TEXAS INSTRUMENTS INCORPORATED Overview
We design, make and sell semiconductors to electronics designers and manufacturers all over the world. For many years, we have run our business with three overarching ambitions in mind. First, we will act like owners who will own the company for decades. Second, we will adapt and succeed in a world that is ever changing. And third, we will be a company that we are personally proud to be a part of and that we would want as our neighbor. When we are successful in achieving these ambitions, our employees, customers, communities and shareholders all win. Our business model is designed around the following four sustainable competitive advantages that we believe, in combination, put us in a unique class of companies: •A strong foundation of manufacturing and technology. We invest in manufacturing technologies and do most of our manufacturing in-house. This strategic decision to directly control our manufacturing helps ensure a consistent supply of products for our customers and also allows us to invest in technology that differentiates the features of our products. We have focused on creating a competitive manufacturing cost advantage by investing in our advanced analog 300-millimeter capacity, which has about a 40% cost advantage per unpackaged chip over 200-millimeter. To strengthen this advantage, we are moving forward with our plan to build our new 300-millimeter wafer fabrication facility inRichardson, Texas , as 300-millimeter wafers will continue to support the majority of our Analog growth. •Broad portfolio of differentiated analog and embedded processing products. Our customers need multiple chips for their systems. The breadth of our portfolio means we can meet more of these needs than our competitors can, which gives us access to more customers and the opportunity to sell more products and generate more revenue per customer system. We invest more than$1 billion each year to develop new products for our portfolio, which includes tens of thousands of products. •Reach of market channels. Customers often begin their initial product selection process and design-in journey on our website, and the breadth of our portfolio attracts more customers to our website than any of our competitors' websites. Our web presence and global sales and applications team are advantages that give us unique access and insight to about 100,000 customers designing TI semiconductors into their end products. •Diversity and longevity of our products, markets and customer positions. Together, the attributes above result in diverse and long-lived positions that deliver high terminal value to our shareholders. Because of the breadth of our portfolio, we are not dependent on any single product, customer, technology or market. Some of our products generate revenue for decades, which strengthens the return on our investments. Our strategic focus, and where we invest the majority of our resources, is on Analog and Embedded Processing, with a particular emphasis on designing and selling those products into the industrial and automotive markets. We believe these markets represent the best growth opportunities over the next decade or longer, due to increasing semiconductor content. Additionally, analog and embedded processing products sold into industrial and automotive markets provide long product life cycles, intrinsic diversity and less capital-intensive manufacturing, which we believe offer stability, profitability and strong cash generation. This business model is the foundation of our capital management strategy, which is based on our belief that free cash flow growth, especially on a per-share basis, is important for maximizing shareholder value over the long term. We also believe that free cash flow will be valued only if it is productively invested in the business or returned to shareholders. The combined effect of our ambitions, business model and sustainable competitive advantages is that we have continued to build a stronger company. Over time, we have gained market share in Analog and Embedded Processing and grown and returned all free cash flow to our owners. 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. 16 -------------------------------------------------------------------------------- •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. •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. Increases and decreases in factory loadings tend to correspond to increases and decreases in demand. •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 ofU.S. dollars. Impact of COVID-19 The coronavirus (COVID-19) pandemic and its follow-on effects are impacting and will likely continue to impact business activity across industries worldwide, including TI. While second quarter did not experience the depth of decline we saw in the 2008 financial crisis, nonetheless we remain cautious of how the economy might behave for the next few years. The impact to our lead times and ability to fulfill orders was minimal in the first six months of 2020. However, depending on pandemic-related factors like the potential of local manufacturing restrictions on our factories, we could experience constraints in fulfilling customer orders in future periods. The coronavirus pandemic remains dynamic with uncertainty around its duration and broader impact. We are monitoring and assessing the situation and preparing for implications to our business, supply chain and customer demand. We have long had a business continuity plan in place for unforeseeable situations, like we are experiencing with COVID-19. Additionally, over the past several years, we have invested in building inventory and expanding our global internally-owned manufacturing footprint. Investing in these capabilities has given us flexibility, such as the ability to build products across multiple manufacturing sites. These investments have helped to minimize disruptions, but may not be sufficient to eliminate them. Performance summary Our second quarter revenue was$3.24 billion , net income was$1.38 billion and earnings per share (EPS) were$1.48 . Revenue decreased 12% from the same quarter a year ago, driven primarily by weakness in the automotive market. In our core businesses, Analog revenue declined 4% and Embedded Processing declined 31% from the same quarter a year ago. Analog and Embedded Processing both had positive sequential growth in the second quarter excluding the automotive market. Our cash flow from operations of$6.3 billion for the trailing 12 months again underscored the strength of our business model. Free cash flow for the same period was$5.7 billion and 42% of revenue. This reflects the quality of our product portfolio, as well as the efficiency of our manufacturing strategy, including the benefit of 300-millimeter Analog production. We have returned$6.7 billion to shareholders in the past 12 months through stock repurchases and dividends. Over the same period, our dividends represented 56% of free cash flow, underscoring their sustainability. Together, our stock repurchases and dividends reflect our continued commitment to return all free cash flow to our shareholders. Results of operations - second quarter 2020 compared with second quarter 2019 Revenue of$3.24 billion decreased$429 million , or 12%, primarily due to lower revenue from Embedded Processing and, to a lesser extent, Analog. 17 -------------------------------------------------------------------------------- Gross profit of$2.08 billion was down$278 million , or 12%, due to lower revenue. As a percentage of revenue, gross profit was 64.3% in both periods. Operating expenses (R&D and SG&A) were$780 million compared with$810 million . Acquisition charges were$50 million compared with$80 million and were non-cash. See Note 5 to the financial statements. Restructuring charges/other was a charge of$24 million , due to an Embedded Processing action, compared with a credit of$36 million due to the sale of our manufacturing facility in Greenock,Scotland in 2019. Operating profit was$1.23 billion , or 37.9% of revenue, compared with$1.51 billion , or 41.1% of revenue. OI&E was$99 million of income compared with$52 million of income, which increased primarily due to the reversal of interest accrued on an uncertain tax position. Interest and debt expense of$48 million increased$4 million due to the issuance of additional long-term debt. Our provision for income taxes was a benefit of$101 million compared with an expense of$209 million . This change was due to higher discrete tax benefits, which included a$249 million benefit from the settlement of a depreciation-related uncertain tax position, and, to a lesser extent, lower income before income taxes. Our annual operating tax rate, which does not include discrete tax items, is about 13% compared with 16% in 2019. We use "annual operating tax rate" to describe the estimated annual effective tax rate. The 2020 rate differs from the 21%U.S. statutory corporate tax rate due to the effect ofU.S. tax benefits. Net income was$1.38 billion compared with$1.31 billion . EPS was$1.48 compared with$1.36 . Second quarter 2020 segment results Our segment results compared with the year-ago quarter are as follows: Analog (includes Power, Signal Chain and High Volume product lines) Q2 2020 Q2 2019 Change Revenue$ 2,434 $ 2,534 (4) % Operating profit 1,053 1,108 (5) %
Operating profit % of revenue 43.3 % 43.7 %
Analog revenue decreased in High Volume and Power, while Signal Chain was about
even. The decrease in High Volume revenue was due to the mix of products
shipped. Operating profit decreased due to lower revenue and associated gross
profit.
Embedded Processing (includes Connected Microcontrollers and Processors product
lines)
Q2 2020 Q2 2019 Change
Revenue $ 546 $ 790 (31) %
Operating profit 125 265 (53) %Operating profit % of revenue 22.9 % 33.5 %
Embedded Processing revenue decreased in both product lines, led by Processors.
Operating profit decreased due to lower revenue and associated gross profit.
Other (includes DLP® products, calculators and custom ASIC products)
Q2 2020 Q2 2019 Change
Revenue $ 259 $ 344 (25) %
Operating profit* 50 133 (62) %
Operating profit % of revenue 19.3 % 38.7 %
* Includes acquisition charges and restructuring charges/other
Other revenue decreased
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Results of operations - first six months of 2020 compared with first six months
of 2019
Revenue of $6.57 billion decreased $694 million , or 10%, primarily due to lower
revenue from Embedded Processing and, to a lesser extent, Analog.
Gross profit of $4.17 billion was down $451 million , or 10%, due to lower
revenue. As a percentage of revenue, gross profit decreased to 63.5% from 63.6%.
Operating expenses were $1.57 billion compared with $1.61 billion .
Restructuring charges/other was a charge of $24 million , due to an Embedded
Processing action, compared with a credit of $36 million due to the sale of our
manufacturing facility in Greenock, Scotland in 2019.
Acquisition charges were $100 million compared with $159 million and were
non-cash. See Note 5 to the financial statements.
Operating profit was $2.47 billion , or 37.6% of revenue, compared with $2.89
billion , or 39.7% of revenue.
OI&E was $124 million of income compared with $88 million of income, which
increased primarily due to the reversal of interest accrued on an uncertain tax
position.
Interest and debt expense of $93 million increased $11 million due to the
issuance of additional long-term debt.
Our provision for income taxes was a benefit of $51 million compared with an
expense of $369 million . This change was due to higher discrete tax benefits,
which included a $249 million benefit from the settlement of a
depreciation-related uncertain tax position, and, to a lesser extent, lower
income before income taxes.
Net income was $2.55 billion compared with $2.52 billion . EPS was $2.72 compared
with $2.63 .
Year-to-date segment results
Our segment results compared with the year-ago period are as follows:
Analog
YTD 2020 YTD 2019 Change
Revenue $ 4,894 $ 5,052 (3) %
Operating profit 2,078 2,196 (5) %
Operating profit % of revenue 42.5 % 43.5 %
Analog revenue decreased in High Volume and Signal Chain due to changes in the mix of products shipped. Power revenue was about even. Operating profit decreased due to lower revenue and associated gross profit. Embedded Processing
YTD 2020 YTD 2019 Change
Revenue $ 1,199 $ 1,586 (24) %
Operating profit 307 514 (40) %
Operating profit % of revenue 25.6 % 32.4 %
Embedded Processing revenue decreased in both product lines, led by Processors. Operating profit decreased due to lower revenue and associated gross profit.
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Other
YTD 2020 YTD 2019 Change
Revenue $ 475 $ 624 (24) %
Operating profit* 87 175 (50) %
Operating profit % of revenue 18.3 % 28.0 %
* Includes acquisition charges and restructuring charges/other
Other revenue decreased$149 million , and operating profit decreased$88 million . Financial condition At the end of the second quarter of 2020, total cash (cash and cash equivalents plus short-term investments) was$4.96 billion , a decrease of$427 million from the end of 2019. Accounts receivable were$1.18 billion , an increase of$102 million compared with the end of 2019. Days sales outstanding at the end of the second quarter of 2020 were 33 compared with 29 at the end of 2019. Inventory was$2.14 billion , an increase of$135 million from the end of 2019. Days of inventory at the end of the second quarter of 2020 were 166 compared with 144 at the end of 2019. The increase in inventory reflects our desire to maintain high optionality with our operating plan so we can keep our lead times stable and product availability high, particularly during this time when our customers' ability to forecast their demand is limited. It is also higher as we reduce the number of distributors this year and have a closer, more direct relationship with our customers. 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 a variable-rate, revolving credit facility. Cash flows from operating activities for the first six months of 2020 were$2.57 billion , a decrease of$332 million from the year-ago period primarily due to an increase in cash used for working capital. Our revolving credit facility is with a consortium of investment-grade banks and allows us to borrow up to$2 billion untilMarch 2024 . This credit facility also serves as support for the issuance of commercial paper. As ofJune 30, 2020 , our credit facility was undrawn, and we had no commercial paper outstanding. Investing activities for the first six months of 2020 provided$2.26 billion compared with$915 million in the year-ago period. Capital expenditures were$291 million compared with$535 million in the year-ago period and were primarily for semiconductor manufacturing equipment and facilities in both periods. Short-term investments provided cash of$2.55 billion compared with$1.40 billion in the year-ago period. Financing activities for the first six months of 2020 used$2.98 billion compared with$2.44 billion in the year-ago period. In 2020, we received net proceeds of$1.50 billion from the issuance of fixed-rate, long-term debt, and we retired maturing debt of$500 million . In the year-ago period, we received net proceeds of$743 million from the issuance of fixed-rate, long-term debt. Dividends paid were$1.66 billion compared with$1.45 billion in the year-ago period, reflecting an increase in the dividend rate, partially offset by fewer shares outstanding. We used$2.52 billion to repurchase 23.2 million shares of our common stock compared with$2.02 billion used in the year-ago period to repurchase 19.6 million shares. Employee exercises of stock options provided cash proceeds of$233 million compared with$297 million in the year-ago period. We had$4.29 billion of cash and cash equivalents and$666 million of short-term investments as ofJune 30, 2020 . We believe we have the necessary financial resources and operating plans to fund our working capital needs, capital expenditures, dividend and debt-related payments, and other business requirements for at least the next 12 months. Non-GAAP financial information This MD&A includes references to free cash flow and ratios based on that measure. These are financial measures that were not prepared in accordance with generally accepted accounting principles inthe United States (GAAP). Free cash flow was calculated by subtracting capital expenditures from the most directly comparable GAAP measure, cash flows from operating activities (also referred to as cash flow from operations). 20 -------------------------------------------------------------------------------- We believe that free cash flow and the associated ratios provide insight into our liquidity, our cash-generating capability and the amount of cash potentially available to return to shareholders, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures. Reconciliation to the most directly comparable GAAP measures is provided in the table below. For 12 Months Ended June 30, 2020 2019 Change Cash flow from operations (GAAP)$ 6,317 $ 7,154 (12) % Capital expenditures (603) (1,228) Free cash flow (non-GAAP)$ 5,714 $ 5,926 (4) % Revenue$ 13,689 $ 15,240
Cash flow from operations as a percentage of revenue (GAAP) 46.1 %
46.9 %
Free cash flow as a percentage of revenue (non-GAAP) 41.7 % 38.9 %
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. Long-term contractual obligations Information regarding long-term contractual obligations is in Item 7 of our Form 10-K for the year endedDecember 31, 2019 . Additionally, in the first six months of 2020, we issued$750 million principal amount of 1.375% notes maturing in 2025 and$750 million principal amount of 1.75% notes maturing in 2030. We retired$500 million of maturing debt inApril 2020 . Changes in accounting standards See Note 2 to the financial statements for information regarding the status of new accounting and reporting standards. 21
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