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 in
Richardson, 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.
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•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.
•All dollar amounts in the tables are stated in millions of U.S. dollars.
Our results of operations discussed below provides details of our financial
results for 2019 and 2018 and year-to-year comparisons between 2019 and 2018.
Discussion of 2017 items and year-to-year comparisons between 2018 and 2017 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, 2018.
Results of operations
In 2019, we continued our focus on analog and embedded processing products and
the industrial and automotive markets. Together, these products and markets
represent highly diverse opportunities with thousands of applications and
long-term growth potential. Gross margin of 63.7% reflected the quality of our
product portfolio, as well as the efficiency of our manufacturing strategy,
including the benefit of 300-millimeter Analog production.
Our focus on Analog and Embedded Processing allows us to generate strong cash
flow from operations. Our cash flow from operations of $6.65 billion underscored
the strength of our business model. Free cash flow was $5.80 billion and
represented 40.3% of revenue, up from 38.4% a year ago. During 2019, we returned
$5.97 billion to shareholders through a combination of stock repurchases and
dividends. Our strategy is to return all free cash flow to shareholders. Our
dividends represented 52% of free cash flow, underscoring their sustainability.
For an explanation of free cash flow, see the Non-GAAP financial information
section.
Details of financial results - 2019 compared with 2018
Revenue of $14.38 billion decreased $1.40 billion, or 9%, primarily due to lower
revenue from Embedded Processing and Analog.
Gross profit of $9.16 billion was down $1.11 billion, or 11%, primarily due to
lower revenue. As a percentage of revenue, gross profit decreased to 63.7% from
65.1%.
Operating expenses (R&D and SG&A) were $3.19 billion compared with $3.24
billion.
Acquisition charges of $288 million were non-cash. See Note 7 to the financial
statements.
Restructuring charges/other was a credit of $36 million due to the sale of our
manufacturing facility in Greenock, Scotland.
Operating profit was $5.72 billion, or 39.8% of revenue, compared with $6.71
billion, or 42.5% of revenue.
Other income and expense (OI&E) was $175 million of income compared with $98
million of income. See Note 12 to the financial statements.
Interest and debt expense of $170 million increased $45 million due to the
issuance of additional long-term debt.
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Our provision for income taxes was $711 million compared with $1.11 billion. The
decrease was due to lower income before income taxes and a lower annual
operating tax rate. Our annual operating tax rate, which does not include
discrete tax items, was 16% compared with 20% in 2018. We use "annual operating
tax rate" to describe the estimated annual effective tax rate, as explained
further in the Non-GAAP financial information section.
Our effective tax rate, which includes discrete tax items, was 12% in 2019
compared with 17% in 2018. See Note 4 to the financial statements for a
reconciliation of the U.S. statutory income tax rate to our effective tax rate.
Net income was $5.02 billion compared with $5.58 billion. EPS was $5.24 compared
with $5.59.
Segment results - 2019 compared with 2018
Analog (includes Power, Signal Chain and High Volume product lines)
                                    2019           2018         Change
Revenue                          $ 10,223       $ 10,801          (5) %
Operating profit                    4,477          5,109         (12) %

Operating profit % of revenue 43.8 % 47.3 %




Analog revenue decreased due to Power, High Volume and, to a lesser extent,
Signal Chain. Operating profit decreased primarily due to lower revenue and
associated gross profit.
Embedded Processing (includes Connected Microcontrollers and Processors product
lines)
                                    2019          2018        Change
Revenue                          $ 2,943       $ 3,554         (17) %
Operating profit                     907         1,205         (25) %

Operating profit % of revenue 30.8 % 33.9 %




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)
                                    2019          2018        Change
Revenue                          $ 1,217       $ 1,429         (15) %
Operating profit *                   339           399         (15) %

Operating profit % of revenue 27.9 % 27.9 %




* Includes acquisition charges and restructuring charges/other
Other revenue decreased $212 million, and operating profit decreased $60
million.
Financial condition
At the end of 2019, total cash (cash and cash equivalents plus short-term
investments) was $5.39 billion, an increase of $1.15 billion from the end of
2018.
Accounts receivable were $1.07 billion, a decrease of $133 million compared with
the end of 2018. Days sales outstanding were 29 at the end of both 2019 and
2018.
Inventory was $2.00 billion, a decrease of $216 million from the end of 2018.
Days of inventory at the end of 2019 were 144 compared with 152 at the end of
2018.
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 2019 were $6.65 billion, a decrease of $540 million primarily due to lower
net income.
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Our revolving credit facility is with a consortium of investment-grade banks and
allows us to borrow up to $2 billion until March 2024. This credit facility also
serves as support for the issuance of commercial paper. As of December 31, 2019,
our credit facility was undrawn, and we had no commercial paper outstanding.
Investing activities for 2019 used $1.92 billion compared with $78 million in
2018. Capital expenditures were $847 million compared with $1.13 billion in 2018
and were primarily for semiconductor manufacturing equipment in both periods.
Short-term investments used cash of $1.14 billion in 2019 and provided cash
proceeds of $1.07 billion in 2018.
Financing activities for 2019 used $4.73 billion compared with $6.33 billion in
2018. In 2019, we received net proceeds of $1.49 billion from the issuance of
fixed-rate, long-term debt and retired maturing debt of $750 million. In 2018,
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 2019
were $3.01 billion compared with $2.56 billion in 2018, reflecting an increase
in the dividend rate, partially offset by fewer shares outstanding. We used
$2.96 billion to repurchase 27.4 million shares of our common stock compared
with $5.10 billion used in 2018 to repurchase 49.5 million shares. Employee
exercises of stock options provided cash proceeds of $539 million compared with
$373 million in 2018.
We had $2.44 billion of cash and cash equivalents and $2.95 billion of
short-term investments as of December 31, 2019. 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,
                                                                         2019                  2018
Cash flow from operations (GAAP)                                   $       6,649           $   7,189
Capital expenditures                                                        (847)             (1,131)
Free cash flow (non-GAAP)                                          $       5,802           $   6,058

Revenue                                                            $      14,383           $  15,784

Cash flow from operations as a percentage of revenue (GAAP)                 46.2   %            45.5  %
Free cash flow as a percentage of revenue (non-GAAP)                        40.3   %            38.4  %


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.
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Long-term contractual obligations


                                                                             Payments Due by Period
Contractual Obligations                          2020           2021/2022         2023/2024         Thereafter            Total
Long-term debt (a)                            $   669          $  1,349

$ 1,060 $ 5,488 $ 8,566 Purchase commitments (b)

                          452               407                97                 109             1,065
Transition tax on indefinitely
reinvested earnings (c)                             -               100               237                 169               506
Operating leases (d)                               75               114                66                 131               386
Deferred compensation plans (e)                    23                63                54                 135               275
Total (f)                                     $ 1,219          $  2,033          $  1,514          $    6,032          $ 10,798


(a)Principal and related interest payments for our long-term debt obligations,
including amounts classified as the current portion of long-term debt.
(b)Includes payments for software licenses and contractual arrangements with
suppliers when there is a fixed, non-cancellable payment schedule or when
minimum payments are due with a reduced delivery schedule. Excludes cancellable
arrangements. See Note 11 to the financial statements.
(c)Includes payments for the one-time transition tax on our indefinitely
reinvested earnings related to the 2017 enactment of the U.S. Tax Cuts and Jobs
Act. See Note 4 to the financial statements.
(d)Includes minimum payments for leased facilities and equipment and purchases
of industrial gases under contracts accounted for as operating leases. See Note
10 to the financial statements.
(e)Estimated payments for certain liabilities that existed as of December 31,
2019.
(f)Excludes $303 million of uncertain tax liabilities under ASC 740, as well as
any planned future funding contributions to retirement benefit plans. Amounts
associated with uncertain tax liabilities have been excluded because of the
difficulty in making reasonably reliable estimates of the timing of cash
settlements with the respective taxing authorities. Regarding future funding of
retirement benefit plans, we plan to contribute about $20 million in 2020, but
funding projections beyond 2020 are not practical to estimate due to the rules
affecting tax-deductible contributions and the impact from the plans' asset
performance, interest rates and potential U.S. and non-U.S. legislation.
Critical accounting policies
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.
Revenue recognition
Based on management's assessment of the revenue recognition criteria, we
generally recognize revenue from sales of our products to distributors upon
shipment or delivery to the distributors. For our consignment arrangements with
distributors, delivery occurs and revenue is recognized when the distributor
pulls product from consignment inventory that we store at designated locations.
Recognition is not contingent upon resale of the products to the distributors'
customers in either scenario.
Revenue is recognized net of allowances, which are management's estimates of
future credits to be granted to distributors under programs common in the
semiconductor industry. These allowances are not material and generally include
special pricing arrangements, product returns due to quality issues, and
incentives designed to maximize growth opportunities.
Allowances are based on analysis of historical data and contractual terms and
are recorded when revenue is recognized. We believe we can reasonably and
reliably estimate allowances for credits to distributors in a timely manner.
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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 deferred tax assets 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.
Changes in accounting standards
See Note 2 to the financial statements for information regarding the status of
new accounting and reporting standards.
Off-balance sheet arrangements
As of December 31, 2019, we had no significant off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Commitments and contingencies
See Note 11 to the financial statements for a discussion of our commitments and
contingencies.
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