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Item 7. Management’s Discussion and Analysis

2023-02-03 compared with 2022-02-04 · 41 added, 33 removed, 118 unchanged (39% of the section changed)

Management’s discussion and analysis of financial condition and results of operations

We design, make and sell semiconductors to electronics designers and manufacturers all over the 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:

We design and manufacture semiconductors that we sell to electronics designers and manufacturers all over the world.

Technology is the foundation of our company, but ultimately, our objective and the best metric for owners to measure our progress is through the growth of free cash flow per share over the long term.

Our strategy to maximize long-term free cash flow per share growth has three elements:

A great business model that is focused on analog and embedded processing products and built around four sustainable competitive advantages.

The four sustainable competitive advantages are powerful in combination and provide tangible benefits:

A strong foundation of manufacturing and technology that provides lower costs and greater control of our supply chain.

A broad portfolio of analog and embedded processing products that offers more opportunity per customer and more value for our investments.

The reach of our market channels that gives access to more customers and more of their design projects, leading to the opportunity to sell more of our products into each design and gives us better insight and knowledge of customer needs.

Diversity and longevity of our products, markets and customer positions that provide less single point dependency and longer returns on our investments.

(a) A strong foundation of manufacturing and technology that provides lower costs and greater control of our supply chain.

(b) A broad portfolio of analog and embedded processing products that offers more opportunity per customer and more value for our investments.

(c) The reach of our market channels that gives access to more customers and more of their design projects, leading to the opportunity to sell more of our products into each design and gives us better insight and knowledge of customer needs.

(d) Diversity and longevity of our products, markets and customer positions that provide less single point dependency and longer returns on our investments.

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.

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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.

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

• For an explanation of free cash flow, see the Non-GAAP financial information section.

• All dollar amounts in the tables are stated in millions of U.S.

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

After a sustained period of growth, a market correction began in 2022.

As a result, demand for our products weakened, and we expect this to continue into 2023.

During this time, we will continue to manage our operating plan and expenses with a steady hand as we focus on long-term investments to strengthen our competitive advantages.

Results of operations

Our strategic focus is on analog and embedded processing products sold into six end markets:

Our strategic focus is on analog and embedded processing products.

We sell our products into six end markets:

industrial, automotive, personal electronics, communications equipment, enterprise systems and other.

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 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.

While all of these end markets represent good opportunities, we place additional strategic emphasis on designing and selling our products into the industrial and automotive markets, which we believe represent the best long-term growth opportunities.

Gross margin of 68.8% reflected the quality of our product portfolio, as well as the efficiency of our manufacturing strategy, including the benefit of 300-mm 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 $5.92 billion and represented 29.6% of revenue.

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.

During 2022, we invested $3.37 billion in R&D and SG&A, invested $2.80 billion in capital expenditures and returned $7.91 billion to shareholders through dividends and stock repurchases.

Details of financial results – 2022 compared with 2021

Revenue of $20.03 billion increased $1.68 billion, or 9.2%, due to higher revenue from Analog and, to a lesser extent, Embedded Processing.

This increase benefited from higher prices and the mix of products shipped.

Gross profit of $13.77 billion was up $1.40 billion, or 11.3%, primarily due to higher revenue.

As a percentage of revenue, gross profit increased to 68.8% from 67.5%.

Operating expenses (R&D and SG&A) were $3.22 billion compared with $3.15 billion.

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

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 expenses (R&D and SG&A) were $3.37 billion compared with $3.22 billion, as a result of increased investments in R&D and inflation.

Restructuring charges/other was $257 million compared with $54 million due to integration charges at our Lehi, Utah, manufacturing facility in both periods, which were partially offset by gains on sales of assets in 2021.

The charges associated with our Lehi facility transitioned to cost of revenue once production began in December 2022.

See Note 11 to the financial statements.

Operating profit was $10.14 billion, or 50.6% of revenue, compared with $8.96 billion, or 48.8% of revenue.

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.

Other income and expense (OI&E) was $106 million of income compared with $143 million of income.

See Note 11 to the financial statements.

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.

Interest and debt expense of $214 million increased $30 million due to the issuance of additional long-term debt.

See Note 8 to the financial statements.

Our provision for income taxes was $1.28 billion compared with $1.15 billion.

This increase was primarily due to higher income before income taxes and lower discrete tax benefits compared to 2021.

Our effective tax rate, which includes discrete tax items, was 12.8% in 2022 compared with 12.9% in 2021.

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Financial condition

At the end of 2021, total cash (cash and cash equivalents plus short-term investments) was $9.74 billion, an increase of $3.17 billion from the end of 2020.

At the end of 2022, total cash (cash and cash equivalents plus short-term investments) was $9.07 billion, a decrease of $672 million from the end of 2021.

Accounts receivable were $1.90 billion, an increase of $194 million compared with the end of 2021.

Days sales outstanding at the end of 2022 were 37 compared with 32 at the end of 2021.

Inventory was $1.91 billion, a decrease of $45 million from the end of 2020.

Inventory was $2.76 billion, an increase of $847 million from the end of 2021.

Days of inventory at the end of 2022 were 157 compared with 116 at the end of 2021.

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As of December 31, 2022, our credit facility was undrawn, and we had no commercial paper outstanding.

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.

Cash flows from operating activities for 2022 were $8.72 billion, a decrease of $36 million due to higher cash used for working capital as we continued to strategically build our inventory, offset by higher net income.

Investing activities for 2022 used $3.58 billion compared with $4.10 billion in 2021.

Capital expenditures were $2.80 billion compared with $2.46 billion in 2021 and were primarily for semiconductor manufacturing equipment and facilities in both periods, including the purchase of our 300-mm semiconductor factory in Lehi, Utah, during 2021.

Short-term investments used cash of $826 million in 2022 compared with $1.65 billion in 2021.

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

In August 2022, the U.S.

government enacted the U.S.

CHIPS and Science Act, which provides funding for manufacturing grants and research investments and establishes a 25% investment tax credit for certain investments in U.S.

semiconductor manufacturing.

We expect to receive the cash benefit associated with the investment tax credit for qualifying capital expenditures in future periods and to apply for other incentives provided by the legislation.

Financing activities for 2022 used $6.72 billion compared with $3.14 billion in 2021.

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In 2021, we received net proceeds of $1.50 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $550 million.

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.

Dividends paid in 2022 were $4.30 billion compared with $3.89 billion in 2021, reflecting an increased dividend rate, partially offset by fewer shares outstanding.

We used $3.62 billion to repurchase 22.2 million shares of our common stock compared with $527 million used in 2021 to repurchase 2.9 million shares.

Employee exercises of stock options provided cash proceeds of $241 million compared with $377 million in 2021.

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Free cash flow as a percentage of revenue (non-GAAP) 29.6 % 34.3 %

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.

Critical accounting estimates

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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.

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.

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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