Texas Instruments 2011 Annual Report Download - page 43

TEXAS INSTRUMENTS 2011 ANNUAL REPORT ■ 41
ANNUAL
REPORT
We own and operate semiconductor manufacturing facilities in North America, Asia and Europe. These include both high-volume 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.
The cost and lifespan of the equipment and processes we use to manufacture semiconductors vary by product. Our Analog products
and most of our Embedded Processing products can be manufactured using older, less expensive equipment than is needed for
manufacturing advanced logic products, such as our Wireless products. Advanced logic wafer manufacturing continually requires new
and expensive processes and equipment. In contrast, the processes and equipment required for manufacturing our Analog products and
most of our Embedded Processing products do not have this requirement.
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. We source about 25 percent of our
wafers from external foundries, with the vast majority of this outsourcing being for advanced logic wafers. In 2011, external foundries provided
about 75 percent of the fabricated wafers for our advanced logic manufacturing needs. We expect the proportion of our advanced logic wafers
provided by foundries will increase over time. We expect to maintain sufficient internal wafer fabrication capacity to meet the vast majority of
our analog production needs.
In addition to using foundries to supplement our wafer fabrication capacity, we selectively use subcontractors to supplement our
assembly/test capacity. We generally use subcontractors for assembly/test of products that would be less cost-efficient to complete
in-house (e.g., relatively low-volume products that are unlikely to keep internal equipment fully utilized), or when demand temporarily
exceeds our internal capacity. We believe we often have a cost advantage from maintaining internal assembly/test capacity.
Our internal/external manufacturing strategy reduces the level of our required capital expenditures, and thereby reduces our
subsequent levels of depreciation below what it would be if we sourced all manufacturing internally. Consequently, we experience
less fluctuation in our profit margins due to changing product demand, and lower cash requirements for expanding and updating our
manufacturing capabilities.
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. Typically, new chips are produced in limited quantities at first and then ramp to high-volume production over
time. Consequently, new products tend not to have a significant revenue impact for one or more quarters after their introduction. In the
results discussions below, changes in our shipments are caused by changing demand for our products unless otherwise noted.
Market cycle
The “semiconductor cycle” is an important concept that refers to the ebb and flow of supply. 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. This 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 quarter than in other quarters, particularly for products sold into cell phones and other consumer electronics devices, which
have stronger sales later in the year 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 might reflect in our financial statements one or
more tax refunds or assessments, or changes to tax liabilities, involving one or more taxing authorities.