Texas Instruments 2006 Annual Report Download - page 57

TEXAS INSTRUMENTS 2006 ANNUAL REPORT 5555
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.
Off-balance Sheet Arrangements
As of December 31, 2006, we had no significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.
Commitments and Contingencies
See Note 14 to the Financial Statements for a discussion of our commitments and contingencies.
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 2006, we had forward currency exchange contracts outstanding of $268 million
to hedge net balance sheet exposures (including $85 million to sell euros, $82 million to sell British pounds and $48 million
to sell Japanese yen). Similar hedging activities existed at year-end 2005. Because most of the aggregate non-U.S. dollar
balance sheet exposure is hedged by these exchange contracts, based on year-end 2006 balances and rates, a hypothetical
10 percent plus or minus fluctuation in non-U.S. currency exchange rates would result in a pre-tax currency exchange gain or
loss of less than $1 million.
Our total long-term debt, at historical cost, was $43 million at year-end 2006 and $630 million at year-end 2005. This long-term
debt had a fair value, based on current interest rates, of approximately $44 million at year-end 2006 and $634 million at year-
end 2005. Fair value will vary as interest rates change.
In order to achieve a mix of interest rates on our long-term debt, we used interest rate swaps that changed the characteristics
of the interest payments on certain underlying debt from fixed-rate payments to short-term LIBOR-based variable rate
payments. Although these interest rate swaps had no impact in 2006, the swaps decreased interest expense by $11 million in
2005 and $19 million in 2004. The year-end 2006 effective interest rate for the $43 million of 8.75% notes due 2007, including the
effect of the swaps, was approximately 9.10%. Measured 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, including auction-rate securities, with original maturities greater than three months (see Note 3 to the
Financial Statements for additional information). Their aggregate fair value and carrying amount were $3.51 billion at year-end
2006 (fair value and carrying amount were $5.10 billion at year-end 2005). Fair value will vary as interest rates change.
Equity and other long-term investments at year-end 2006 consisted of the following:
• Equity investments – include marketable (publicly traded) and non-marketable (private investments, including various
venture funds) equity investments.
• Investments in mutual funds – 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 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 the mutual
fund investments are expected to offset related changes in deferred compensation liabilities such that a 10 percent increase
or decrease in investment prices would not affect operating results.