Texas Instruments 2012 Annual Report Download - page 44

ANNUAL
REPORT
TEXAS INSTRUMENTS42 • 2012 ANNUAL REPORT
Manufacturing
Semiconductor manufacturing begins with a sequence of photo-lithographic and chemical processing steps that fabricate a number of
semiconductor devices on a thin silicon wafer. Each device on the wafer is tested, the wafer is cut into individual units and each unit is
assembled into a package that then is usually retested. The entire process takes place in highly specialized facilities and requires an
average of 12 weeks, with most products completing within 8 to 16 weeks.
The cost and lifespan of the equipment and processes we use to manufacture semiconductors vary by technology. Our Analog
products and most of our Embedded Processing products can be manufactured using mature and stable, and therefore less expensive,
equipment than is needed for manufacturing advanced CMOS logic products, such as our Wireless products.
We own and operate semiconductor manufacturing facilities in North America, Asia, Japan and Europe. These include both wafer
fabrication and assembly/test facilities. Our facilities require substantial investment to construct and are largely fixed-cost assets
once in operation. Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed. In general,
these fixed costs do not decline with reductions in customer demand or utilization of capacity, potentially hurting our profit margins.
Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over increased output, potentially
benefiting our profit margins.
We expect to maintain sufficient internal wafer fabrication capacity to meet the vast majority of our production needs. To supplement
our internal wafer fabrication capacity and maximize our responsiveness to customer demand and return on capital, our wafer
manufacturing strategy utilizes the capacity of outside suppliers, commonly known as foundries, and subcontractors. In 2012, we
sourced about 20 percent of our total wafers and about 75 percent of our advanced CMOS logic needs from external foundries.
In 2011, we initiated closure of an older wafer fabrication facility in Hiji, Japan, and another in Houston, Texas. We expect to
complete these plant closures in 2013.
Product cycle
The global semiconductor market is characterized by constant, though generally incremental, advances in product designs and
manufacturing processes. Semiconductor prices and manufacturing costs tend to decline over time as manufacturing processes and
product life cycles mature.
Market cycle
The “semiconductor cycle” is an important concept that refers to the ebb and flow of supply and demand. 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. The semiconductor cycle is affected by the significant time
and money required to build and maintain semiconductor manufacturing facilities.
Seasonality
Our revenue and operating results are subject to some seasonal variation. Our semiconductor sales generally are seasonally weaker
in the first and fourth quarters and stronger in the second and third quarters, as manufacturers prepare for the major holiday selling
seasons. Calculator revenue is tied to the U.S. back-to-school season and is therefore at its highest in the second and third quarters.
Tax considerations
We operate in a number of tax jurisdictions and are subject to several types of taxes including those that are based on income, capital,
property and payroll, as well as sales and other transactional taxes. The timing of the final determination of our tax liabilities varies by
jurisdiction and taxing authority. As a result, during any particular reporting period we may reflect in our financial statements one or
more tax refunds or assessments, or changes to tax liabilities, involving one or more taxing authorities.
Results of operations
The information presented in this Management’s discussion and analysis of financial condition and results of operations (MD&A) is
based on our segment structure as it existed as of December 31, 2012. Additionally, the MD&A reflects our reclassification of certain
amounts in the prior periods’ financial statements to conform to the 2012 presentation. Throughout the following discussion of our
results of operations, unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are
evidenced by fluctuations in shipment volumes. New products tend not to have a significant impact because our revenue is derived from
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.