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 second quarter revenue was $4.53 billion, net income was $1.72 billion and earnings per share (EPS) were $1.87.
Revenue increased 3% sequentially and decreased 13% from the same quarter a year ago. Similar to last quarter, we experienced weakness across our end markets with the exception of automotive.
Our cash flow from operations of $7.4 billion for the trailing 12 months again underscored the strength of our business model, the quality of our product portfolio and the benefit of 300-mm production. Free cash flow for the same period was $3.2 billion and 17% of revenue.
Over the past 12 months we invested $3.6 billion in R&D and SG&A, invested $4.2 billion in capital expenditures and returned $6.5 billion to shareholders.
Results of operations – second quarter 2023 compared with second quarter 2022
Revenue of $4.53 billion decreased $681 million, or 13%, due to lower revenue from Analog, partially offset by higher revenue from Embedded Processing.
Gross profit of $2.91 billion was down $715 million, or 20%, due to lower revenue and higher manufacturing costs associated with planned capacity expansion. As a percentage of revenue, gross profit decreased to 64.2% from 69.6%.
Operating expenses (R&D and SG&A) were $938 million compared with $836 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 $1.97 billion, or 43.5% of revenue, compared with $2.72 billion, or 52.2% of revenue.
OI&E was $119 million of income compared with $7 million of income, due to higher interest income.
Interest and debt expense of $89 million increased $40 million due to the issuance of additional long-term debt. See Note 6 to the financial statements.
Our provision for income taxes was $280 million compared with $390 million. This decrease was primarily due to lower income before income taxes.
Net income was $1.72 billion compared with $2.29 billion. EPS was $1.87 compared with $2.45.
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Second quarter 2023 segment results
Our segment results compared with the year-ago quarter are as follows:
Analog (includes Power and Signal Chain product lines)
Q2 2023 Q2 2022 Change
Revenue $ 3,278 $ 3,992 (18) %
Operating profit 1,463 2,226 (34) %
Operating profit % of revenue 44.6 % 55.8 %
Analog revenue decreased in both product lines, led by Power. Operating profit decreased primarily due to lower revenue and higher manufacturing costs.
Embedded Processing (includes microcontrollers and processors)
Q2 2023 Q2 2022 Change
Revenue $ 894 $ 821 9 %
Operating profit 318 324 (2) %
Operating profit % of revenue 35.6 % 39.5 %
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)
Q2 2023 Q2 2022 Change
Revenue $ 359 $ 399 (10) %
Operating profit* 191 173 10 %
Operating profit % of revenue 53.2 % 43.4 %
* Includes restructuring charges/other
Other revenue decreased $40 million, and operating profit increased $18 million.
Results of operations – first six months of 2023 compared with first six months of 2022
Revenue of $8.91 billion decreased $1.21 billion, or 12%, due to lower revenue from Analog, partially offset by higher revenue from Embedded Processing.
Gross profit of $5.77 billion was down $1.29 billion, or 18%, due to lower revenue and higher manufacturing costs associated with planned capacity expansion. As a percentage of revenue, gross profit decreased to 64.8% from 69.9%.
Operating expenses were $1.87 billion compared with $1.65 billion. 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 $132 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 $3.91 billion, or 43.8% of revenue, compared with $5.29 billion, or 52.2% of revenue.
OI&E was $199 million of income compared with $22 million of income, due to higher interest income.
Interest and debt expense of $157 million increased $56 million due to the issuance of additional long-term debt.
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Our provision for income taxes was $518 million compared with $715 million. This decrease was primarily due to lower income before income taxes.
Net income was $3.43 billion compared with $4.49 billion. EPS was $3.72 compared with $4.80.
Year-to-date segment results
Our segment results compared with the year-ago period are as follows:
Analog
YTD 2023 YTD 2022 Change
Revenue $ 6,567 $ 7,808 (16) %
Operating profit 3,037 4,376 (31) %
Operating profit % of revenue 46.2 % 56.0 %
Analog revenue decreased in both product lines, led by Power. Operating profit decreased primarily due to lower revenue and higher manufacturing costs.
Embedded Processing
YTD 2023 YTD 2022 Change
Revenue $ 1,726 $ 1,603 8 %
Operating profit 555 639 (13) %
Operating profit % of revenue 32.2 % 39.9 %
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
YTD 2023 YTD 2022 Change
Revenue $ 617 $ 706 (13) %
Operating profit* 314 271 16 %
Operating profit % of revenue 50.9 % 38.4 %
* Includes restructuring charges/other
Other revenue decreased $89 million, and operating profit increased $43 million.
Financial condition
At the end of the second quarter of 2023, total cash (cash and cash equivalents plus short-term investments) was $9.55 billion, an increase of $485 million from the end of 2022.
Accounts receivable were $1.96 billion, an increase of $61 million compared with the end of 2022. Days sales outstanding for the second quarter of 2023 were 39 compared with 37 at the end of 2022.
Inventory was $3.73 billion, an increase of $972 million from the end of 2022. Days of inventory for the second quarter of 2023 were 207 compared with 157 at the end of 2022.
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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 June 30, 2023, our credit facility was undrawn, and we had no commercial paper outstanding. Cash flows from operating activities for the first six months of 2023 were $2.56 billion, a decrease of $1.35 billion from the year-ago period due to lower net income and higher cash used for working capital, as we continued to strategically build inventory.
Investing activities for the first six months of 2023 used $2.36 billion compared with $443 million in the year-ago period. Capital expenditures were $2.43 billion compared with $1.04 billion in the year-ago period and were primarily for semiconductor manufacturing equipment and facilities in both periods. Short-term investments provided cash of $31 million compared with $525 million 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. See Note 9 to the financial statements.
Financing activities for the first six months of 2023 provided $187 million compared with $4.30 billion of cash used in the year-ago period. In 2023, we received net proceeds of $3.00 billion from the issuance of fixed-rate, long-term debt, and we retired maturing debt of $500 million. In the year-ago period, we retired maturing debt of $500 million. Dividends paid were $2.25 billion compared with $2.12 billion in the year-ago period, reflecting an increased dividend rate, partially offset by fewer shares outstanding. We used $182 million to repurchase 1.1 million shares of our common stock compared with $1.77 billion used in the year-ago period to repurchase 10.7 million shares. Employee exercises of stock options provided cash proceeds of $150 million compared with $113 million in the year-ago period.
We had $3.44 billion of cash and cash equivalents and $6.11 billion of short-term investments as of June 30, 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.
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Reconciliation to the most directly comparable GAAP measures is provided in the table below.
For 12 Months Ended
June 30,
2023 2022 Change
Cash flow from operations (GAAP) $ 7,367 $ 8,697 (15) %
Capital expenditures (4,185) (2,808)
Free cash flow (non-GAAP) $ 3,182 $ 5,889 (46) %
Revenue $ 18,821 $ 19,592
Cash flow from operations as a percentage of revenue (GAAP) 39.1 % 44.4 %
Free cash flow as a percentage of revenue (non-GAAP) 16.9 % 30.1 %
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