Texas Instruments 2006 Annual Report Download - page 50

TEXAS INSTRUMENTS 2006 ANNUAL REPORT
4848
Discontinued Operations
Revenue from the former Sensors & Controls business was $375 million in 2006 compared with $1.06 billion in 2005. Results for
2006 cover the period up to the date of the sale (April 27, 2006). Income from discontinued operations for 2006, which includes
the $1.67 billion gain from the sale of the former Sensors & Controls business, was $1.70 billion, compared with $151 million in
2005 (see Note 2 to the Financial Statements for further discussion).
Prior Results of Operations
2005 Compared with 2004
2005 was our 75th year in operation, and as we crossed that milestone we delivered record annual results for revenue,
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 high for operating margin of
20.7 percent.
Diluted income from continuing operations per share was $1.30 for the year and includes stock-based compensation expense
of $0.07 for the year.
Gross profit of $6.02 billion, or 48.8 percent of revenue, increased 14 percent from 2004 primarily due to higher gross margin
in our Semiconductor business segment. Stock-based compensation expense included in cost of revenue was $32 million in
2005 compared with zero in 2004.
R&D expense of $1.99 billion, or 16.1 percent of revenue, increased $40 million, or 2 percent from 2004, primarily due to stock-
based compensation expense, which was $53 million in 2005 compared with zero in 2004.
SG&A expense of $1.47 billion, or 11.9 percent of revenue, increased 9 percent primarily due to higher stock-based
compensation and, to a lesser extent, expenses for DLP product advertising. Stock-based compensation expense included in
SG&A was $90 million in 2005 compared with $18 million in 2004.
Operating profit for the year was a record $2.56 billion. Operating margin was also a record at 20.7 percent of revenue,
increasing 31 percent from 2004 due to higher operating margin in Semiconductor. Total stock-based compensation expense
for 2005 was $175 million, or 1.4 percent of revenue, compared with $18 million in 2004.
Profit sharing expense in 2005 was $115 million compared with $243 million in 2004. Beginning in 2005, expenses under the TI
employee profit sharing plan were determined using a different formula than was used in 2004 (see Note 11 to the Financial
Statements for a description of the new calculation). We accrue profit sharing based on how we expect to perform for the
year in total. The accrual in a given quarter is based on our expectations at that time as to annual performance. The profit
sharing accrual is included in cost of revenue, R&D expense, and SG&A expense. As a result of the change in our profit
sharing formula we expect profit sharing expenses to be more stable over time.
OI&E decreased $28 million in 2005 to $205 million. Interest income was $165 million, an increase of $29 million, due to
higher average interest rates earned on short-term investments. This was offset by lower income in 2005 than in 2004
from settlements related to grants from the Italian government regarding our former memory business operations, and the
2004 favorable settlement with the State of Texas over claims for refund of state sales taxes relating to our former defense
electronics business.
In 2005, we recognized net discrete tax items of $92 million, consisting of $147 million primarily associated with favorable
developments on certain outstanding income tax matters, partially offset by a $55 million accrual for taxes on dividends from
earnings repatriated from our non-U.S. subsidiaries under the AJCA. The effective tax rate for 2005, which, by definition, does
not include discrete tax items, was 24 percent. This compares with the effective tax rate in 2004 of 22 percent. This difference
was primarily due to an increase in income from continuing operations before income taxes in 2005. The effective tax rate for
2005 of 24 percent differs from the 35 percent corporate statutory rate due to the effect of non-U.S. tax rates and, to a lesser
extent, various tax benefits such as for export sales and research activities.