ITEM 7. Management's discussion and analysis of financial condition and results of operations
Overview
We design and manufacture semiconductors that we sell to electronics designers and manufacturers all over the world. Technology is the foundation of our company, but ultimately, our objective and the best metric for owners to measure our progress is through the growth of free cash flow per share over the long term.
Our strategy to maximize long-term free cash flow per share growth has three elements:
- 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:
(a) A strong foundation of manufacturing and technology that provides lower costs and greater control of our supply chain.
(b) A broad portfolio of analog and embedded processing products that offers more opportunity per customer and more value for our investments.
(c) 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.
(d) 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, invest in 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, 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 2024 and 2023 and year-to-year comparisons between 2024 and 2023. Discussion of 2022 items and year-to-year comparisons between 2023 and 2022 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, 2023.
Results of operations
Our strategic focus is on analog and embedded processing products. We sell our products into six end markets: industrial, automotive, personal electronics, enterprise systems, communications equipment and other. While all of these end markets represent good opportunities, we place additional strategic emphasis on designing and selling our products into the industrial and automotive markets, which we believe represent the best long-term growth opportunities.
Our focus on analog and embedded processing allows us to generate strong cash flow from operations. Our cash flow from operations of $6.32 billion underscored the strength of our business model, the quality of our product portfolio and the benefit of 300mm production. Free cash flow was $1.50 billion and represented 9.6% of revenue. During 2024, we invested $3.75 billion in R& D and SG& A, invested $4.82 billion in capital expenditures and returned $5.72 billion to shareholders.
Details of financial results - 2024 compared with 2023
Revenue of $15.64 billion decreased $1.88 billion, or 10.7%, due to lower revenue from Analog and Embedded Processing.
Gross profit of $9.09 billion was down $1.93 billion, or 17.5%, primarily due to lower revenue and, to a lesser extent, higher manufacturing costs associated with our planned capacity expansions. As a percentage of revenue, gross profit decreased to 58.1% from 62.9%.
Operating expenses (R& D and SG& A) were $3.75 billion compared with $3.69 billion.
Restructuring charges/other was a credit of $124 million primarily due to a gain on the sale of a property during 2024. See Note 11 to the financial statements.
Operating profit was $5.47 billion, or 34.9% of revenue, compared with $7.33 billion, or 41.8% of revenue.
Other income and expense (OI& E) was $496 million of income compared with $440 million of income, due to interest income. See Note 11 to the financial statements.
Interest and debt expense of $508 million increased $155 million due to the issuance of additional long-term debt. See Note 8 to the financial statements.
Our provision for income taxes was $654 million compared with $908 million. This decrease was due to lower income before income taxes. Our effective tax rate, which includes discrete tax items, was 12.0% in 2024 compared with 12.2% in 2023. 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 $4.80 billion compared with $6.51 billion. EPS was $5.20 compared with $7.07.
Segment results - 2024 compared with 2023
Analog (includes Power and Signal Chain product lines)
2024 2023 Change
─────────────────────────────────────────────────────────────────────────────────────────
Revenue $ 12,161 $ 13,040 (7)
Operating profit 4,608 5,821 (21)
Operating profit % of revenue 37.9 44.6
Analog revenue decreased due to the mix of products shipped in both product lines, led by Signal Chain. Operating profit decreased primarily due to lower revenue and higher manufacturing costs.
Embedded Processing (includes microcontrollers and processors)
2024 2023 Change
───────────────────────────────────────────────────────────────────────────────────────
Revenue $ 2,533 $ 3,368 (25)
Operating profit 352 1,008 (65)
Operating profit % of revenue 13.9 29.9
Embedded Processing revenue decreased. Operating profit decreased primarily due to lower revenue and associated gross profit.
Other (includes DLP
®
products, calculators and custom ASIC products)
2024 2023 Change
─────────────────────────────────────────────────────────────────────────────────────
Revenue $ 947 $ 1,111 (15)
Operating profit * 505 502 1
Operating profit % of revenue 53.3 45.2
*Includes restructuring charges/other
Other revenue decreased $164 million, and operating profit increased $3 million.
Financial condition
At the end of 2024, total cash (cash and cash equivalents plus short-term investments) was $7.58 billion, a decrease of $995 million from the end of 2023.
Accounts receivable were $1.72 billion, a decrease of $68 million compared with the end of 2023. Days sales outstanding at the end of 2024 and 2023 were 39.
Inventory was $4.53 billion, an increase of $528 million from the end of 2023. Days of inventory at the end of 2024 were 241 compared with 219 at the end of 2023.
Liquidity and capital resources
Our primary source of liquidity is cash flow from operations. Additional sources of liquidity are cash and cash equivalents, short-term investments and access to debt markets. We also have a variable-rate, revolving credit facility. As of December 31, 2024, our credit facility was undrawn, and we had no commercial paper outstanding. Cash flows from operating activities for 2024 were $6.32 billion, a decrease of $102 million due to lower net income, partially offset by lower cash used for working capital. Cash flows from operating activities for 2024 include a cash benefit of $588 million from the U. S. CHIPS and Science Act (CHIPS Act) investment tax credit (ITC) used to reduce income taxes payable.
Investing activities for 2024 used $3.20 billion compared with $4.36 billion in 2023. Capital expenditures were $4.82 billion compared with $5.07 billion in 2023 and were primarily for semiconductor manufacturing equipment and facilities in both periods. Short-term investments provided cash proceeds of $1.47 billion in 2024 compared with $682 million in 2023.
As we continue to invest to strengthen our competitive advantages in manufacturing and technology, as part of our long-term capacity planning, our capital expenditures are expected to remain at elevated levels. We expect to receive between $7.5 billion to $9.5 billion through 2034 from the CHIPS Act. This includes the ITC for qualified U. S. manufacturing investments and direct funding of up to $1.6 billion for our three large-scale 300mm wafer fabs currently under construction in Sherman, Texas, and Lehi, Utah. We received $588 million in associated cash benefit from qualifying capital expenditures in 2024.
Financing activities for 2024 used $2.88 billion compared with $2.14 billion in 2023. In 2024, we received net proceeds of $2.98 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $600 million. In 2023, we received net proceeds of $3.00 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $500 million. Dividends paid in 2024 were $4.80 billion compared with $4.56 billion in 2023, reflecting an increased dividend rate. We used $929 million to repurchase 4.7 million shares of our common stock compared with $293 million used in 2023 to repurchase 1.8 million shares. Employee exercises of stock options provided cash proceeds of $517 million compared with $263 million in 2023.
We had $3.20 billion of cash and cash equivalents and $4.38 billion of short-term investments as of December 31, 2024. We believe we have the necessary financial resources and operating plans to fund our working capital needs, capital expenditures, dividend and debt-related payments and other business requirements for at least the next 12 months.
Non-GAAP financial information
This MD& A includes references to free cash flow and ratios based on that measure. These are financial measures that were not prepared in accordance with generally accepted accounting principles in the United States (GAAP). Free cash flow was calculated by subtracting capital expenditures from the most directly comparable GAAP measure, cash flows from operating activities (also referred to as cash flow from operations).
We believe that free cash flow and the associated ratios provide insight into our liquidity, our cash-generating capability and the amount of cash potentially available to return to shareholders, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures.
Reconciliation to the most directly comparable GAAP measures is provided in the table below.
For Years Ended December 31,
2024 2023
─────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────
Cash flow from operations (GAAP) * $ 6,318 $ 6,420
Capital expenditures (4,820) (5,071)
Free cash flow (non-GAAP) $ 1,498 $ 1,349
Revenue $ 15,641 $ 17,519
Cash flow from operations as a percentage of revenue (GAAP) 40.4 36.6
Free cash flow as a percentage of revenue (non-GAAP) 9.6 7.7
- Includes a cash benefit of $588 million from the CHIPS Act ITC used to reduce income taxes payable for 2024
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. 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 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 evaluation of tax liabilities involves dealing with uncertainties in the interpretation and application of complex tax laws, and significant judgment is necessary to determine whether, based on the technical merits, a tax position is more likely than not to be sustained. We determine 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 our analysis of the underlying issues and the associated 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.
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