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. During 2020, we reorganized the product lines
within our Analog segment to simplify our business structure into our Power and
Signal Chain product lines. These changes had no impact on our previously
reported consolidated financial statements or on our reportable segment 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. 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 of U.S. dollars.
Our results of operations provides details of our financial results for 2020 and
2019 and year-to-year comparisons between 2020 and 2019. Discussion of 2018
items and year-to-year comparisons between 2019 and 2018 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, 2019.
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. Therefore, we remain cautious about how the economy might behave
for the next few years.
The impact to our lead times and ability to fulfill orders was minimal in 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 continue to
monitor and assess the situation and address implications to our business,
supply chain and customer demand.
We have long had a business continuity plan in place for unforeseeable
situations, like we have seen 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.
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 64.1% 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 $6.14 billion underscored
the strength of our business model. Free cash flow was $5.49 billion and
represented 38.0% of revenue. During 2020, consistent with our commitment to
return free cash flow to owners, we returned $5.98 billion to shareholders
through a combination of dividends and stock repurchases. Our dividend
represented 62% of free cash flow, underscoring its sustainability.
Details of financial results - 2020 compared with 2019
Revenue of $14.46 billion increased $78 million, or 1%, primarily due to higher
revenue from Analog, partially offset by lower revenue from Embedded Processing.
Gross profit of $9.27 billion was up $105 million, or 1%, due to higher revenue
and increased factory loadings. As a percentage of revenue, gross profit
increased to 64.1% from 63.7%.
Operating expenses (R&D and SG&A) were $3.15 billion compared with $3.19
billion.
Acquisition charges were $198 million compared with $288 million and were
non-cash. See Note 7 to the financial statements.
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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 $5.89 billion, or 40.8% of revenue, compared with $5.72
billion, or 39.8% of revenue.
Other income and expense (OI&E) was $313 million of income compared with $175
million of income, which increased primarily due to higher royalty income. See
Note 12 to the financial statements.
Interest and debt expense of $190 million increased $20 million due to the
issuance of additional long-term debt.
Our provision for income taxes was $422 million compared with $711 million. The
decrease 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, higher U.S. tax benefits, partially offset by higher
income before income taxes.
Our annual operating tax rate, which does not include discrete tax items, was
14% compared with 16% in 2019. We use "annual operating tax rate" to describe
the estimated annual effective tax rate. Our effective tax rate, which includes
discrete tax items, was 7% in 2020 compared with 12% in 2019. 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 $5.60 billion compared with $5.02 billion. EPS was $5.97 compared
with $5.24.
Segment results - 2020 compared with 2019
Analog (includes Power and Signal Chain product lines)
                                    2020           2019         Change
Revenue                          $ 10,886       $ 10,223           6  %
Operating profit                    4,912          4,477          10  %
Operating profit % of revenue        45.1  %        43.8  %

Analog revenue increased in both product lines about evenly. Operating profit increased due to higher revenue and associated gross profit. Embedded Processing (includes microcontrollers and processors)


                                    2020          2019        Change
Revenue                          $ 2,570       $ 2,943         (13) %
Operating profit                     743           907         (18) %

Operating profit % of revenue 28.9 % 30.8 %




Embedded Processing revenue decreased. Operating profit decreased due to lower
revenue and associated gross profit.
Other (includes DLP® products, calculators and custom ASIC products)
                                    2020          2019        Change
Revenue                          $ 1,005       $ 1,217         (17) %
Operating profit *                   239           339         (29) %

Operating profit % of revenue 23.8 % 27.9 %




* Includes acquisition charges and restructuring charges/other
Other revenue decreased $212 million, and operating profit decreased $100
million.
Financial condition
At the end of 2020, total cash (cash and cash equivalents plus short-term
investments) was $6.57 billion, an increase of $1.18 billion from the end of
2019.
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Accounts receivable were $1.41 billion, an increase of $340 million compared
with the end of 2019. Days sales outstanding at the end of 2020 were 31 compared
with 29 at the end of 2019.
Inventory was $1.96 billion, a decrease of $46 million from the end of 2019.
Days of inventory at the end of 2020 were 123 compared with 144 at the end of
2019.
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 2020 were $6.14 billion, a decrease of $510 million primarily due to an
increase in cash used for working capital, partially offset by higher net
income.
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, 2020,
our credit facility was undrawn, and we had no commercial paper outstanding.
Investing activities for 2020 used $922 million compared with $1.92 billion in
2019. Capital expenditures were $649 million compared with $847 million in 2019
and were primarily for semiconductor manufacturing equipment and facilities in
both periods. Short-term investments used cash of $241 million in 2020 compared
with $1.14 billion in 2019.
Financing activities for 2020 used $4.55 billion compared with $4.73 billion in
2019. 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. 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. Dividends paid in 2020
were $3.43 billion compared with $3.01 billion in 2019, reflecting an increase
in the dividend rate, partially offset by fewer shares outstanding. We used
$2.55 billion to repurchase 23.4 million shares of our common stock compared
with $2.96 billion used in 2019 to repurchase 27.4 million shares. Employee
exercises of stock options provided cash proceeds of $470 million compared with
$539 million in 2019.
We had $3.11 billion of cash and cash equivalents and $3.46 billion of
short-term investments as of December 31, 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 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,
                                                                         2020                  2019
Cash flow from operations (GAAP)                                   $       6,139           $   6,649
Capital expenditures                                                        (649)               (847)
Free cash flow (non-GAAP)                                          $       5,490           $   5,802

Revenue                                                            $      14,461           $  14,383

Cash flow from operations as a percentage of revenue (GAAP)                 42.5   %            46.2  %
Free cash flow as a percentage of revenue (non-GAAP)                        38.0   %            40.3  %


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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
                                                                              Payments Due by Period
Contractual Obligations                         2021            2022/2023           2024/2025           Thereafter            Total
Long-term debt (a)                           $   726          $    1,326          $    1,337          $     6,172          $  9,561
Purchase commitments (b)                         400                 196                  55                   96               747
Transition tax on indefinitely
reinvested earnings (c)                           44                 155                 302                    -               501
Operating leases (d)                              76                  98                  59                  138               371
Deferred compensation plans (e)                   25                  68                  66                  154               313
Total (f)                                    $ 1,271          $    1,843          $    1,819          $     6,560          $ 11,493


(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.
(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,
2020.
(f)Excludes $89 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 $10 million in 2021, but
funding projections beyond 2021 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.
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.
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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, 2020, 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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