TI Reports 3Q04 Financial Results

Conference Call on TI Web Site at 4:30 p.m. Central Time Today http://www.ti.com

DALLAS, Oct. 18 /PRNewswire-FirstCall/ -- Texas Instruments Incorporated (NYSE: TXN) (TI) today reported third-quarter 2004 revenue of $3250 million, about even with the second quarter and up 28 percent from the year-ago quarter. Revenue from the company's wireless and Digital Light Processing(TM) (DLP(TM)) semiconductor products reached record levels for the second consecutive quarter. Strong sequential growth in these areas offset declines in other areas, primarily in standard products, which were affected by ongoing inventory adjustments, especially in distribution channels.

Compared with the third quarter of last year, the increase in TI's revenue reflected double-digit growth across all the company's major Semiconductor operations, with particularly strong contributions from wireless, DLP and high-performance analog products.

In the segments of TI's business, Semiconductor revenue was even sequentially and up 31 percent from a year ago. Sensors & Controls revenue seasonally declined 5 percent from the prior quarter, and increased 14 percent from the year-ago period due to broad-based demand. Educational & Productivity Solutions (E&PS) revenue increased 13 percent sequentially primarily due to seasonal back-to-school demand, and 8 percent from the year- ago period primarily due to strong retail demand for new graphing calculators.

Earnings per share (EPS) of $0.32 include benefits from taxes, which the company discussed in its mid-quarter update on Sept. 8, 2004. Earnings were better than anticipated in the mid-quarter update primarily because the company had higher non-operating income, operating expenses were further reduced, and revenue strengthened late in the quarter.

"TI's operating profit in the third quarter more than doubled from a year ago to reach an all-time high," said Rich Templeton, TI president and chief executive officer. "The value of TI's diverse product portfolio was evident as weaker revenue from standard products was offset by record revenue from both wireless and DLP products. In wireless, TI has achieved early leadership in the UMTS market, which is widely expected to be the prevalent global standard for 3G. A strong majority of these 3G cell phones are based on TI digital signal processors. Likewise, in the nascent market for digital televisions, our DLP technology is now outselling plasma in the North American market for big-screen TVs.

"Nonetheless, the environment is not without challenges. In the third quarter, distributors and customers adjusted semiconductor inventories, and these adjustments have continued into the fourth quarter. In response, we have taken quick actions to sharply reduce production loadings, which should enable us to exit the year with lower inventory levels. We also tightened expense controls across the board," he said.

"In this more uncertain environment, it is important to note that TI's operational flexibility has resulted in a more stable financial model for the company. Our manufacturing strategy combines internal and foundry capacity so that TI's most capital-intensive, advanced-logic factories remain highly utilized as the market expands and contracts. This strategy proved successful in the third quarter as utilization in TI's advanced-logic factories remained high. In addition, this strategy has allowed us to reduce capital spending. TI's capital expenditures in each year since 2001 have been lower as a percent of revenue than any in the past decade," he said.

"I am very confident in TI's position and future. Cash flow is high, our long-term prospects are excellent, and our balance sheet is strong. To increase the return we deliver shareholders, in the quarter we announced plans for a $1 billion share repurchase and a 17 percent higher dividend," Templeton said.

   Details of Financial Results

  Revenue

In the third quarter, TI revenue of $3250 million increased $9 million sequentially and $717 million from the year-ago quarter.

Gross Profit

Gross profit of $1489 million, or 45.8 percent of revenue, was about even sequentially. A reduction in the profit-sharing accrual was offset by the higher expense that resulted from lower utilization of Semiconductor's manufacturing assets, particularly for production of analog products. Compared with the year-ago quarter, gross profit increased by $459 million, or 45 percent, as a result of higher revenue.

Operating Expenses

Research and development (R&D) expense of $483 million, or 14.9 percent of revenue, declined $31 million compared with the prior quarter primarily due to the lower profit-sharing accrual, as well as additional expense reductions. R&D expense increased from $468 million in the year-ago quarter due to higher product development expenses in Semiconductor, especially for wireless products.

Selling, general and administrative (SG&A) expense was $349 million, or 10.7 percent of revenue, down $26 million compared with the prior quarter due to the lower profit-sharing accrual. SG&A expense increased from $313 million in the year-ago quarter primarily due to higher marketing expenses, particularly in Semiconductor.

Operating Profit

Operating profit of $657 million, or 20.2 percent of revenue, increased $65 million sequentially due to lower operating expenses. Compared with the year-ago quarter, operating profit increased $408 million due to higher gross profit.

As discussed in the Sept. 8, 2004, update to the company's outlook, third- quarter results include a lower profit-sharing accrual compared with the second quarter, reflecting a downward adjustment in the company's expectations for its 2004 performance. The adjustment resulted in a cumulative reduction in the profit-sharing accrual in the third quarter. There was no profit- sharing accrual in the year-ago quarter. Profit sharing is allocated across cost of revenue, SG&A and R&D.

Other Income (Expense) Net (OI&E) and Interest Expense

OI&E of $62 million increased $24 million from the prior quarter due to the partial settlement of matters related to grants from the Italian government regarding TI's former memory business operations. Compared with the year-ago quarter, OI&E decreased $81 million due to a pre-tax gain of $106 million recorded in the third-quarter of 2003 related to the company's sale of Micron Technology, Inc. common stock.

Interest expense of $4 million declined $4 million from the second and year-ago quarters due to the company's lower debt level.

Net Income

Net income was $563 million, or $0.32 per share, an increase of $122 million sequentially due to higher operating profit, as well as lower taxes. Compared with the year-ago quarter, net income increased $116 million primarily due to higher operating profit, which more than offset lower OI&E and higher taxes. The year-ago quarter included the recognition of a previously reserved tax benefit of $162 million associated with TI's impairment write-down of Micron stock in the fourth quarter of 2002.

As discussed in the Sept. 8, 2004, update to the company's outlook, the expected annual tax rate was revised to 26 percent as of the end of the third quarter, primarily due to an increase in the estimated U.S. tax benefit for export sales. Net income in the quarter reflects an effective quarterly tax rate of 21 percent due to the cumulative reduction in tax expense.

Orders

TI orders of $3019 million decreased 7 percent sequentially primarily due to lower demand for Semiconductor products, as well as a seasonal decline in E&PS demand. Compared with the year-ago quarter, TI orders increased 13 percent due to higher demand for Semiconductor products. Semiconductor orders were $2623 million, down 5 percent sequentially primarily due to lower demand for standard products sold through distribution channels, which more than offset higher demand for wireless and DLP products. Compared with the year-ago quarter, Semiconductor orders increased 14 percent due to higher demand across a broad range of products.

Cash

At the end of the third quarter, total cash (cash and cash equivalents plus short-term investments and long-term cash investments) was $5617 million. In the third quarter, as previously announced, TI redeemed $400 million of 7 percent notes that matured during the quarter.

Cash flow from operations was $942 million, up $436 million sequentially and $432 million compared with the year-ago quarter.

Capital Expenditures and Depreciation

Capital expenditures of $330 million decreased $26 million sequentially and increased $97 million from the year-ago quarter. TI's capital expenditures in the third quarter were used primarily to increase capacity for assembly and test operations, and for 90-nanometer wafer fabrication.

Depreciation of $378 million increased $15 million sequentially and $22 million from the year-ago quarter.

Accounts Receivable and Inventory

Accounts receivable of $1965 million increased $35 million sequentially due to higher shipments in the last month of the third quarter compared with the last month of the second quarter. Accounts receivable increased $443 million from the end of the year-ago quarter due to higher revenue. Days sales outstanding were 54 at the end of the third quarter, the same as the end of the prior and year-ago quarters.

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