Management Discussion

Texas Instruments Inc · 10-K · FY 2021

● TEXAS INSTRUMENTS INC · FY 2021

Texas Instruments Inc. demonstrated exceptional execution in 2021, driving revenue up 27% to $18.34 billion and operating profit over 48%, while generating $6.29 billion in free cash flow. The leadership team maintains a highly disciplined strategy centered on maximizing shareholder value through capital efficiency and strong competitive advantages. However, the assessment notes that internal challenges are often framed as manageable by existing strengths rather than addressed with detailed contingency planning.

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● SYMBOLOGY.ONLINE l1 SYNTHESIS

Texas Instruments Inc Management Discussion Analysis

Management Team Leadership Assessment (Based on MD&A)

The leadership team demonstrates a highly structured and financially disciplined approach to managing Texas Instruments Inc., characterized by clear strategic focus and robust financial execution. However, the presentation of challenges is often framed within the context of existing strengths, which warrants careful scrutiny regarding full transparency.

1. Transparency and Honesty in Discussing Challenges

Strength: The management team exhibits a high degree of technical transparency by providing detailed explanations for complex financial results. For instance, they clearly differentiate between GAAP and Non-GAAP measures (e.g., explaining the use of "annual operating tax rate" vs. "effective tax rate") and provide specific reasons for fluctuations in profitability, such as noting that increased provision for income taxes was due to higher pre-tax income and lower discrete tax benefits compared to 2020. Furthermore, they are transparent about accounting judgments, detailing the uncertainties inherent in calculating tax provisions and assessing deferred tax asset recoverability.
Weakness: While acknowledging external risks, the discussion of internal challenges is largely framed as manageable or mitigated by existing strengths. The primary mention of systemic risk—the COVID-19 pandemic—is a general caution ("we remain cautious about how the economy might behave for the next few years") rather than a deep dive into specific operational vulnerabilities or potential negative impacts on their core business model, which could suggest an overly optimistic framing of current headwinds.

2. Strategic Thinking and Forward Planning

Strength: The strategy is exceptionally well-defined and measurable, centering on "the growth of free cash flow per share" as the ultimate metric for value generation. They have clearly articulated a three-pronged approach (great business model, capital discipline, efficiency) supported by four specific competitive advantages (e.g., strong manufacturing foundation providing lower costs and greater supply chain control). Their forward planning is concrete, noting that they "expect our capital expenditures to be higher than historical levels" as part of their long-term capacity planning to strengthen these advantages.
Weakness: The strategic narrative relies heavily on the assumption that the current competitive advantages will remain sustainable "for a long time to come." While this provides confidence, the MD&A does not detail specific contingency plans or alternative strategies should key technological shifts or disruptive competitors erode their established market position in analog and embedded processing.

3. Execution Capabilities Based on Past Performance

Strength: The company demonstrates exceptional execution capabilities, evidenced by strong financial growth and capital efficiency in 2021. Revenue increased significantly by 27% to $18.34 billion, while operating profit saw a substantial increase of over 48% (to $8.96 billion). Crucially, they successfully translated this operational strength into shareholder value, generating $6.29 billion in free cash flow and returning $4.41 billion to shareholders through dividends and stock repurchases.
Weakness: While overall performance is strong, there are minor indicators of working capital pressure that could signal execution friction. Days sales outstanding increased slightly from 31 to 32 days, and while inventory decreased, the increase in accounts receivable suggests a potential shift in collection cycles or changes in customer payment terms during the period.

4. Risk Awareness and Mitigation Strategies

Strength: The team is highly aware of macro-level risks (global economic uncertainty due to COVID-19) and has robust mitigation strategies built into its core operations. They mitigate dependency risk through "Diversity and longevity of our products, markets and customer positions that provide less single point dependency." Furthermore, their strong liquidity position—with total cash reaching $9.74 billion—provides a substantial buffer against financial shocks, allowing them to fund capital expenditures ($2.46 billion) while maintaining operational flexibility.
Weakness: The discussion of specific supply chain risks is limited to stating that manufacturing provides "greater control of our supply chain," which is an advantage rather than a detailed risk mitigation plan. While they acknowledge the fixed cost structure (where decreased factory loadings lead to lower profit margins), they do not provide explicit forward-looking scenarios or hedging strategies for potential cyclical downturns in demand, relying instead on the inherent strength and diversity of their product portfolio.

● TEXAS INSTRUMENTS INC · FY 2021

Management Discussion

ITEM 7. Management's discussion and analysis of financial condition and results of operations

Overview

We design, make and sell semiconductors to electronics designers and manufacturers all over the world. Technology is the foundation of our company, but ultimately, our objective and the best metric to measure progress and generate long-term value for owners is the growth of free cash flow per share.

Our strategy to maximize free cash flow per share growth has three elements:

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.

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.
Efficiency, which means constantly striving for more output for every dollar spent.

We believe that our business model with the combined effect of our four competitive advantages sets TI apart from our peers and will for a long time to come. We will invest to strengthen our competitive advantages, be disciplined in capital allocation and stay diligent in our pursuit of efficiencies. Finally, we will remain focused on the belief that long-term growth of free cash flow per share is the ultimate measure to generate value.

Management's discussion and analysis of financial condition and results of operations (MD& A) should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. In the following discussion of our results of operations:

• Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels, and how management allocates resources and measures results. See Note 1 to the financial statements for more information regarding our segments.

•When we discuss our results:

◦ Unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are evidenced by fluctuations in shipment volumes.

◦ New products do not tend to have a significant impact on our revenue in any given period because we sell such a large number of products.

◦ From time to time, our revenue and gross profit are affected by changes in demand for higher-priced or lower-priced products, which we refer to as changes in the "mix" of products shipped.

◦ Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed. When factory loadings decrease, our fixed costs are spread over reduced output and, absent other circumstances, our profit margins decrease. Conversely, as factory loadings increase, our fixed costs are spread over increased output and, absent other circumstances, our profit margins increase.

• For an explanation of free cash flow 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 2021 and 2020 and year-to-year comparisons between 2021 and 2020. Discussion of 2019 items and year-to-year comparisons between 2020 and 2019 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, 2020.

The coronavirus (COVID-19) pandemic and its effects are impacting and will likely continue to impact market conditions and business operations across industries worldwide, including at TI. Therefore, we remain cautious about how the economy might behave for the next few years and continue to monitor potential impact on our operations.

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 67.5% reflected the quality of our product portfolio, as well as the efficiency of our manufacturing strategy, including the benefit of 300-millimeter production.

Our focus on analog and embedded processing allows us to generate strong cash flow from operations. Our cash flow from operations of $8.76 billion underscored the strength of our business model. Free cash flow was $6.29 billion and represented 34.3% of revenue. During 2021, we returned $4.41 billion to shareholders through dividends and stock repurchases. Over the same period, our dividend represented 62% of free cash flow, underscoring its sustainability.

Details of financial results - 2021 compared with 2020

Revenue of $18.34 billion increased $3.88 billion, or 27%, due to higher revenue from Analog and, to a lesser extent, Embedded Processing.

Gross profit of $12.38 billion was up $3.11 billion, or 34%, primarily due to higher revenue. As a percentage of revenue, gross profit increased to 67.5% from 64.1%.

Operating expenses (R& D and SG& A) were $3.22 billion compared with $3.15 billion.

Acquisition charges were $142 million compared with $198 million and were non-cash.

Restructuring charges/other was $54 million due to integration charges at our Lehi, Utah, manufacturing facility partially offset by gains on sales of assets, compared with $24 million due to an Embedded Processing action in 2020.

Operating profit was $8.96 billion, or 48.8% of revenue, compared with $5.89 billion, or 40.8% of revenue.

Other income and expense (OI& E) was $143 million of income compared with $313 million of income, which decreased primarily due to lower royalty income. See Note 11 to the financial statements.

Our provision for income taxes was $1.15 billion compared with $422 million. This increase was due to higher income before income taxes and lower discrete tax benefits compared to 2020, which included a $249 million benefit from the settlement of a depreciation-related uncertain tax position.

Our annual operating tax rate, which does not include discrete tax items, was 14% in both periods. We use "annual operating tax rate" to describe the estimated annual effective tax rate. Our effective tax rate, which includes discrete tax items, was 13% in 2021 compared with 7% in 2020. 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 $7.77 billion compared with $5.60 billion. EPS was $8.26 compared with $5.97.

Segment results - 2021 compared with 2020

Analog (includes Power and Signal Chain product lines)

2021 2020 Change
─────────────────────────────────────────────────────────────────────────────────────────
Revenue $ 14,050 $ 10,886 29
Operating profit 7,393 4,912 51
Operating profit % of revenue 52.6 45.1

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

Embedded Processing (includes microcontrollers and processors)

2021 2020 Change
───────────────────────────────────────────────────────────────────────────────────────
Revenue $ 3,049 $ 2,570 19
Operating profit 1,174 743 58
Operating profit % of revenue 38.5 28.9

Embedded Processing revenue increased. Operating profit increased primarily due to higher revenue and associated gross profit.

Other (includes DLP

products, calculators and custom ASIC products)

2021 2020 Change
───────────────────────────────────────────────────────────────────────────────────────
Revenue $ 1,245 $ 1,005 24
Operating profit * 393 239 64
Operating profit % of revenue 31.6 23.8

Includes acquisition charges and restructuring charges/other

Other revenue increased $240 million, and operating profit increased $154 million.

Financial condition

At the end of 2021, total cash (cash and cash equivalents plus short-term investments) was $9.74 billion, an increase of $3.17 billion from the end of 2020.

Accounts receivable were $1.70 billion, an increase of $287 million compared with the end of 2020. Days sales outstanding at the end of 2021 were 32 compared with 31 at the end of 2020.

Inventory was $1.91 billion, a decrease of $45 million from the end of 2020. Days of inventory at the end of 2021 were 116 compared with 123 at the end of 2020.

Liquidity and capital resources

Our primary source of liquidity is cash flow from operations. Additional sources of liquidity are cash and cash equivalents, short-term investments and access to debt markets. We also have a variable rate, revolving credit facility. As of December 31, 2021, our credit facility was undrawn, and we had no commercial paper outstanding. Cash flows from operating activities for 2021 were $8.76 billion, an increase of $2.62 billion due to higher net income and lower cash used for working capital.

Investing activities for 2021 used $4.10 billion compared with $922 million in 2020. Capital expenditures were $2.46 billion compared with $649 million in 2020 and were primarily for semiconductor manufacturing equipment and facilities in both periods, including the purchase of our 300-millimeter semiconductor factory in Lehi, Utah, during 2021. As we continue to invest to strengthen our competitive advantage in manufacturing and technology as part of our long-term capacity planning, we expect our capital expenditures to be higher than historical levels. Short-term investments used cash of $1.65 billion in 2021 compared with $241 million in 2020.

Financing activities for 2021 used $3.14 billion compared with $4.55 billion in 2020. In 2021, we received net proceeds of $1.50 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $550 million. In 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. Dividends paid in 2021 were $3.89 billion compared with $3.43 billion in 2020, reflecting an increased dividend rate. We used $527 million to repurchase 2.9 million shares of our common stock compared with $2.55 billion used in 2020 to repurchase 23.4 million shares. Employee exercises of stock options provided cash proceeds of $377 million compared with $470 million in 2020.

We had $4.63 billion of cash and cash equivalents and $5.11 billion of short-term investments as of December 31, 2021. We believe we have the necessary financial resources and operating plans to fund our working capital needs, capital expenditures, dividend and debt-related payments and other business requirements for at least the next 12 months.

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,
2021 2020
─────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────
Cash flow from operations (GAAP) $ 8,756 $ 6,139
Capital expenditures (2,462) (649)
Free cash flow (non-GAAP) $ 6,294 $ 5,490
Revenue $ 18,344 $ 14,461
Cash flow from operations as a percentage of revenue (GAAP) 47.7 42.5
Free cash flow as a percentage of revenue (non-GAAP) 34.3 38.0

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.

Critical accounting estimates

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.

Income taxes

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 valuation allowances 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.

Commitments and contingencies

See Note 10 to the financial statements for a discussion of our commitments and contingencies.

ITEM 7A. Quantitative and qualitative disclosures about market risk