Texas Instruments 2013 Annual Report Download - page 43

TEXAS INSTRUMENTS 2013 ANNUAL REPORT • 41
ANNUAL
REPORT
Seasonality
Our revenue is subject to some seasonal variation. Our semiconductor revenue tends to be weaker in the first and fourth quarters when
compared to the second and third quarters. Calculator revenue is tied to the U.S. back-to-school season and is therefore at its highest in
the second and third quarters.
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 logic products, such as some of our processor 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 lowering 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 manufacturing capacity to meet the vast majority of our production needs. To supplement
our manufacturing capacity and maximize our responsiveness to customer demand and return on capital, we utilize the capacity of
outside suppliers, commonly known as foundries, and subcontractors. In 2013, we sourced about 20 percent of our total wafers from
external foundries and about 35 percent of our assembly/test services from subcontractors.
In 2013, we closed older wafer fabrication facilities in Hiji, Japan, and Houston, Texas. In December 2013, we acquired an assembly/
test facility in the Hi-Tech Zone of Chengdu, China, adjacent to our existing fabrication facility in Chengdu.
Inventory
Our inventory practices differ by product, but we generally maintain inventory levels that are consistent with our expectations of
customer demand. Because of the longer product life cycles of catalog products and their inherently lower risk of obsolescence,
we generally carry more inventory of those products than application-specific products. Additionally, we sometimes maintain
product inventory in unfinished wafer form, as well as higher finished-goods inventory of low-volume catalog products, allowing
greater flexibility in periods of high demand. We also have consignment inventory programs in place for our largest customers and
some distributors.
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
2013 compared with 2012
Our performance in 2013 was strong, reflecting our increased focus on Analog and Embedded Processing, where the diversity and
longevity of our positions are assets. During 2013, 79 percent of our revenue came from our core businesses of Analog and Embedded
Processing, with Analog revenue increasing 3 percent from 2012 and Embedded Processing revenue increasing 9 percent from 2012.
Operating margin for Analog was 25.8 percent, and it exceeded 30 percent during the second half of 2013. Operating margin for
Embedded Processing was 7.6 percent, a level that should increase as we continue to grow and better align resources with market
opportunities. Additionally, we completed our exit from legacy wireless products. Our business model continues to generate strong cash
flow from operations, with free cash flow for 2013 of $3 billion, or 24 percent of revenue. During the year we returned over $4 billion of
cash to investors through a combination of stock repurchases and dividends.
Free cash flow is a non-GAAP financial measure. For a reconciliation to GAAP and an explanation of the purpose for providing this
non-GAAP measure, see the Non-GAAP financial information section after the Liquidity and capital resources section.