TEXAS INSTRUMENTS INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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Overview

We design, make and sell semiconductors to electronics designers and
manufacturers all over the world. Technology is the foundation of our company,
but ultimately, our objective and the best metric to measure progress and
generate long-term value for owners is the growth of free cash flow per share.
Our strategy to maximize free cash flow per share growth has three elements:
1.A great business model that is focused on analog and embedded processing
products and built around four sustainable competitive advantages. The four
sustainable competitive advantages are powerful in combination and provide
tangible benefits:
i.A strong foundation of manufacturing and technology that provides lower costs
and greater control of our supply chain.
ii.A broad portfolio of analog and embedded processing products that offers more
opportunity per customer and more value for our investments.
iii.The reach of our market channels that gives access to more customers and
more of their design projects, leading to the opportunity to sell more of our
products into each design and gives us better insight and knowledge of customer
needs.
iv.Diversity and longevity of our products, markets and customer positions that
provide less single point dependency and longer returns on our investments.
Together, these competitive advantages help position TI in a unique class of
companies capable of generating and returning significant amounts of cash for
our owners. We make our investments with an eye towards long-term strengthening
and leveraging of these advantages.
2.Discipline in allocating capital to the best opportunities. This spans how we
select R&D projects, develop new capabilities like TI.com, invest in new
manufacturing capacity or how we think about acquisitions and returning cash to
our owners.
3.Efficiency, which means constantly striving for more output for every dollar
spent.
We believe that our business model with the combined effect of our four
competitive advantages sets TI apart from our peers and will for a long time to
come. We will invest to strengthen our competitive advantages, be disciplined in
capital allocation and stay diligent in our pursuit of efficiencies. Finally, we
will remain focused on the belief that long-term growth of free cash flow per
share is the ultimate measure to generate value.
Management's discussion and analysis of financial condition and results of
operations (MD&A) should be read in conjunction with the financial statements
and the related notes that appear elsewhere in this document. In the following
discussion of our results of operations:
•Our segments represent groups of similar products that are combined on the
basis of similar design and development requirements, product characteristics,
manufacturing processes and distribution channels, and how management allocates
resources and measures results. See Note 1 to the financial statements for more
information regarding our segments.
•When we discuss our results:
•Unless otherwise noted, changes in our revenue are attributable to changes in
customer demand, which are evidenced by fluctuations in shipment volumes.
•New products do not tend to have a significant impact on our revenue in any
given period because we sell such a large number of products.
•From time to time, our revenue and gross profit are affected by changes in
demand for higher-priced or lower-priced products, which we refer to as changes
in the "mix" of products shipped.
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•Because we own much of our manufacturing capacity, a significant portion of our
operating cost is fixed. When factory loadings decrease, our fixed costs are
spread over reduced output and, absent other circumstances, our profit margins
decrease. Conversely, as factory loadings increase, our fixed costs are spread
over increased output and, absent other circumstances, our profit margins
increase.
•For an explanation of free cash flow and the term "annual operating tax rate,"
see the Non-GAAP financial information section.
•All dollar amounts in the tables are stated in millions of U.S. dollars.
Our results of operations provides details of our financial results for 2021 and
2020 and year-to-year comparisons between 2021 and 2020. Discussion of 2019
items and year-to-year comparisons between 2020 and 2019 that are not included
in this Form 10-K can be found in "Management's discussion and analysis of
financial condition and results of operations" in Part II, Item 7 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2020.
The coronavirus (COVID-19) pandemic and its effects are impacting and will
likely continue to impact market conditions and business operations across
industries worldwide, including at TI. Therefore, we remain cautious about how
the economy might behave for the next few years and continue to monitor
potential impact on our operations.
Results of operations
Our strategic focus is on analog and embedded processing products sold into six
end markets: industrial, automotive, personal electronics, communications
equipment, enterprise systems and other. While all end markets represent good
opportunities, we place additional strategic emphasis on designing and selling
those products into the industrial and automotive markets, which we believe
represent the best growth opportunities. Gross margin of 67.5% reflected the
quality of our product portfolio, as well as the efficiency of our manufacturing
strategy, including the benefit of 300-millimeter production.
Our focus on analog and embedded processing allows us to generate strong cash
flow from operations. Our cash flow from operations of $8.76 billion underscored
the strength of our business model. Free cash flow was $6.29 billion and
represented 34.3% of revenue. During 2021, we returned $4.41 billion to
shareholders through dividends and stock repurchases. Over the same period, our
dividend represented 62% of free cash flow, underscoring its sustainability.
Details of financial results - 2021 compared with 2020
Revenue of $18.34 billion increased $3.88 billion, or 27%, due to higher revenue
from Analog and, to a lesser extent, Embedded Processing.
Gross profit of $12.38 billion was up $3.11 billion, or 34%, primarily due to
higher revenue. As a percentage of revenue, gross profit increased to 67.5% from
64.1%.
Operating expenses (R&D and SG&A) were $3.22 billion compared with $3.15
billion.
Acquisition charges were $142 million compared with $198 million and were
non-cash.
Restructuring charges/other was $54 million due to integration charges at our
Lehi, Utah, manufacturing facility partially offset by gains on sales of assets,
compared with $24 million due to an Embedded Processing action in 2020.
Operating profit was $8.96 billion, or 48.8% of revenue, compared with $5.89
billion, or 40.8% of revenue.
Other income and expense (OI&E) was $143 million of income compared with $313
million of income, which decreased primarily due to lower royalty income. See
Note 11 to the financial statements.
Our provision for income taxes was $1.15 billion compared with $422 million.
This increase was due to higher income before income taxes and lower discrete
tax benefits compared to 2020, which included a $249 million benefit from the
settlement of a depreciation-related uncertain tax position.
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Our annual operating tax rate, which does not include discrete tax items, was
14% in both periods. We use "annual operating tax rate" to describe the
estimated annual effective tax rate. Our effective tax rate, which includes
discrete tax items, was 13% in 2021 compared with 7% in 2020. See Note 4 to the
financial statements for a reconciliation of the U.S. statutory corporate tax
rate to our effective tax rate.
Net income was $7.77 billion compared with $5.60 billion. EPS was $8.26 compared
with $5.97.
Segment results - 2021 compared with 2020
Analog (includes Power and Signal Chain product lines)
                                    2021           2020         Change
Revenue                          $ 14,050       $ 10,886          29  %
Operating profit                    7,393          4,912          51  %
Operating profit % of revenue        52.6  %        45.1  %


Analog revenue increased in both product lines, led by Signal Chain. Operating
profit increased primarily due to higher revenue and associated gross profit.
Embedded Processing (includes microcontrollers and processors)
                                    2021          2020        Change
Revenue                          $ 3,049       $ 2,570          19  %
Operating profit                   1,174           743          58  %

Operating profit % of revenue 38.5% 28.9%


Embedded Processing revenue increased. Operating profit increased primarily due
to higher revenue and associated gross profit.
Other (includes DLP® products, calculators and custom ASIC products)
                                    2021          2020        Change
Revenue                          $ 1,245       $ 1,005          24  %
Operating profit *                   393           239          64  %

Operating profit % of revenue 31.6% 23.8%


* Includes acquisition charges and restructuring charges/other
Other revenue increased $240 million, and operating profit increased $154
million.
Financial condition
At the end of 2021, total cash (cash and cash equivalents plus short-term
investments) was $9.74 billion, an increase of $3.17 billion from the end of
2020.
Accounts receivable were $1.70 billion, an increase of $287 million compared
with the end of 2020. Days sales outstanding at the end of 2021 were 32 compared
with 31 at the end of 2020.
Inventory was $1.91 billion, a decrease of $45 million from the end of 2020.
Days of inventory at the end of 2021 were 116 compared with 123 at the end of
2020.
Liquidity and capital resources
Our primary source of liquidity is cash flow from operations. Additional sources
of liquidity are cash and cash equivalents, short-term investments and access to
debt markets. We also have a variable rate, revolving credit facility. As of
December 31, 2021, our credit facility was undrawn, and we had no commercial
paper outstanding. Cash flows from operating activities for 2021 were
$8.76 billion, an increase of $2.62 billion due to higher net income and lower
cash used for working capital.
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Investing activities for 2021 used $4.10 billion compared with $922 million in
2020. Capital expenditures were $2.46 billion compared with $649 million in 2020
and were primarily for semiconductor manufacturing equipment and facilities in
both periods, including the purchase of our 300-millimeter semiconductor factory
in Lehi, Utah, during 2021. As we continue to invest to strengthen our
competitive advantage in manufacturing and technology as part of our long-term
capacity planning, we expect our capital expenditures to be higher than
historical levels. Short-term investments used cash of $1.65 billion in 2021
compared with $241 million in 2020.
Financing activities for 2021 used $3.14 billion compared with $4.55 billion in
2020. In 2021, we received net proceeds of $1.50 billion from the issuance of
fixed-rate, long-term debt and retired maturing debt of $550 million. In 2020,
we received net proceeds of $1.50 billion from the issuance of fixed-rate,
long-term debt and retired maturing debt of $500 million. Dividends paid in 2021
were $3.89 billion compared with $3.43 billion in 2020, reflecting an increased
dividend rate. We used $527 million to repurchase 2.9 million shares of our
common stock compared with $2.55 billion used in 2020 to repurchase 23.4 million
shares. Employee exercises of stock options provided cash proceeds of
$377 million compared with $470 million in 2020.
We had $4.63 billion of cash and cash equivalents and $5.11 billion of
short-term investments as of December 31, 2021. We believe we have the necessary
financial resources and operating plans to fund our working capital needs,
capital expenditures, dividend and debt-related payments and other business
requirements for at least the next 12 months.
Non-GAAP financial information
This MD&A includes references to free cash flow and ratios based on that
measure. These are financial measures that were not prepared in accordance with
generally accepted accounting principles in the United States (GAAP). Free cash
flow was calculated by subtracting capital expenditures from the most directly
comparable GAAP measure, cash flows from operating activities (also referred to
as cash flow from operations).
We believe that free cash flow and the associated ratios provide insight into
our liquidity, our cash-generating capability and the amount of cash potentially
available to return to shareholders, as well as insight into our financial
performance. These non-GAAP measures are supplemental to the comparable GAAP
measures.
Reconciliation to the most directly comparable GAAP measures is provided in the
table below.
                                                                       For Years Ended December 31,
                                                                         2021                  2020
Cash flow from operations (GAAP)                                   $       8,756           $   6,139
Capital expenditures                                                      (2,462)               (649)
Free cash flow (non-GAAP)                                          $       6,294           $   5,490

Revenue                                                            $      18,344           $  14,461

Cash flow from operations as a percentage of revenue (GAAP)                 47.7   %            42.5  %
Free cash flow as a percentage of revenue (non-GAAP)                        34.3   %            38.0  %


This MD&A also includes references to an annual operating tax rate, a non-GAAP
term we use to describe the estimated annual effective tax rate, a GAAP measure
that by definition does not include discrete tax items. We believe the term
annual operating tax rate helps differentiate from the effective tax rate, which
includes discrete tax items.
Critical accounting estimates
Our accounting policies are more fully described in Note 2 of the consolidated
financial statements. As disclosed in Note 2, the preparation of consolidated
financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions about future events that affect the amounts reported
in the financial statements and accompanying notes. However, based on facts and
circumstances inherent in developing estimates and assumptions, management
believes it is unlikely that applying other estimates and assumptions would have
a material impact on the financial statements. We consider the following
accounting policies to be those that are most important to the portrayal of our
financial condition and that require a higher degree of judgment.
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Income taxes
In determining net income for financial statement purposes, we must make certain
estimates and judgments in the calculation of tax provisions and the resultant
tax liabilities and in the recoverability of deferred tax assets that arise from
temporary differences between the tax and financial statement recognition of
revenue and expense.
In the ordinary course of global business, there may be many transactions and
calculations where the ultimate tax outcome is uncertain. The calculation of tax
liabilities involves dealing with uncertainties in the interpretation and
application of complex tax laws, and significant judgment is necessary to (i)
determine whether, based on the technical merits, a tax position is more likely
than not to be sustained and (ii) measure the amount of tax benefit that
qualifies for recognition. We recognize potential liabilities for anticipated
tax audit issues in the United States and other tax jurisdictions based on an
estimate of the ultimate resolution of whether, and the extent to which,
additional taxes will be due. Although we believe the estimates are reasonable,
no assurance can be given that the final outcome of these matters will not be
different from what is reflected in the historical income tax provisions and
accruals.
As part of our financial process, we must assess the likelihood that our
deferred tax assets can be recovered. If recovery is not likely, the provision
for taxes must be increased by recording a reserve in the form of a valuation
allowance for the deferred tax assets that are estimated not to be ultimately
recoverable. Our judgment regarding future recoverability of our deferred tax
assets may change due to various factors, including changes in U.S. or
international tax laws and changes in market conditions and their impact on our
assessment of taxable income in future periods. These changes, if any, may
require adjustments to the valuation allowances and an accompanying reduction or
increase in net income in the period when such determinations are made.
Inventory valuation allowances
Inventory is valued net of allowances for unsalable or obsolete raw materials,
work in process and finished goods. Statistical allowances are determined
quarterly for raw materials and work in process based on historical disposals of
inventory for salability and obsolescence reasons. For finished goods, quarterly
statistical allowances are determined by comparing inventory levels of
individual parts to historical shipments, current backlog and estimated future
sales in order to identify inventory considered unlikely to be sold. A specific
allowance for each material type will be carried if there is a significant event
not captured by the statistical allowance, such as an end-of-life part or demand
with imminent risk of cancellation. Allowances are also calculated quarterly for
instances where inventoried costs for individual products are in excess of the
net realizable value for those products. Actual future write-offs of inventory
for salability and obsolescence reasons may differ from estimates and
calculations used to determine valuation allowances due to changes in customer
demand, customer negotiations, technology shifts and other factors.
Commitments and contingencies
See Note 10 to the financial statements for a discussion of our commitments and
contingencies.
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