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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Texas Instruments    TXN

TEXAS INSTRUMENTS

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

10/21/2020 | 09:19am EST

Overview

We design, make and sell semiconductors to electronics designers and
manufacturers all over the world. For many years, we have run our business with
three overarching ambitions in mind. First, we will act like owners who will own
the company for decades. Second, we will adapt and succeed in a world that is
ever changing. And third, we will be a company that we are personally proud to
be a part of and that we would want as our neighbor. When we are successful in
achieving these ambitions, our employees, customers, communities and
shareholders all win.
Our business model is designed around the following four sustainable competitive
advantages that we believe, in combination, put us in a unique class of
companies:
•A strong foundation of manufacturing and technology. We invest in manufacturing
technologies and do most of our manufacturing in-house. This strategic decision
to directly control our manufacturing helps ensure a consistent supply of
products for our customers and also allows us to invest in technology that
differentiates the features of our products. We have focused on creating a
competitive manufacturing cost advantage by investing in our advanced analog
300-millimeter capacity, which has about a 40% cost advantage per unpackaged
chip over 200-millimeter. To strengthen this advantage, we are moving forward
with our plan to build our new 300-millimeter wafer fabrication facility in
Richardson, Texas, as 300-millimeter wafers will continue to support the
majority of our Analog growth.
•Broad portfolio of differentiated analog and embedded processing products. Our
customers need multiple chips for their systems. The breadth of our portfolio
means we can meet more of these needs than our competitors can, which gives us
access to more customers and the opportunity to sell more products and generate
more revenue per customer system. We invest more than $1 billion each year to
develop new products for our portfolio, which includes tens of thousands of
products.
•Reach of market channels. Customers often begin their initial product selection
process and design-in journey on our website, and the breadth of our portfolio
attracts more customers to our website than any of our competitors' websites.
Our web presence and global sales and applications team are advantages that give
us unique access and insight to about 100,000 customers designing TI
semiconductors into their end products.
•Diversity and longevity of our products, markets and customer positions.
Together, the attributes above result in diverse and long-lived positions that
deliver high terminal value to our shareholders. Because of the breadth of our
portfolio, we are not dependent on any single product, customer, technology or
market. Some of our products generate revenue for decades, which strengthens the
return on our investments.
Our strategic focus, and where we invest the majority of our resources, is on
Analog and Embedded Processing, with a particular emphasis on designing and
selling those products into the industrial and automotive markets. We believe
these markets represent the best growth opportunities over the next decade or
longer, due to increasing semiconductor content. Additionally, analog and
embedded processing products sold into industrial and automotive markets provide
long product life cycles, intrinsic diversity and less capital-intensive
manufacturing, which we believe offer stability, profitability and strong cash
generation.
This business model is the foundation of our capital management strategy, which
is based on our belief that free cash flow growth, especially on a per-share
basis, is important for maximizing shareholder value over the long term. We also
believe that free cash flow will be valued only if it is productively invested
in the business or returned to shareholders.
The combined effect of our ambitions, business model and sustainable competitive
advantages is that we have continued to build a stronger company. Over time, we
have gained market share in Analog and Embedded Processing and grown and
returned all free cash flow to our owners.
                                       17
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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. During the third quarter, we reorganized the
product lines within our Analog segment to simplify our business structure into
our Power and Signal Chain product lines. These changes had no impact on our
previously reported consolidated financial statements or on our reportable
segment 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.
•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.
Impact of COVID-19
The coronavirus (COVID-19) pandemic and its follow-on effects are impacting and
will likely continue to impact business activity across industries worldwide,
including TI. Therefore, we remain cautious about how the economy might behave
for the next few years.
The impact to our lead times and ability to fulfill orders was minimal in the
first nine months of 2020. However, depending on pandemic-related factors like
the potential of local manufacturing restrictions on our factories, we could
experience constraints in fulfilling customer orders in future periods. The
coronavirus pandemic remains dynamic with uncertainty around its duration and
broader impact. We are monitoring and assessing the situation and preparing for
implications to our business, supply chain and customer demand.
We have long had a business continuity plan in place for unforeseeable
situations, like we are experiencing with COVID-19. Additionally, over the past
several years, we have invested in building inventory and expanding our global
internally owned manufacturing footprint. Investing in these capabilities has
given us flexibility, such as the ability to build products across multiple
manufacturing sites. These investments have helped to minimize disruptions, but
may not be sufficient to eliminate them.
Performance summary
Our third quarter revenue was $3.82 billion, net income was $1.35 billion and
earnings per share (EPS) were $1.45.
Revenue increased 18% sequentially with notable strength from the rebound of
automotive demand and growing demand from personal electronics. Revenue
increased 1% from the same quarter a year ago.
In our core businesses, Analog revenue grew 18% and Embedded Processing grew 19%
sequentially. From a year ago, Analog revenue grew 7% and Embedded Processing
declined 10%.
                                       18
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Our cash flow from operations of $5.8 billion for the trailing 12 months again
underscored the strength of our business model. Free cash flow for the same
period was $5.2 billion and 38% 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 Analog production.
We have returned $6.4 billion to shareholders in the past 12 months through
stock repurchases and dividends. Over the same period, our dividends represented
64% of free cash flow, underscoring their sustainability. In September, we
announced we would increase our dividend by 13%. Together, our stock repurchases
and dividends reflect our continued commitment to return all free cash flow to
our shareholders.
Results of operations - third quarter 2020 compared with third quarter 2019
Revenue of $3.82 billion increased $46 million, or 1%, primarily due to higher
revenue from Analog, partially offset by lower revenue from Embedded Processing.
Gross profit of $2.45 billion was about even. As a percentage of revenue, gross
profit decreased to 64.3% from 64.9%.
Operating expenses (R&D and SG&A) were $793 million compared with $778 million.
Acquisition charges were $51 million compared with $79 million and were
non-cash. See Note 5 to the financial statements.
Operating profit was $1.61 billion, or 42.2% of revenue, compared with $1.59
billion, or 42.1% of revenue.
OI&E was $27 million of income compared with $34 million of income, which
decreased primarily due to reduced interest income.
Interest and debt expense of $49 million increased $6 million due to the
issuance of additional long-term debt.
Our provision for income taxes was $234 million compared with $155 million. This
increase was due to lower discrete tax items, partially offset by a lower annual
operating tax rate. Our annual operating tax rate, which does not include
discrete tax items, is about 14% compared with 16% in 2019. We use "annual
operating tax rate" to describe the estimated annual effective tax rate. The
2020 rate differs from the 21% U.S. statutory corporate tax rate due to the
effect of U.S. tax benefits.
Net income was $1.35 billion compared with $1.43 billion. EPS was $1.45 compared
with $1.49.
Third quarter 2020 segment results
Our segment results compared with the year-ago quarter are as follows:
Analog (includes Power and Signal Chain product lines)
                                  Q3 2020       Q3 2019       Change
Revenue                          $ 2,865$ 2,674           7  %
Operating profit                   1,320         1,231           7  %
Operating profit % of revenue       46.1  %       46.0  %


Analog revenue increased in both product lines, led by Signal Chain. Operating
profit increased due to higher revenue and associated gross profit.
Embedded Processing (includes Connected Microcontrollers and Processors product
lines)
                                  Q3 2020      Q3 2019      Change
Revenue                          $  651$  724         (10) %
Operating profit                    187          233         (20) %

Operating profit % of revenue 28.7 % 32.2 %

Embedded Processing revenue decreased in both product lines, led by Processors. Operating profit decreased due to lower revenue and associated gross profit.

                                       19
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Other (includes DLP® products, calculators and custom ASIC products)

                                  Q3 2020      Q3 2019      Change
Revenue                          $  301$  373         (19) %
Operating profit*                   102          125         (18) %

Operating profit % of revenue 33.9 % 33.5 % * Includes acquisition charges



Other revenue decreased $72 million, and operating profit decreased $23 million.
Results of operations - first nine months of 2020 compared with first nine
months of 2019
Revenue of $10.39 billion decreased $648 million, or 6%, primarily due to lower
revenue from Embedded Processing.
Gross profit of $6.62 billion was down $444 million, or 6%, due to lower
revenue. As a percentage of revenue, gross profit decreased to 63.8% from 64.1%.
Operating expenses were $2.37 billion compared with $2.39 billion.
Restructuring charges/other was a charge of $24 million due to an Embedded
Processing action, compared with a credit of $36 million due to the sale of our
manufacturing facility in Greenock, Scotland in 2019.
Acquisition charges were $151 million compared with $238 million and were
non-cash. See Note 5 to the financial statements.
Operating profit was $4.08 billion, or 39.3% of revenue, compared with $4.47
billion, or 40.6% of revenue.
OI&E was $151 million of income compared with $122 million of income, which
increased primarily due to the reversal of interest accrued on an uncertain tax
position, partially offset by lower interest income.
Interest and debt expense of $142 million increased $17 million due to the
issuance of additional long-term debt.
Our provision for income taxes was $183 million compared with $524 million. This
decrease was due to higher discrete tax benefits, which included a $249 million
benefit from the settlement of a depreciation-related uncertain tax position,
and, to a lesser extent, a lower annual operating tax rate and lower income
before income taxes.
Net income was $3.91 billion compared with $3.95 billion. EPS was $4.17 compared
with $4.12.
Year-to-date segment results
Our segment results compared with the year-ago period are as follows:
Analog
                                  YTD 2020      YTD 2019      Change
Revenue                          $ 7,759$ 7,726           -  %
Operating profit                   3,398         3,427          (1) %

Operating profit % of revenue 43.8 % 44.4 %



Analog revenue was about even in both product lines. Operating profit was about
even.
Embedded Processing
                                  YTD 2020      YTD 2019      Change
Revenue                          $ 1,850$ 2,310         (20) %
Operating profit                     494           747         (34) %

Operating profit % of revenue 26.7 % 32.3 %

Embedded Processing revenue decreased in both product lines, led by Processors. Operating profit decreased due to lower revenue and associated gross profit.

                                       20
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Other
                                               YTD 2020       YTD 2019       Change
Revenue                                       $    776$    997         (22) %
Operating profit*                                  189            300         (37) %
Operating profit % of revenue                     24.4  %        30.1  %

* Includes acquisition charges and restructuring charges/other



Other revenue decreased $221 million, and operating profit decreased $111
million.
Financial condition
At the end of the third quarter of 2020, total cash (cash and cash equivalents
plus short-term investments) was $5.52 billion, an increase of $131 million from
the end of 2019.
Accounts receivable were $1.39 billion, an increase of $318 million compared
with the end of 2019. Days sales outstanding at the end of the third quarter of
2020 were 33 compared with 29 at the end of 2019.
Inventory was $2.07 billion, an increase of $71 million from the end of 2019.
Days of inventory at the end of the third quarter of 2020 were 137 compared with
144 at the end of 2019. The increase in inventory reflects our desire to
maintain high optionality with our operating plan so we can keep our lead times
stable and product availability high, particularly during this time when our
customers' ability to forecast their demand is limited. It is also higher as we
reduce the number of distributors this year and have a closer, direct
relationship with our customers.
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 2020 were $4.01 billion, a decrease of $881 million
from the year-ago period primarily due to an increase in 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,
2020, our credit facility was undrawn, and we had no commercial paper
outstanding.
Investing activities for the first nine months of 2020 provided $74 million
compared with $1 million in the year-ago period. Capital expenditures were
$437 million compared with $684 million in the year-ago period and were
primarily for semiconductor manufacturing equipment and facilities in both
periods. Short-term investments provided cash of $523 million compared with
$630 million in the year-ago period.
Financing activities for the first nine months of 2020 used $3.70 billion
compared with $3.44 billion in the year-ago period. In 2020, 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. In the year-ago period, we received
net proceeds of $1.49 billion from the issuance of fixed-rate, long-term debt,
and we retired maturing debt of $750 million. Dividends paid were $2.49 billion
compared with $2.17 billion in the year-ago period, reflecting an increase in
the dividend rate, partially offset by fewer shares outstanding. We used
$2.54 billion to repurchase 23.3 million shares of our common stock compared
with $2.47 billion used in the year-ago period to repurchase 23.4 million
shares. Employee exercises of stock options provided cash proceeds of
$356 million compared with $491 million in the year-ago period.
We had $2.82 billion of cash and cash equivalents and $2.70 billion of
short-term investments as of September 30, 2020. 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).
                                       21
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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,
                                                               2020              2019               Change
Cash flow from operations (GAAP)                           $   5,768$  7,040                  (18) %
Capital expenditures                                            (600)           (1,007)
Free cash flow (non-GAAP)                                  $   5,168$  6,033                  (14) %

Revenue                                                    $  13,735$ 14,750

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

                                                          42.0  %           47.7  %
Free cash flow as a percentage of revenue (non-GAAP)            37.6  %     

40.9 %



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, 2019. Additionally, in the first nine
months of 2020, we issued $750 million principal amount of 1.375% notes maturing
in 2025 and $750 million principal amount of 1.75% notes maturing in 2030. We
retired $500 million of maturing debt in April 2020.
Changes in accounting standards
See Note 2 to the financial statements for information regarding the status of
new accounting and reporting standards.
                                       22

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© Edgar Online, source Glimpses

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