What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-07-22 compared with 2020-04-22 · 73 added, 33 removed, 124 unchanged (46% of the section changed)

42 unchanged sentences

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.

Impact of COVID-19

The coronavirus (COVID-19) pandemic, the likely resulting recession and its follow-on effects are impacting and will likely continue to impact business activity across industries worldwide, including TI.

The impact to our lead times and ability to fulfill orders was minimal in Q1 2020.

However, depending on pandemic-related factors like the duration of local manufacturing restrictions in Malaysia and the Philippines, we could experience constraints in fulfilling customer orders in future periods.

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.

With a COVID-19 recession likely upon us, and with reduced visibility of customer demand, we are using the 2008 financial crisis to model our forecasted second quarter results of operations in an environment of a potentially significant decrease in customer demand.

TI has long had a business continuity plan in place for unforeseeable situations, like we are experiencing with COVID-19.

Additionally, over the past several years, TI has invested in building inventory and expanding our global internally-owned manufacturing footprint.

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.

1 unchanged sentence

Performance summary

Our first quarter revenue was $3.33 billion, net income was $1.17 billion and earnings per share (EPS) were $1.24.

Revenue decreased 7% from the same quarter a year ago.

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.

4 unchanged sentences

Together, our stock repurchases and dividends reflect our continued commitment to return all free cash flow to our shareholders.

We expect our annual operating tax rate to be about 14% in 2020.

For an explanation of free cash flow and the term “annual operating tax rate,” see the Non-GAAP financial information section.

Results of operations – first quarter 2020 compared with first quarter 2019

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.

Gross profit of $2.08 billion was down $278 million, or 12%, due to lower revenue.

As a percentage of revenue, gross profit decreased to 62.7% from 62.9%.

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.

1 unchanged sentence

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 $25 million of income compared with $36 million of income.

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 $50 million compared with $160 million.

The decrease was due to higher discrete tax benefits, lower income before income taxes and, to a lesser extent, a lower annual operating tax rate.

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.

5 unchanged sentences

EPS was $1.48 compared with $1.36.

First quarter 2020 segment results

Second quarter 2020 segment results

Our segment results compared with the year-ago quarter are as follows:

4 unchanged sentences

Operating profit % of revenue 43.3 % 43.7 %

Analog revenue decreased in Signal Chain and High Volume due to the mix of products shipped.

Power revenue increased.

Operating profit decreased primarily due to lower revenue and associated gross profit.

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)

10 unchanged sentences

Operating profit % of revenue 19.3 % 38.7 %

* Includes acquisition charges

* Includes acquisition charges and restructuring charges/other

Other revenue decreased $85 million, and operating profit decreased $83 million.

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.

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.

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:

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.

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 first quarter of 2020, total cash (cash and cash equivalents plus short-term investments) was $4.74 billion, a decrease of $645 million from the end of 2019.

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 first quarter of 2020 were 36 compared with 29 at 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 first quarter of 2020 were 145 compared with 144 at 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

1 unchanged sentence

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 three months of 2020 were $851 million, a decrease of $256 million from the year-ago period primarily due to lower net income and an increase in cash used for working capital.

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 until March 2024.

This credit facility also serves as support for the issuance of commercial paper.

As of March 31, 2020, our credit facility was undrawn, and we had no commercial paper outstanding.

Investing activities for the first three months of 2020 provided $826 million compared with $1.17 billion of cash provided in the year-ago period.

As of June 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 $992 million compared with $1.44 billion in the year-ago period.

Financing activities for the first three months of 2020 used $1.60 billion compared with $998 million in the year-ago period.

In 2020, we received net proceeds of $749 million from the issuance of fixed-rate, long-term debt.

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 $841 million compared with $724 million in the year-ago period, reflecting an increase in the dividend rate, partially offset by fewer shares outstanding.

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 $2.52 billion of cash and cash equivalents and $2.22 billion of short-term investments as of March 31, 2020.

We had $4.29 billion of cash and cash equivalents and $666 million of short-term investments as of June 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.

18 unchanged sentences

Information regarding long-term contractual obligations is in Item 7 of our Form 10-K for the year ended December 31, 2019.

Additionally, in the first three months of 2020, we issued $750 million principal amount of 1.375% notes maturing in 2025.

These proceeds were used for general corporate purposes, including to repay $ 500 million of 1.75 % notes in April 2020.

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 in April 2020.

Changes in accounting standards

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis