What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-04 compared with 2021-02-05 · 28 added, 68 removed, 123 unchanged (44% of the section changed)

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• 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.

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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.

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Discussion of 2019 items and year-to-year comparisons between 2020 and 2019 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, 2020.

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.

The coronavirus (COVID-19) pandemic and its effects are impacting and will likely continue to impact market conditions and business operations across industries worldwide, including at TI.

Therefore, we remain cautious about how the economy might behave for the next few years and continue to monitor potential impact on our operations.

Results of operations

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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.

Gross margin of 67.5% reflected the quality of our product portfolio, as well as the efficiency of our manufacturing strategy, including the benefit of 300-millimeter production.

Our focus on analog and embedded processing allows us to generate strong cash flow from operations.

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Free cash flow was $6.29 billion and represented 34.3% 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.

During 2021, we returned $4.41 billion to shareholders through dividends and stock repurchases.

Over the same period, our dividend represented 62% of free cash flow, underscoring its sustainability.

Details of financial results – 2021 compared with 2020

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.

Revenue of $18.34 billion increased $3.88 billion, or 27%, due to higher revenue from Analog and, to a lesser extent, Embedded Processing.

Gross profit of $12.38 billion was up $3.11 billion, or 34%, primarily due to higher revenue.

As a percentage of revenue, gross profit increased to 67.5% from 64.1%.

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Acquisition charges were $142 million compared with $198 million and were non-cash.

See Note 7 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.

Restructuring charges/other was $54 million due to integration charges at our Lehi, Utah, manufacturing facility partially offset by gains on sales of assets, compared with $24 million due to an Embedded Processing action in 2020.

Operating profit was $8.96 billion, or 48.8% of revenue, compared with $5.89 billion, or 40.8% 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.

Other income and expense (OI&E) was $143 million of income compared with $313 million of income, which decreased primarily due to lower royalty income.

See Note 11 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.

Our provision for income taxes was $1.15 billion compared with $422 million.

This increase was due to higher income before income taxes and lower discrete tax benefits compared to 2020, which included a $249 million benefit from the settlement of a depreciation-related uncertain tax position.

Our annual operating tax rate, which does not include discrete tax items, was 14% in both periods.

We use “annual operating tax rate” to describe the estimated annual effective tax rate.

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Operating profit % of revenue 52.6 % 45.1 %

Analog revenue increased in both product lines about evenly.

Operating profit increased due to higher revenue and associated gross profit.

Analog revenue increased in both product lines, led by Signal Chain.

Operating profit increased primarily due to higher revenue and associated gross profit.

Embedded Processing (includes microcontrollers and processors)

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Operating profit % of revenue 38.5 % 28.9 %

Embedded Processing revenue decreased.

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

Embedded Processing revenue increased.

Operating profit increased primarily due to higher revenue and associated gross profit.

Other (includes DLP ® products, calculators and custom ASIC products)

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* Includes acquisition charges and restructuring charges/other

Other revenue decreased $212 million, and operating profit decreased $100 million.

Other revenue increased $240 million, and operating profit increased $154 million.

Financial condition

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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.

Additional sources of liquidity are cash and cash equivalents, short-term investments and access to debt markets.

We also have a variable rate, revolving credit facility.

As of December 31, 2021, 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.

Cash flows from operating activities for 2021 were $8.76 billion, an increase of $2.62 billion due to higher net income and lower cash used for working capital.

Investing activities for 2021 used $4.10 billion compared with $922 million in 2020.

Capital expenditures were $2.46 billion compared with $649 million in 2020 and were primarily for semiconductor manufacturing equipment and facilities in both periods, including the purchase of our 300-millimeter semiconductor factory in Lehi, Utah, during 2021.

As we continue to invest to strengthen our competitive advantage in manufacturing and technology as part of our long-term capacity planning, we expect our capital expenditures to be higher than historical levels.

Short-term investments used cash of $1.65 billion in 2021 compared with $241 million in 2020.

Financing activities for 2021 used $3.14 billion compared with $4.55 billion in 2020.

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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.

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.

Dividends paid in 2021 were $3.89 billion compared with $3.43 billion in 2020, reflecting an increased dividend rate.

We used $527 million to repurchase 2.9 million shares of our common stock compared with $2.55 billion used in 2020 to repurchase 23.4 million shares.

Employee exercises of stock options provided cash proceeds of $377 million compared with $470 million in 2020.

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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.

Critical accounting policies

Critical accounting estimates

Our accounting policies are more fully described in Note 2 of the consolidated financial statements.

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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.

These changes, if any, may require adjustments to the valuation allowances and an accompanying reduction or increase in net income in the period when such determinations are made.

Inventory valuation allowances

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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

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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 7. Management’s Discussion and Analysis