Except as noted, financial results are for continuing operations. The sale of TI's former Sensors & Controls business was completed on April 27, 2006, and that business is reported as a discontinued operation.
Earnings per share (EPS) from continuing operations were $0.35, a decline of $0.10 from the prior quarter. The fourth quarter of 2006 included a benefit of $0.05 from the reinstatement of the federal research tax credit and a benefit of $0.01 from catch-up payments associated with new patent license agreements.
"We believe the inventory correction that began in the second half of last year largely ended in the first quarter," said Rich Templeton, TI president and CEO. "Orders are beginning to rebound, and we expect sequential growth to resume in the second quarter.
"TI's performance in the first quarter was confirmation of fundamental and sustainable long-term changes we have made in the company. Even with an 8 percent decline in sequential revenue, gross margin remained above 50 percent and operating margin remained above 20 percent. TI performed considerably better than in prior troughs because of a more resilient manufacturing strategy and a stronger portfolio of analog products.
"Analog will continue to play an increasing role in our company. Even though we are the world's leading supplier, our share is low in this large but fragmented market. The opportunity for share gains combined with the attractive financial characteristics of the analog market is appealing. This represents a unique opportunity, especially alongside our strong position in DSP, which provides early entry into important new markets. We continue to keep customers at the core of our strategy, recognizing that we are successful only to the extent we help make them successful," Templeton said.
Gross profit was $1.64 billion, or 51.3 percent of revenue. This was down $111 million from the prior quarter and down $35 million from the year-ago quarter due to lower revenue.
Research and development (R&D) expense was $552 million. Despite seasonally higher pay and benefits, this was about even with the prior quarter due to cost-saving actions. R&D expense increased $19 million from the year- ago quarter due to higher product development costs in the company's Semiconductor segment.
Selling, general and administrative (SG&A) expense was $405 million. This was a decrease of 5 percent from the prior quarter due to lower marketing expense, including seasonally lower advertising. SG&A expense declined $16 million from the year-ago quarter due to cost-saving actions.
Operating profit was $680 million, or 21.3 percent of revenue. This was a decrease of $87 million from the prior quarter and $38 million from the year- ago quarter primarily due to lower gross profit in the company's Semiconductor segment. Included in Corporate were stock-based compensation expense of $78 million, or 2.4 percent of revenue, and restructuring expense of $14 million, including $9 million in cost of revenue and $5 million in R&D.
Other Income (Expense) Net (OI&E)
OI&E was $40 million. This was a decrease of $30 million from the prior quarter, which included a favorable settlement of all remaining matters related to grants from the Italian government regarding TI's former memory operations. OI&E declined $12 million from the year-ago quarter.
Net Income Net income was $516 million, or $0.35 per share.
TI orders were $3.20 billion. This was an increase of $128 million from the prior quarter due to higher demand for products in both of the company's segments -- Semiconductor and Education Technology. Orders declined $399 million from the year-ago quarter due to lower demand in both segments.
Cash flow from operations was $554 million. This was a decrease of $292 million from the prior quarter due to increased cash needed to meet working capital requirements, such as payment of profit sharing and bonus related to 2006 performance, as well as lower net income. Total cash (cash and cash equivalents plus short-term investments) was $3.34 billion at the end of the first quarter. This was a decrease of $381 million from the end of the prior quarter and a decrease of $328 million from the year-ago quarter. In the first quarter, the company used $857 million to repurchase 28 million shares of common stock and paid $58 million in dividends.
Capital Spending and Depreciation
Capital expenditures were $179 million. This was a decrease of $35 million from the prior quarter and a decrease of $229 million from the year- ago quarter due to lower expenditures for semiconductor manufacturing equipment. TI's capital expenditures in the quarter were primarily for equipment used in the assembly and test of semiconductors, and wafer fabrication equipment used to manufacture analog semiconductors.
Depreciation was $252 million. This was about even with the prior quarter and a decrease of $18 million from the year-ago quarter.
Accounts Receivable and Inventories
Accounts receivable were $1.76 billion at the end of the first quarter. This was about even with the prior quarter, and a decrease of $42 million from the year-ago quarter primarily due to lower revenue. Days sales outstanding were 50 at the end of the first quarter compared with 46 at the end of the prior quarter and 49 at the end of the year-ago quarter.
Inventory was $1.41 billion at the end of the first quarter. This was a decrease of $28 million from the prior quarter as the company reduced inventory, especially DSP products used in wireless applications, in response to lower demand. This was partially offset by planned replenishment of long- lived, high-performance analog product inventory. Compared with a year ago, inventory increased $163 million primarily due to replenishment of high- performance analog product inventory from less-than-desirable levels a year ago. Days of inventory at the end of the first quarter were 82 compared with 75 at the end of the prior quarter and 67 a year ago, as inventory decreased at a slower rate than cost of revenue.
TI intends to provide a mid-quarter update to its financial outlook on June 11, 2007, by issuing a press release and holding a conference call. Both will be available on the company's web site.
For the second quarter of 2007, TI expects revenue to be in the following ranges:
* Total TI, $3.32 billion to $3.60 billion; * Semiconductor, $3.14 billion to $3.40 billion; and * Education Technology, $180 million to $200 million. TI expects earnings per share to be in the range of $0.39 to $0.45.
In 2007, TI still expects: an annual effective tax rate of about 28 percent, capital expenditures of about $0.9 billion and depreciation of about $1.0 billion. TI now expects R&D expense of about $2.2 billion, down from the prior expectation of about $2.3 billion.
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Consolidated Statements of Income (Millions of dollars, except share and per-share amounts) For Three Months Ended Mar. 31, Dec. 31, Mar. 31, 2007 2006 2006 Net revenue $ 3,191 $ 3,463 $ 3,334 Cost of revenue (COR) 1,554 1,715 1,662 Gross profit 1,637 1,748 1,672 Research and development (R&D) 552 556 533 Selling, general and administrative (SG&A) 405 425 421 Total operating costs and expenses 2,511 2,696 2,616 Profit from operations 680 767 718 Other income (expense) net 40 70 52 Interest expense on loans 1 1 3 Income from continuing operations before income taxes 719 836 767 Provision for income taxes 203 165 225 Income from continuing operations 516 671 542 Income (loss) from discontinued operations, net of income taxes -- (3) 43 Net income $ 516 $ 668 $ 585 Basic earnings per common share: Income from continuing operations $ .36 $ .46 $ .34 Net income $ .36 $ .45 $ .37 Diluted earnings per common share: Income from continuing operations $ .35 $ .45 $ .33 Net income $ .35 $ .45 $ .36 Average shares outstanding (millions): Basic 1,442 1,469 1,585 Diluted 1,470 1,499 1,618 Cash dividends declared per share of common stock $ .04 $ .04 $ .03 Percentage of revenue: Gross profit 51.3% 50.5% 50.1% R&D 17.3% 16.0% 16.0% SG&A 12.7% 12.3% 12.6% Operating profit 21.3% 22.1% 21.5% TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (Millions of dollars, except share amounts) Mar. 31, Dec. 31, Mar. 31, 2007 2006 2006 Assets Current assets: Cash and cash equivalents $ 965 $ 1,183 $ 722 Short-term investments 2,371 2,534 2,942 Accounts receivable, net of allowances of ($25), ($26) and ($32) 1,756 1,774 1,798 Raw materials 114 105 91 Work in process 879 930 819 Finished goods 416 402 336 Inventories 1,409 1,437 1,246 Deferred income taxes 1,071 741 626 Prepaid expenses and other current assets 257 181 248 Assets of discontinued operations 4 4 495 Total current assets 7,833 7,854 8,077 Property, plant and equipment at cost 7,715 7,751 8,442 Less accumulated depreciation (3,835) (3,801) (4,574) Property, plant and equipment, net 3,880 3,950 3,868 Equity and other long-term investments 250 287 240 Goodwill 792 792 793 Acquisition-related intangibles 131 118 131 Deferred income taxes 436 601 390 Capitalized software licenses, net 280 188 222 Overfunded retirement plans 54 58 -- Prepaid retirement costs -- -- 205 Other assets 94 82 112 Total assets $13,750 $13,930 $14,038 Liabilities and Stockholders' Equity Current liabilities: Loans payable and current portion of long-term debt $ 43 $ 43 $ -- Accounts payable 550 560 720 Accrued expenses and other liabilities 877 1,029 895 Income taxes payable 286 284 280 Accrued profit sharing and retirement 51 162 43 Liabilities of discontinued operations -- -- 157 Total current liabilities 1,807 2,078 2,095 Long-term debt -- -- 318 Underfunded retirement plans 197 208 -- Accrued retirement costs -- -- 116 Deferred income taxes 10 23 17 Deferred credits and other liabilities 453 261 254 Total liabilities 2,467 2,570 2,800 Stockholders' equity: Preferred stock, $25 par value. Authorized -- 10,000,000 shares. Participating cumulative preferred. None issued -- -- -- Common stock, $1 par value. Authorized -- 2,400,000,000 shares. Shares issued: March 31, 2007 -- 1,739,211,844; December 31, 2006 -- 1,739,108,694; March 31, 2006 -- 1,739,070,044 1,739 1,739 1,739 Paid-in capital 822 885 744 Retained earnings 18,017 17,529 13,930 Less treasury common stock at cost: Shares: March 31, 2007 -- 305,502,566; December 31, 2006 -- 289,078,450; March 31, 2006 -- 181,032,577 (8,940) (8,430) (5,092) Accumulated other comprehensive income (loss), net of tax (355) (363) (83) Total stockholders' equity 11,283 11,360 11,238 Total liabilities and stockholders' equity $13,750 $13,930 $14,038 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (Millions of dollars) For Three Months Ended Mar. 31, Dec. 31, Mar. 31, 2007 2006 2006 Cash flows from operating activities: Net income $ 516 $ 668 $ 585 Adjustments to reconcile net income to cash provided by operating activities of continuing operations: (Income) loss from discontinued operations -- 3 (43) Depreciation 252 249 270 Stock-based compensation 78 78 91 Amortization of capitalized software 25 25 30 Amortization of acquisition-related intangibles 14 13 16 Deferred income taxes (3) (77) (36) Increase (decrease) from changes in: Accounts receivable 17 315 (144) Inventories 28 54 (57) Prepaid expenses and other current assets (79) (7) (111) Accounts payable and accrued expenses (167) (209) (106) Income taxes payable (1) (156) 151 Accrued profit sharing and retirement (111) 30 (99) Change in funded status of retirement plans and accrued retirement costs 1 (94) 17 Other (16) (46) (42) Net cash provided by operating activities of continuing operations 554 846 522 Cash flows from investing activities: Additions to property, plant and equipment (179) (214) (408) Proceeds from sales of assets -- 14 4 Purchases of cash investments (846) (1,275) (1,153) Sales and maturities of cash investments 1,011 1,509 2,341 Purchases of equity investments (5) (7) (5) Sales of equity and other long-term investments 2 2 7 Acquisitions, net of cash acquired (27) -- (177) Net cash provided by (used in) investing activities of continuing operations (44) 29 609 Cash flows from financing activities: Payments on loans and long-term debt -- -- (311) Dividends paid on common stock (58) (59) (48) Sales and other common stock transactions 154 51 142 Excess tax benefit from stock option exercises 34 15 7 Stock repurchases (857) (1,130) (1,440) Net cash used in financing activities of continuing operations (727) (1,123) (1,650) Cash flows from discontinued operations: Operating activities -- -- 35 Investing activities -- -- (10) Net cash provided by discontinued operations -- -- 25 Effect of exchange rate changes on cash (1) 1 2 Net decrease in cash and cash equivalents (218) (247) (492) Cash and cash equivalents, beginning of period 1,183 1,430 1,214 Cash and cash equivalents, end of period $ 965 $ 1,183 $ 722 Segment Net Revenue (Millions of dollars) For Three Months Ended Mar. 31, Dec. 31, Mar. 31, 2007 2006 2006 Semiconductor $ 3,115 $ 3,385 $ 3,260 Education Technology 76 78 74 Total net revenue $ 3,191 $ 3,463 $ 3,334 Segment Profit (Loss) (Millions of dollars) For Three Months Ended Mar. 31, Dec. 31, Mar. 31, 2007 2006 2006 Semiconductor $ 831 $ 908 $ 883 Education Technology 16 19 13 Corporate* (167) (160) (178) Profit from operations $ 680 $ 767 $ 718 * Corporate includes the following stock-based compensation expense: COR $ 15 $ 15 $ 18 R&D 23 24 28 SG&A 40 39 45 Profit from operations $ 78 $ 78 $ 91 Semiconductor * Revenue in the first quarter was $3.12 billion. This was a decrease of 8 percent from the prior quarter due to a broad-based decline in demand. Compared with a year ago, revenue decreased 4 percent primarily due to lower demand for DSP products that more than offset higher demand for analog products. -- Analog product revenue of $1.25 billion was down 5 percent from the prior quarter due to a broad-based decline in demand. Compared with the year-ago quarter, analog revenue increased 2 percent as a decline in analog revenue for wireless applications was more than offset by broad-based increases in other analog products, especially high-performance analog. Revenue from high-performance analog products declined 5 percent from the prior quarter and increased 8 percent from a year ago. -- DSP product revenue of $1.16 billion was down 5 percent from the prior quarter and down 10 percent from a year ago due to lower demand for a broad range of products. -- TI's remaining Semiconductor product revenue of $713 million was 17 percent lower than the prior quarter due to declines in DLP(R) products, royalties, microprocessors and standard logic that offset growth in microcontrollers. Royalties declined because new patent license agreements that were signed in the prior quarter included non-recurring catch-up payments. TI's remaining Semiconductor revenue decreased 5 percent from the year-ago quarter as declines in microprocessors, DLP products and standard logic more than offset growth in royalties and microcontrollers. * Gross profit was $1.63 billion, or 52.3 percent of revenue. This was a decrease of $103 million from the prior quarter and a decrease of $30 million from the year-ago quarter due to lower revenue. * Operating profit was $831 million, or 26.7 percent of revenue. This was a decline of $77 million from the prior quarter and a decline of $52 million from the year-ago quarter primarily due to lower gross profit. * Semiconductor orders were $3.08 billion. This was an increase of 3 percent from the prior quarter due to higher demand for DSP products and a decrease of 10 percent from the year-ago quarter due to broadly lower demand. Semiconductor Highlights * TI introduced a new high-performance analog product that will enable a range of portable electronic products to draw power from new energy sources, such as solar and micro-fuel cells. The DC/DC boost converter can operate at the industry's lowest input voltage of less than 0.3 volt with high efficiency. * TI demonstrated a prototype DLP pico-projector small enough to integrate into mobile devices, such as cell phones and digital cameras. This innovation will give manufacturers a new and enhanced display option for their devices. * TI launched its "LoCosto ULC" single-chip platform for the ultra low- cost cell phone market. This platform enables cell phone manufacturers to include more features in their products, including an enhanced color display, FM stereo, MP3 ring tones and playback, and camera functionality. The new platform will include the industry's first single-chip GSM/GPRS cell phone products to be manufactured using 65- nanometer process technology and is expected to sample in the second quarter of 2007. * TI extended its OMAP(TM) 3 platform with products that allow cell phone manufacturers to scale their product offerings to address a range of performance levels and price points. The products bring "life-like" 3D graphics to the handset and create a mobile gaming experience comparable to today's handheld gaming devices. In addition, the products are the industry's first application processors to play 720p high-definition video on cell phones. Education Technology * Revenue was $76 million. This was a decrease of $2 million from the prior quarter and an increase of $2 million from the year-ago quarter. * Gross profit was $45 million, or 59.0 percent of revenue. Gross profit was even with the prior quarter and increased $4 million from the year- ago quarter primarily due to a combination of higher revenue and product cost reductions. * Operating profit was $16 million, or 20.6 percent of revenue. This was a decrease of $3 million compared with the prior quarter due to higher SG&A expense. It was an increase of $3 million from the year-ago quarter due to higher gross profit.