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. •All dollar amounts in the tables are stated in millions ofU.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 endedDecember 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. 17 -------------------------------------------------------------------------------- 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 theU.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. 18 -------------------------------------------------------------------------------- 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 ofDecember 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$2.95 billion of short-term investments as ofDecember 31, 2019 . We believe we have the necessary financial resources and operating plans to fund our working capital needs, capital expenditures, dividend and debt-related payments, and other business requirements for at least the next 12 months. Non-GAAP financial information This MD&A includes references to free cash flow and ratios based on that measure. These are financial measures that were not prepared in accordance with generally accepted accounting principles inthe United States (GAAP). Free cash flow was calculated by subtracting capital expenditures from the most directly comparable GAAP measure, cash flows from operating activities (also referred to as cash flow from operations). We believe that free cash flow and the associated ratios provide insight into our liquidity, our cash-generating capability and the amount of cash potentially available to return to shareholders, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures. Reconciliation to the most directly comparable GAAP measures is provided in the table below. For Years Ended December 31, 2019 2018 Cash flow from operations (GAAP)$ 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. 19 --------------------------------------------------------------------------------
Long-term contractual obligations
Payments Due by Period Contractual Obligations 2020 2021/2022 2023/2024 Thereafter Total Long-term debt (a)$ 669 $ 1,349
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 theU.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 ofDecember 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 potentialU.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 withU.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. 20 -------------------------------------------------------------------------------- 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 inthe 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 inU.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 ofDecember 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. 21
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