Item 2. Management’s Discussion and Analysis
ITEM 2. Management’s discussion and analysis of financial condition and results of operations
Overview
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:
1. 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:
i. A strong foundation of manufacturing and technology that provides lower costs and greater control of our supply chain.
ii. A broad portfolio of analog and embedded processing products that offers more opportunity per customer and more value for our investments.
iii. 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.
iv. 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. We make our investments with an eye towards long-term strengthening and leveraging of these advantages.
2. Discipline in allocating capital to the best opportunities. 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.
3. Efficiency, which means constantly striving for more output for every dollar spent.
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.
Management’s discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. In the following discussion of our results of operations:
• 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. See Note 1 to the financial statements for more information regarding our segments.
• When we discuss our results:
◦ Unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are evidenced by fluctuations in shipment volumes.
◦ New products do not tend to have a significant impact on our revenue in any given period because we sell such a large number of products.
◦ From time to time, our revenue and gross profit are affected by changes in demand for higher-priced or lower-priced products, which we refer to as changes in the “mix” of products shipped.
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◦ Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed. When factory loadings decrease, our fixed costs are spread over reduced output and, absent other circumstances, our profit margins decrease. 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, see the Non-GAAP financial information section.
• All dollar amounts in the tables are stated in millions of U.S. dollars.
Performance summary
Our first quarter revenue was $4.38 billion, net income was $1.71 billion and earnings per share (EPS) were $1.85.
Revenue decreased 6% sequentially and decreased 11% from the same quarter a year ago. During the quarter we experienced weakness across our end markets with the exception of automotive, as expected.
Our cash flow from operations of $7.7 billion for the trailing 12 months again underscored the strength of our business model. Free cash flow for the same period was $4.4 billion and 23% of revenue. This reflects the quality of our product portfolio, as well as the efficiency of our manufacturing strategy, including the benefit of 300-mm production.
Over the past 12 months we invested $3.5 billion in R&D and SG&A, invested $3.3 billion in capital expenditures and returned $7.5 billion to shareholders.
Results of operations – first quarter 2023 compared with first quarter 2022
Revenue of $4.38 billion decreased $526 million, or 11%, primarily due to lower revenue from Analog, partially offset by higher revenue from Embedded Processing.
Gross profit of $2.86 billion was down $579 million, or 17%, due to lower revenue and higher manufacturing costs. As a percentage of revenue, gross profit decreased to 65.4% from 70.2%.
Operating expenses (R&D and SG&A) were $929 million compared with $813 million. This increase was due to higher employee-related costs as we invest to strengthen our competitive advantages.
Restructuring charges/other in the year-ago period was $66 million due to preproduction costs at our Lehi, Utah, manufacturing facility. These costs transitioned primarily to cost of revenue after production began in December 2022.
Operating profit was $1.93 billion, or 44.2% of revenue, compared with $2.56 billion, or 52.3% of revenue.
OI&E was $80 million of income compared with $15 million of income, due to higher interest income.
Interest and debt expense of $68 million increased $16 million due to the issuance of additional long-term debt. See Note 6 to the financial statements.
Our provision for income taxes was $238 million compared with $325 million. This decrease was due to lower income before income taxes.
Net income was $1.71 billion compared with $2.20 billion. EPS was $1.85 compared with $2.35.
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First quarter 2023 segment results
Our segment results compared with the year-ago quarter are as follows:
Analog (includes Power and Signal Chain product lines)
Q1 2023 Q1 2022 Change
Revenue $ 3,289 $ 3,816 (14) %
Operating profit 1,574 2,150 (27) %
Operating profit % of revenue 47.9 % 56.3 %
Analog revenue decreased in both product lines, led by Power. Operating profit decreased primarily due to lower revenue and associated gross profit.
Embedded Processing (includes microcontrollers and processors)
Q1 2023 Q1 2022 Change
Revenue $ 832 $ 782 6 %
Operating profit 237 315 (25) %
Operating profit % of revenue 28.5 % 40.3 %
Embedded Processing revenue increased due to the mix of products shipped. Operating profit decreased primarily due to higher manufacturing costs, partially offset by higher revenue.
Other (includes DLP ® products, calculators and custom ASIC products)
Q1 2023 Q1 2022 Change
Revenue $ 258 $ 307 (16) %
Operating profit* 123 98 26 %
Operating profit % of revenue 47.7 % 31.9 %
* Includes restructuring charges/other
Other revenue decreased $49 million, and operating profit increased $25 million.
Financial condition
At the end of the first quarter of 2023, total cash (cash and cash equivalents plus short-term investments) was $9.55 billion, an increase of $478 million from the end of 2022.
Accounts receivable were $1.88 billion, a decrease of $18 million compared with the end of 2022. Days sales outstanding for the first quarter of 2023 were 39 compared with 37 at the end of 2022.
Inventory was $3.29 billion, an increase of $531 million from the end of 2022. Days of inventory for the first quarter of 2023 were 195 compared with 157 at the end of 2022.
Liquidity and capital resources
Our primary source of liquidity is cash flow from operations. 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 March 31, 2023, our credit facility was undrawn, and we had no commercial paper outstanding. Cash flows from operating activities for the first three months of 2023 were $1.16 billion, a decrease of $984 million from the year-ago period due to lower net income and higher cash used for working capital, as we continued to strategically build inventory.
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Investing activities for the first three months of 2023 provided $28 million compared with $1.67 billion of cash used in the year-ago period. Capital expenditures were $982 million compared with $443 million in the year-ago period and were primarily for semiconductor manufacturing equipment and facilities in both periods. Short-term investments provided cash of $1.01 billion compared with $1.21 billion of cash used in the year-ago period.
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.
Financing activities for the first three months of 2023 provided $239 million compared with $1.60 billion of cash used in the year-ago period. In 2023, we received net proceeds of $1.40 billion from the issuance of fixed-rate, long-term debt. Dividends paid were $1.13 billion compared with $1.06 billion in the year-ago period, reflecting an increased dividend rate, partially offset by fewer shares outstanding. We used $103 million to repurchase 0.6 million shares of our common stock compared with $589 million used in the year-ago period to repurchase 3.4 million shares. Employee exercises of stock options provided cash proceeds of $85 million compared with $57 million in the year-ago period.
We had $4.48 billion of cash and cash equivalents and $5.07 billion of short-term investments as of March 31, 2023. 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.
Non-GAAP financial information
This MD&A includes references to free cash flow and ratios based on that measure. These are financial measures that were not prepared in accordance with generally accepted accounting principles in the United States (GAAP). Free cash flow was calculated by subtracting capital expenditures from the most directly comparable GAAP measure, cash flows from operating activities (also referred to as cash flow from operations).
We believe that free cash flow and the associated ratios provide insight into our liquidity, our cash-generating capability and the amount of cash potentially available to return to shareholders, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures.
Reconciliation to the most directly comparable GAAP measures is provided in the table below.
For 12 Months Ended
March 31,
2023 2022 Change
Cash flow from operations (GAAP) $ 7,736 $ 9,050 (15) %
Capital expenditures (3,336) (2,597)
Free cash flow (non-GAAP) $ 4,400 $ 6,453 (32) %
Revenue $ 19,502 $ 18,960
Cash flow from operations as a percentage of revenue (GAAP) 39.7 % 47.7 %
Free cash flow as a percentage of revenue (non-GAAP) 22.6 % 34.0 %
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