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.
18
◦ 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 third quarter revenue was $4.15 billion, net income was $1.36 billion and earnings per share (EPS) were $1.47.
Revenue decreased 8% from the same quarter a year ago and increased 9% sequentially. Industrial continued to decline sequentially, while all other end markets grew.
Our cash flow from operations of $6.2 billion for the trailing 12 months again underscored the strength of our business model, the quality of our product portfolio and the benefit of 300mm production. Free cash flow for the same period was $1.5 billion.
Over the past 12 months we invested $3.7 billion in R&D and SG&A, invested $4.8 billion in capital expenditures and returned $5.2 billion to shareholders.
Results of operations – third quarter 2024 compared with third quarter 2023
Revenue of $4.15 billion decreased $381 million, or 8%, due to lower revenue from Embedded Processing and, to a lesser extent, Analog.
Gross profit of $2.47 billion was down $341 million, or 12%, primarily due to lower revenue and, to a lesser extent, higher manufacturing costs associated with our planned capacity expansions. As a percentage of revenue, gross profit decreased to 59.6% from 62.1%.
Operating expenses (R&D and SG&A) were $920 million compared with $923 million.
Operating profit was $1.55 billion, or 37.4% of revenue, compared with $1.89 billion, or 41.7% of revenue.
OI&E was $131 million of income compared with $128 million of income.
Interest and debt expense of $131 million increased $33 million due to the issuance of additional long-term debt. See Note 6 to the financial statements.
Our provision for income taxes was $192 million compared with $213 million. This decrease was primarily due to lower income before income taxes and higher discrete tax benefits.
Net income was $1.36 billion compared with $1.71 billion. EPS was $1.47 compared with $1.85.
19
Third quarter 2024 segment results
Our segment results compared with the year-ago quarter are as follows:
Analog (includes Power and Signal Chain product lines)
Q3 2024 Q3 2023 Change
Revenue $ 3,223 $ 3,353 (4) %
Operating profit 1,316 1,504 (13) %
Operating profit % of revenue 40.8 % 44.9 %
Analog revenue decreased in Signal Chain due to the mix of products shipped. Power was about even. Operating profit decreased primarily due to lower revenue and higher manufacturing costs.
Embedded Processing (includes microcontrollers and processors)
Q3 2024 Q3 2023 Change
Revenue $ 653 $ 890 (27) %
Operating profit 109 258 (58) %
Operating profit % of revenue 16.7 % 29.0 %
Embedded Processing revenue decreased. Operating profit decreased due to lower revenue and associated gross profit.
Other (includes DLP ® products, calculators and custom ASIC products)
Q3 2024 Q3 2023 Change
Revenue $ 275 $ 289 (5) %
Operating profit * 129 130 (1) %
Operating profit % of revenue 46.9 % 45.0 %
* Includes restructuring charges/other
Other revenue decreased $14 million, and operating profit decreased $1 million.
Results of operations – first nine months of 2024 compared with first nine months of 2023
Revenue of $11.63 billion decreased $1.81 billion, or 13%, due to lower revenue from Analog and, to a lesser extent, Embedded Processing.
Gross profit of $6.78 billion was down $1.81 billion, or 21%, primarily due to lower revenue and, to a lesser extent, higher manufacturing costs associated with our planned capacity expansions. As a percentage of revenue, gross profit decreased to 58.3% from 63.9%.
Operating expenses were $2.82 billion compared with $2.79 billion.
Restructuring charges/other was a credit of $124 million primarily due to a gain on the sale of a property during 2024.
Operating profit was $4.09 billion, or 35.1% of revenue, compared with $5.80 billion, or 43.1% of revenue.
OI&E was $384 million of income compared with $327 million of income, primarily due to higher interest income.
Interest and debt expense of $378 million increased $123 million due to the issuance of additional long-term debt.
Our provision for income taxes was $500 million compared with $731 million. This decrease was due to lower income before income taxes.
20
Net income was $3.59 billion compared with $5.14 billion. EPS was $3.89 compared with $5.58.
Year-to-date segment results
Our segment results compared with the year-ago period are as follows:
Analog
YTD 2024 YTD 2023 Change
Revenue $ 8,987 $ 9,920 (9) %
Operating profit 3,371 4,541 (26) %
Operating profit % of revenue 37.5 % 45.8 %
Analog revenue decreased due to the mix of products shipped in both product lines, led by Signal Chain. Operating profit decreased primarily due to lower revenue and higher manufacturing costs.
Embedded Processing
YTD 2024 YTD 2023 Change
Revenue $ 1,920 $ 2,616 (27) %
Operating profit 294 813 (64) %
Operating profit % of revenue 15.3 % 31.1 %
Embedded Processing revenue decreased. Operating profit decreased primarily due to lower revenue and associated gross profit.
Other
YTD 2024 YTD 2023 Change
Revenue $ 727 $ 906 (20) %
Operating profit * 423 444 (5) %
Operating profit % of revenue 58.2 % 49.0 %
* Includes restructuring charges/other
Other revenue decreased $179 million, and operating profit decreased $21 million.
Financial condition
At the end of the third quarter of 2024, total cash (cash and cash equivalents plus short-term investments) was $8.75 billion, an increase of $177 million from the end of 2023.
Accounts receivable were $1.86 billion, an increase of $75 million compared with the end of 2023. Days sales outstanding for the third quarter of 2024 were 40 compared with 39 at the end of 2023.
Inventory was $4.30 billion, an increase of $297 million from the end of 2023. Days of inventory for the third quarter of 2024 were 231 compared with 219 at the end of 2023.
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 September 30, 2024, our credit facility was undrawn, and we had no commercial paper outstanding. Cash flows from operating activities for the first nine months of 2024 were $4.32 billion, a decrease of $176 million from the year-ago period primarily due to lower net income, partially offset by lower cash used for working capital. Cash flows from operating activities for the first nine months of 2024 include a cash benefit of $532 million from the U.S. CHIPS and Science Act (CHIPS Act) investment tax credit used to reduce income taxes payable.
21
Investing activities for the first nine months of 2024 used $3.82 billion compared with $4.05 billion in the year-ago period. Capital expenditures were $3.63 billion compared with $3.92 billion in the year-ago period and were primarily for semiconductor manufacturing equipment and facilities in both periods. Short-term investments used cash of $346 million compared with $164 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 remain at elevated levels. We expect to receive an estimated $6 billion to $8 billion through 2034 from the U.S. Department of Treasury’s investment tax credit for qualified U.S. manufacturing investments. We have received $532 million of the associated cash benefit for qualifying capital expenditures in the first nine months of 2024. Additionally, in August 2024, we signed a non-binding preliminary memorandum of terms with the U.S. Department of Commerce for up to $1.6 billion in direct funding under the CHIPS Act.
In September 2024, we announced we would increase our dividend by 5%, marking 21 consecutive years of dividend increases.
Financing activities for the first nine months of 2024 provided $879 million compared with $929 million in the year-ago period. In 2024, we received net proceeds of $2.98 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $300 million. In the year-ago period, we received net proceeds of $3.00 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $500 million. Dividends paid were $3.56 billion compared with $3.38 billion in the year-ago period, reflecting an increased dividend rate. We used $392 million to repurchase 2.0 million shares of our common stock compared with $228 million in the year-ago period to repurchase 1.3 million shares. Employee exercises of stock options provided cash proceeds of $430 million compared with $218 million in the year-ago period.
We had $2.59 billion of cash and cash equivalents and $6.16 billion of short-term investments as of September 30, 2024. 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
September 30,
2024 2023 Change
Cash flow from operations (GAAP) * $ 6,244 $ 6,538 (4) %
Capital expenditures (4,776) (4,890)
Free cash flow (non-GAAP) $ 1,468 $ 1,648 (11) %
Revenue $ 15,711 $ 18,112
Cash flow from operations as a percentage of revenue (GAAP) 39.7 % 36.1 %
Free cash flow as a percentage of revenue (non-GAAP) 9.3 % 9.1 %
* Includes a cash benefit of $532 million from the U.S. CHIPS and Science Act ITC used to reduce income taxes payable for the twelve months ended September 30, 2024
22
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.