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TI Reports 3Q05 Financial Results

Record Revenue, Up 11% Sequentially, 10% from Year Ago

Record Gross and Operating Margins Despite Reduction in Inventory

Record Operating Cash Flow of $1.51 Billion

EPS of $0.38 Includes $0.03 Stock-Based Compensation Expense and $0.01 Higher Taxes

Orders Up 10% Sequentially, 24% from Year Ago

Oct 24, 2005

 Non-GAAP Financial Measures Reconciliation

DALLAS (October 24, 2005) – Texas Instruments Incorporated (TI) (NYSE: TXN) today reported record quarterly revenue of $3.59 billion, an increase of 11 percent sequentially and 10 percent over the third quarter of last year. Growth was driven by the company’s Semiconductor segment, which was up 13 percent sequentially and 13 percent from a year ago with particularly strong demand for digital signal processors (DSPs) and analog chips that are used in a variety of communications and entertainment electronics.

Earnings per share (EPS) in the third quarter were $0.38. As previously announced, the company began expensing stock options in the third quarter, and as a result, EPS included $0.03 of additional expense for stock-based compensation. For comparison purposes, it is important to note that equivalent stock-based compensation expense was not reflected in any prior quarterly period. EPS also included $0.01 for higher-than-anticipated taxes in the quarter. In addition to record revenue, TI reached new highs for gross margin at 49.3 percent, for operating margin at 22.7 percent, and for operating cash flow at $1.51 billion. “This performance is especially significant as semiconductor inventories declined at TI and distributors,” said Rich Templeton, president and chief executive officer.

“Additionally, TI continued to gain share in areas with sustainable long-term growth,” he said. “Wireless revenue grew 16 percent sequentially and 20 percent from a year ago; high-performance analog revenue grew 10 percent sequentially and 16 percent from a year ago; and DLP® product revenue grew 41 percent sequentially and was even with a year ago.

“TI continues to hold leadership positions in semiconductors for both the high and low ends of the cell phone market. For solutions used in feature-rich 3G UMTS cell phones, revenue remains on track to exceed $1 billion in 2005. In low-priced cell phones, TI’s solutions are penetrating markets such as China, India, Brazil and Africa, changing the way people communicate.

“In high-performance analog, our leadership products in data converters, power management and amplifiers continue to attract new customers and yield solid results. And in DLP products, we recovered from an inventory correction in the first half of the year and moved into a strong third quarter,” Templeton said.

“In summary, this was an excellent quarter. We are fortunate to have a unique position with leadership in multiple markets and a business model that allows us to invest in critical R&D yet generate high levels of operating cash flow. We remain focused on making our customers successful and on returning value to our shareholders,” Templeton concluded.

Gross Profit
In the third quarter, TI’s gross profit was a record $1.77 billion, or 49.3 percent of revenue. This included the impact of $16 million, or 0.5 percent of revenue, of stock-based compensation expense. Gross profit increased $250 million sequentially and $282 million from a year ago due to higher gross profit in the company’s Semiconductor segment.

Operating Expenses
Research and development (R&D) expense of $527 million, or 14.7 percent of revenue, increased $34 million sequentially and $44 million from a year ago primarily due to stock-based compensation expense, which was $26 million in the quarter. The change from a year ago also included higher product development expenses, primarily for analog and DSP semiconductors that go into cell phones.

Selling, general and administrative (SG&A) expense of $429 million, or 12.0 percent of revenue, increased $70 million sequentially and $80 million from a year ago primarily due to compensation expense as well as higher marketing expense. Stock-based compensation expense in SG&A was $40 million in the third quarter.

Operating Profit
Operating profit of $815 million and operating margin of 22.7 percent of revenue were all-time highs for the company. Operating profit increased $146 million sequentially and $158 million from a year ago due to higher gross profit. Operating profit reflected the impact of $82 million, or 2.3 percent of revenue, of stock-based compensation expense, which was included in corporate activities.

Other Income (Expense) Net (OI&E)
OI&E of $49 million decreased $7 million sequentially and $13 million from a year ago primarily due to favorable items included in the previous periods. OI&E in the second quarter included a tax interest benefit, and the year-ago quarter included a significant favorable settlement with the Italian government regarding TI’s former memory-chip operations.

Net Income
Net income was $631 million. EPS of $0.38, which includes $0.03 of stock-based compensation expense and $0.01 of higher-than-anticipated taxes, was even with the second quarter. EPS in the second quarter included $0.06 of nonrecurring tax-related benefits.

Compared with a year ago, EPS increased $0.06 due to higher operating profit.

The 27 percent effective tax rate for the third quarter was higher than the previously expected 24 percent rate due to a revision in the estimated annual effective tax rate and the associated cumulative adjustment

Orders
TI orders of $3.74 billion increased $351 million sequentially and $721 million from a year ago due to higher demand for Semiconductor products.

Cash
Cash flow from operations of $1.51 billion increased $687 million sequentially and $572 million from a year ago.

At the end of the third quarter, total cash (cash and cash equivalents plus short-term investments and long-term cash investments) was $5.25 billion, up $773 million from the end of the previous quarter and down $366 million from the end of the year-ago period. During the quarter, the company used $496 million in cash to repurchase 15 million shares of TI common stock. Over the past 12 months, TI has repurchased 140 million shares of common stock and paid $169 million in dividends.

Capital Spending and Depreciation
Capital expenditures of $450 million increased $193 million sequentially and $120 million from a year ago. TI’s capital expenditures in the third quarter were primarily for assembly and test equipment, advanced wafer fabrication equipment and building the company’s new 300-millimeter manufacturing facility in Richardson, Texas.

Depreciation of $339 million decreased $6 million sequentially and $39 million from a year ago.

Accounts Receivable and Inventories
Accounts receivable of $1.92 billion at the end of the third quarter increased $13 million sequentially due to higher revenue, partially offset by seasonally lower receivables in the company’s E&PS business. Accounts receivable decreased $50 million from the end of the year-ago quarter. Days sales outstanding were 48 at the end of the third quarter compared with 53 at the end of the previous quarter and 54 at the end of the year-ago quarter.

Inventories of $1.16 billion at the end of the third quarter decreased $44 million sequentially due to stronger-than-expected shipments, which reduced inventory to less-than-desired levels. Inventory decreased $198 million from a year ago when inventories were higher than desired. Days of inventory at the end of the third quarter were 57 compared with 63 at the end of the previous quarter and 69 at the end of the year-ago quarter.

Outlook
TI intends to provide a mid-quarter update to its financial outlook on December 7, 2005, by issuing a press release and holding a conference call. Both will be available on the company’s web site.

For the fourth quarter of 2005, TI expects revenue to be in the following ranges:

  • Total TI, $3.425 billion to $3.715 billion;
  • Semiconductor, $3.075 billion to $3.325 billion;
  • Sensors & Controls, $290 million to $310 million; and
  • E&PS, $60 million to $80 million

TI expects EPS to be in the range of $0.36 to $0.40. This estimate includes about $0.03 for stock-based compensation expense.

For 2005, TI expects R&D expense of about $2.1 billion, capital expenditures of about $1.3 billion and depreciation of about $1.4 billion. The estimated annual effective tax rate for 2005 is about 25 percent.

               TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
                      Consolidated Statements of Income
                   (In millions, except per-share amounts)

                                            For Three Months Ended
                                   Sept. 30         June 30      Sept. 30
                                       2005            2005          2004

    Net revenue                      $ 3590          $ 3239        $ 3250
    Cost of revenue (COR)              1819            1718          1761

    Gross profit                       1771            1521          1489
      Gross profit % of revenue        49.3%           47.0%         45.8%

    Research and development (R&D)      527             493           483
      R&D % of revenue                 14.7%           15.2%         14.9%
    Selling, general and
     administrative (SG&A)              429             359           349
      SG&A % of revenue                12.0%           11.1%         10.7%

    Total operating expenses            956             852           832

    Profit from operations              815             669           657
      Operating profit % of revenue    22.7%           20.6%         20.2%
    Other income (expense) net           49              56            62
    Interest on loans                     2               2             4

    Income before income taxes          862             723           715
    Provision for income taxes          231              95           152

    Net income                       $  631          $  628        $  563

    Basic earnings per common share  $  .39          $  .38        $  .33

    Diluted earnings per common
     share                           $  .38          $  .38        $  .32


    Average shares outstanding,
     basic                             1624            1633          1730
    Average shares outstanding,
     diluted                           1663            1669          1759
    Cash dividends declared per
     share of common stock           $ .025          $ .025        $ .021


    Stock-based compensation expense included in items above:

                                   Sept. 30         June 30      Sept. 30
                                       2005            2005          2004
      COR                            $   16             ---           ---
        % of revenue                    0.5%            ---           ---
      R&D                                26             ---           ---
        % of revenue                    0.7%            ---           ---
      SG&A                               40          $    5        $    5
        % of revenue                    1.1%            0.2%          0.2%
      Profit from operations             82               5             5
        % of revenue                    2.3%            0.2%          0.2%



               TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
                         Consolidated Balance Sheets
                           (In millions of dollars)

                                     Sept. 30         June 30      Sept. 30
                                         2005            2005          2004

    Assets

      Cash and cash equivalents        $ 1946          $ 2133        $ 1674
      Short-term investments             3305            2345          2312
      Accounts receivable, net of
       allowances for customer
       adjustments and doubtful
       accounts of $48 million at
       September 30, 2005,
       $39 million at June 30, 2005,
       and $45 million at
       September 30, 2004                1915            1902          1965

      Raw materials                       114             116           122
      Work in process                     719             700           885
      Finished goods                      325             386           349

      Inventories                        1158            1202          1356

      Deferred income taxes               581             597           451
      Prepaid expenses and other
       current assets                     226             320           541

      Total current assets               9131            8499          8299

      Property, plant and equipment
       at cost                           9189            9323          9830
      Less accumulated depreciation     (5324)          (5566)        (5711)

      Property, plant and
       equipment, net                    3865            3757          4119

      Long-term cash investments          ---             ---          1631
      Equity and debt investments         234             265           248
      Goodwill                            708             708           693
      Acquisition-related intangibles      76              86           125
      Deferred income taxes               413             568           476
      Capitalized software
       licenses, net                      262             288           310
      Prepaid retirement costs            224             246           154
      Other assets                         71              69            82

      Total assets                     $14984          $14486        $16137


    Liabilities and Stockholders'
     Equity

      Loans payable and current
       portion long-term debt          $  303          $  306        $   10
      Accounts payable                    796             614           664
      Accrued expenses and other
       liabilities                        962             865           886
      Income taxes payable                 82             255           124
      Profit sharing contributions
       and accrued retirement             103              70           208

      Total current liabilities          2246            2110          1892

      Long-term debt                       55              55           373
      Accrued retirement costs            510             534           591
      Deferred income taxes                33              35            63
      Deferred credits and other
       liabilities                        267             289           322

      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:
       September 30, 2005 --
       1,738,650,318; June 30, 2005 --
       1,738,514,238; September 30,
       2004 -- 1,738,141,785             1739            1739          1738
      Paid-in capital                     674             611           789
      Retained earnings                 12787           12197         10795
      Less treasury common stock at
       cost:
      Shares: September 30, 2005 --
       120,597,527; June 30,
       2005 -- 115,461,457;
       September 30, 2004 --
       10,216,953                       (3152)          (2908)         (248)
      Accumulated other comprehensive
       income (loss):
      Minimum pension liability          (158)           (163)         (155)
      Unrealized holding gains (losses)
       on investments                     (15)            (11)          (15)
      Deferred compensation                (2)             (2)           (8)

      Total stockholders' equity        11873           11463         12896

      Total liabilities and
       stockholders' equity            $14984          $14486        $16137



               TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES
                           Statements of Cash Flows
                           (In millions of dollars)

                                              For Three Months Ended
                                     Sept. 30         June 30      Sept. 30
                                         2005            2005          2004

    Cash flows from operating
     activities:
      Net income                       $  631          $  628        $  563
      Adjustments to reconcile net
       income to cash provided by
       operating activities:
      Depreciation                        339             345           378
      Stock-based compensation             82               5             5
      Amortization of acquisition-
       related costs                       13              15            16
      (Gains)/losses on investments       ---               2             4
      (Gains)/losses on sales of assets   ---              (1)          ---
      Deferred income taxes               110            (174)           41
      Other                                80              42            43
      (Increase) decrease from
       change in:
      Accounts receivable                 (12)           (212)          (37)
      Inventories                          44              43           (71)
      Prepaid expenses and other
       current assets                      93              86           (50)
      Accounts payable and accrued
       expenses                           248               1           (53)
      Income taxes payable               (154)             10            88
      Accrued profit sharing and
       retirement                          32              31            26
      Noncurrent accrued retirement
       costs                                8               6           (11)

      Net cash provided by operating
       activities                        1514             827           942

    Cash flows from investing
     activities:
      Additions to property, plant
       and equipment                     (450)           (257)         (330)
      Sales of assets                     ---               5           ---
      Purchases of cash investments     (2095)           (248)         (911)

      Sales and maturities of cash
       investments                       1147            1192           883
      Purchases of equity investments      (5)             (6)           (2)
      Sales of equity and debt
       investments                         39             ---             1
      Acquisition of businesses, net
       of cash acquired                   ---             (18)          ---

      Net cash provided by (used in)
       investing activities             (1364)            668          (359)

    Cash flows from financing
     activities:
      Payments on loans payable and
       long-term debt                     ---             (10)         (405)
      Dividends paid on common stock      (41)            (41)          (36)
      Sales and other common stock
       transactions                       160             116             5
      Excess tax benefit from
       stock-option exercises              42             ---           ---
      Common stock repurchases           (496)          (1292)          (98)

      Net cash used in financing
       activities                        (335)          (1227)         (534)

    Effect of exchange rate changes
     on cash                               (2)              9             2

    Net increase (decrease) in cash
     and cash equivalents                (187)            277            51
    Cash and cash equivalents at
     beginning of period                 2133            1856          1623

    Cash and cash equivalents at
     end of period                     $ 1946          $ 2133        $ 1674



                         Business Segment Net Revenue
                           (In millions of dollars)

                                              For Three Months Ended
                                     Sept. 30         June 30      Sept. 30
                                         2005            2005          2004

    Semiconductor
      Trade                            $ 3134          $ 2764        $ 2785
      Intersegment                          1               1             1

                                         3135            2765          2786

    Sensors & Controls
      Trade                               278             294           275
      Intersegment                          2               1             1

                                          280             295           276

    Educational & Productivity
     Solutions
      Trade                               177             181           190

    Intersegment Eliminations              (2)             (2)           (2)

    Total net revenue                  $ 3590          $ 3239        $ 3250



                        Business Segment Profit (Loss)
                           (In millions of dollars)

                                            For Three Months Ended
                                   Sept. 30         June 30      Sept. 30
                                       2005            2005          2004

    Semiconductor                    $  835          $  594        $  582
    Sensors & Controls                   60              72            66
    Educational & Productivity
     Solutions                           79              79            83
    Corporate *                        (145)            (57)          (53)
    Charges/gains and acquisition-
     related amortization               (14)            (19)          (21)

    Profit from operations           $  815          $  669        $  657

     *  Profit from operations includes, in millions of dollars, stock-based
        compensation expense of $82, $5 and $5 for the third quarter and
        second quarter of 2005 and the third quarter of 2004.

Semiconductor

  • Semiconductor revenue of $3.13 billion increased $370 million sequentially, or 13 percent, due to strong growth in demand for the company’s DSP, analog and DLP products. Compared with a year ago, revenue increased 13 percent due to higher demand for DSP and analog products.
  • Gross profit was $1.60 billion, or 50.9 percent of revenue. Gross profit increased $280 million sequentially and $308 million from a year ago primarily due to higher revenue plus manufacturing cost reductions and higher utilization of manufacturing assets.
  • Operating profit was $835 million, or 26.6 percent of revenue, up $241 million sequentially and $253 million from a year ago due to higher gross profit.
  • Analog revenue increased 13 percent sequentially reflecting strong demand for high-performance analog products, as well as wireless analog products. Compared with a year ago, analog revenue increased 11 percent primarily due to strength in high-performance analog products. High-performance analog revenue grew 10 percent sequentially and 16 percent from a year ago.
  • DSP revenue increased 16 percent sequentially and 20 percent from a year ago primarily due to higher demand from the wireless market.
  • TI’s remaining Semiconductor revenue grew 11 percent sequentially and 4 percent from a year ago. The sequential increase was primarily due to increased DLP product revenue and, to a lesser extent, standard logic and royalty revenue. Microcontroller and RISC microprocessor revenue was about the same as the second quarter. From a year ago, RISC microprocessor, royalty, microcontroller and standard logic revenue increased. DLP product revenue was about the same as a year ago.
  • Semiconductor orders of $3.32 billion increased 12 percent sequentially primarily due to strong demand for DSP and analog products used in cell phones, as well as demand for high-performance analog and other DSP products. Compared with a year ago, orders increased 26 percent due to strong demand across a broad base of the company’s products.

3Q Semiconductor Highlights

  • TI introduced DaVinci™, its most advanced semiconductor technology for new generations of digital video products. A DSP-based solution with integrated processors, software and tools, DaVinci-enabled solutions are under way for products such as digital cameras, automotive infotainment products, portable media players, set-top boxes and video security systems. Additionally, TI released a suite of companion analog products to help customers quickly introduce their DaVinci-based systems into the market.
  • Samsung Electronics selected TI's OMAP™ platform and Bluetooth® solutions for its first Symbian OS™ and Series 60-based smartphones.
  • TI announced it has achieved cumulative shipments of more than 150 million Voice over IP (VoIP) ports, retaining its leadership in the VoIP market.

Sensors & Controls

  • Sensors & Controls revenue was $280 million, down $15 million sequentially primarily due to lower seasonal demand for controls products and up $4 million from a year ago due to higher demand for automotive sensors products.
  • Gross profit was $93 million, or 33.1 percent of revenue, down $15 million sequentially due to lower revenue and higher manufacturing costs, and down $9 million from a year ago primarily due to higher manufacturing costs, including start-up expenses for new products.
  • Operating profit was $60 million, or 21.4 percent of revenue, down $12 million sequentially and down $6 million from a year ago due to lower gross profit.

Educational & Productivity Solutions (E&PS)

  • E&PS revenue was $177 million, down $4 million sequentially and down $13 million from a year ago due to lower sales of graphing calculators.
  • Gross profit was $110 million, or 62.1 percent of revenue, about even sequentially and down $4 million from a year ago primarily due to lower revenue.
  • Operating profit was $79 million, or 44.7 percent of revenue, even sequentially and down $4 million from a year ago due to lower gross profit.

###

Safe Harbor Statement
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: This release includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as TI or its management “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of similar import. Similarly, statements in this release that describe the Company’s business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in forward-looking statements.

We urge you to carefully consider the following important factors that could cause actual results to differ materially from the expectations of the Company or its management:

  • Market demand for semiconductors, particularly for analog chips and digital signal processors in key markets such as telecommunications and computers;
  • TI’s ability to maintain or improve profit margins, including its ability to utilize its manufacturing facilities at sufficient levels to cover its fixed operating costs, in an intensely competitive and cyclical industry;
  • TI’s ability to develop, manufacture and market innovative products in a rapidly changing technological environment;
  • TI’s ability to compete in products and prices in an intensely competitive industry;
  • TI’s ability to maintain and enforce a strong intellectual property portfolio and obtain needed licenses from third parties;
  • Consolidation of TI’s patent licensees and market conditions reducing royalty payments to TI;
  • Economic, social and political conditions in the countries in which TI, its customers or its suppliers operate, including security risks, health conditions, possible disruptions in transportation networks and fluctuations in foreign currency exchange rates;
  • Natural events such as severe weather and earthquakes in the locations in which TI, its customers or suppliers operate;
  • Availability and cost of raw materials, utilities and critical manufacturing equipment;
  • Changes in the tax rate applicable to TI as the result of changes in tax law, the jurisdictions in which profits are determined to be earned and taxed, the outcome of tax audits and the ability to realize deferred tax assets;
  • Losses or curtailments of purchases from key customers and the timing and amount of distributor and other customer inventory adjustments;
  • Customer demand that differs from company forecasts;
  • The financial impact of inadequate or excess TI inventories to meet demand that differs from projections;
  • Product liability or warranty claims, or recalls by TI 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.

For a more detailed discussion of these factors, see the text under the heading “Cautionary Statements Regarding Future Results of Operations” in Item 1 of the Company’s most recent Form 10-K. The forward-looking statements included in this release are made only as of the date of publication, and the Company undertakes no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

Texas Instruments Incorporated provides innovative DSP and analog technologies to meet our customers’ real world signal processing requirements. In addition to Semiconductor, the company’s businesses include Sensors & Controls and Education Technology. TI is headquartered in Dallas, Texas, and has manufacturing, design or sales operations in more than 25 countries.

Texas Instruments is traded on the New York Stock Exchange under the symbol TXN. More information is located on the World Wide Web at www.ti.com.

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