SUMMARY OF OPERATIONS

2007 was a year of progress for TI. The company established a stronger strategic position in analog, developed a more profitable product portfolio and delivered continued gains in capital efficiency as it focused its manufacturing strategy on producing long-term returns. The combination of higher profitability and better capital efficiency generated strong cash flow, and TI increased its return on invested capital for the sixth year in a row.

Total revenue was $13.83 billion, a 3 percent decrease from the previous year, due to lower revenue from RISC microprocessors, semiconductors used in cell phone applications and DLP^® products. Even so, earnings per share (EPS) were up 8 percent to $1.83, as TI continues to shift its product portfolio toward higher-margin products that require less capital spending. As a result, the company generated more cash flow from operations that it returned to shareholders through stock repurchases and increased dividends, and raised EPS through lower share count. This marked the fifth consecutive year of growth in TI’s EPS, and the fifth year that EPS grew faster than revenue.

“...the company generated more cash flow from operations that it returned to shareholders through stock repurchases and increased dividends...”

TI profitability was up in the year. Gross profit increased $74 million, while operating profit grew by $130 million. As a result, gross margin was 53.0 percent of revenue, and operating margin was 25.3 percent of revenue – both record levels for the company.

Despite an industry-wide inventory correction early in the year, TI moved through the trough of the cycle and maintained gross margins in excess of 50 percent, demonstrating the impact of its manufacturing strategy and the strength of its product portfolio. Moreover, TI raised its profitability targets to 55 percent gross margin and 30 percent operating margin.

SEMICONDUCTOR
In 2007, TI Semiconductor revenue was $13.31 billion, a decrease of 3 percent from 2006. Analog and digital signal processors (DSPs), TI’s core product lines, generated more than $5 billion each in revenue, and the combination was about 80 percent of TI’s semiconductor revenue.

Despite a decrease in revenue, higher gross profit and lower operating expenses delivered a new record level of operating profit, $3.88 billion, an increase of $52 million from the previous year.

ANALOG: Analog revenue was up 1 percent, to $5.29 billion. Strong demand for TI’s high-performance analog products led this growth with revenue up 9 percent. This more than offset lower revenue from custom analog products sold into cell phone applications. TI continued to add to its thousands of analog products, making its portfolio stronger, more differentiated and more attractive to a broader set of customers. To further strengthen its product portfolio, TI acquired two analog companies in 2007, Integrated Circuit Designs and POWERPRECISE Solutions, that brought new products and engineering talent to the company. These acquisitions complement TI’s 2006 purchase of Chipcon, a market leader in short-range, low-power radio frequency technology.

DSP: The company’s sale of its DSL customer premises equipment semiconductor product line helped reduce DSP product revenue 2 percent to $5.07 billion. TI also saw declines across a number of DSP markets, including cell phone applications.

Nonetheless, TI DSPs continued to be adopted across a wide range of electronics products. The high-performance and low-power levels of TI’s DSPs made these products a preferred solution for customers developing a range of applications, such as communications infrastructure equipment, automotive navigation products and advanced imaging systems. Most DSP customers tailor these products to their specific applications through their own software investments. TI’s software compatibility across generations of DSP products ensures that customers are able to re-use their software investments over time.

In 2007, video applications were once again an important market for DSPs. TI added to its popular DaVinci™ product line by introducing a new, low-cost processor that doubles the battery life of portable, high-definition video products, such as digital cameras and security cameras.

TI’s OMAP applications processors continue to have a commanding lead in the cell phone market and play a pivotal role in smartphones, the fastest growing handset segment. Last year, TI extended its OMAP 3 platform with products that allow cell phone manufacturers to scale their product offerings to a range of performance levels and price points. The products helped customers bring life-like 3-D graphics to cell phones and create a mobile gaming experience comparable to today’s handheld gaming devices.

“TI continued to add to its thousands of analog products, making its portfolio stronger, more differentiated and more attractive to a broader set of customers.”

MANUFACTURING: TI benefited from its hybrid manufacturing model, with the company employing a combination of internal and third-party foundry manufacturing for advanced digital processes. This hybrid approach provided the company with more flexibility in its operations to adapt to changing market conditions yet focus its internal efforts more intently on analog.

TI continued to enhance its analog capabilities, significantly increasing the number of researchers involved in analog process development while also expanding analog manufacturing capacity. In May, TI announced plans to increase its capacity for assembling and testing semiconductors with a new facility in the Philippines that will be the most environmentally efficient semiconductor assembly-and-test site in the world.

EDUCATION TECHNOLOGY
TI revenue from sales of graphing calculators in its largest market, the U.S., was slightly lower as customers reduced inventory levels. The company made progress in France, where TI grew sales and now holds about half the market for graphing calculators, and in Asia, where sales were up over 25 percent. For the U.S. algebra and pre-algebra market segments, TI introduced Math Forward™, an innovative program that works directly with middle schools in several states to close the math achievement gap between low-and high-performing students.

In 2007, TI introduced new math learning handhelds and software to the global market. The most notable newcomer was the TI-Nspire™ product line, which allows users to save their work, link to data banks and view mathematical problems in different representations, such as algebraic or geometric.

Revenue for this segment was $526 million, about even with the prior year’s level. Gross profit was up by $19 million to $340 million, or a record 64.6 percent of revenue. Operating profit grew by $8 million to $208 million, or a record 39.4 percent of revenue. This marks the eleventh straight year that Education Technology improved profitability, both in gross margin and operating margin.