-term Investments Following is information on the investments at December 31, 2006 and 2005: Unrealized Cost Gains (Losses) Net Fair Value December 31, 2006 Equity investments: Marketable ...Non-marketable ...Mutual funds and other ...

  • Page 22
    ... for 2006, 2005 and 2004, primarily related to developed technology. Fully amortized assets are written off against accumulated amortization. The following table sets forth the estimated amortization of acquisition-related intangibles for the years ended December 31: 2007 ...2008 ...2009 ...2010...

  • Page 23
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 21 Interest incurred on loans in 2006, 2005 and 2004 was $12 million, $14 million and $24 million. Of these amounts, $5 million in 2006, $5 million in 2005 and $3 million in 2004 were capitalized as a component of capital asset construction costs. Our remaining...

  • Page 24
    ...deferred-compensation accounts established for such directors. The plan provides for the grant of a stock option to each non-employee director once per year in the period from January 2004 through 2010. Each grant is an option to purchase 15,000 shares with an option price equal to fair market value...

  • Page 25
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 23 Stock option and RSU transactions under the above mentioned long-term incentive and director compensation plans during 2006 were as follows: STOCK OPTIONS RESTRICTED STOCK UNITS Shares Weighted Average Exercise Price per Share Shares Weighted Average ...

  • Page 26
    ...per share (85 percent of the fair market value of TI common stock on January 3, 2007, the date of automatic exercise). Of the total outstanding options, none were exercisable at year-end 2006. Employee stock purchase plan transactions during 2006 were as follows: Employee Stock Purchase Plan (shares...

  • Page 27
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 25 Shares available for future grant and reserved for issuance are summarized below: AS OF DECEMBER 31, 2006 Shares Long-term Incentive and Director Compensation Plans TI Employees 2005 Stock Purchase Plan Available for future grant ...Reserved for issuance...

  • Page 28
    ..., 2006, we do not expect to return any of the assets of the plans to TI during the next 12 months. Plan Descriptions: We provide various retirement plans for employees including defined benefit, defined contribution and retiree health care benefit plans, as well as deferred compensation arrangements...

  • Page 29
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 27 U.S. Retirement Plans: The principal retirement plans in the U.S include a qualified defined benefit pension plan (which is closed to new participants hired after November 1997), a defined contribution plan and an enhanced defined contribution plan. Both ...

  • Page 30
    28 TEXAS INSTRUMENTS 2006 ANNUAL REPORT Effect on the Statements of Income and Balance Sheets Expense related to defined benefit and retiree health care benefit plans was as follows: U.S. DEFINED BENEFIT U.S. RETIREE HEALTH CARE NON-U.S. DEFINED BENEFIT 2006 2005 2004 2006 2005 2004 2006 ...

  • Page 31
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 29 Amounts recognized on the balance sheet as of December 31, 2006, under SFAS 158: U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit Total Overfunded retirement plans ...Accrued profit sharing and retirement ...Underfunded retirement ...

  • Page 32
    ... TEXAS INSTRUMENTS 2006 ANNUAL REPORT The ranges of assumptions used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries. DEFINED BENEFIT RETIREE HEALTH CARE 2006 2005 2006 2005 Weighted average assumptions used to determine benefit...

  • Page 33
    ... of the plan assets related to the defined benefit pension plans and retiree health care benefit plan are directly invested in TI common stock. Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute approximately $40 million to U.S. retirement plans and...

  • Page 34
    ... actually held for the account of participants, as of December 31, 2006, we have a forward purchase contract with a commercial bank to acquire 765,000 shares of TI common stock at a fixed price of $30.29 per share at the end of the contract term or, at our option, to settle in cash with the bank. We...

  • Page 35
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 33 Our Education Technology segment is a leading supplier of graphing handheld calculators. This segment also provides customers with business and scientific calculators and a wide range of advanced classroom tools and professional development resources to help...

  • Page 36
    ... TEXAS INSTRUMENTS 2006 ANNUAL REPORT Major Customer Direct sales to the Nokia group of companies were 11 percent of our revenue in 2006, 2005 and 2004, although if indirect sales such as to contract manufacturers are included, Nokia accounted for 15 percent, 16 percent and 13 percent of our 2006...

  • Page 37
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 35 The primary components of deferred income tax assets and liabilities at December 31 were as follows: DECEMBER 31, 2006 2005 Deferred income tax assets: Accrued retirement costs (defined benefit and retiree health care) ...Inventories and related reserves ...

  • Page 38
    ... letters of credit to enable manufacturers of certain products for the Education Technology segment to receive payment upon shipment to us. Indemnification Guarantees: We routinely sell products with a limited intellectual property indemnification included in the terms of sale. Historically...

  • Page 39
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 37 15. Supplemental Financial Information Other Income (Expense) Net: 2006 2005 2004 Interest income ...Settlement of Italian grants (a) ...Sales tax refund benefits (b) ...Other (c) ...Total ...(a) (b) (c) $ 196 28 20 21 $ 265 $ 165 11 - 29 $ 205 $ 136 54 ...

  • Page 40
    ... on available-for-sale investments ...Postretirement benefit plans: Minimum pension liability ...Prior service cost ...Net actuarial loss ...Total ...Cash Payments: 2006 DECEMBER 31, 2006 2005 $ (12) - 6 (357) $ (363) $ (16) (65) - - $ (81) 2005 2004 Income taxes (net of refunds) ...Interest...

  • Page 41
    ... position of Texas Instruments Incorporated and subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. As...

  • Page 42
    40 TEXAS INSTRUMENTS 2006 ANNUAL REPORT REPORT BY MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of TI is responsible for establishing and maintaining adequate internal control over financial reporting. TI's internal control system was designed to provide reasonable ...

  • Page 43
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 41 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Directors Texas Instruments Incorporated We have audited management's assessment, included in the accompanying Report by Management on Internal ...

  • Page 44
    42 TEXAS INSTRUMENTS 2006 ANNUAL REPORT SUMMARY OF SELECTED FINANCIAL DATA (Millions of dollars, except share and per-share amounts) Years Ended December 31, 2006 2005 2004 2003 2002 Net revenue...Operating costs and expenses ...Profit from operations ...Other income (expense) net ...Interest ...

  • Page 45
    ...millions of U.S. dollars, except per-share amounts. The former Sensors & Controls business has been reflected as discontinued operations (see Note 2 to the Financial Statements for additional information). The radio frequency identification (RFID) systems operations that had been part of the Sensors...

  • Page 46
    ... 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. We strive to keep...

  • Page 47
    ... the benefits of our hybrid manufacturing strategy whereby we outsource to foundries a large part of our most costly production. Statement of Operations - Selected Items FOR THE YEARS ENDED DECEMBER 31, 2006 2005 2004 Revenue by segment: Semiconductor ...Education Technology ...Net revenue...

  • Page 48
    46 TEXAS INSTRUMENTS 2006 ANNUAL REPORT Earnings per share (EPS) from continuing operations of $1.69 increased 30 percent from the prior year. EPS in 2006 included a full year of stock-option expense of $0.14 resulting in $0.07 of additional expense compared with the prior year when stockoption ...

  • Page 49
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 47 For the year, analog revenue increased 18 percent primarily due to increased shipments resulting from higher demand for high-performance analog products. Revenue from high-performance analog products increased 33 percent primarily due to market-share gains. ...

  • Page 50
    ...operating profit, operating margin and operating cash flow. We also gained market share in our core semiconductor technologies of DSP and analog for the fourth consecutive year. Details of Financial Results For the year, our revenue reached $12.33 billion, an increase of 7 percent. We also set a new...

  • Page 51
    ... chips to the rapidly growing emerging market for low-price cell phones. Industry shipments of WCDMA cell phones doubled in 2005. In 2005, about 55 percent of our 3G revenue came from sales of OMAPâ„¢ application processors and about 45 percent from sales of digital baseband modems. (OMAP processors...

  • Page 52
    ...Education Technology revenue for 2005 was $506 million, down 2 percent from 2004 primarily due to tighter inventory management at retail customers. Gross profit of $300 million, or a record 59.2 percent of revenue, increased $8 million from 2004 primarily due to lower manufacturing costs. Operating...

  • Page 53
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 51 Liquidity and Capital Resources Our primary source of liquidity is our cash flow from operations. In addition, we have $1.18 billion of cash and cash equivalents and $2.53 billion of short-term investments, totaling $3.72 billion as of December 31, 2006. ...

  • Page 54
    52 TEXAS INSTRUMENTS 2006 ANNUAL REPORT Long-term Contractual Obligations PAYMENTS DUE BY PERIOD Contractual Obligations 2007 2008/2009 2010/2011 Thereafter Total Long-term debt obligations (a) ...Operating lease obligations (b) ...Software license obligations (c)...Purchase obligations ...

  • Page 55
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 53 of the programs, with differences among geographic regions taken into consideration. We continually monitor the actual claimed allowances against our estimates, and we adjust our estimates as appropriate to reflect trends in distributor revenue and inventory...

  • Page 56
    ..., differences in operating results, shorter asset useful lives and lower market values for excess assets. Changes in Accounting Standards See Note 10 for a discussion of the impact of adopting SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment...

  • Page 57
    ... from its inception through year-end 2006, the effect of this swap has been to reduce the average annual interest rate on these notes from 8.75% to 6.54%. Our cash equivalents are debt securities with original maturities equal to or less than three months. Short-term investments are debt securities...

  • Page 58
    ..., Effects of Stock-based Compensation, for details). Reflects settlement of patent-related litigation with Conexant Systems, Inc. Reflects settlement of an audit of Texas state sales and use taxes paid on various purchases over a nine-year period. The 2006 U.S. federal research tax credit was...

  • Page 59
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 57 COMMON STOCK PRICES AND DIVIDENDS TI common stock is listed on the New York Stock Exchange and traded principally in that market. The table below shows the high and low closing prices of TI common stock as reported by Bloomberg L.P. and the dividends paid ...

  • Page 60
    58 TEXAS INSTRUMENTS 2006 ANNUAL REPORT COMPARISON OF TOTAL SHAREHOLDER RETURN This graph compares TI's total shareholder return with the S&P 500 Index and the S&P Information Technology Index over a five-year period, beginning December 31, 2001, and ending December 31, 2006. The total shareholder...

  • Page 61
    ...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...

  • Page 62
    ... New York Stock Exchange (NYSE) listing standards, an unqualified annual certification indicating compliance with the listing standards was signed by TI's Chief Executive Officer and submitted to the NYSE on April 26, 2006. INVESTOR INFORMATION Investor Relations P.O. Box 660199, MS 8657 Dallas, TX...

  • Page 63
    TEXAS INSTRUMENTS 2006 ANNUAL REPORT 61 BOARD OF DIRECTORS, EXECUTIVE OFFICERS AND TI FELLOWS DIRECTORS James R. Adams Retired Chairman of the Board, Texas Instruments; Retired Group President, SBC Communications Inc. David L. Boren President, The University of Oklahoma Thomas J. Engibous Chairman...

  • Page 64
    Texas Instruments Incorporated P.O. Box 660199 Dallas, TX 75266-0199 www.ti.com An Equal Opportunity Employer © Texas Instruments Incorporated, 2007 8 Printed in the U.S.A. on recyclable paper TI-30001H