TEXAS INSTRUMENTS INC 10-Q

ITEM 1. Financial statements For Three Months Ended Consolidated Statements of Income March 31, (In millions, except per-share amounts) 2022 2021 Revenue $ 4,905 $ 4,289 Cost of revenue (COR) 1,463 1,492 Gross profit 3,442 2,797 Research and development (R&D) 391 386 Selling, general and administrative (SG&A) 422 425 Acquisition charges — 47 Restructuring charges/other 66 — Operating profit 2,563 1,939 Other income (expense), net (OI&E) 15 46 Interest and debt expense 52 46 Income before income taxes 2,526 1,939 Provision for income taxes 325 186 Net income $ 2,201 $ 1,753 Earnings per common share (EPS): Basic $ 2.37 $ 1.89 Diluted $ 2.35 $ 1.87 Average shares outstanding: Basic 923 922 Diluted 934 935 A portion of net income is allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents. Diluted EPS is calculated using the following: Net income $ 2,201 $ 1,753 Income allocated to RSUs ( 9 ) ( 8 ) Income allocated to common stock for diluted EPS $ 2,192 $ 1,745 See accompanying notes. 2 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES For Three Months Ended Consolidated Statements of Comprehensive Income March 31, (In millions) 2022 2021 Net income $ 2,201 $ 1,753 Other comprehensive income (loss) Net actuarial losses of defined benefit plans: Adjustments, net of tax effect of ($ 2 ) and ($ 2 ) 6 5 Recognized within net income, net of tax effect of ($ 1 ) and ($ 3 ) 2 8 Available-for-sale investments: Unrealized losses, net of tax effect of $ 1 and $ 0 ( 4 ) — Other comprehensive income (loss), net of taxes 4 13 Total comprehensive income $ 2,205 $ 1,766 See accompanying notes. 3 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES March 31, December 31, Consolidated Balance Sheets 2022 2021 (In millions, except par value) Assets Current assets: Cash and cash equivalents $ 3,505 $ 4,631 Short-term investments 6,320 5,108 Accounts receivable, net of allowances of ($ 9 ) and ($ 8 ) 1,795 1,701 Raw materials 265 245 Work in process 1,151 1,067 Finished goods 644 598 Inventories 2,060 1,910 Prepaid expenses and other current assets 330 335 Total current assets 14,010 13,685 Property, plant and equipment at cost 8,236 7,858 Accumulated depreciation ( 2,797 ) ( 2,717 ) Property, plant and equipment 5,439 5,141 Goodwill 4,362 4,362 Deferred tax assets 273 263 Capitalized software licenses 91 85 Overfunded retirement plans 383 392 Other long-term assets 718 748 Total assets $ 25,276 $ 24,676 Liabilities and stockholders’ equity Current liabilities: Current portion of long-term debt $ 500 $ 500 Accounts payable 641 571 Accrued compensation 386 775 Income taxes payable 405 121 Accrued expenses and other liabilities 596 602 Total current liabilities 2,528 2,569 Long-term debt 7,242 7,241 Underfunded retirement plans 81 79 Deferred tax liabilities 94 87 Other long-term liabilities 1,314 1,367 Total liabilities 11,259 11,343 Stockholders’ equity: Preferred stock, $ 25 par value. Shares authorized – 10 ; none issued — — Common stock, $ 1 par value. Shares authorized – 2,400 ; shares issued – 1,741 1,741 1,741 Paid-in capital 2,667 2,630 Retained earnings 47,053 45,919 Treasury common stock at cost Shares: March 31, 2022 – 819 ; December 31, 2021 – 817 ( 37,291 ) ( 36,800 ) Accumulated other comprehensive income (loss), net of taxes (AOCI) ( 153 ) ( 157 ) Total stockholders’ equity 14,017 13,333 Total liabilities and stockholders’ equity $ 25,276 $ 24,676 See accompanying notes. 4 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES For Three Months Ended Consolidated Statements of Cash Flows March 31, (In millions) 2022 2021 Cash flows from operating activities Net income $ 2,201 $ 1,753 Adjustments to net income: Depreciation 200 179 Amortization of acquisition-related intangibles — 47 Amortization of capitalized software 14 15 Stock compensation 74 61 Gains on sales of assets ( 2 ) ( 1 ) Deferred taxes ( 1 ) 8 Increase (decrease) from changes in: Accounts receivable ( 94 ) ( 170 ) Inventories ( 150 ) 65 Prepaid expenses and other current assets 21 73 Accounts payable and accrued expenses 11 69 Accrued compensation ( 388 ) ( 379 ) Income taxes payable 284 131 Changes in funded status of retirement plans 21 28 Other ( 47 ) ( 29 ) Cash flows from operating activities 2,144 1,850 Cash flows from investing activities Capital expenditures ( 443 ) ( 308 ) Proceeds from asset sales 2 1 Purchases of short-term investments ( 3,988 ) ( 2,782 ) Proceeds from short-term investments 2,774 2,000 Other ( 13 ) ( 20 ) Cash flows from investing activities ( 1,668 ) ( 1,109 ) Cash flows from financing activities Repayment of debt — ( 550 ) Dividends paid ( 1,063 ) ( 940 ) Stock repurchases ( 589 ) ( 100 ) Proceeds from common stock transactions 57 196 Other ( 7 ) ( 12 ) Cash flows from financing activities ( 1,602 ) ( 1,406 ) Net change in cash and cash equivalents ( 1,126 ) ( 665 ) Cash and cash equivalents at beginning of period 4,631 3,107 Cash and cash equivalents at end of period $ 3,505 $ 2,442 See accompanying notes. 5 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Notes to financial statements 1. Description of business, including segment and geographic area information We design, make and sell semiconductors to electronics designers and manufacturers all over the world. We have two reportable segments, Analog and Embedded Processing, each of which represents groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels. • Analog semiconductors change real-world signals, such as sound, temperature, pressure or images, by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors. 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. Our Analog segment consists of two major product lines: Power and Signal Chain. • 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. We report the results of our remaining business activities in Other. Other includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other includes DLP ® products, calculators and custom ASIC products. Our centralized manufacturing and support organizations, such as facilities, procurement and logistics, provide support to our operating segments, including those in Other. Costs incurred by these organizations, including depreciation, are charged to the segments on a per-unit basis. Consequently, depreciation expense is not an independently identifiable component within the segments’ results and, therefore, is not provided. Segment information For Three Months Ended March 31, 2022 2021 Revenue: Analog $ 3,816 $ 3,280 Embedded Processing 782 767 Other 307 242 Total revenue $ 4,905 $ 4,289 Operating profit: Analog $ 2,150 $ 1,646 Embedded Processing 315 287 Other (a) 98 6 Total operating profit $ 2,563 $ 1,939 (a) Includes acquisition charges and restructuring charges/other 6 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Geographic area information The following geographic area information includes revenue, based on product shipment destination. The geographic revenue information does not necessarily reflect end demand by geography because our products tend to be shipped to the locations where our customers manufacture their products. For Three Months Ended March 31, 2022 2021 Revenue: United States $ 494 $ 393 Asia (a) 3,203 2,858 Europe, Middle East and Africa 814 682 Japan 263 239 Rest of world 131 117 Total revenue $ 4,905 $ 4,289 (a) Revenue from products shipped into China was $ 2.5 billion and $ 2.3 billion in the first quarters of 2022 and 2021, respectively, which includes shipments to customers that manufacture in China and then export end products to their customers around the world, as well as distributors that transship inventory through China to service other countries. 2. Basis of presentation and significant accounting policies and practices Basis of presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and on the same basis as the audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2021. The Consolidated Statements of Income, Comprehensive Income and Cash Flows for the periods ended March 31, 2022 and 2021, and the Consolidated Balance Sheet as of March 31, 2022, are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown. Certain information and note disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Because the consolidated interim financial statements do not include all of the information and notes required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2021. Certain amounts in prior periods' financial statements have been reclassified to conform to the current presentation. The results for the three-month periods are not necessarily indicative of a full year’s results. Significant accounting policies and practices Earnings per share (EPS) We use the two-class method for calculating EPS because the restricted stock units (RSUs) we grant are participating securities containing non-forfeitable rights to receive dividend equivalents. Under the two-class method, a portion of net income is allocated to RSUs and excluded from the calculation of income allocated to common stock. 7 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Computation and reconciliation of earnings per common share are as follows: For Three Months Ended March 31, 2022 2021 Net Income Shares EPS Net Income Shares EPS Basic EPS: Net income $ 2,201 $ 1,753 Income allocated to RSUs ( 9 ) ( 8 ) Income allocated to common stock $ 2,192 923 $ 2.37 $ 1,745 922 $ 1.89 Dilutive effect of stock compensation plans 11 13 Diluted EPS: Net income $ 2,201 $ 1,753 Income allocated to RSUs ( 9 ) ( 8 ) Income allocated to common stock $ 2,192 934 $ 2.35 $ 1,745 935 $ 1.87 Potentially dilutive securities representing 5 million and 3 million shares of common stock that were outstanding during the first quarters of 2022 and 2021, respectively, were excluded from the computation of diluted earnings per common share during these periods because their effect would have been anti-dilutive. Derivatives and hedging We use derivative financial instruments to manage exposure to foreign exchange risk. These instruments are primarily forward foreign currency exchange contracts, which are used as economic hedges to reduce the earnings impact that exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. Gains and losses from changes in the fair value of these forward foreign currency exchange contracts are credited or charged to OI&E. We do not apply hedge accounting to our foreign currency derivative instruments. We are exposed to variability in compensation charges related to certain deferred compensation obligations to employees. We use total return swaps to economically hedge this exposure and offset the related compensation expense, recognizing changes in the value of the swaps and the related deferred compensation liabilities in SG&A. In connection with the issuance of long-term debt, we may use financial derivatives such as treasury-rate lock agreements that are recognized in AOCI and amortized over the life of the related debt. The results of these derivative transactions have not been material. We do not use derivatives for speculative or trading purposes. Fair values of financial instruments The fair values of our derivative financial instruments were not material as of March 31, 2022. Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our deferred compensation liabilities, are carried at fair value. The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. As of March 31, 2022, the carrying value of long-term debt, including the current portion, was $ 7.74 billion, and the estimated fair value was $ 7.76 billion. The estimated fair value is measured using broker-dealer quotes, which are Level 2 inputs. See Note 4 for a description of fair value and the definition of Level 2 inputs. 3. Income taxes Our estimated annual effective tax rate is about 14 %, which does not include discrete tax items. This differs from the 21 % U.S. statutory corporate tax rate due to the effect of U.S. tax benefits. 8 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Provision for income taxes is based on the following: For Three Months Ended March 31, 2022 2021 Taxes calculated using the estimated annual effective tax rate $ 361 $ 275 Discrete tax items ( 36 ) ( 89 ) Provision for income taxes $ 325 $ 186 Effective tax rate 13 % 10 % 4. Valuation of debt and equity investments and certain liabilities Investments measured at fair value Money market funds, available-for-sale debt investments and mutual funds are stated at fair value, which is generally based on market prices or broker quotes. See Fair-value considerations . Unrealized gains and losses from available-for-sale debt securities are recorded as an increase or decrease, net of taxes, in AOCI on our Consolidated Balance Sheets, and any credit losses on available-for-sale debt securities are recorded as an allowance for credit losses with an offset recognized in OI&E in our Consolidated Statements of Income. Our mutual funds hold a variety of debt and equity investments intended to generate returns that offset changes in certain deferred compensation liabilities. We record changes in the fair value of these mutual funds and the related deferred compensation liabilities in SG&A. Other investments Our other investments include equity-method investments and non-marketable equity investments, which are not measured at fair value. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity-method investments are recognized in OI&E based on our ownership share of the investee’s financial results. Non-marketable equity securities are measured at cost with adjustments for observable changes in price or impairments. Gains and losses on non-marketable equity investments are recognized in OI&E. 9 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Details of our investments are as follows: March 31, 2022 December 31, 2021 Cash and Cash Equivalents Short-Term Investments Long-Term Investments Cash and Cash Equivalents Short-Term Investments Long-Term Investments Measured at fair value: Money market funds $ 1,041 $ — $ — $ 1,824 $ — $ — Corporate obligations 670 1,104 — 1,060 1,070 — U.S. government and agency securities 846 4,917 — 642 3,388 — Non-U.S. government and agency securities 100 299 — 300 650 — Mutual funds — — 13 — — 16 Total 2,657 6,320 13 3,826 5,108 16 Other measurement basis: Equity-method investments — — 33 — — 42 Non-marketable equity investments — — 4 — — 4 Cash on hand 848 — — 805 — — Total $ 3,505 $ 6,320 $ 50 $ 4,631 $ 5,108 $ 62 As of March 31, 2022, and December 31, 2021, unrealized gains and losses associated with our available-for-sale investments were not material. We did no t recognize any credit losses related to available-for-sale investments for the first three months of 2022 and 2021. All of our debt securities classified as available for sale as of March 31, 2022, have maturities within one year. Proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $ 2.77 billion and $ 2.00 billion for the first quarters of 2022 and 2021, respectively. Gross realized gains and losses from these sales were not material. Fair-value considerations We measure and report certain financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level hierarchy described below indicates the extent and level of judgment used to estimate fair-value measurements. • Level 1 – Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date. • Level 2 – Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. We utilize a third-party data service to provide Level 2 valuations. We verify these valuations for reasonableness relative to unadjusted quotes obtained from brokers or dealers based on observable prices for similar assets in active markets. • Level 3 – Uses inputs that are unobservable, supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models that utilize management estimates of market participant assumptions. As of March 31, 2022, and December 31, 2021, we had no Level 3 assets or liabilities. 10 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES The following are our assets and liabilities that were accounted for at fair value on a recurring basis. These tables do not include cash on hand, assets held by our postretirement plans, or assets and liabilities that are measured at historical cost or any basis other than fair value. March 31, 2022 December 31, 2021 Level 1 Level 2 Total Level 1 Level 2 Total Assets: Money market funds $ 1,041 $ — $ 1,041 $ 1,824 $ — $ 1,824 Corporate obligations — 1,774 1,774 — 2,130 2,130 U.S. government and agency securities 5,413 350 5,763 3,629 401 4,030 Non-U.S. government and agency securities — 399 399 — 950 950 Mutual funds 13 — 13 16 — 16 Total assets $ 6,467 $ 2,523 $ 8,990 $ 5,469 $ 3,481 $ 8,950 Liabilities: Deferred compensation $ 350 $ — $ 350 $ 395 $ — $ 395 Total liabilities $ 350 $ — $ 350 $ 395 $ — $ 395 5. Postretirement benefit plans Expenses related to defined benefit and retiree health care benefit plans are as follows: U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit For Three Months Ended March 31, 2022 2021 2022 2021 2022 2021 Service cost $ 4 $ 5 $ 1 $ 1 $ 7 $ 9 Interest cost 6 8 3 3 10 9 Expected return on plan assets ( 8 ) ( 8 ) ( 4 ) ( 3 ) ( 18 ) ( 20 ) Recognized net actuarial loss — 4 — — — 2 Net periodic benefit costs 2 9 — 1 ( 1 ) — Settlement losses 2 4 — — 1 1 Total, including other postretirement losses $ 4 $ 13 $ — $ 1 $ — $ 1 6. Debt and lines of credit Short-term borrowings We maintain a line of credit to support commercial paper borrowings, if any, and to provide additional liquidity through bank loans. As of March 31, 2022, we had a variable-rate revolving credit facility from a consortium of investment-grade banks that allows us to borrow up to $ 1 billion until March 2023. The interest rate on borrowings under this credit facility, if drawn, is indexed to the applicable Term Secured Overnight Financing Rate (Term SOFR). As of March 31, 2022, our credit facility was undrawn, and we had no commercial paper outstanding. Long-term debt In April 2022, we retired $ 500 million of maturing debt. 11 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Long-term debt outstanding is as follows: March 31, December 31, 2022 2021 Notes due 2022 at 1.85 % $ 500 $ 500 Notes due 2023 at 2.25 % 500 500 Notes due 2024 at 2.625 % 300 300 Notes due 2025 at 1.375 % 750 750 Notes due 2026 at 1.125 % 500 500 Notes due 2027 at 2.90 % 500 500 Notes due 2029 at 2.25 % 750 750 Notes due 2030 at 1.75 % 750 750 Notes due 2031 at 1.90 % 500 500 Notes due 2039 at 3.875 % 750 750 Notes due 2048 at 4.15 % 1,500 1,500 Notes due 2051 at 2.70 % 500 500 Total debt 7,800 7,800 Net unamortized discounts, premiums and issuance costs ( 58 ) ( 59 ) Total debt, including net unamortized discounts, premiums and issuance costs 7,742 7,741 Current portion of long-term debt ( 500 ) ( 500 ) Long-term debt $ 7,242 $ 7,241 Interest and debt expense was $ 52 million and $ 46 million for the first quarters of 2022 and 2021, respectively. This was net of the amortized discounts, premiums and issuance costs. Capitalized interest was not material. 7. Stockholders’ equity Changes in equity are as follows: Common Stock Paid-in Capital Retained Earnings Treasury Common Stock AOCI Balance, December 31, 2021 $ 1,741 $ 2,630 $ 45,919 $ ( 36,800 ) $ ( 157 ) 2022 Net income — — 2,201 — — Dividends declared and paid ($ 1.15 per share) — — ( 1,063 ) — — Common stock issued for stock-based awards — ( 36 ) — 93 — Stock repurchases — — — ( 584 ) — Stock compensation — 74 — — — Other comprehensive income (loss), net of taxes — — — — 4 Dividend equivalents on RSUs — — ( 5 ) — — Other — ( 1 ) 1 — — Balance, March 31, 2022 $ 1,741 $ 2,667 $ 47,053 $ ( 37,291 ) $ ( 153 ) 12 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Common Stock Paid-in Capital Retained Earnings Treasury Common Stock AOCI Balance, December 31, 2020 $ 1,741 $ 2,333 $ 42,051 $ ( 36,578 ) $ ( 360 ) 2021 Net income — — 1,753 — — Dividends declared and paid ($ 1.02 per share) — — ( 940 ) — — Common stock issued for stock-based awards — ( 3 ) — 199 — Stock repurchases — — — ( 100 ) — Stock compensation — 61 — — — Other comprehensive income (loss), net of taxes — — — — 13 Dividend equivalents on RSUs — — ( 4 ) — — Balance, March 31, 2021 $ 1,741 $ 2,391 $ 42,860 $ ( 36,479 ) $ ( 347 ) 8. Contingencies Indemnification guarantees We routinely sell products with an intellectual property indemnification included in the terms of sale. Historically, we have had only minimal, infrequent losses associated with these indemnities. Consequently, we cannot reasonably estimate any future liabilities that may result. Warranty costs/product liabilities We accrue for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability. Historically, we have experienced a low rate of payments on product claims. Although we cannot predict the likelihood or amount of any future claims, we do not believe they will have a material adverse effect on our financial condition, results of operations or liquidity. Our stated warranties for semiconductor products obligate us to repair, replace or credit the purchase price of a covered product back to the buyer. Product claim consideration may exceed the price of our products. General We are subject to various legal and administrative proceedings. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity. 9. Supplemental financial information Restructuring charges/other During the first quarter of 2022, restructuring charges/other included $ 66 million related to integration charges at our Lehi, Utah, manufacturing facility. These costs are included in Other for segment reporting purposes. 13 TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES Details on amounts reclassified out of accumulated other comprehensive income (loss), net of taxes, to net income Our Consolidated Statements of Comprehensive Income include items that have been recognized within net income during the first quarters of 2022 and 2021. The table below details where these transactions are recorded in our Consolidated Statements of Income. For Three Months Ended Impact to Related Statement of Income Lines March 31, 2022 2021 Net actuarial losses of defined benefit plans: Recognized net actuarial loss and settlement losses (a) $ 3 $ 11 Decrease to OI&E Tax effect ( 1 ) ( 3 ) Decrease to provision for income taxes Recognized within net income, net of taxes $ 2 $ 8 Decrease to net income (a) Detailed in Note 5. Stock compensation During the first quarter of 2022, 1 million shares were issued from treasury related to stock compensation. 14