What changed in this filing

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Item 1. Business

2021-02-05 compared with 2020-02-20 · 99 added, 96 removed, 113 unchanged (63% of the section changed)

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In 2020, we generated $14.46 billion of revenue.

For decades, we have operated with a passion to create a better world by making electronics more affordable through semiconductors.

We were pioneers in the transition from vacuum tubes to transistors and then to integrated circuits.

As each generation became more reliable, more affordable and lower in power, semiconductors were used by a growing number of customers and markets.

This passion is alive today as we help our customers develop electronics and new applications, particularly in industrial and automotive markets.

For many years, we have run our business with three overarching ambitions in mind.

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When we are successful in achieving these ambitions, our employees, customers, communities and shareholders all win.

Our business model is designed around four sustainable competitive advantages that we believe, in combination, put us in a unique class of companies.

These advantages include (i) a strong foundation of manufacturing and technology, (ii) a broad portfolio of differentiated analog and embedded processing products, (iii) reach of market channels including our sales force and TI.com and (iv) diversity and longevity of our products, markets and customer positions.

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 (cash flow from operations less capital expenditures) will be valued only if it is productively invested in the business or returned to shareholders.

TI’s business model puts us in a unique class of companies with the ability to grow, generate cash and return that cash 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.

As engineers, we are fortunate to work on exciting technology which helps our customers innovate to create a better 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:

The first element of our strategy is a business model that is focused on analog and embedded processing products and built around four competitive advantages.

This business model is the result of a series of strategic decisions made over the years and that continue today.

The four sustainable competitive advantages are a strong foundation of manufacturing and technology, a broad portfolio of analog and embedded processing products, the reach of our market channels, and diversity and longevity of our products, markets and customer positions.

In combination, these four competitive advantages provide tangible benefits, are difficult to replicate and ultimately separate us from our best peers.

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.

The second element of our strategy to maximize free cash flow per share growth is disciplined allocation of capital.

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.

Over a 10-year period from 2011 to 2020, we allocated $83 billion, which reinforces the importance of discipline in capital allocation.

The largest allocation over this period was to drive organic growth, which includes investments in R&D, sales and marketing, capital expenditures and working capital for inventory.

Beyond that, we also allocated capital to dividends and share repurchases.

Dividends are designed to appeal to a broad set of investors, and share repurchases are made with the goal of the accretive capture of future free cash flow for long-term investors.

Lastly, we allocate to acquisitions for inorganic growth, which we last did in 2011 when we acquired National Semiconductor.

The third element of our strategy is efficiency, which we think of as constantly striving for more output for every dollar spent.

This is about getting our investments in the most impactful areas to maximize the growth of long-term free cash flow per share;

it is not just about optimizing cost-cutting to get to the last dollar of expense.

We bring this philosophy of efficiency and continuous improvement to all areas of the company, and this focus on efficiency contributes to revenue growth, improved gross margins, disciplined R&D and SG&A expense, free cash flow margins and ultimately to free cash flow per share growth.

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.

Product information

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Semiconductors, generally known as “chips,” combine multiple transistors to form a complete electronic circuit.

We have tens of thousands of products that are used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution.

This broad portfolio includes products that are integral to almost all electronic equipment.

We have a diverse product portfolio that is used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution.

This broad portfolio includes approximately 80,000 products that are integral to almost every type of electronic equipment.

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.

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Analog semiconductors are also used to manage power in all electronic equipment by converting, distributing, storing, discharging, isolating and measuring electrical energy, whether the equipment is plugged into a wall or using a battery.

As the digitization of electronics continues, there is a growing need and opportunity for analog chips to provide the power to run devices and the critical interfaces with human beings, the real world and other electronic devices.

Our Analog products are used in many markets, particularly industrial, automotive and personal electronics.

Sales of our Analog products generated about 75% of our revenue in 2020.

According to external sources, the market for analog semiconductors was about $54 billion in 2019.

Our Analog segment’s revenue in 2019 was about 19% of this fragmented market, which is the leading position.

We believe we are well positioned to increase our market share over time.

Our Analog segment includes the following major product lines:

Power, Signal Chain and High Volume.

Power includes products that help customers manage power in electronic systems.

Our broad portfolio is designed to manage power requirements across different voltage levels using battery management solutions, portable components, power supply controls, point-of-load products, switches and interfaces, integrated protection devices, high-voltage products and mobile lighting and display products.

Power and Signal Chain.

Power includes products that help customers manage power in electronic systems in all end markets.

Our broad portfolio is designed to manage power requirements across different voltage levels, including battery-management solutions, DC/DC switching regulators, AC/DC and isolated controllers and converters, power switches, linear regulators, voltage supervisors, voltage references and lighting products.

Signal Chain includes products that sense, condition and measure real-world signals to allow information to be transferred or converted for further processing and control.

Our Signal Chain products, which serve a variety of end markets, include amplifiers, data converters, interface products, motor drives, clocks and sensing products.

High Volume includes integrated analog and standard products that are primarily sold into markets such as personal electronics, industrial and automotive.

These products support applications like displays and automotive safety systems.

Our Signal Chain products, which serve a variety of end markets, include amplifiers, data converters, interface products, motor drives, clocks, logic and sensing products.

Embedded Processing

Our Embedded Processing segment generated $2.57 billion of revenue in 2020.

Embedded Processing products are the “brains” of many types of electronic equipment.

Embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application.

Our devices vary from simple, low-cost microcontrollers used in applications such as electric toothbrushes to highly specialized, complex devices used in automotive applications such as infotainment systems and advanced driver assistance systems (ADAS).

Embedded Processing products are the digital “brains” of many types of electronic equipment.

They are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application.

Our devices vary from simple, low-cost microcontrollers used in applications such as electric toothbrushes to highly specialized, complex devices such as motor control.

Our Embedded Processing products are used in many markets, particularly industrial and automotive.

An important characteristic of our Embedded Processing products is that our customers often invest their own research and development (R&D) to write software that operates on our products.

This investment tends to increase the length of our customer relationships because many customers prefer to re-use software from one product generation to the next.

This investment tends to increase the length of our customer relationships because many customers prefer to reuse software from one product generation to the next.

Sales of Embedded Processing products generated about 18% of our revenue in 2020.

According to external sources, the market for embedded processors was about $18 billion in 2019.

Our Embedded Processing segment’s revenue in 2019 was about 16% of this fragmented market, which is among the leaders.

We believe we are well positioned to increase our market share over time.

Our Embedded Processing segment includes the following major product lines:

Connected Microcontrollers and Processors.

Connected Microcontrollers

Connected Microcontrollers includes microcontrollers, microcontrollers with integrated wireless capabilities and stand-alone wireless connectivity solutions.

Our Embedded Processing segment includes microcontrollers, digital signal processors (DSPs) and applications processors.

Microcontrollers are self-contained systems with a processor core, memory and peripherals that are designed to control a set of specific tasks for electronic equipment.

Processors includes digital signal processors (DSPs) and applications processors.

DSPs perform mathematical computations almost instantaneously to process or improve digital data.

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We report the results of our remaining business activities in Other, which includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments.

Other generated $1.22 billion of revenue in 2019 and includes revenue from DLP ® products (primarily used in projectors to create high-definition images), calculators and certain custom semiconductors known as application-specific integrated circuits (ASICs).

Other generated $1.01 billion of revenue in 2020 and includes revenue from DLP ® products (primarily used to project high-definition images), calculators and certain custom semiconductors known as application-specific integrated circuits (ASICs).

In Other, we also include items that are not used in evaluating the results of or in allocating resources to our segments.

Examples of these items include acquisition charges, restructuring charges, and certain corporate-level items, such as litigation expenses, environmental costs, insurance settlements and gains and losses from other activities, including asset dispositions.

Examples of these items include acquisition charges, restructuring charges and certain corporate-level items, such as litigation expenses, environmental costs and gains and losses from other activities, including asset dispositions.

Markets for our products

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Industrial Factory automation & control

(36% of TI revenue) Building automation

(37% of TI revenue) Medical

Building automation

Grid infrastructure

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Test & measurement

Pro audio, video & signage

Power delivery

Retail automation & payments

Pro audio, video & signage

Retail automation & payment

Industrial transport

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(20% of TI revenue) Advanced driver assistance systems (ADAS)

Passive safety

Hybrid, electric & powertrain systems

Passive safety

Body electronics & lighting

Personal electronics Mobile phones

(23% of TI revenue) Portable electronics

PC & notebooks

(27% of TI revenue) PC & notebooks

Portable electronics

Connected peripherals & printers

Home theatre & entertainment

Home theater & entertainment

Wearables (non-medical)

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As a result, we face significant global competition from dozens of large and small companies, including both broad-based suppliers and niche suppliers.

Our competitors also include emerging companies, particularly in Asia, that sell products into the same markets in which we operate.

We believe that competitive performance in the semiconductor market generally depends on several factors, including the breadth of a company’s product line, the strength and depth of its channels to market, technological innovation, product development execution, technical support, customer service, quality, reliability, manufacturing capacity and capabilities and price.

Our competitors also include emerging companies, particularly in Asia.

We believe that competitive performance in the semiconductor market generally depends on several factors, including the breadth of a company’s product line, the strength and reach of its channels to market, technological innovation, product development execution, technical support, customer service, quality, reliability, price and manufacturing capacity and capabilities.

In addition, manufacturing process and package technologies that provide differentiated levels of performance and a structural cost advantage are competitive factors for our analog products, and customers’ prior investments in software development is a competitive factor for our embedded processing products.

Product cycle

The global semiconductor market is characterized by constant, though generally incremental, advances in product designs and manufacturing processes.

Semiconductor prices and manufacturing costs tend to decline over time as manufacturing processes and product life cycles mature.

The “semiconductor cycle” refers to the ebb and flow of supply and demand and the building and depleting of inventories.

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These are typically referred to as upturns and downturns in the semiconductor cycle.

The semiconductor cycle could be affected by the significant time and money required to build and maintain semiconductor manufacturing facilities.

We employ several strategies to dampen the effect of the semiconductor cycle on TI.

We focus our resources on analog and embedded processing products and industrial and automotive markets.

These products and markets serve a large and diverse customer base, which reduces our dependence on the performance of a single market or small group of customers.

Industrial and automotive markets also benefit from long product life cycles, which help to smooth the impact of cyclicality.

In addition, we plan manufacturing facility and equipment expansion ahead of demand, as well as utilize consignment inventory programs to give us improved insight into customer demand and more accurately manage factory loadings.

A semiconductor cycle could be affected by the significant time and money required to build and maintain semiconductor manufacturing facilities.

We employ several strategies which have many benefits, including dampening the effect of the semiconductor cycle on TI.

As an example, we are focused on building closer direct relationships with customers.

When it comes to market cycles, these relationships provide improved insight into customer demand and allow us to more accurately and efficiently manage factory loadings and inventory levels, which lead to more stable lead times and higher product availability.

Finally, we focus our resources on analog and embedded processing products and industrial and automotive markets.

Generally, our products serve a large and diverse customer base, which reduces our dependence on the performance of any single product, market or customer.

In addition, they typically have long shelf lives and low risk of obsolescence.

Industrial and automotive markets also benefit from long product life cycles, with revenue often lasting 10 years or more, which help to smooth the impact of cyclicality.

Our revenue is subject to some seasonal variation.

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Customers, sales and distribution

We sell our products to about 100,000 customers.

We sell our products to over 100,000 customers.

Our customer base is diverse, with more than one-third of our revenue derived from customers outside our largest 100.

We market and sell our products through direct sales channels, including our broad sales force and our website, and through distributors.

In 2019, about 65% of our sales were fulfilled through our distributors, and they maintain inventory of our products.

Over the past several years, we have been investing in new capabilities and evolving our distribution network to better align with our strategy to establish closer, more direct relationships with our customers.

Closer direct customer relationships give us better insight into customer needs and allow us to provide better service and greater assurance of supply, among other benefits.

As we expand these direct customer relationships over the next several years, we will have less business flowing through the distribution channel and therefore will require fewer distributors.

We market and sell our products through direct sales channels, including our website and broad sales and applications team, and through distributors.

Over the past several years, we have been investing in new capabilities and evolving our distribution network to better align with our strategy to establish closer direct relationships with our customers.

With less business flowing through the distribution channel, we require fewer distributors.

During 2020, we completed our transition to a single worldwide distributor, coupled with a few region-specific distributors, for order fulfillment.

Building closer direct customer relationships strengthens our reach of market channel advantage, which gives us access to more customers and more of their design projects, leading to the opportunity to sell more of our products into each design.

Additionally, broader and deeper access gives us better insight and knowledge of customer needs.

Our investments in new and improved capabilities to directly support our customers include website and e-commerce enhancements as well as inventory consignment programs and order fulfillment services.

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Each device on the wafer is packaged and tested.

The entire process takes place in highly specialized facilities, with most products requiring about two to three months for completion.

The entire process takes place in highly specialized facilities that require substantial investments.

We own and operate semiconductor manufacturing facilities in North America, Asia, Japan and Europe.

These include both wafer fabrication and assembly/test facilities.

Our facilities require substantial investment to construct and are largely fixed-cost assets once in operation.

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.

This strategic decision to make manufacturing and technology a core competitive advantage delivers tangible benefits of lower manufacturing costs and greater control of our supply chain.

We have focused on creating a competitive manufacturing structural cost advantage by investing in our advanced analog 300-millimeter capacity.

An unpackaged chip built on 300-millimeter wafers costs about 40% less than an unpackaged chip built on 200-millimeter wafers.

To strengthen this advantage, construction is underway on our new 300-millimeter wafer fabrication facility in Richardson, Texas, as 300-millimeter wafers will continue to support the majority of our Analog growth.

We assess and are careful to address potential health, safety, and environmental risks presented by our operations, including our manufacturing operations.

We care for our environment and work to prevent pollution and the potential risks related to climate change by implementing practices such as recycling and reusing materials, controlling harmful emissions, and properly handling hazardous and restricted substances.

We expect to continue to maintain sufficient internal manufacturing capacity to meet the majority of our production needs and to obtain manufacturing equipment to support new technology developments and revenue growth.

To supplement our manufacturing capacity and maximize our responsiveness to customer demand, we use the capacity of outside suppliers, commonly known as foundries, and subcontractors.

In 2019, we sourced about 20% of our total wafers from external foundries, most of which support our Embedded Processing segment, and about 40% of our assembly/test services from subcontractors.

Our objectives for inventory are to maintain high levels of customer service and stable lead times, minimize inventory obsolescence and improve manufacturing asset utilization.

To meet these objectives and to allow greater flexibility in periods of high demand, we build ahead of demand long-lived, low-volume products and maintain inventory of other products that have a broad customer base and low risk of obsolescence.

Further, we have improved insight into demand and are better able to manage our factory loadings because over time we have increased consignment inventory programs and are building closer, more direct relationships with our customers.

In 2019, about 65% of TI revenue was fulfilled from consignment programs.

Our strategy and expected customer demand will cause our inventory levels to fluctuate over time.

We define backlog as of a particular date as purchase orders with a customer-requested delivery date within a specified length of time.

Our backlog at any particular date may not be indicative of revenue for any future period.

As customer requirements and industry conditions change, orders may be subject to cancellation or modification of terms such as pricing, quantity or delivery date.

Customer order placement practices continually evolve based on customers’ individual business needs and capabilities, as well as industry supply and capacity considerations.

Further, our consignment programs do not result in backlog because the order occurs at the same time as delivery, i.e., when the customer pulls the product from consigned inventory.

Our backlog of orders was $1.0 billion at December 31, 2019, and $1.5 billion at December 31, 2018.

To supplement our manufacturing capacity and maximize our responsiveness to customer demand, we selectively use the capacity of outside suppliers, commonly known as foundries, and subcontractors.

In 2020, we sourced about 20% of our total wafers from external foundries and about 40% of our assembly/test services from subcontractors.

Our objectives for inventory are to maintain high levels of customer service, maintain stable and competitive lead times, minimize inventory obsolescence and improve manufacturing asset utilization.

To meet these objectives and to allow greater flexibility in periods of high demand, we build ahead of demand our broad-based products that are used across a diverse set of applications and customers and have low risk of obsolescence.

Inventory levels will vary based on market conditions and seasonality.

Raw materials

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We do not consider our business materially dependent upon any one patent or patent license.

We often participate in industry initiatives to set technical standards.

Our competitors may participate in the same initiatives.

Participation in these initiatives may require us to license certain of our patents to other companies on reasonable and non-discriminatory terms.

We own trademarks that are used in the conduct of our business.

These trademarks are valuable assets, the most important of which are “Texas Instruments” and our corporate monogram.

Executive officers of the Registrant

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Name Age Position

Niels Anderskouv 50 Senior Vice President

Bahai 58 Senior Vice President

Barker 57 Senior Vice President and Chief Information Officer

Flessner 50 Senior Vice President

Haviv Ilan 51 Senior Vice President

Gary 46 Senior Vice President

Haviv Ilan 52 Executive Vice President and Chief Operating Officer

Kozanian 38 Senior Vice President

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Whitaker 55 Senior Vice President

Bing Xie 52 Senior Vice President

The term of office of these officers is from the date of their election until their successor shall have been elected and qualified.

All have been employees of the company for more than five years.

Templeton and Xie and Ms.

Whitaker have served as executive officers of the company for more than five years.

Trochu became an executive officer of the company in 2015.

Anderskouv, Ilan and Lizardi and Mses.

Barker and Van Haren became executive officers of the company in 2017.

Templeton and Mses.

Trochu and Whitaker have served as executive officers of the company for more than five years.

Ilan and Lizardi and Ms.

Van Haren became executive officers of the company in 2017.

Bahai, Flessner and Kozanian became executive officers of the company in 2018.

Ron became an executive officer in 2019.

Anderskouv was previously an executive officer of the company from 2012 to 2014.

At December 31, 2019, we had 29,768 employees.

Gary became an executive officer in 2020.

Human capital management

At December 31, 2020, we had about 30,000 employees worldwide.

Of those, about 85% were in Sales, R&D or manufacturing.

Our objective for human capital management is to recruit, develop and retain the best talent possible.

As a technology and manufacturing company, our success is grounded in having strong engineering talent and a reliable factory workforce.

We have a promote-from-within culture and offer training and rotation programs that provide the opportunity to quickly gain experience in different areas.

In 2020, our turnover rate was 7.1%.

It is important that our employees represent a mix of experiences and backgrounds in order to make our company stronger, more innovative and more inclusive.

Inclusion is one of our core values, and we have programs in place to promote diversity and inclusion.

To learn more, review our Corporate Citizenship Report.

Information in our Corporate Citizenship Report is not part of this report.

Available information

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and (iv) our Code of Ethics for TI Chief Executive Officer and Senior Finance Officers.

Stockholders may request copies of these documents free of charge by writing to Texas Instruments Incorporated, P.O.

Box 660199, MS 8657, Dallas, Texas, 75266-0199, Attention:

Investor Relations.

Stockholders may request copies of these documents free of charge by writing to Texas Instruments Incorporated, Attention:

Investor Relations, P.O.

Box 660199, MS 8657, Dallas, Texas, 75266-0199.

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-K

Item 1. Business