SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2020
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from ___________ to ___________
Commission File Number 001-03761
TEXAS INSTRUMENTS INCORPORATED
|(Exact Name of Registrant as Specified in Its Charter)|
|(State of Incorporation)||(I.R.S. Employer Identification No.)|
12500 TI Boulevard, Dallas, Texas
|(Address of principal executive offices)||(Zip Code)|
Registrant’s telephone number, including area code 214-479-3773
|Securities registered pursuant to Section 12(b) of the Act:|
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|Common Stock, par value $1.00||TXN||The Nasdaq Global Select Market|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☒||Accelerated filer||☐|
|Non-accelerated filer||☐||Smaller reporting company||☐|
|Emerging growth company||☐|| |
|If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act||☐|
|Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ||☒|
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $116,120,360,680 as of June 30, 2020.
920,239,191 (Number of shares of common stock outstanding as of January 27, 2021)
Part III hereof incorporates information by reference to the Registrant’s proxy statement for the 2021 annual meeting of stockholders.
ITEM 1. Business
We design and make semiconductors that we sell to electronics designers and manufacturers all over the world. Our operations began in 1930, and we are incorporated in Delaware. With headquarters in Dallas, Texas, we have design, manufacturing or sales operations in more than 30 countries. Our two reportable segments are Analog and Embedded Processing, and we report the results of our remaining business activities in Other. In 2020, we generated $14.46 billion of revenue.
For decades, we have operated with a passion to create a better world by making electronics more affordable through semiconductors. We were pioneers in the transition from vacuum tubes to transistors and then to integrated circuits. As each generation became more reliable, more affordable and lower in power, semiconductors were used by a growing number of customers and markets. This passion is alive today as we help our customers develop electronics and new applications, particularly in industrial and automotive markets.
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.
As engineers, we are fortunate to work on exciting technology which helps our customers innovate to create a better 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:
The first element of our strategy is a business model that is focused on analog and embedded processing products and built around four competitive advantages. This business model is the result of a series of strategic decisions made over the years and that continue today. The four sustainable competitive advantages are a strong foundation of manufacturing and technology, a broad portfolio of analog and embedded processing products, the reach of our market channels, and diversity and longevity of our products, markets and customer positions. In combination, these four competitive advantages provide tangible benefits, are difficult to replicate and ultimately separate us from our best peers. 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.
The second element of our strategy to maximize free cash flow per share growth is disciplined allocation of capital. 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. Over a 10-year period from 2011 to 2020, we allocated $83 billion, which reinforces the importance of discipline in capital allocation. The largest allocation over this period was to drive organic growth, which includes investments in R&D, sales and marketing, capital expenditures and working capital for inventory. Beyond that, we also allocated capital to dividends and share repurchases. Dividends are designed to appeal to a broad set of investors, and share repurchases are made with the goal of the accretive capture of future free cash flow for long-term investors. Lastly, we allocate to acquisitions for inorganic growth, which we last did in 2011 when we acquired National Semiconductor.
The third element of our strategy is efficiency, which we think of as constantly striving for more output for every dollar spent. This is about getting our investments in the most impactful areas to maximize the growth of long-term free cash flow per share; it is not just about optimizing cost-cutting to get to the last dollar of expense. We bring this philosophy of efficiency and continuous improvement to all areas of the company, and this focus on efficiency contributes to revenue growth, improved gross margins, disciplined R&D and SG&A expense, free cash flow margins and ultimately to free cash flow per share growth.
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.
Semiconductors are electronic components that serve as the building blocks inside modern electronic systems and equipment. Semiconductors, generally known as “chips,” combine multiple transistors to form a complete electronic circuit. We have a diverse product portfolio that is used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution. This broad portfolio includes approximately 80,000 products that are integral to almost every type of electronic equipment.
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. Our segments also reflect how management allocates resources and measures results.
Our Analog segment generated $10.89 billion of revenue in 2020. Analog semiconductors change real-world signals, such as sound, temperature, pressure or images, by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors. Analog semiconductors are also used to manage power in all electronic equipment by converting, distributing, storing, discharging, isolating and measuring electrical energy, whether the equipment is plugged into a wall or using a battery. As the digitization of electronics continues, there is a growing need and opportunity for analog chips to provide the power to run devices and the critical interfaces with human beings, the real world and other electronic devices. Our Analog products are used in many markets, particularly industrial, automotive and personal electronics.
Sales of our Analog products generated about 75% of our revenue in 2020.
Our Analog segment includes the following major product lines: Power and Signal Chain.
Power includes products that help customers manage power in electronic systems in all end markets. Our broad portfolio is designed to manage power requirements across different voltage levels, including battery-management solutions, DC/DC switching regulators, AC/DC and isolated controllers and converters, power switches, linear regulators, voltage supervisors, voltage references and lighting products.
Signal Chain includes products that sense, condition and measure real-world signals to allow information to be transferred or converted for further processing and control. Our Signal Chain products, which serve a variety of end markets, include amplifiers, data converters, interface products, motor drives, clocks, logic and sensing products.
Our Embedded Processing segment generated $2.57 billion of revenue in 2020. Embedded Processing products are the digital “brains” of many types of electronic equipment. They are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. Our devices vary from simple, low-cost microcontrollers used in applications such as electric toothbrushes to highly specialized, complex devices such as motor control. Our Embedded Processing products are used in many markets, particularly industrial and automotive.
An important characteristic of our Embedded Processing products is that our customers often invest their own research and development (R&D) to write software that operates on our products. This investment tends to increase the length of our customer relationships because many customers prefer to reuse software from one product generation to the next.
Sales of Embedded Processing products generated about 18% of our revenue in 2020.
Our Embedded Processing segment includes microcontrollers, digital signal processors (DSPs) and applications processors. Microcontrollers are self-contained systems with a processor core, memory and peripherals that are designed to control a set of specific tasks for electronic equipment. DSPs perform mathematical computations almost instantaneously to process or improve digital data. Applications processors are designed for specific computing activity.
We report the results of our remaining business activities in Other, which includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other generated $1.01 billion of revenue in 2020 and includes revenue from DLP® products (primarily used to project high-definition images), calculators and certain custom semiconductors known as application-specific integrated circuits (ASICs).
In Other, we also include items that are not used in evaluating the results of or in allocating resources to our segments. Examples of these items include acquisition charges, restructuring charges and certain corporate-level items, such as litigation expenses, environmental costs and gains and losses from other activities, including asset dispositions.
Markets for our products
The table below lists the major markets for our products in 2020 and the estimated percentage of our 2020 revenue that the market represented. The chart also lists, in declining order of our revenue, the sectors within each market.
|Industrial||Factory automation & control|
|(37% of TI revenue)||Medical|
|Aerospace & defense|
|Test & measurement|
|Motor drives |
|Pro audio, video & signage|
|Retail automation & payment|
|Automotive||Infotainment & cluster|
|(20% of TI revenue)||Advanced driver assistance systems (ADAS)|
|Hybrid, electric & powertrain systems|
|Body electronics & lighting|
|Personal electronics||Mobile phones|
|(27% of TI revenue)||PC & notebooks|
|Connected peripherals & printers|
|Home theater & entertainment|
|Communications equipment||Wireless infrastructure|
|(8% of TI revenue)||Wired networking|
|Broadband fixed line access|
|Enterprise systems||Data center & enterprise computing|
|(6% of TI revenue)||Enterprise projectors|
|Other (calculators and other)|
|(2% of TI revenue)|
Despite recent consolidation, the analog and embedded processing markets remain highly fragmented. As a result, we face significant global competition from dozens of large and small companies, including both broad-based suppliers and niche suppliers. Our competitors also include emerging companies, particularly in Asia.
We believe that competitive performance in the semiconductor market generally depends on several factors, including the breadth of a company’s product line, the strength and reach of its channels to market, technological innovation, product development execution, technical support, customer service, quality, reliability, price and manufacturing capacity and capabilities. In addition, manufacturing process and package technologies that provide differentiated levels of performance and a structural cost advantage are competitive factors for our analog products, and customers’ prior investments in software development is a competitive factor for our embedded processing products.
The “semiconductor cycle” refers to the ebb and flow of supply and demand and the building and depleting of inventories. The semiconductor market historically has been characterized by periods of tight supply caused by strengthening demand and/or insufficient manufacturing capacity, followed by periods of surplus inventory caused by weakening demand and/or excess manufacturing capacity. These are typically referred to as upturns and downturns in the semiconductor cycle. A semiconductor cycle could be affected by the significant time and money required to build and maintain semiconductor manufacturing facilities.
We employ several strategies which have many benefits, including dampening the effect of the semiconductor cycle on TI. As an example, we are focused on building closer direct relationships with customers. When it comes to market cycles, these relationships provide improved insight into customer demand and allow us to more accurately and efficiently manage factory loadings and inventory levels, which lead to more stable lead times and higher product availability. Finally, we focus our resources on analog and embedded processing products and industrial and automotive markets. Generally, our products serve a large and diverse customer base, which reduces our dependence on the performance of any single product, market or customer. In addition, they typically have long shelf lives and low risk of obsolescence. Industrial and automotive markets also benefit from long product life cycles, with revenue often lasting 10 years or more, which help to smooth the impact of cyclicality.
Our revenue is subject to some seasonal variation. Historically, our sequential revenue growth rate tends to be weaker in the first and fourth quarters when compared with the second and third quarters.
Customers, sales and distribution
We sell our products to over 100,000 customers. Our customer base is diverse, with more than one-third of our revenue derived from customers outside our largest 100.
We market and sell our products through direct sales channels, including our website and broad sales and applications team, and through distributors. Over the past several years, we have been investing in new capabilities and evolving our distribution network to better align with our strategy to establish closer direct relationships with our customers. With less business flowing through the distribution channel, we require fewer distributors. During 2020, we completed our transition to a single worldwide distributor, coupled with a few region-specific distributors, for order fulfillment. Building closer direct customer relationships strengthens our reach of market channel advantage, which gives us access to more customers and more of their design projects, leading to the opportunity to sell more of our products into each design. Additionally, broader and deeper access gives us better insight and knowledge of customer needs.
Our investments in new and improved capabilities to directly support our customers include website and e-commerce enhancements as well as inventory consignment programs and order fulfillment services.
Semiconductor manufacturing begins with a sequence of photolithographic and chemical processing steps that fabricate a number of semiconductor devices on a thin silicon wafer. Each device on the wafer is packaged and tested. The entire process takes place in highly specialized facilities that require substantial investments.
We own and operate semiconductor manufacturing facilities in North America, Asia, Japan and Europe. These include both wafer fabrication and assembly/test facilities.
We invest in manufacturing technologies and do most of our manufacturing in-house. This strategic decision to make manufacturing and technology a core competitive advantage delivers tangible benefits of lower manufacturing costs and greater control of our supply chain. We have focused on creating a competitive manufacturing structural cost advantage by investing in our advanced analog 300-millimeter capacity. An unpackaged chip built on 300-millimeter wafers costs about 40% less than an unpackaged chip built on 200-millimeter wafers. To strengthen this advantage, construction is underway on our new 300-millimeter wafer fabrication facility in Richardson, Texas, as 300-millimeter wafers will continue to support the majority of our Analog growth.
We assess and are careful to address potential health, safety, and environmental risks presented by our operations, including our manufacturing operations. We care for our environment and work to prevent pollution and the potential risks related to climate change by implementing practices such as recycling and reusing materials, controlling harmful emissions, and properly handling hazardous and restricted substances.
We expect to continue to maintain sufficient internal manufacturing capacity to meet the majority of our production needs and to obtain manufacturing equipment to support new technology developments and revenue growth. To supplement our manufacturing capacity and maximize our responsiveness to customer demand, we selectively use the capacity of outside suppliers, commonly known as foundries, and subcontractors. In 2020, we sourced about 20% of our total wafers from external foundries and about 40% of our assembly/test services from subcontractors.
Our objectives for inventory are to maintain high levels of customer service, maintain stable and competitive lead times, minimize inventory obsolescence and improve manufacturing asset utilization. To meet these objectives and to allow greater flexibility in periods of high demand, we build ahead of demand our broad-based products that are used across a diverse set of applications and customers and have low risk of obsolescence. Inventory levels will vary based on market conditions and seasonality.
We purchase materials, parts and supplies from a number of suppliers. In some cases we purchase such items from sole-source suppliers. The materials, parts and supplies essential to our business are generally available at present, and we believe that such materials, parts and supplies will be available in the foreseeable future.
We own many patents and have many patent applications pending in the United States and other countries in fields relating to our business. We have developed a strong, broad-based patent portfolio and continually add patents to that portfolio. We also have license agreements, which vary in duration, involving rights to our portfolio or those of other companies. We do not consider our business materially dependent upon any one patent or patent license.
Executive officers of the Registrant
The following is an alphabetical list of the names and ages of the executive officers of the company and the positions or offices with the company held by each person named:
|Ahmad S. Bahai||58||Senior Vice President|
|Kyle M. Flessner||50||Senior Vice President|
|Mark S. Gary||46||Senior Vice President|
|Haviv Ilan||52||Executive Vice President and Chief Operating Officer|
|Hagop H. Kozanian||38||Senior Vice President|
|Rafael R. Lizardi||48||Senior Vice President, Chief Financial Officer and Chief Accounting Officer|
|Amichai Ron||43||Senior Vice President|
|Richard K. Templeton||62||Director, Chairman of the Board, President and Chief Executive Officer|
|Cynthia Hoff Trochu||57||Senior Vice President, Secretary and General Counsel|
|Julie M. Van Haren||51||Senior Vice President|
|Darla H. Whitaker||55||Senior Vice President|
The term of office of these officers is from the date of their election until their successor shall have been elected and qualified. All have been employees of the company for more than five years. Mr. Templeton and Mses. Trochu and Whitaker have served as executive officers of the company for more than five years. Messrs. Ilan and Lizardi and Ms. Van Haren became executive officers of the company in 2017. Messrs. Bahai, Flessner and Kozanian became executive officers of the company in 2018. Mr. Ron became an executive officer in 2019. Mr. Gary became an executive officer in 2020.
Human capital management
At December 31, 2020, we had about 30,000 employees worldwide. Of those, about 85% were in Sales, R&D or manufacturing. Our objective for human capital management is to recruit, develop and retain the best talent possible. As a technology and manufacturing company, our success is grounded in having strong engineering talent and a reliable factory workforce. We have a promote-from-within culture and offer training and rotation programs that provide the opportunity to quickly gain experience in different areas. In 2020, our turnover rate was 7.1%.
It is important that our employees represent a mix of experiences and backgrounds in order to make our company stronger, more innovative and more inclusive. Inclusion is one of our core values, and we have programs in place to promote diversity and inclusion. To learn more, review our Corporate Citizenship Report. Information in our Corporate Citizenship Report is not part of this report.
Our internet address is www.ti.com. Information on our website is not part of this report. We make available free of charge through our Investor Relations website our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed with the SEC. Also available through the TI Investor Relations website are reports filed by our directors and executive officers on Forms 3, 4 and 5, and amendments to those reports.
Available on our website at www.ti.com/corporategovernance: (i) our Corporate Governance Guidelines; (ii) charters for the Audit, Compensation, and Governance and Stockholder Relations Committees of our board of directors; (iii) our Code of Conduct; and (iv) our Code of Ethics for TI Chief Executive Officer and Senior Finance Officers. Stockholders may request copies of these documents free of charge by writing to Texas Instruments Incorporated, Attention: Investor Relations, P.O. Box 660199, MS 8657, Dallas, Texas, 75266-0199.
ITEM 1A. Risk factors
You should read the following risk factors in conjunction with the factors discussed elsewhere in this and other of our filings with the Securities and Exchange Commission (SEC) and in materials incorporated by reference into these filings. These risk factors are intended to highlight certain factors that may affect our financial condition and results of operations and are not meant to be an exhaustive discussion of risks that apply to TI, a company with broad international operations. Like many companies, we are susceptible to a potential downturn associated with macroeconomic weakness, which may affect our performance and the performance of our customers. Similarly, the price of our securities is subject to volatility due to fluctuations in general market conditions, actual financial results that do not meet our and/or the investment community’s expectations, changes in our and/or the investment community’s expectations for our future results, dividends or share repurchases, and other factors, many of which are beyond our control.
Risks related to our business and industry
The extent to which the COVID-19 pandemic will adversely affect our business, results of operations and financial condition is uncertain.
The global spread of the novel coronavirus, severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), and the coronavirus disease, COVID-19, has created significant uncertainty and economic disruption, both near-term and potentially long-term. We have modified, and might further modify, our business practices in response to the COVID-19 pandemic, related third-party responses, including from government authorities and our suppliers, customers and distributors, and the economic and social ramifications of the disease and societal responses across the markets in which TI operates. The extent to which the COVID-19 pandemic will continue to affect our business, results of operation and financial condition is difficult to predict and depends on numerous evolving factors including: the duration and scope of the pandemic; government, social, business and other actions that have been and will be taken in response to the pandemic; and the effect of the pandemic on short- and long-term general economic conditions. We might experience short- or long-term constrained supply or volatility in customer demand, which could materially and adversely affect our business and financial results in future periods.
Our global operations subject us to risks associated with domestic or international political, social, economic or other conditions.
We have facilities in more than 30 countries. About 90% of our revenue comes from shipments to locations outside the United States; shipments of products to China-based customers represent about 20% of our revenue. Certain countries where we operate have experienced, and other countries may experience, trade tension that affects global trade and macroeconomic conditions through the enactment of tariffs, import or export restrictions, trade embargoes and sanctions, restrictions on cross-border investment and other trade barriers. Trade tensions impact our ability to deliver products and product support into China, cause Chinese customers to seek alternate suppliers and could otherwise adversely affect our operations and financial results.
We are exposed to political, social and economic conditions, security risks, terrorism or other hostile acts, health conditions and epidemics, labor conditions, and possible disruptions in transportation, communications and information technology networks of the various countries in which we operate. In addition, our global operations expose us to periods when the U.S. dollar significantly fluctuates in relation to the non-U.S. currencies in which we transact business. The remeasurement of non-U.S. dollar transactions can have an adverse effect on our results of operations and financial condition.
We face substantial competition that requires us to respond rapidly to product development and pricing pressures.
We face intense technological and pricing competition in the markets in which we operate. We expect this competition will continue to increase from large competitors and from small competitors serving niche markets, and also from emerging companies, particularly in Asia, that sell products into the same markets in which we operate. For example, we may face increased competition as a result of China actively promoting and reshaping its domestic semiconductor industry through policy changes and investment. These actions, in conjunction with trade tensions, may restrict us from participating in the China market or may prevent us from competing effectively. Certain competitors possess sufficient financial, technical and management resources to develop and market products that may compete favorably against our products, and consolidation among our competitors may allow them to compete more effectively. The price and product development pressures that result from competition may lead to reduced profit margins and lost business opportunities in the event that we are unable to match the price declines or cost efficiencies, or meet the technological, product, support, software or manufacturing advancements of our competitors.
Changes in expected demand for our products could have a material adverse effect on our results of operations.
Our customers include companies in a wide range of end markets and sectors within those markets. If demand in one or more sectors within our end markets declines or the rate of growth slows, our results of operations may be adversely affected. The cyclical nature of the semiconductor market occasionally leads to significant and rapid increases and decreases in product demand. Additionally, the loss or significant curtailment of purchases by one or more of our large customers, including curtailments due to a change in the design or manufacturing sourcing policies or practices of these customers, the timing of customer or distributor inventory adjustments, changes in demand for customer products, or trade restrictions, may adversely affect our results of operations and financial condition.
Our results of operations also might suffer because of a general decline in customer demand resulting from, for example: uncertainty regarding the stability of global credit and financial markets; natural events, epidemics or domestic or international political, social, economic or other conditions; breaches of customer information technology systems that disrupt customer operations; or a customer’s inability to access credit markets and other sources of needed liquidity.
Our ability to match inventory and production with the product mix needed to fill orders may affect our ability to meet a quarter’s revenue forecast. We manufacture products based on forecasts of customers’ demands. These forecasts are based on multiple assumptions, and if inaccurate, could cause us to hold inadequate, excess or obsolete inventory that would reduce our profit margins and adversely affect our results of operations and financial condition.
Our operating results and our reputation could be adversely affected by breaches, disruptions or other incidents relating to our information technology systems.
Breaches, disruptions or other incidents relating to our information technology systems or the systems of our customers, vendors and other third parties could be caused by factors such as computer viruses, system failures, restricted network access, unauthorized access, terrorism, employee malfeasance, or human error. These events could, among other things, compromise our information technology networks; result in corrupt or lost data or the unauthorized release of our, our customers’ or our suppliers’ confidential or proprietary information; cause a disruption to our manufacturing and other operations; result in the release of personal data; or cause us to incur costs associated with increased protection, remediation, regulatory inquiries or penalties, or claims for damages, any of which could adversely affect our operating results and our reputation. Cybersecurity or other threats to our information technology systems or the systems of our customers, vendors and other third parties are frequent and constantly evolving, thereby increasing the difficulty of defending against them.
Our ability to successfully implement strategic, business and organizational changes could affect our business plans and results of operations.
From time to time, we undertake strategic, business and organizational changes, including acquisitions, divestitures and restructuring actions, to support or carry out our objectives. If we do not successfully implement these changes, our business plans and operating results could be adversely affected. We may not achieve or sustain the expected growth, cost savings or other benefits of strategic, business and organizational changes, and charges associated with these actions could differ materially in amount and timing from our expectations.
Our results of operations could be affected by natural events in the locations in which we operate.
We have manufacturing, data and design facilities and other operations in locations subject to natural occurrences such as severe weather, geological events or epidemics that could disrupt operations. A natural disaster that results in a prolonged disruption, particularly where we have principal manufacturing and design operations, as listed in the Properties section in Item 2, may adversely affect our results and financial condition.
Rapid technological change in markets we serve requires us to develop new technologies and products.
Rapid technological change in markets we serve could contribute to shortened product life cycles and a decline in average selling prices of our products. Our results of operations depend in part upon our ability to successfully develop, manufacture and market innovative products in a timely and cost-effective manner. We make significant investments in research and development to improve existing technology and products, develop new products to meet changing customer demands, and improve our production processes. In some cases, we might not realize a return or the expected return on our investments because they are generally made before commercial viability can be assured. Further, projects that are commercially viable may not contribute to our operating results until at least a few years after they are completed.
We face supply chain and manufacturing risks.
We rely on third parties to supply us with goods and services in a cost-effective and timely manner. Our access to needed goods and services may be adversely affected by potential disputes with suppliers or disruptions in our suppliers’ operations as a result of, for example: quality excursions; uncertainty regarding the stability of global credit and financial markets; domestic or international political, social, economic and other conditions; natural events or epidemics in the locations in which our suppliers operate; or limited or delayed access to key raw materials, natural resources and utilities. Additionally, a breach or other incident relating to our suppliers’ information technology systems could result in a release of confidential or proprietary information. If our suppliers are unable to access credit markets and other sources of needed liquidity, we may be unable to obtain needed supplies, collect accounts receivable or access needed technology.
In particular, our manufacturing processes and critical manufacturing equipment require that certain key raw materials, natural resources and utilities be available. Limited or delayed access to and high costs of these items could adversely affect our results of operations. Our products contain materials that are subject to conflict minerals reporting requirements. Our relationships with customers and suppliers may be adversely affected if we are unable to describe our products as conflict-free. Additionally, our costs may increase if one or more of our customers demand that we change the sourcing of materials we cannot identify as conflict-free.
Our inability to timely implement new manufacturing technologies or install manufacturing equipment could adversely affect our results of operations. We subcontract a portion of our wafer fabrication and assembly and testing of our products, and we depend on third parties to provide advanced logic manufacturing process technology development. We do not have long-term contracts with all of these suppliers, and the number of alternate suppliers is limited. Reliance on these suppliers involves risks, including possible shortages of capacity in periods of high demand, suppliers’ inability to develop and deliver advanced logic manufacturing process technology in a timely, cost-effective, and appropriate manner, the possibility of suppliers’ imposition of increased costs on us and the unauthorized disclosure or use of our intellectual property.
Our results of operations and our reputation could be affected by warranty claims, product liability claims, product recalls or legal proceedings.
Claims based on warranty, product liability, epidemic or delivery failures, or other grounds relating to our products, manufacturing, services, designs, communications or cybersecurity could lead to significant expenses as we defend the claims or pay damage awards or settlements. In the event of a claim, we would also incur costs if we decide to compensate the affected customer or end consumer. Any such claims may also cause us to write off the value of related inventory. We maintain product liability insurance, but there is no guarantee that such insurance will be available or adequate to protect against all such claims. In addition, it is possible for a customer to recall a product containing a TI part, for example, with respect to products used in automotive applications or handheld electronics, which may cause us to incur costs and expenses relating to the recall. Any of these events could adversely affect our results of operations, financial condition and reputation.
Our results of operations and financial condition could be adversely affected if a customer or a distributor suffers a loss with respect to our inventory.
We have consignment inventory programs in place for some of our largest customers and distributors. If a customer or distributor were to experience a loss with respect to TI-consigned inventory, our results of operations and financial condition would be adversely affected if we do not recover the full value of the lost inventory from the customer, distributor or insurer, or if our recovery is delayed.
Our results of operations could be adversely affected by distributors’ promotion of competing product lines or our distributors’ financial performance.
In 2020, about half of our revenue was generated from sales of our products through distributors. Our distributors carry competing product lines, and our sales could be affected if semiconductor distributors promote competing products over our products. Moreover, our results of operations could be affected if our distributors suffer financial difficulties that result in their inability to pay amounts owed to us. Disputes with current or former distributors could be disruptive or harmful to our business.
Our margins vary.
Our profit margins vary due to a number of factors, which may include customer demand and shipment volume; our manufacturing processes; product mix; inventory levels; tariffs; freight costs; and new accounting pronouncements or changes in existing accounting practices or standards. In addition, we operate in a highly competitive market environment that might adversely affect pricing for our products. Because we own much of our manufacturing capacity, a significant portion of our operating costs is fixed. In general, these fixed costs do not decline with reductions in customer demand or factory loadings, and can adversely affect profit margins as a result.
Our continued success depends in part on our ability to retain and recruit a sufficient number of qualified employees in a competitive environment.
Our continued success depends in part on the retention and recruitment of skilled personnel, as well as the effective management of succession for key employees. Skilled and experienced personnel in our industry, including engineering, management, marketing, technical and staff personnel, are in high demand and competition for their talents is intense. There can be no assurance that we will be able to successfully retain and recruit the key engineering, management and technical personnel that we require to execute our business strategy. Our ability to recruit internationally or deploy employees to various locations may be limited by immigration laws.
Legal and regulatory risks
Our operations could be affected by the complex laws, rules and regulations to which our business is subject.
We are subject to complex laws, rules and regulations affecting our domestic and international operations relating to, for example, the environment and climate change, safety and health; trade; bribery and corruption; financial reporting; tax; data privacy and protection; labor and employment; competition; market access; epidemics; intellectual property ownership and infringement; and the movement of currency. Compliance with these laws, rules and regulations may be onerous and expensive and could restrict our ability to manufacture or ship our products and operate our business. If we do not comply or if we become subject to enforcement activity, we could be subject to fines, penalties or other legal liability. Furthermore, should these laws, rules and regulations be amended or expanded, or new ones enacted, we could incur materially greater compliance costs or restrictions on our ability to manufacture our products and operate our business.
Some of these complex laws, rules and regulations – for example, those related to environmental, safety and health requirements – may particularly affect us in the jurisdictions in which we manufacture products, especially if such laws and regulations: require the use of abatement equipment beyond what we currently employ; require the addition or elimination of a raw material or process to or from our current manufacturing processes; or impose costs, fees or reporting requirements on the direct or indirect use of energy, natural resources, or materials or gases used or emitted into the environment in connection with the manufacture of our products. A substitute for a prohibited raw material or process might not be available, or might not be available at reasonable cost.
Our results of operations could be affected by changes in tax-related matters.
We have facilities in more than 30 countries and as a result are subject to taxation and audit by a number of taxing authorities. Tax rates vary among the jurisdictions in which we operate. If our tax rate increases, our results of operations could be adversely affected. A number of factors could cause our tax rate to increase, including a change in the jurisdictions in which our profits are earned and taxed; a change in the mix of profits from those jurisdictions; changes in available tax credits or deductions, including for amounts relating to stock compensation; changes in applicable tax rates; changes in tariff regulations or surcharges; changes in accounting principles; or adverse resolution of audits by taxing authorities. We have deferred tax assets on our balance sheet. Changes in applicable tax laws and regulations or in our business performance could affect our ability to realize those deferred tax assets, which could also affect our results of operations.
In addition, we are subject to laws and regulations in various jurisdictions that determine how much profit has been earned and when it is subject to taxation in that jurisdiction. These laws and regulations can be complex and subject to interpretation. Changes in these laws and regulations, including those that align with the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting recommendations, could affect the locations where we are deemed to earn income, which could in turn affect our results of operations. Each quarter we forecast our tax expense based on our forecast of our performance for the year. If that performance forecast changes, our forecasted tax expense will change.
Our performance depends in part on our ability to enforce our intellectual property rights and to maintain freedom of operation.
Access to worldwide markets depends in part on the continued strength of our intellectual property portfolio in all jurisdictions where we conduct business. There can be no assurance that, as our business evolves, we will obtain the necessary intellectual property rights, or that we will be able to independently develop the technology, software or know-how necessary to conduct our business or that we can do so without infringing the intellectual property rights of others. To the extent that we have to rely on technology from others for which a license is required, there can be no assurance that we will be able to obtain such a license at all or on terms we consider reasonable. We, directly and indirectly, face infringement claims from third parties, including non-practicing entities that have acquired patents to pursue enforcement actions against other companies. We also face infringement claims where we or our customers make, use or sell products and where the intellectual property laws may be less established or less predictable. These assertions, whether or not of any merit, expose us to claims for damages and/or injunctions from third parties, as well as claims for indemnification by our customers in instances where we have a contractual or other legal obligation to indemnify them against damages resulting from infringement claims.
We actively enforce and protect our own intellectual property rights. However, our efforts cannot prevent all misappropriation or improper use of our protected technology and information, including, for example, third parties’ use of our patented or copyrighted technology, or our trade secrets in their products without the right to do so, or third parties’ sale of counterfeit products bearing our trademark. The risk of unfair copying or cloning may impede our ability to sell our products. The laws of countries where we operate may not protect our intellectual property rights to the same extent as U.S. laws.
Increases in health care and pension benefit costs could affect our results of operations and financial condition.
Federal and state health care reform programs could increase our costs with regard to medical coverage of our employees, which could reduce profitability and affect our results of operations and financial condition. In addition, obligations related to our pension and other postretirement plans reflect assumptions that affect the planned funding and costs of these plans, including the actual return on plan assets, discount rates, plan participant population demographics and changes in pension regulations. Changes in these assumptions may affect plan funding, cash flow and results of operations, and our costs and funding obligations could increase significantly if our plans’ actual experience differs from these assumptions.
Risks related to our financing activities and other risks
Our debt could affect our operations and financial condition.
From time to time, we issue debt securities with various interest rates and maturities. While we believe we will have the ability to service this debt, our ability to make principal and interest payments when due depends upon our future performance, which will be subject to general economic conditions, industry cycles, and business and other factors affecting our operations, including our other risk factors, many of which are beyond our control. In addition, our obligation to make principal and interest payments could divert funds that otherwise might be invested in our operations or returned to shareholders, or could cause us to raise funds by, for example, issuing new debt or equity or selling assets.
Our results of operations and liquidity could be affected by changes in the financial markets.
We maintain bank accounts, one or more multiyear revolving credit agreements, and a portfolio of investments to support the financing needs of the company. Our ability to fund our operations, invest in our business, make strategic acquisitions, service our debt obligations and meet our cash return objectives depends upon continuous access to our bank and investment accounts, and may depend on access to our bank credit lines that support commercial paper borrowings and provide additional liquidity through short-term bank loans. If we are unable to access these accounts and credit lines (for example, due to instability in the financial markets), our results of operations and financial condition could be adversely affected and our ability to access the capital markets or redeem our investments could be restricted.
Material impairments of our goodwill or intangible assets could adversely affect our results of operations.
We have a significant amount of goodwill and intangible assets on our consolidated balance sheet. Charges associated with impairments of goodwill or intangible assets could adversely affect our financial condition and results of operations.
ITEM 1B. Unresolved staff comments
ITEM 2. Properties
Our principal executive offices are located at 12500 TI Boulevard, Dallas, Texas. The following table indicates the general location of our principal manufacturing and design operations and the reportable segments that make major use of them. Except as otherwise indicated, we own these facilities.
|North Texas (Dallas, Richardson and Sherman)||X||X|
|Santa Clara, California||X|
|South Portland, Maine||X|
|Chengdu, China †||X||X|
|Shanghai, China *||X||X|
|Bangalore, India †||X||X|
|Kuala Lumpur, Malaysia †||X||X|
|Melaka, Malaysia †||X|
|Aguascalientes, Mexico *||X|
|Baguio, Philippines †||X||X|
|Pampanga (Clark), Philippines †||X||X|
|Taipei, Taiwan †||X||X|
† Portions of the facilities are leased and owned. This may include land leases.
Our facilities in the United States contained approximately 12.9 million square feet at December 31, 2020, of which approximately 0.4 million square feet were leased. Our facilities outside the United States contained approximately 9.7 million square feet at December 31, 2020, of which approximately 1.6 million square feet were leased.
At the end of 2020, we occupied substantially all of the space in our facilities.
Leases covering our currently occupied leased facilities expire at varying dates, generally within the next five years. We believe our current properties are suitable and adequate for their intended purpose.
ITEM 3. Legal proceedings
We are involved in various inquiries and proceedings that arise in the ordinary course of our business. We believe that the amount of our liability, if any, will not have a material adverse effect upon our financial condition, results of operations or liquidity.
ITEM 4. Mine safety disclosures
ITEM 5. Market for Registrant’s common equity, related stockholder matters and issuer purchases of equity securities
TI common stock is quoted on The Nasdaq Global Select Market under the ticker symbol TXN. At December 31, 2020, we had 12,624 stockholders of record.
The following table contains information regarding our purchases of our common stock during the fourth quarter of 2020.
|Period||Total Number of Shares Purchased||Average Price Paid per Share|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (a)
|October 1, 2020 through October 31, 2020||1,323 ||$||146.19 ||— ||$||10.65 ||billion|
|November 1, 2020 through November 30, 2020||91,680 ||156.59 ||91,680 ||10.63 ||billion|
|December 1, 2020 through December 31, 2020||4,513 ||159.96 ||4,513 ||10.63 ||billion|
|Total||97,516 ||(b)||$||156.61 ||(b)||96,193 ||$||10.63 ||billion (c)|
(a)All open-market purchases during the quarter were made under the authorization from our board of directors to purchase up to $12.0 billion of additional shares of TI common stock announced September 20, 2018.
(b)In addition to open-market purchases, 1,323 shares of common stock were surrendered by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock units.
(c)As of December 31, 2020, this amount consisted of the remaining portion of the $12.0 billion authorized in September 2018. No expiration date has been specified for this authorization.
ITEM 6. Selected financial data
|For Years Ended December 31,|
|(Millions of dollars, except share and per-share amounts)||2020||2019||2018||2017||2016|
|Cash flow data:|
|Cash flows from operating activities||$||6,139 ||$||6,649 ||$||7,189 ||$||5,363 ||$||4,614 |
|Capital expenditures||649 ||847 ||1,131 ||695 ||531 |
|Free cash flow (a)||5,490 ||5,802 ||6,058 ||4,668 ||4,083 |
|Dividends paid||3,426 ||3,008 ||2,555 ||2,104 ||1,646 |
|Stock repurchases||2,553 ||2,960 ||5,100 ||2,556 ||2,132 |
|Income statement data:|
|Revenue by segment:|
|Analog||10,886 ||10,223 ||10,801 ||9,900 ||8,536 |
|Embedded Processing||2,570 ||2,943 ||3,554 ||3,498 ||3,023 |
|Other||1,005 ||1,217 ||1,429 ||1,563 ||1,811 |
|Revenue||14,461 ||14,383 ||15,784 ||14,961 ||13,370 |
|Gross profit||9,269 ||9,164 ||10,277 ||9,614 ||8,257 |
|Operating expenses (R&D and SG&A)||3,153 ||3,189 ||3,243 ||3,202 ||3,098 |
|Acquisition charges||198 ||288 ||318 ||318 ||319 |
|Restructuring charges/other||24 ||(36)||3 ||11 ||(15)|
|Operating profit||5,894 ||5,723 ||6,713 ||6,083 ||4,855 |
|Net income||$||5,595 ||$||5,017 ||$||5,580 ||$||3,682 ||$||3,595 |
|A portion of net income is allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents. Diluted earnings per share (EPS) is calculated using the following:|
|Net income||$||5,595 ||$||5,017 ||$||5,580 ||$||3,682 ||$||3,595 |
|Income allocated to RSUs||(27)||(31)||(42)||(33)||(44)|
|Income allocated to common shares for diluted EPS||$||5,568 ||$||4,986 ||$||5,538 ||$||3,649 ||$||3,551 |
|Average diluted shares outstanding (millions)||933 ||952 ||990 ||1,012 ||1,021 |
|Diluted EPS||$||5.97 ||$||5.24 ||$||5.59 ||$||3.61 ||$||3.48 |
|Cash dividends declared per common share||$||3.72 ||$||3.21 ||$||2.63 ||$||2.12 ||$||1.64 |
(a)Free cash flow is a non-GAAP measure derived by subtracting capital expenditures from cash flows from operating activities.
|(Millions of dollars)||2020||2019||2018||2017||2016|
|Balance sheet data:|
|Cash, cash equivalents and short-term investments||$||6,568 ||$||5,387 ||$||4,233 ||$||4,469 ||$||3,490 |
|Total assets||19,351 ||18,018 ||17,137 ||17,642 ||16,431 |
|Current portion of long-term debt||550 ||500 ||749 ||500 ||631 |
|Long-term debt||6,248 ||5,303 ||4,319 ||3,577 ||2,978 |
See “Management’s discussion and analysis of financial condition and results of operations” and “Financial statements and supplementary data.”
ITEM 7. Management’s discussion and analysis of financial condition and results of operations
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. During 2020, 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.
Our results of operations provides details of our financial results for 2020 and 2019 and year-to-year comparisons between 2020 and 2019. Discussion of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s discussion and analysis of financial condition and results of operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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 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 continue to monitor and assess the situation and address implications to our business, supply chain and customer demand.
We have long had a business continuity plan in place for unforeseeable situations, like we have seen 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.
Results of operations
Our strategic focus is on analog and embedded processing products sold into six end markets: industrial, automotive, personal electronics, communications equipment, enterprise systems and other. While all end markets represent good opportunities, we place additional strategic emphasis on designing and selling those products into the industrial and automotive markets, which we believe represent the best growth opportunities. Gross margin of 64.1% reflected the quality of our product portfolio, as well as the efficiency of our manufacturing strategy, including the benefit of 300-millimeter Analog production.
Our focus on analog and embedded processing allows us to generate strong cash flow from operations. Our cash flow from operations of $6.14 billion underscored the strength of our business model. Free cash flow was $5.49 billion and represented 38.0% of revenue. During 2020, consistent with our commitment to return free cash flow to owners, we returned $5.98 billion to shareholders through a combination of dividends and stock repurchases. Our dividend represented 62% of free cash flow, underscoring its sustainability.
Details of financial results – 2020 compared with 2019
Revenue of $14.46 billion increased $78 million, or 1%, primarily due to higher revenue from Analog, partially offset by lower revenue from Embedded Processing.
Gross profit of $9.27 billion was up $105 million, or 1%, due to higher revenue and increased factory loadings. As a percentage of revenue, gross profit increased to 64.1% from 63.7%.
Operating expenses (R&D and SG&A) were $3.15 billion compared with $3.19 billion.
Acquisition charges were $198 million compared with $288 million and were non-cash. See Note 7 to the financial statements.
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.
Operating profit was $5.89 billion, or 40.8% of revenue, compared with $5.72 billion, or 39.8% of revenue.
Other income and expense (OI&E) was $313 million of income compared with $175 million of income, which increased primarily due to higher royalty income. See Note 12 to the financial statements.
Interest and debt expense of $190 million increased $20 million due to the issuance of additional long-term debt.
Our provision for income taxes was $422 million compared with $711 million. The 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, higher U.S. tax benefits, partially offset by higher income before income taxes.
Our annual operating tax rate, which does not include discrete tax items, was 14% compared with 16% in 2019. We use “annual operating tax rate” to describe the estimated annual effective tax rate. Our effective tax rate, which includes discrete tax items, was 7% in 2020 compared with 12% in 2019. See Note 4 to the financial statements for a reconciliation of the U.S. statutory corporate tax rate to our effective tax rate.
Net income was $5.60 billion compared with $5.02 billion. EPS was $5.97 compared with $5.24.
Segment results – 2020 compared with 2019
Analog (includes Power and Signal Chain product lines)
|Revenue||$||10,886 ||$||10,223 ||6 ||%|
|Operating profit||4,912 ||4,477 ||10 ||%|
|Operating profit % of revenue||45.1 ||%||43.8 ||%|
Analog revenue increased in both product lines about evenly. Operating profit increased due to higher revenue and associated gross profit.
Embedded Processing (includes microcontrollers and processors)
|Revenue||$||2,570 ||$||2,943 ||(13)||%|
|Operating profit||743 ||907 ||(18)||%|
|Operating profit % of revenue||28.9 ||%||30.8 ||%|
Embedded Processing revenue decreased. Operating profit decreased due to lower revenue and associated gross profit.
Other (includes DLP® products, calculators and custom ASIC products)
|Revenue||$||1,005 ||$||1,217 ||(17)||%|
|Operating profit *||239 ||339 ||(29)||%|
|Operating profit % of revenue||23.8 ||%||27.9 ||%|
* Includes acquisition charges and restructuring charges/other
Other revenue decreased $212 million, and operating profit decreased $100 million.
At the end of 2020, total cash (cash and cash equivalents plus short-term investments) was $6.57 billion, an increase of $1.18 billion from the end of 2019.
Accounts receivable were $1.41 billion, an increase of $340 million compared with the end of 2019. Days sales outstanding at the end of 2020 were 31 compared with 29 at the end of 2019.
Inventory was $1.96 billion, a decrease of $46 million from the end of 2019. Days of inventory at the end of 2020 were 123 compared with 144 at the end of 2019.
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 2020 were $6.14 billion, a decrease of $510 million primarily due to an increase in cash used for working capital, partially offset by higher net income.
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 December 31, 2020, our credit facility was undrawn, and we had no commercial paper outstanding.
Investing activities for 2020 used $922 million compared with $1.92 billion in 2019. Capital expenditures were $649 million compared with $847 million in 2019 and were primarily for semiconductor manufacturing equipment and facilities in both periods. Short-term investments used cash of $241 million in 2020 compared with $1.14 billion in 2019.
Financing activities for 2020 used $4.55 billion compared with $4.73 billion in 2019. In 2020, we received net proceeds of $1.50 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $500 million. In 2019, we received net proceeds of $1.49 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $750 million. Dividends paid in 2020 were $3.43 billion compared with $3.01 billion in 2019, reflecting an increase in the dividend rate, partially offset by fewer shares outstanding. We used $2.55 billion to repurchase 23.4 million shares of our common stock compared with $2.96 billion used in 2019 to repurchase 27.4 million shares. Employee exercises of stock options provided cash proceeds of $470 million compared with $539 million in 2019.
We had $3.11 billion of cash and cash equivalents and $3.46 billion of short-term investments as of December 31, 2020. We believe we have the necessary financial resources and operating plans to fund our working capital needs, capital expenditures, dividend and debt-related payments and other business requirements for at least the next 12 months.
Non-GAAP financial information
This MD&A includes references to free cash flow and ratios based on that measure. These are financial measures that were not prepared in accordance with generally accepted accounting principles in the United States (GAAP). Free cash flow was calculated by subtracting capital expenditures from the most directly comparable GAAP measure, cash flows from operating activities (also referred to as cash flow from operations).
We believe that free cash flow and the associated ratios provide insight into our liquidity, our cash-generating capability and the amount of cash potentially available to return to shareholders, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures.
Reconciliation to the most directly comparable GAAP measures is provided in the table below.
|For Years Ended December 31,|
|Cash flow from operations (GAAP)||$||6,139 ||$||6,649 |
|Free cash flow (non-GAAP)||$||5,490 ||$||5,802 |
|Revenue||$||14,461 ||$||14,383 |
|Cash flow from operations as a percentage of revenue (GAAP)||42.5 ||%||46.2 ||%|
|Free cash flow as a percentage of revenue (non-GAAP)||38.0 ||%||40.3 ||%|
This MD&A also includes references to an annual operating tax rate, a non-GAAP term we use to describe the estimated annual effective tax rate, a GAAP measure that by definition does not include discrete tax items. We believe the term annual operating tax rate helps differentiate from the effective tax rate, which includes discrete tax items.
Long-term contractual obligations
|Payments Due by Period|
|Long-term debt (a)||$||726 ||$||1,326 ||$||1,337 ||$||6,172 ||$||9,561 |
|Purchase commitments (b)||400 ||196 ||55 ||96 ||747 |
|Transition tax on indefinitely reinvested earnings (c)||44 ||155 ||302 ||— ||501 |
|Operating leases (d)||76 ||98 ||59 ||138 ||371 |
|Deferred compensation plans (e)||25 ||68 ||66 ||154 ||313 |
|Total (f)||$||1,271 ||$||1,843 ||$||1,819 ||$||6,560 ||$||11,493 |
(a)Principal and related interest payments for our long-term debt obligations, including amounts classified as the current portion of long-term debt.
(b)Includes payments for software licenses and contractual arrangements with suppliers when there is a fixed, non-cancellable payment schedule or when minimum payments are due with a reduced delivery schedule. Excludes cancellable arrangements. See Note 11 to the financial statements.
(c)Includes payments for the one-time transition tax on our indefinitely reinvested earnings related to the 2017 enactment of the U.S. Tax Cuts and Jobs Act.
(d)Includes minimum payments for leased facilities and equipment and purchases of industrial gases under contracts accounted for as operating leases. See Note 10 to the financial statements.
(e)Estimated payments for certain liabilities that existed as of December 31, 2020.
(f)Excludes $89 million of uncertain tax liabilities under ASC 740, as well as any planned future funding contributions to retirement benefit plans. Amounts associated with uncertain tax liabilities have been excluded because of the difficulty in making reasonably reliable estimates of the timing of cash settlements with the respective taxing authorities. Regarding future funding of retirement benefit plans, we plan to contribute about $10 million in 2021, but funding projections beyond 2021 are not practical to estimate due to the rules affecting tax-deductible contributions and the impact from the plans’ asset performance, interest rates and potential U.S. and non-U.S. legislation.
Critical accounting policies
Our accounting policies are more fully described in Note 2 of the consolidated financial statements. As disclosed in Note 2, the preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. However, based on facts and circumstances inherent in developing estimates and assumptions, management believes it is unlikely that applying other estimates and assumptions would have a material impact on the financial statements. We consider the following accounting policies to be those that are most important to the portrayal of our financial condition and that require a higher degree of judgment.
In determining net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax provisions and the resultant tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense.
In the ordinary course of global business, there may be many transactions and calculations where the ultimate tax outcome is uncertain. The calculation of tax liabilities involves dealing with uncertainties in the interpretation and application of complex tax laws, and significant judgment is necessary to (i) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (ii) measure the amount of tax benefit that qualifies for recognition. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different from what is reflected in the historical income tax provisions and accruals.
As part of our financial process, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to be ultimately recoverable. Our judgment regarding future recoverability of our deferred tax assets may change due to various factors, including changes in U.S. or international tax laws and changes in market conditions and their impact on our assessment of taxable income in future periods. These changes, if any, may require adjustments to the deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made.
Inventory valuation allowances
Inventory is valued net of allowances for unsalable or obsolete raw materials, work in process and finished goods. Statistical allowances are determined quarterly for raw materials and work in process based on historical disposals of inventory for salability and obsolescence reasons. For finished goods, quarterly statistical allowances are determined by comparing inventory levels of individual parts to historical shipments, current backlog and estimated future sales in order to identify inventory considered unlikely to be sold. A specific allowance for each material type will be carried if there is a significant event not captured by the statistical allowance, such as an end-of-life part or demand with imminent risk of cancellation. Allowances are also calculated quarterly for instances where inventoried costs for individual products are in excess of the net realizable value for those products. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and other factors.
Changes in accounting standards
See Note 2 to the financial statements for information regarding the status of new accounting and reporting standards.
Off-balance sheet arrangements
As of December 31, 2020, we had no significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Commitments and contingencies
See Note 11 to the financial statements for a discussion of our commitments and contingencies.
ITEM 7A. Quantitative and qualitative disclosures about market risk
Foreign exchange risk
The U.S. dollar is our functional currency for financial reporting. Our non-U.S. entities own assets or liabilities denominated in U.S. dollars or other currencies. Exchange rate fluctuations impact taxable income in those jurisdictions and consequently impact our effective tax rate.
Our balance sheet also reflects amounts remeasured from non-U.S. dollar currencies. Because most of the aggregate non-U.S. dollar balance sheet exposure is hedged by forward currency exchange contracts, which are based on year-end 2020 balances and currency exchange rates, a hypothetical 10% plus or minus fluctuation in non-U.S. currency exchange rates relative to the U.S. dollar would result in a pretax currency exchange gain or loss of approximately $3 million.
We use these forward currency exchange contracts to reduce the earnings impact that exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. As of December 31, 2020, we had forward currency exchange contracts outstanding with a notional value of $416 million to hedge net balance sheet exposures (including $147 million to sell Japanese yen, $85 million to sell euros and $82 million to sell British pounds). Similar hedging activities existed at year-end 2019.
Interest rate risk
We have the following potential exposure to changes in interest rates: (i) the effect of changes in interest rates on the fair value of our investments in cash equivalents and short-term investments, which could produce a gain or a loss; and (ii) the effect of changes in interest rates on the fair value of our debt.
As of December 31, 2020, a hypothetical 100 basis point increase in interest rates would decrease the fair value of our investments in cash equivalents and short-term investments by about $9 million and decrease the fair value of our long-term debt by $650 million. Because interest rates on our long-term debt are fixed, changes in interest rates would not affect the cash flows associated with long-term debt.
Long-term investments at year-end 2020 include the following:
•Investments in mutual funds – includes mutual funds that were selected to generate returns that offset changes in certain liabilities related to deferred compensation arrangements. The mutual funds hold a variety of debt and equity investments.
•Investments in venture capital funds – includes investments in limited partnerships (accounted for under either the equity method or at cost as non-marketable equity securities).
•Equity investments – includes non-marketable (non-publicly traded) equity securities.
Investments in mutual funds are stated at fair value. Changes in prices of the mutual fund investments are expected to offset related changes in certain deferred compensation liabilities. Non-marketable equity securities and certain venture capital funds are stated at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. Investments in the remaining venture capital funds are stated using the equity method. See Note 6 to the financial statements for details of equity and other long-term investments.
We also utilize total return swaps to economically hedge exposure to changes in liabilities related to the equity market risks of certain deferred compensation arrangements with employees. Gains or losses from changes in the fair value of these total return swaps generally offset the related losses or gains on the deferred compensation liabilities.
ITEM 8. Financial statements and supplementary data
List of financial statements:
•Income for each of the three years in the period ended December 31, 2020
•Comprehensive income for each of the three years in the period ended December 31, 2020
•Balance sheets as of December 31, 2020 and 2019
•Cash flows for each of the three years in the period ended December 31, 2020
•Stockholders’ equity for each of the three years in the period ended December 31, 2020
Schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the notes thereto.
|Consolidated Statements of Income||For Years Ended December 31,|
|(Millions of dollars, except share and per-share amounts)||2020||2019||2018|
|Revenue||$||14,461 ||$||14,383 ||$||15,784 |
|Cost of revenue (COR)||5,192 ||5,219 ||5,507 |
|Gross profit||9,269 ||9,164 ||10,277 |
|Research and development (R&D)||1,530 ||1,544 ||1,559 |
|Selling, general and administrative (SG&A)||1,623 ||1,645 ||1,684 |
|Acquisition charges||198 ||288 ||318 |
|Restructuring charges/other||24 ||(36)||3 |
|Operating profit||5,894 ||5,723 ||6,713 |
|Other income (expense), net (OI&E)||313 ||175 ||98 |
|Interest and debt expense||190 ||170 ||125 |
|Income before income taxes||6,017 ||5,728 ||6,686 |
|Provision for income taxes||422 ||711 ||1,106 |
|Net income||$||5,595 ||$||5,017 ||$||5,580 |
|Earnings per common share (EPS):|
|Basic||$||6.05 ||$||5.33 ||$||5.71 |
|Diluted||$||5.97 ||$||5.24 ||$||5.59 |
|Average shares outstanding (millions):|
|Basic||921 ||936 ||970 |
|Diluted||933 ||952 ||990 |
|A portion of net income is allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents. Diluted EPS is calculated using the following:|
|Net income ||$||5,595 ||$||5,017 ||$||5,580 |
|Income allocated to RSUs||(27)||(31)||(42)|
|Income allocated to common stock for diluted EPS||$||5,568 ||$||4,986 ||$||5,538 |
See accompanying notes.
|Consolidated Statements of Comprehensive Income||For Years Ended December 31,|
|(Millions of dollars)||2020||2019||2018|
|Net income||$||5,595 ||$||5,017 ||$||5,580 |
|Other comprehensive income (loss)|
|Net actuarial losses of defined benefit plans:|
Adjustments, net of tax effect of $3, ($37) and $35
Recognized within net income, net of tax effect of ($9), ($13) and ($15)
|29 ||38 ||50 |
|Prior service credit of defined benefit plans:|
Adjustments, net of tax effect of $0, $0 and $1
|— ||— ||(6)|
Recognized within net income, net of tax effect of $0, $0 and $1
Change in fair value, net of tax effect of $0, $0 and $1
|— ||— ||(2)|
|Other comprehensive income (loss), net of taxes||(13)||126 ||(59)|
|Total comprehensive income||$||5,582 ||$||5,143 ||$||5,521 |
See accompanying notes.
|Consolidated Balance Sheets||December 31,|
|(Millions of dollars, except share amounts)||2020||2019|
|Cash and cash equivalents||$||3,107 ||$||2,437 |
|Short-term investments||3,461 ||2,950 |
Accounts receivable, net of allowances of ($11) and ($8)
|1,414 ||1,074 |
|Raw materials||180 ||176 |
|Work in process||964 ||916 |
|Finished goods||811 ||909 |
|Inventories||1,955 ||2,001 |
|Prepaid expenses and other current assets||302 ||299 |
|Total current assets||10,239 ||8,761 |
|Property, plant and equipment at cost||5,781 ||5,740 |
|Property, plant and equipment||3,269 ||3,303 |
|Long-term investments||49 ||300 |
|Goodwill||4,362 ||4,362 |
|Acquisition-related intangibles||152 ||340 |
|Deferred tax assets||343 ||197 |
|Capitalized software licenses||122 ||69 |
|Overfunded retirement plans||246 ||218 |
|Other long-term assets||569 ||468 |
|Total assets||$||19,351 ||$||18,018 |
|Liabilities and stockholders’ equity|
|Current portion of long-term debt||$||550 ||$||500 |
|Accounts payable||415 ||388 |
|Accrued compensation||767 ||714 |
|Income taxes payable||134 ||46 |
|Accrued expenses and other liabilities||524 ||475 |
|Total current liabilities||2,390 ||2,123 |
|Long-term debt||6,248 ||5,303 |
|Underfunded retirement plans||131 ||93 |
|Deferred tax liabilities||90 ||78 |
|Other long-term liabilities||1,305 ||1,514 |
|Total liabilities||10,164 ||9,111 |
Preferred stock, $25 par value. Authorized – 10,000,000 shares
Participating cumulative preferred – None issued
|— ||— |
Common stock, $1 par value. Authorized – 2,400,000,000 shares
Shares issued – 1,740,815,939
|1,741 ||1,741 |
|Paid-in capital||2,333 ||2,110 |
|Retained earnings||42,051 ||39,898 |
|Treasury common stock at cost|
Shares: 2020 – 821,461,787; 2019 – 808,784,381
|Accumulated other comprehensive income (loss), net of taxes (AOCI)||(360)||(347)|
|Total stockholders’ equity||9,187 ||8,907 |
|Total liabilities and stockholders’ equity||$||19,351 ||$||18,018 |
See accompanying notes.
|Consolidated Statements of Cash Flows||For Years Ended December 31,|
|(Millions of dollars)||2020||2019||2018|
|Cash flows from operating activities|
|Net income||$||5,595 ||$||5,017 ||$||5,580 |
|Adjustments to net income:|
|Depreciation||733 ||708 ||590 |
|Amortization of acquisition-related intangibles||198 ||288 ||318 |
|Amortization of capitalized software||61 ||54 ||46 |
|Stock compensation||224 ||217 ||232 |
|Gains on sales of assets||(4)||(23)||(3)|
|Deferred taxes||(137)||81 ||(105)|
|Increase (decrease) from changes in:|
|Accounts receivable||(340)||133 ||71 |
|Inventories||46 ||216 ||(282)|
|Prepaid expenses and other current assets||(79)||265 ||669 |
|Accounts payable and accrued expenses||63 ||(93)||(7)|
|Accrued compensation||63 ||(15)||(7)|
|Income taxes payable||(181)||(193)||158 |
|Changes in funded status of retirement plans||(9)||29 ||36 |
|Cash flows from operating activities||6,139 ||6,649 ||7,189 |
|Cash flows from investing activities|
|Proceeds from asset sales||4 ||30 ||9 |
|Purchases of short-term investments||(5,786)||(3,444)||(5,641)|
|Proceeds from short-term investments||5,545 ||2,309 ||6,708 |
|Cash flows from investing activities||(922)||(1,920)||(78)|
|Cash flows from financing activities|
|Proceeds from issuance of long-term debt||1,498 ||1,491 ||1,500 |
|Repayment of debt||(500)||(750)||(500)|
|Proceeds from common stock transactions||470 ||539 ||373 |
|Cash flows from financing activities||(4,547)||(4,730)||(6,329)|
|Net change in cash and cash equivalents||670 ||(1)||782 |
|Cash and cash equivalents at beginning of period||2,437 ||2,438 ||1,656 |
|Cash and cash equivalents at end of period||$||3,107 ||$||2,437 ||$||2,438 |
See accompanying notes.
|Consolidated Statements of Stockholders’ Equity||Common|
|(Millions of dollars, except per-share amounts)|
Balance, December 31, 2017
|$||1,741 ||$||1,776 ||$||34,662 ||$||(27,458)||$||(384)|
|Net income||— ||— ||5,580 ||— ||— |
Dividends declared and paid ($2.63 per share)
|— ||— ||(2,555)||— ||— |
|Common stock issued for stock-based awards||— ||(55)||— ||428 ||— |
|Stock repurchases||— ||— ||— ||(5,100)||— |
|Stock compensation||— ||232 ||— ||— ||— |
|Other comprehensive income (loss), net of taxes||— ||— ||— ||— ||(59)|
|Dividend equivalents on RSUs||— ||— ||(17)||— ||— |
|Cumulative effect of accounting changes||— ||— ||236 ||— ||(30)|
|Other||— ||(3)||— ||— ||— |
Balance, December 31, 2018
|1,741 ||1,950 ||37,906 ||(32,130)||(473)|
|Net income||— ||— ||5,017 ||— ||— |
Dividends declared and paid ($3.21 per share)
|— ||— ||(3,008)||— ||— |
|Common stock issued for stock-based awards||— ||(55)||— ||594 ||— |
|Stock repurchases||— ||— ||— ||(2,960)||— |
|Stock compensation||— ||217 ||— ||— ||— |
|Other comprehensive income (loss), net of taxes||— ||— ||— ||— ||126 |
|Dividend equivalents on RSUs||— ||— ||(17)||— ||— |
|Other||— ||(2)||— ||1 ||— |
Balance, December 31, 2019
|1,741 ||2,110 ||39,898 ||(34,495)||(347)|
|Net income||— ||— ||5,595 ||— ||— |
Dividends declared and paid ($3.72 per share)
|— ||— ||(3,426)||— ||— |
|Common stock issued for stock-based awards||— ||— ||— ||470 ||— |
|Stock repurchases||— ||— ||— ||(2,553)||— |
|Stock compensation||— ||224 |