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OFFON

TEXAS INSTRUMENTS

(TXN)
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TEXAS INSTRUMENTS INC Management's discussion and analysis of financial condition and results of operations (form 10-Q)

10/27/2021 | 09:33am EST

Overview

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:
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. Increases and decreases in factory loadings tend to correspond to
increases and decreases in demand.
•For an explanation of free cash flow and the term "annual operating tax rate,"
see the Non-GAAP financial information section.
•All dollar amounts in the tables are stated in millions of U.S. dollars.
The coronavirus (COVID-19) pandemic and its effects are impacting and will
likely continue to impact market conditions and business operations across
industries worldwide, including at TI. Therefore, we remain cautious about how
the economy might behave for the next few years and continue to monitor
potential impact on our operations.
Performance summary
Our third quarter revenue was $4.64 billion, net income was $1.95 billion and
earnings per share (EPS) were $2.07.
Revenue increased 22% from the same quarter a year ago due to strong demand in
industrial, automotive and personal electronics. Analog revenue grew 24% and
Embedded Processing grew 13% from the same quarter a year ago.
Our cash flow from operations of $8.5 billion for the trailing 12 months again
underscored the strength of our business model. Free cash flow for the same
period was $7.1 billion and 41% of revenue. This reflects the quality of our
product portfolio, as well as the efficiency of our manufacturing strategy,
including the benefit of 300-millimeter production.
We returned $4.2 billion to shareholders in the past 12 months through dividends
and stock repurchases. Over the same period, our dividend represented 53% of
free cash flow, underscoring its sustainability. In September, we announced we
would increase our dividend by 13%.
Results of operations - third quarter 2021 compared with third quarter 2020
Revenue of $4.64 billion increased $826 million, or 22%, due to higher revenue
from Analog and, to a lesser extent, Embedded Processing.
Gross profit of $3.15 billion was up $699 million, or 28%, primarily due to
higher revenue. As a percentage of revenue, gross profit increased to 67.9% from
64.3%.
Operating expenses (R&D and SG&A) were $800 million compared with $793 million.
Acquisition charges were $47 million compared with $51 million and were
non-cash.
Operating profit was $2.31 billion, or 49.6% of revenue, compared with $1.61
billion, or 42.2% of revenue.
OI&E was $15 million of income compared with $27 million of income.
Our provision for income taxes was $328 million compared with $234 million. This
increase was due to higher income before income taxes. 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,
which differs from the 21% U.S. statutory corporate tax rate due to the effect
of U.S. tax benefits.
Net income was $1.95 billion compared with $1.35 billion. EPS was $2.07 compared
with $1.45.
                                       17
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Third quarter 2021 segment results Our segment results compared with the year-ago quarter are as follows: Analog (includes Power and Signal Chain product lines)

                                  Q3 2021       Q3 2020       Change
Revenue                          $ 3,548$ 2,865          24  %
Operating profit                   1,871         1,320          42  %
Operating profit % of revenue       52.7  %       46.1  %


Analog revenue increased in both product lines, led by Signal Chain. Operating
profit increased primarily due to higher revenue and associated gross profit.
Embedded Processing (includes microcontrollers and processors)
                                  Q3 2021      Q3 2020      Change
Revenue                          $  738$  651          13  %
Operating profit                    282          187          51  %

Operating profit % of revenue 38.2 % 28.7 %



Embedded Processing revenue increased. Operating profit increased primarily due
to higher revenue and associated gross profit.
Other (includes DLP® products, calculators and custom ASIC products)
                                            Q3 2021        Q3 2020      Change
Revenue                                   $    357$  301          19  %
Operating profit*                              152           102          49  %
Operating profit % of revenue                 42.6   %      33.9  %

* Includes acquisition charges and restructuring charges/other



Other revenue increased $56 million, and operating profit increased $50 million.
Results of operations - first nine months of 2021 compared with first nine
months of 2020
Revenue of $13.51 billion increased $3.13 billion, or 30%, due to higher revenue
from Analog and, to a lesser extent, Embedded Processing.
Gross profit of $9.03 billion was up $2.40 billion, or 36%, primarily due to
higher revenue. As a percentage of revenue, gross profit increased to 66.8% from
63.8%.
Operating expenses were $2.43 billion compared with $2.37 billion.
Acquisition charges were $142 million compared with $151 million and were
non-cash.
Operating profit was $6.46 billion, or 47.8% of revenue, compared with $4.08
billion, or 39.3% of revenue.
OI&E was $134 million of income compared with $151 million of income.
Our provision for income taxes was $825 million compared with $183 million. This
increase was due to higher income before income taxes and lower discrete tax
benefits compared to the year-ago period, which included a $249 million benefit
from the settlement of a depreciation-related uncertain tax position.
Net income was $5.63 billion compared with $3.91 billion. EPS was $5.99 compared
with $4.17.
                                       18
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Year-to-date segment results
Our segment results compared with the year-ago period are as follows:
Analog
                                  YTD 2021       YTD 2020      Change
Revenue                          $ 10,292$ 7,759          33  %
Operating profit                    5,295         3,398          56  %
Operating profit % of revenue        51.4  %       43.8  %

Analog revenue increased in both product lines, led by Signal Chain. Operating profit increased due to higher revenue and associated gross profit. Embedded Processing

                                  YTD 2021      YTD 2020      Change
Revenue                          $ 2,285$ 1,850          24  %
Operating profit                     881           494          78  %

Operating profit % of revenue 38.6 % 26.7 %



Embedded Processing revenue increased. Operating profit increased primarily due
to higher revenue and associated gross profit.
Other
                                               YTD 2021       YTD 2020       Change
Revenue                                       $    935$    776          20  %
Operating profit*                                  281            189          49  %
Operating profit % of revenue                     30.1  %        24.4  %

* Includes acquisition charges and restructuring charges/other



Other revenue increased $159 million, and operating profit increased $92
million.
Financial condition
At the end of the third quarter of 2021, total cash (cash and cash equivalents
plus short-term investments) was $9.78 billion, an increase of $3.21 billion
from the end of 2020.
Accounts receivable were $1.65 billion, an increase of $239 million compared
with the end of 2020. Days sales outstanding for the third quarter of 2021 were
32 compared with 31 at the end of 2020.
Inventory was $1.86 billion, a decrease of $92 million from the end of 2020.
Days of inventory for the third quarter of 2021 were 112 compared with 123 at
the end of 2020.
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 a
variable-rate, revolving credit facility. Cash flows from operating activities
for the first nine months of 2021 were $6.40 billion, an increase of
$2.39 billion from the year-ago period due to higher net income and lower cash
used for working capital.
Our revolving credit facility is with a consortium of investment-grade banks and
allows us to borrow up to $2 billion until March 2024. This credit facility also
serves as support for the issuance of commercial paper. As of September 30,
2021, our credit facility was undrawn, and we had no commercial paper
outstanding.
                                       19
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Investing activities for the first nine months of 2021 used $1.87 billion
compared with providing cash of $74 million in the year-ago period. Capital
expenditures were $1.18 billion compared with $437 million in the year-ago
period and were primarily for semiconductor manufacturing equipment and
facilities in both periods. We expect our capital expenditures to continue to
increase in future periods. Short-term investments used cash of $657 million
compared with providing cash of $523 million in the year-ago period.
Financing activities for the first nine months of 2021 used $1.98 billion
compared with $3.70 billion in the year-ago period. 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. In the year-ago period, we received net
proceeds of $1.50 billion from the issuance of fixed-rate, long-term debt, and
we retired maturing debt of $500 million. Dividends paid were $2.82 billion
compared with $2.49 billion in the year-ago period, reflecting an increase in
the dividend rate. We used $385 million to repurchase 2.1 million shares of our
common stock compared with $2.54 billion used in the year-ago period to
repurchase 23.3 million shares. Employee exercises of stock options provided
cash proceeds of $325 million compared with $356 million in the year-ago period.
We had $5.66 billion of cash and cash equivalents and $4.12 billion of
short-term investments as of September 30, 2021. 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.
In October 2021, we completed our acquisition of Micron Technology's
300-millimeter semiconductor factory in Lehi, Utah, for cash consideration of
about $900 million.
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,
                                                               2021              2020               Change
Cash flow from operations (GAAP)                           $   8,524$  5,768                   48  %
Capital expenditures                                          (1,392)             (600)
Free cash flow (non-GAAP)                                  $   7,132$  5,168                   38  %

Revenue                                                    $  17,588$ 13,735

Cash flow from operations as a percentage of revenue (GAAP)

                                                          48.5  %           42.0  %
Free cash flow as a percentage of revenue (non-GAAP)            40.6  %     

37.6 %



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.
Long-term contractual obligations
Information regarding long-term contractual obligations is in Item 7 of our Form
10-K for the year ended December 31, 2020. Additionally, in September 2021, we
issued $500 million principal amount of 1.125% notes maturing in 2026, $500
million principal amount of 1.90% notes maturing in 2031 and $500 million
principal amount of 2.70% notes maturing in 2051. We retired $550 million of
maturing debt in February 2021.
                                       20

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© Edgar Online, source Glimpses

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