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:
1.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.
2.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.
3.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.
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◦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 2023 and 2022 and year-to-year comparisons between 2023 and 2022. Discussion of 2021 items and year-to-year comparisons between 2022 and 2021 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, 2022.
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, communications equipment, enterprise systems 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 $6.42 billion underscored the strength of our business model, the quality of our product portfolio and the benefit of 300mm production. Free cash flow was $1.35 billion and represented 7.7% of revenue. During 2023, we invested $3.69 billion in R&D and SG&A, invested $5.07 billion in capital expenditures and returned $4.85 billion to shareholders.
Details of financial results – 2023 compared with 2022
Revenue of $17.52 billion decreased $2.51 billion, or 12.5%, primarily due to lower revenue from Analog, partially offset by higher revenue from Embedded Processing.
Gross profit of $11.02 billion was down $2.75 billion, or 20.0%, primarily due to lower revenue and, to a lesser extent, higher manufacturing costs associated with planned capacity expansion and reduced factory loadings. As a percentage of revenue, gross profit decreased to 62.9% from 68.8%.
Operating expenses (R&D and SG&A) were $3.69 billion compared with $3.37 billion. This increase was primarily due to higher employee-related costs as we invest to strengthen our competitive advantages.
Restructuring charges/other in the year-ago period was $257 million due to preproduction costs at our Lehi, Utah, manufacturing facility. These costs transitioned primarily to cost of revenue after production began in December 2022. See Note 11 to the financial statements.
Operating profit was $7.33 billion, or 41.8% of revenue, compared with $10.14 billion, or 50.6% of revenue.
Other income and expense (OI&E) was $440 million of income compared with $106 million of income, due to higher interest income. See Note 11 to the financial statements.
Interest and debt expense of $353 million increased $139 million due to the issuance of additional long-term debt. See Note 8 to the financial statements.
Our provision for income taxes was $908 million compared with $1.28 billion. This decrease was due to lower income before income taxes. Our effective tax rate, which includes discrete tax items, was 12.2% in 2023 compared with 12.8% in 2022. 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 $6.51 billion compared with $8.75 billion. EPS was $7.07 compared with $9.41.
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Segment results – 2023 compared with 2022
Analog (includes Power and Signal Chain product lines)
Operating profit % of revenue 44.6 % 54.4 %
Analog revenue decreased in both product lines about equally. Operating profit decreased primarily due to lower revenue and higher manufacturing costs.
Embedded Processing (includes microcontrollers and processors)
Operating profit % of revenue 29.9 % 38.4 %
Embedded Processing revenue increased due to the mix of products shipped. Operating profit decreased primarily due to higher manufacturing costs, partially offset by higher revenue.
Other (includes DLP® products, calculators and custom ASIC products)
Operating profit % of revenue 45.2 % 37.5 %
*Includes restructuring charges/other
Other revenue decreased $297 million, and operating profit decreased $26 million.
Financial condition
At the end of 2023, total cash (cash and cash equivalents plus short-term investments) was $8.58 billion, a decrease of $492 million from the end of 2022.
Accounts receivable were $1.79 billion, a decrease of $108 million compared with the end of 2022. Days sales outstanding at the end of 2023 were 39 compared with 37 at the end of 2022.
Inventory was $4.00 billion, an increase of $1.24 billion from the end of 2022. Days of inventory at the end of 2023 were 219 compared with 157 at the end of 2022.
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, 2023, our credit facility was undrawn, and we had no commercial paper outstanding. Cash flows from operating activities for 2023 were $6.42 billion, a decrease of $2.30 billion due to lower net income and higher cash used for working capital, as we continued to strategically build inventory.
Investing activities for 2023 used $4.36 billion compared with $3.58 billion in 2022. Capital expenditures were $5.07 billion compared with $2.80 billion in 2022 and were primarily for semiconductor manufacturing equipment and facilities in both periods. Short-term investments provided cash proceeds of $682 million in 2023 compared with $826 million of cash used in 2022.
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As we continue to invest to strengthen our competitive advantage in manufacturing and technology as part of our long-term capacity planning, our capital expenditures are expected to continue to be higher than historical levels. In August 2022, the U.S. government enacted the U.S. CHIPS and Science Act, which provides funding for manufacturing grants and research investments and establishes a 25% investment tax credit for certain investments in U.S. semiconductor manufacturing. We expect to receive the cash benefit associated with the investment tax credit for qualifying capital expenditures in future periods, and we have submitted applications for the manufacturing grants provided by the legislation. See Note 11 to the financial statements.
Financing activities for 2023 used $2.14 billion compared with $6.72 billion in 2022. 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. In 2022, we received net proceeds of $1.49 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $500 million. Dividends paid in 2023 were $4.56 billion compared with $4.30 billion in 2022, reflecting an increased dividend rate. We used $293 million to repurchase 1.8 million shares of our common stock compared with $3.62 billion used in 2022 to repurchase 22.2 million shares. Employee exercises of stock options provided cash proceeds of $263 million compared with $241 million in 2022.
We had $2.96 billion of cash and cash equivalents and $5.61 billion of short-term investments as of December 31, 2023. 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,
Cash flow from operations (GAAP) $ 6,420 $ 8,720
Free cash flow (non-GAAP) $ 1,349 $ 5,923
Cash flow from operations as a percentage of revenue (GAAP) 36.6 % 43.5 %
Free cash flow as a percentage of revenue (non-GAAP) 7.7 % 29.6 %
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.
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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.
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.
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ITEM 7A. Quantitative and qualitative disclosures about market risk
Foreign exchange risk
The U.S. dollar is our functional currency for financial reporting. Our non-U.S. entities own assets or liabilities denominated in U.S. dollars or other currencies, and exchange rate fluctuations in those jurisdictions may impact our effective tax rate.
Our balance sheet also reflects amounts remeasured from non-U.S. dollar currencies. Because most of the aggregate non-U.S. dollar balance sheet exposure is hedged by forward currency exchange contracts, which are based on year-end 2023 balances and currency exchange rates, a hypothetical 10% plus or minus fluctuation in non-U.S. currency exchange rates relative to the U.S. dollar would result in a pretax currency exchange gain or loss of approximately $4 million.
We use these forward currency exchange contracts to reduce the earnings impact that exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. As of December 31, 2023, we had forward currency exchange contracts outstanding with a notional value of $328 million to hedge net balance sheet exposures (including $102 million to sell Japanese yen, $77 million to sell British pounds and $58 million to buy Chinese yuan). Similar hedging activities existed at year-end 2022.
Interest rate risk
We have the following potential exposure to changes in interest rates: (i) the effect of changes in interest rates on the fair value of our investments in cash equivalents and short-term investments, which could produce a gain or a loss; and (ii) the effect of changes in interest rates on the fair value of our debt.
As of December 31, 2023, a hypothetical 100 basis point increase in interest rates would decrease the fair value of our investments in cash equivalents and short-term investments by about $22 million and decrease the fair value of our long-term debt by $891 million. Because interest rates on our long-term debt are fixed, changes in interest rates would not affect the cash flows associated with long-term debt.
Equity risk
Long-term investments at year-end 2023 include the following:
•Investments in mutual funds – includes mutual funds that were selected to generate returns that offset changes in certain liabilities related to deferred compensation arrangements. The mutual funds hold a variety of debt and equity investments.
•Investments in venture capital funds – includes investments in limited partnerships (accounted for under either the equity method or at cost with adjustments to observable market changes or impairments).
•Equity investments – includes nonmarketable (nonpublicly traded) equity securities.
Investments in mutual funds are stated at fair value. Changes in prices of the mutual fund investments are expected to offset related changes in certain deferred compensation liabilities. Nonmarketable equity securities and certain venture capital funds are stated at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. Investments in the remaining venture capital funds are stated using the equity method. See Note 6 to the financial statements for details of equity and other long-term investments.
We also utilize total return swaps to economically hedge exposure to changes in liabilities related to the market risks of certain deferred compensation arrangements with employees. Gains or losses from changes in the fair value of these total return swaps generally offset the related losses or gains on the deferred compensation liabilities.
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ITEM 8. Financial statements and supplementary data
List of financial statements:
•Income for each of the three years in the period ended December 31, 2023.
•Comprehensive income for each of the three years in the period ended December 31, 2023.
•Balance sheets as of December 31, 2023 and 2022.
•Cash flows for each of the three years in the period ended December 31, 2023.
•Stockholders’ equity for each of the three years in the period ended December 31, 2023.
•Reports of independent registered public accounting firm (PCAOB ID: 42).
Schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the notes thereto.
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Consolidated Statements of Income For Years Ended December 31,
Acquisition charges — — 142
Restructuring charges/other — 257 54
Other income (expense), net (OI&E) 440 106 143
Earnings per common share (EPS):
Average shares outstanding:
Income allocated to RSUs (33) (39) (33)
Income allocated to common stock for diluted EPS $ 6,477 $ 8,710 $ 7,736
See accompanying notes.
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Consolidated Statements of Comprehensive Income For Years Ended December 31,
Other comprehensive income (loss)
Net actuarial losses of defined benefit plans:
Adjustments, net of tax effect of ($9), $48 and ($56) 27 (155) 175
Recognized within net income, net of tax effect of ($5), ($17) and ($8) 15 61 29
Prior service cost (credit) of defined benefit plans:
Recognized within net income, net of tax effect of $0, $0 and $0 1 (1) (1)
Derivative instruments:
Change in fair value, net of tax effect of $0, $0 and $0 1 1 —
Available-for-sale investments:
Unrealized gains (losses), net of tax effect of ($1), $1 and $0 5 (3) —
Other comprehensive income (loss), net of taxes 49 (97) 203
See accompanying notes.
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Consolidated Balance Sheets December 31,
(In millions, except par value) 2023 2022
Assets
Current assets:
Cash and cash equivalents $ 2,964 $ 3,050
Accounts receivable, net of allowances of ($16) and ($13) 1,787 1,895
Prepaid expenses and other current assets 761 302
Property, plant and equipment at cost 13,268 9,950
Property, plant and equipment 9,999 6,876
Capitalized software licenses 223 152
Overfunded retirement plans 173 188
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt $ 599 $ 500
Accrued expenses and other liabilities 911 646
Underfunded retirement plans 108 118
Deferred tax liabilities 63 66
Stockholders’ equity:
Preferred stock, $25 par value. Shares authorized – 10; none issued — —
Treasury common stock at cost
Accumulated other comprehensive income (loss), net of taxes (AOCI) (205) (254)
Total liabilities and stockholders’ equity $ 32,348 $ 27,207
See accompanying notes.
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Consolidated Statements of Cash Flows For Years Ended December 31,
Cash flows from operating activities
Adjustments to net income:
Amortization of acquisition-related intangibles — — 142
Amortization of capitalized software 63 54 57
Gains on sales of assets — (3) (57)
Increase (decrease) from changes in:
Prepaid expenses and other current assets 46 6 57
Accounts payable and accrued expenses (33) 106 33
Accrued compensation 29 22 7
Income taxes payable (7) 94 (20)
Changes in funded status of retirement plans 45 114 62
Cash flows from investing activities
Proceeds from asset sales 3 3 75
Cash flows from financing activities
Proceeds from common stock transactions 263 241 377
Net change in cash and cash equivalents (86) (1,581) 1,524
Cash and cash equivalents at beginning of period 3,050 4,631 3,107
Cash and cash equivalents at end of period $ 2,964 $ 3,050 $ 4,631
See accompanying notes.
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(In millions, except per-share amounts)
Net income — — 7,769 — —
Dividends declared and paid ($4.21 per share) — — (3,886) — —
Common stock issued for stock-based awards — 67 — 310 —
Stock repurchases — — — (532) —
Stock compensation — 230 — — —
Other comprehensive income (loss), net of taxes — — — — 203
Dividend equivalents on RSUs — — (15) — —
Net income — — 8,749 — —
Dividends declared and paid ($4.69 per share) — — (4,297) — —
Common stock issued for stock-based awards — 35 — 206 —
Stock repurchases — — — (3,620) —
Stock compensation — 289 — — —
Other comprehensive income (loss), net of taxes — — — — (97)
Dividend equivalents on RSUs — — (18) — —
Other — (3) — — —
Net income — — 6,510 — —
Dividends declared and paid ($5.02 per share) — — (4,557) — —
Common stock issued for stock-based awards — 50 — 213 —
Stock repurchases — — — (283) —
Stock compensation — 362 — — —
Other comprehensive income (loss), net of taxes — — — — 49
Dividend equivalents on RSUs — — (23) — —
Other — (1) — — —
See accompanying notes.
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Notes to financial statements
1. Description of business, including segment and geographic area information
We design and manufacture semiconductors that we sell to electronics designers and manufacturers all over the world. We have two reportable segments, Analog and Embedded Processing, each of which represents groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels. Our segments also reflect how management allocates resources and measures results.
•Analog semiconductors change real-world signals, such as sound, temperature, pressure or images, by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors. Analog semiconductors are also used to manage power in all electronic equipment by converting, distributing, storing, discharging, isolating and measuring electrical energy, whether the equipment is plugged into a wall or using a battery. Our Analog segment consists of two major product lines: Power and Signal Chain.
•Embedded Processing products are the digital “brains” of many types of electronic equipment. They are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application.
We report the results of our remaining business activities in Other. Other includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other includes DLP® products, calculators and custom ASIC products.
In Other, we also include items that are not used in evaluating the results of or in allocating resources to our segments. Examples of these items include acquisition, integration and restructuring charges (see Note 11); and certain corporate-level items, such as litigation expenses, environmental costs, insurance settlements, and gains and losses from other activities, including asset dispositions. We allocate the remainder of our expenses associated with corporate activities to our operating segments based on specific methodologies, such as percentage of operating expenses or headcount.
Our centralized manufacturing and support organizations, such as facilities, procurement and logistics, provide support to our operating segments, including those in Other. Costs incurred by these organizations, including depreciation, are charged to the segments on a per-unit basis. Consequently, depreciation expense is not an independently identifiable component within the segments’ results and, therefore, is not provided.
With the exception of goodwill, we do not identify or allocate assets by operating segment, nor does the chief operating decision maker evaluate operating segments using discrete asset information. We have no material intersegment revenue. The accounting policies of the segments are consistent with those described in the summary of significant accounting policies and practices.
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Segment information
For Years Ended December 31,
Revenue:
Operating profit:
Geographic area information
Our estimate for revenue based on the geographic location of our end customers’ headquarters, which represents where critical decisions are made, is as follows:
For Years Ended December 31,
Revenue:
(a)Revenue from end customers headquartered in Germany was 13%, 11% and 9% of total revenue in 2023, 2022 and 2021, respectively.
Property, plant and equipment by geographic area, based on physical location:
December 31,
Property, plant and equipment:
Europe, Middle East and Africa 68 44
Total property, plant and equipment $ 9,999 $ 6,876
Major customer
No end customer accounted for 10% or more of revenue in 2023, 2022 or 2021.
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2. Basis of presentation and significant accounting policies and practices
Basis of presentation
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The basis of these financial statements is comparable for all periods presented herein.
The consolidated financial statements include the accounts of all subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. All dollar and share amounts in the financial statements and tables in these notes, except per-share amounts, are presented in millions unless otherwise indicated. We have reclassified certain amounts in the prior periods’ financial statements to conform to the 2023 presentation.
The preparation of financial statements requires the use of estimates from which final results may vary.
Significant accounting policies and practices
Revenue recognition
We generate revenue primarily from the sale of semiconductor products, either directly to a customer or to a distributor, and recognize revenue when control is transferred. Control is considered transferred when title and risk of loss pass, when the customer becomes obligated to pay and, where required, when the customer has accepted the products. This transfer generally occurs at a point in time upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order. Payment for sales to customers and distributors is generally due on our standard commercial terms. For sales to distributors, payment is not contingent upon resale of the products.
Revenue from sales of our products that are subject to inventory consignment agreements is recognized at a point in time, when the customer or distributor pulls product from consignment inventory that we store at designated locations. Delivery and transfer of control occur at that point, when title and risk of loss transfers and the customer or distributor becomes obligated to pay for the products pulled from inventory. Until the products are pulled for use or sale by the customer or distributor, we retain control over the products’ disposition, including the right to pull back or relocate the products.
The revenue recognized is adjusted based on allowances, which are prepared on a portfolio basis using a most likely amount methodology based on analysis of historical data and contractual terms. These allowances, which are not material, generally include adjustments for pricing arrangements, product returns andincentives. We recognize shipping fees received from customers, if any, in revenue. We include the related shipping and handling costs in cost of revenue. The majority of our customers pay these fees directly to third parties.
Advertising costs
We expense advertising and other promotional costs as incurred. This expense was $28 million, $27 million and $27 million in 2023, 2022 and 2021, respectively.
Income taxes
We account for income taxes using an asset and liability approach. We record the amount of taxes payable or refundable for the current year and the deferred tax assets and liabilities for future tax consequences related to events that have been recognized in the financial statements or tax returns. We record a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized.
Other assessed taxes
Some transactions require us to collect taxes such as sales, value-added and excise taxes from our customers. These transactions are presented in our Consolidated Statements of Income on a net (excluded from revenue) basis.
Leases
We determine if an arrangement is a lease at inception. Leases are included in other long-term assets, accrued expenses and other liabilities, and other long-term liabilities on our Consolidated Balance Sheets.
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Lease assets represent our right to use underlying assets for the lease term, and lease liabilities represent our obligations to make lease payments over the lease term. On the commencement date, leases are evaluated for classification, and assets and liabilities are recognized based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the information available at commencement in determining the present value of lease payments. Operating lease expense is generally recognized on a straight-line basis over the lease term. Our lease values include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
We have agreements with lease and non-lease components, which are accounted for as a single lease component. Leases with an initial lease term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Earnings per share (EPS)
We use the two-class method for calculating EPS because the restricted stock units (RSUs) we grant are participating securities containing nonforfeitable rights to receive dividend equivalents. Under the two-class method, a portion of net income is allocated to RSUs and excluded from the calculation of income allocated to common stock.
Computation and reconciliation of earnings per common share are as follows:
For Years Ended December 31,
Net Income Shares EPS Net Income Shares EPS Net Income Shares EPS
Basic EPS:
Income allocated to RSUs (34) (40) (33)
Dilutive effect of stock compensation plans 8 10 13
Diluted EPS:
Income allocated to RSUs (33) (39) (33)
Potentially dilutive securities representing 10 million, 5 million and 3 million shares of common stock that were outstanding in 2023, 2022 and 2021, respectively, were excluded from the computation of diluted earnings per common share during these periods because their effect would have been anti-dilutive.
Investments
We present investments on our Consolidated Balance Sheets as cash equivalents, short-term investments or other long-term assets. See Note 6 for additional information.
•Cash equivalents and short-term investments – The primary objectives of our cash equivalent and short-term investment activities are to preserve capital and maintain liquidity while generating appropriate returns. We consider investments in available-for-sale debt securities with maturities of 90 days or less from the date of our investment to be cash equivalents. We consider investments in available-for-sale debt securities with maturities beyond 90 days from the date of our investment as being available for use in current operations and include them in short-term investments.
•Other long-term assets – Long-term investments, which are included within other long-term assets on our Consolidated Balance Sheets, consist of mutual funds, venture capital funds and nonmarketable securities.
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Inventories
Inventories are stated at the lower of cost or estimated net realizable value. Cost is generally computed on a currently adjusted standard cost basis, which approximates cost on a first-in, first-out basis. Standard cost is based on the normal utilization of installed factory capacity. Cost associated with underutilization of capacity is expensed as incurred. Inventory held at consignment locations is included in our finished goods inventory.
We review inventory quarterly for salability and obsolescence. A statistical allowance is provided for inventory considered unlikely to be sold. The statistical allowance is based on an analysis of historical disposal activity, historical customer shipments, as well as estimated future sales. A specific allowance for each material type will be carried if there is a significant event not captured by the statistical allowance. We write off inventory in the period in which disposal occurs.
Government incentives
Incentives provided by government entities are recognized when we have reasonable assurance that we will comply with the conditions of the incentive, if any, and the incentive will be received. Incentives, which include non-income tax incentives, related to the acquisition or construction of fixed assets are recognized as a reduction in the carrying amounts of the related assets and reduce depreciation expense over the useful lives of the assets. Incentives for specific operating activities are offset against the related expense in the period the expense is incurred.
In August 2022, the U.S. government enacted the U.S. CHIPS and Science Act, which provides funding for manufacturing grants and research investments, and it establishes a 25% investment tax credit for certain investments in U.S. semiconductor manufacturing. As of December 31, 2023, we have recognized $1.36 billion of receivables with a corresponding reduction to the carrying amounts of the qualifying manufacturing assets. The receivables are comprised of $497 million in prepaid expenses and other current assets and $859 million in other long-term assets. See Note 11 for additional information.
In 2023, cost of revenue benefited by $45 million from the investment tax credit, recognized as a reduction of depreciation expense.
Property, plant and equipment; acquisition-related intangibles; and other capitalized costs
Property, plant and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Our cost basis includes certain assets acquired in business combinations that were initially recorded at fair value as of the date of acquisition. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. We amortize acquisition-related intangibles on a straight-line basis over the estimated economic life of the assets. Capitalized software licenses are generally amortized on a straight-line basis over the term of the license. Fully depreciated or amortized assets are written off against accumulated depreciation or amortization.
Impairments of long-lived assets
We regularly review whether facts or circumstances exist that indicate the carrying values of property, plant and equipment or other long-lived assets, including intangible assets, are impaired. We assess the recoverability of assets by comparing the projected undiscounted net cash flows associated with those assets to their respective carrying amounts. Any impairment charge is based on the excess of the carrying amount over the fair value of those assets. Fair value is determined by available market valuations, if applicable, or by discounted cash flows.
Goodwill
Goodwill is reviewed for impairment annually in the fourth quarter or more frequently if certain impairment indicators arise. We perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or if we elect not to use a qualitative assessment, then we perform a quantitative goodwill impairment test. See Note 11 for additional information.
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Foreign currency
The functional currency for our non-U.S. subsidiaries is the U.S. dollar. Accounts recorded in currencies other than the U.S. dollar are remeasured into the functional currency. Current assets (except inventories), deferred taxes, current liabilities and long-term liabilities are remeasured at exchange rates in effect at the end of each reporting period. Property, plant and equipment with associated depreciation and inventories are valued at historical exchange rates. Revenue and expense accounts other than depreciation for each month are calculated at the appropriate daily rate of exchange. Currency exchange gains and losses from remeasurement are credited or charged to OI&E.
Derivatives and hedging
We use derivative financial instruments to manage exposure to foreign exchange risk. These instruments are primarily forward foreign currency exchange contracts, which are used as economic hedges to reduce the earnings impact that exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. Gains and losses from changes in the fair value of these forward foreign currency exchange contracts are credited or charged to OI&E. We do not apply hedge accounting to our foreign currency derivative instruments.
We are exposed to variability in compensation charges related to certain deferred compensation obligations to employees. We use total return swaps to economically hedge this exposure and offset the related compensation expense, recognizing changes in the value of the swaps and the related deferred compensation liabilities in SG&A.
In connection with the issuance of long-term debt, we may use financial derivatives such as treasury-rate lock agreements that are recognized in AOCI and amortized over the life of the related debt.
The results of these derivative transactions were not material. We do not use derivatives for speculative or trading purposes.
3. Stock compensation
We have stock options outstanding to participants under long-term incentive plans. The option price per share may not be less than the fair market value of our common stock on the date of the grant. The options have a 10-year term, generally vest ratably over four years and continue to vest after the option recipient retires.
We also have RSUs outstanding to participants under long-term incentive plans. Each RSU represents the right to receive one share of TI common stock, issued on the vesting date, which is generally four years after the date of grant. RSUs continue to vest after the recipient retires. Holders of RSUs receive an annual cash payment equivalent to the dividends paid on our common stock. The fair value per share of RSUs is generally determined based on the closing price of our common stock on the date of grant.
We have options and RSUs outstanding to non-employee directors under director compensation plans. The plans generally provide for annual grants of stock options and RSUs, a one-time grant of RSUs to each new non-employee director and the issuance of TI common stock upon the distribution of stock units credited to director deferred compensation accounts.
We also have an employee stock purchase plan (ESPP) under which options are offered to all eligible employees in amounts based on a percentage of the employee’s compensation, subject to a cap. Under the plan, the option price per share is 85% of the fair market value on the exercise date. As of December 31, 2023, 31 million shares remain available for future issuance under this plan.
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Total stock compensation expense recognized is as follows:
For Years Ended December 31,
Restructuring charges/other — — 8
These amounts include expenses related to non-qualified stock options, RSUs and stock options offered under our ESPP and are net of estimated forfeitures.
We recognize compensation expense for non-qualified stock options and RSUs on a straight-line basis over the minimum service period required for vesting of the award, adjusting for estimated forfeitures based on historical activity. Awards issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis. Options issued under our ESPP are expensed over a three-month period.
As of December 31, 2023, total future compensation related to equity awards not yet recognized in our Consolidated Statements of Income was $490 million, which we expect to recognize over a weighted average period of 1.8 years.
Fair value methods and assumptions
We account for all awards granted under our various stock compensation plans at fair value.
We estimate the fair values for non-qualified stock options using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
For Years Ended December 31,
Weighted average grant date fair value, per share $ 46.23 $ 39.94 $ 40.78
Weighted average assumptions used:
Expected volatility 31 % 29 % 32 %
Expected lives (in years) 6.1 6.4 6.7
We use market-based measures of implied volatility to determine expected volatility on all options granted. We determine expected lives of options based on the historical option exercise experience of our option holders using a rolling 10-year average.
Expected dividend yields are based on the annualized approved quarterly dividend rate and the current market price of our common stock at the time of grant. No assumption for a future dividend rate change is included unless there is an approved plan to change the dividend in the near term.
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Long-term incentive and director compensation plans
Stock option and RSU transactions under our long-term incentive and director compensation plans are as follows:
Stock Options RSUs
Stock options exercised/RSUs vested (3) $ 71.16 (2) $ 108.04
(a)Forfeited and expired shares were not material.
For Years Ended December 31,
Total grant date fair value of shares vested for RSUs $ 106 $ 121 $ 115
Aggregate intrinsic value of options exercised $ 319 $ 336 $ 611
As of December 31, 2023, 27 million shares remain available for future issuance under these plans.
Summarized information about stock options outstanding as of December 31, 2023, is as follows:
Stock Options Outstanding
Options Fully Vested and Expected to Vest (a) Options Exercisable
Options outstanding (shares) 26 17
Weighted average remaining contractual life (in years) 5.3 3.9
Weighted average exercise price per share $ 119.08 $ 95.21
Intrinsic value (billions) $ 1.34 $ 1.30
(a)Includes effects of expected forfeitures. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $1.34 billion.
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Effect on shares outstanding and treasury shares
Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2023, $21.20 billion of stock repurchase authorizations remain, and no expiration date has been specified.
Our practice is to issue shares of common stock from treasury shares upon exercise of stock options, distribution of director deferred compensation and vesting of RSUs. The following table reflects the changes in our treasury shares:
For Years Ended December 31,
Shares issued (5) (4) (7)
The effects on cash flows are as follows:
For Years Ended December 31,
Proceeds from common stock transactions (a) $ 263 $ 241 $ 377
Tax benefit realized from stock compensation 104 110 175
(a)Net of taxes paid for employee shares withheld of $46 million, $50 million and $53 million in 2023, 2022 and 2021, respectively.
4. Income taxes
Income before income taxes is comprised of the following components:
For Years Ended December 31,
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Provision for income taxes is comprised of the following components:
For Years Ended December 31,
Current Deferred Total Current Deferred Total Current Deferred Total
Principal reconciling items from the U.S. statutory income tax rate to the effective tax rate (provision for income taxes as a percentage of income before income taxes) are as follows:
For Years Ended December 31,
U.S. statutory income tax rate 21.0 % 21.0 % 21.0 %
Foreign derived intangible income (6.8) (7.0) (6.1)
R&D tax credit (1.3) (0.9) (0.9)
Stock compensation (1.0) (0.7) (1.5)
Changes in uncertain tax positions — 0.1 (0.2)
The earnings represented by non-cash operating assets, such as fixed assets and inventory, will continue to be permanently reinvested outside the United States. Provisions of the U.S. Tax Cuts and Jobs Act (the Tax Act), such as the one-time tax on indefinitely reinvested earnings and the global intangible low-taxed income (GILTI) tax for years beginning in 2018, eliminate any additional U.S. taxation resulting from repatriation of earnings of non-U.S. subsidiaries to the United States. Consequently, no U.S. tax provision has been made for the future remittance of these earnings. However, withholding or distribution taxes in certain non-U.S. jurisdictions will be incurred upon repatriation of available cash to the United States. A provision has been made for deferred taxes on these undistributed earnings to the extent that repatriation of the available cash to the United States is expected to result in a tax liability. As of December 31, 2023, we have no basis differences that would result in material unrecognized deferred tax liabilities.
We have made an allowable policy election to account for the effects of GILTI as a component of income tax expense in the period in which the tax is incurred.
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The primary components of deferred tax assets and liabilities are as follows:
December 31,
Deferred tax assets:
Deferred loss and tax credit carryforwards 205 201
Inventories and related reserves 104 88
Retirement costs for defined benefit and retiree health care 37 43
Total deferred tax assets, before valuation allowance 1,542 1,062
Valuation allowance (198) (189)
Total deferred tax assets, after valuation allowance 1,344 873
Deferred tax liabilities:
Property, plant and equipment (592) (410)
International earnings (33) (35)
Acquisition-related intangibles and fair-value adjustments (14) (13)
Total deferred tax liabilities (650) (466)
Net deferred tax asset $ 694 $ 407
The deferred tax assets and liabilities based on tax jurisdictions are presented on our Consolidated Balance Sheets as follows:
December 31,
Deferred tax assets $ 757 $ 473
Deferred tax liabilities (63) (66)
Net deferred tax asset $ 694 $ 407
We make an ongoing assessment regarding the realization of U.S. and non-U.S. deferred tax assets. This assessment is based on our evaluation of relevant criteria, including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, taxable income in prior carryback years and expectations for future taxable income. Valuation allowances increased $9 million in 2023, increased $1 million in 2022 and increased $9 million in 2021. These changes had no impact to net income in 2023, 2022 or 2021.
We have no material tax loss carryforwards as of December 31, 2023.
Cash payments made for income taxes, net of refunds, were $1.35 billion, $1.48 billion and $1.20 billion in 2023, 2022 and 2021, respectively.
Uncertain tax positions
We operate in a number of tax jurisdictions, and our income tax returns are subject to examination by tax authorities in those jurisdictions who may challenge any item on these tax returns. Because the matters challenged by authorities are typically complex, their ultimate outcome is uncertain. Before any benefit can be recorded in our financial statements, we must determine that it is “more likely than not” that a tax position will be sustained by the appropriate tax authorities. We recognize accrued interest related to uncertain tax positions and penalties as components of OI&E.
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The changes in the total amounts of uncertain tax positions are as follows:
Additions based on tax positions related to the current year 3 3 2
Additions for tax positions of prior years — 10 7
Reductions for tax positions of prior years (3) — (6)
Settlements with tax authorities — — (23)
Expiration of the statute of limitations for assessing taxes — — —
Interest expense recognized in the year ended December 31 $ (9) $ (1) $ (5)
Interest payable as of December 31 $ 10 $ 3 $ 13
The liability for uncertain tax positions is a component of other long-term liabilities on our Consolidated Balance Sheets.
All of the $82 million liabilities for uncertain tax positions at both December 31, 2023 and 2022 are comprised of positions that, if recognized, would lower the effective tax rate. If these liabilities are ultimately realized, no existing deferred tax assets in 2023 or 2022 would also be realized.
As of December 31, 2023, the statute of limitations remains open for U.S. federal tax returns for 2017 and following years. Certain tax treaty procedures for relief from double taxation remain pending for U.S. federal tax returns for the years 2018 through 2022.
In non-U.S. jurisdictions, the years open to audit represent the years still open under the statute of limitations. With respect to major jurisdictions outside the United States, our subsidiaries are no longer subject to income tax audits for years before 2012.
5. Financial instruments and risk concentration
Financial instruments
We hold derivative financial instruments such as forward foreign currency exchange contracts, the fair value of which was not material as of December 31, 2023. Our forward foreign currency exchange contracts outstanding as of December 31, 2023, had a notional value of $328 million to hedge our non-U.S. dollar net balance sheet exposures, including $102 million to sell Japanese yen, $77 million to sell British pounds and $58 million to buy Chinese yuan.
Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our deferred compensation liabilities, are carried at fair value. Our postretirement plan assets are carried at fair value or net asset value per share. The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. As of December 31, 2023, the carrying value of long-term debt, including the current portion, was $11.22 billion, and the estimated fair value was $10.68 billion. The estimated fair value is measured using broker-dealer quotes, which are Level 2 inputs. See Note 6 for a description of fair value and the definition of Level 2 inputs.
Risk concentration
We are subject to counterparty risks from financial institutions, customers and issuers of debt securities. Financial instruments that could subject us to concentrations of credit risk are primarily cash deposits, cash equivalents, short-term investments and accounts receivable. To manage our credit risk exposure, we place cash investments in investment-grade debt securities and limit the amount of credit exposure to any one issuer. We also limit counterparties on cash deposits and financial derivative contracts to financial institutions with investment-grade ratings.
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Concentrations of credit risk with respect to accounts receivable are limited due to our large number of customers and their dispersion across different industries and geographic areas. We maintain allowances for expected returns, disputes, adjustments, incentives and credit losses. These allowances are deducted from accounts receivable on our Consolidated Balance Sheets.
Accounts receivable allowances changed to reflect amounts charged (credited) to operating results by $3 million, $5 million and ($3) million in 2023, 2022 and 2021, respectively.
6. Valuation of debt and equity investments and certain liabilities
Investments measured at fair value
Money market funds, debt investments and mutual funds are stated at fair value, which is generally based on market prices or broker quotes. We classify all debt investments as available-for-sale. See Fair-value considerations. Unrealized gains and losses are recorded as an increase or decrease, net of taxes, in AOCI on our Consolidated Balance Sheets, and any credit losses are recorded as an allowance for credit losses with an offset recognized in OI&E in our Consolidated Statements of Income.
Our mutual funds hold a variety of debt and equity investments intended to generate returns that offset changes in certain deferred compensation liabilities. We record changes in the fair value of these mutual funds and the related deferred compensation liabilities in SG&A.
Other investments
Our other investments include equity-method investments and nonmarketable investments, which are not measured at fair value. These investments consist of interests in venture capital funds and other nonmarketable securities. Gains and losses from equity-method investments are recognized in OI&E based on our ownership share of the investee’s financial results. Nonmarketable securities are measured at cost with adjustments for observable changes in price or impairments. Gains and losses on nonmarketable investments are recognized in OI&E.
Details of our investments are as follows:
Measured at fair value:
Money market funds $ 1,068 $ — $ — $ 1,238 $ — $ —
Non-U.S. government and agency securities 50 198 — 149 248 —
Mutual funds — — 12 — — 11
Other measurement basis:
Equity-method investments — — 17 — — 18
Nonmarketable investments — — 5 — — 5
As of December 31, 2023 and 2022, unrealized gains and losses associated with our debt investments were not material. We did not recognize any credit losses related to debt investments in 2023, 2022 or 2021.
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The following table presents the aggregate maturities of our debt investments as of December 31, 2023:
Fair Value
One year or less $ 6,362
One to two years 344
In 2023, 2022 and 2021, the proceeds from sales, redemptions and maturities of short-term debt investments were $13.39 billion, $13.66 billion and $8.48 billion, respectively. Gross realized gains and losses from these sales were not material.
Fair-value considerations
We measure and report certain financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The three-level hierarchy described below indicates the extent and level of judgment used to estimate fair-value measurements.
•Level 1 – Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date.
•Level 2 – Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. We utilize a third-party data service to provide Level 2 valuations. We verify these valuations for reasonableness relative to unadjusted quotes obtained from brokers or dealers based on observable prices for similar assets in active markets.
•Level 3 – Uses inputs that are unobservable, supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models that utilize management estimates of market participant assumptions. As of December 31, 2023 and 2022, we had no Level 3 assets or liabilities.
The following are our assets and liabilities that were accounted for at fair value on a recurring basis. These tables do not include cash on hand, assets held by our postretirement plans, or assets and liabilities that are measured at historical cost or any basis other than fair value.
Level 1 Level 2 Total Level 1 Level 2 Total
Assets:
Non-U.S. government and agency securities — 248 248 — 397 397
Liabilities:
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7. Postretirement benefit plans
Plan descriptions
We have various employee retirement plans, including defined contribution, defined benefit and retiree health care benefit plans. For qualifying employees, we offer deferred compensation arrangements.
U.S. retirement plans
Our principal retirement plans in the United States are a defined contribution plan, an enhanced defined contribution plan and qualified and non-qualified defined benefit pension plans. The defined benefit plans were closed to new participants in 1997, and then current participants were allowed to make a one-time election to continue accruing a benefit in the plans or to cease accruing a benefit and instead to participate in the enhanced defined contribution plan.
Both defined contribution plans offer an employer-matching savings option that allows employees to make pretax and post-tax contributions to various investment choices. Employees who elected to continue accruing a benefit in the qualified defined benefit pension plans may also participate in the defined contribution plan, where employer-matching contributions are provided for up to 2% of the employee’s annual eligible earnings. Employees who elected not to continue accruing a benefit in the defined benefit pension plans and employees hired after November 1997 and through December 31, 2003, may participate in the enhanced defined contribution plan. This plan provides for a fixed employer contribution of 2% of the employee’s annual eligible earnings, plus an employer-matching contribution of up to 4% of the employee’s annual eligible earnings. Employees hired after December 31, 2003, do not receive the fixed employer contribution of 2% of the employee’s annual eligible earnings.
As of December 31, 2023 and 2022, as a result of employees’ elections, TI’s U.S. defined contribution plans held shares of TI common stock totaling 5 million shares and 6 million shares valued at $873 million and $940 million, respectively. Dividends paid on these shares in 2023 and 2022 were $27 million and $28 million, respectively. Effective April 1, 2016, the TI common stock fund was frozen to new contributions or transfers into the fund.
Our aggregate expense for the U.S. defined contribution plans was $75 million in 2023, $70 million in 2022 and $63 million in 2021.
The defined benefit pension plans include employees still accruing benefits, as well as employees and participants who no longer accrue service-related benefits, but instead, may participate in the enhanced defined contribution plan. Benefits under the qualified defined benefit pension plan are determined using a formula based on years of service and the highest five consecutive years of compensation. We intend to contribute amounts to this plan to meet the minimum funding requirements of applicable local laws and regulations, plus such additional amounts as we deem appropriate. The non-qualified defined benefit plans are unfunded and closed to new participants.
U.S. retiree health care benefit plan
U.S. employees who meet eligibility requirements are offered medical coverage during retirement. We make a contribution toward the cost of those retiree medical benefits for certain retirees and their dependents. The contribution rates are based upon various factors, the most important of which are an employee’s date of hire, date of retirement, years of service and eligibility for Medicare benefits. The balance of the cost is borne by the plan’s participants. Employees hired after January 1, 2001, are responsible for the full cost of their medical benefits during retirement.
Non-U.S. retirement plans
We provide retirement coverage for non-U.S. employees, as required by local laws or to the extent we deem appropriate, through a number of defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances.
As of December 31, 2023 and 2022, as a result of employees’ elections, TI’s non-U.S. defined contribution plans held TI common stock valued at $34 million and $33 million, respectively. Dividends paid on these shares of TI common stock in 2023 and 2022 were not material.
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Effects on our Consolidated Statements of Income and Balance Sheets
Expenses related to defined benefit and retiree health care benefit plans are as follows:
U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit
Amortization of prior service cost (credit) — — — — (2) (2) 1 1 1
Recognized net actuarial losses (gains) 6 3 15 (5) — — 12 1 7
Net periodic benefit costs (credits) 19 20 35 (7) — 2 23 (6) —
All defined benefit and retiree health care benefit plan expense components other than service cost are recognized in OI&E in our Consolidated Statements of Income. Service cost is recognized within operating profit.
For the U.S. qualified pension and retiree health care plans, the expected return on plan assets component of net periodic benefit cost is based upon a market-related value of assets. In accordance with U.S. GAAP, the market-related value of assets is the fair value adjusted by a smoothing technique whereby certain gains and losses are phased in over a period of three years.
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Changes in the benefit obligations and plan assets for defined benefit and retiree health care benefit plans are as follows:
U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit
Change in plan benefit obligation
Participant contributions — — 14 15 1 5
Curtailments — — — — — (4)
Effects of exchange rate changes — — — — (6) (242)
Change in plan assets
Employer contributions (qualified plans) — — 1 1 2 9
Employer contributions (non-qualified plans) 3 13 — — — —
Participant contributions — — 14 15 1 5
Effects of exchange rate changes — — — — (13) (271)
Other — — (19) — — —
Changes in actuarial gains and losses in the projected benefit obligations are generally driven by discount rate movement.
Amounts recognized on our Consolidated Balance Sheets as of December 31, are as follows:
U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit Total
Overfunded retirement plans $ — $ 8 $ 165 $ 173
Underfunded retirement plans (82) (2) (24) (108)
Overfunded retirement plans $ — $ 8 $ 180 $ 188
Underfunded retirement plans (97) (2) (19) (118)
Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute about $10 million to our retirement benefit plans in 2024.
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Accumulated benefit obligations, which are generally less than the projected benefit obligations as they exclude the impact of future salary increases, were $480 million and $489 million as of December 31, 2023 and 2022, respectively, for the U.S. defined benefit plans, and $1.67 billion and $1.60 billion as of December 31, 2023 and 2022, respectively, for the non-U.S. defined benefit plans.
The change in AOCI is as follows:
U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit Total
Changes in AOCI by category:
Recognized within net income (13) 5 — (12) (1) (20) (1)
Total change to AOCI (28) (9) — (5) (1) (42) (1)
Information on plan assets
We report and measure the plan assets of our defined benefit pension and other postretirement plans at fair value. The tables below set forth the fair value of our plan assets using the same three-level hierarchy of fair-value inputs described in Note 6.
Level 1 Level 2 Other (a) Total
Assets of U.S. defined benefit plan:
Fixed income securities and cash equivalents $ — $ — $ 272 $ 272
Assets of U.S. retiree health care plan:
Fixed income securities and cash equivalents $ 4 $ — $ 206 $ 210
Equity securities — — 54 54
Assets of non-U.S. defined benefit plans:
Fixed income securities and cash equivalents $ 49 $ 52 $ 1,343 $ 1,444
(a)Consists of bond index and equity index funds, measured at net asset value per share, as well as cash equivalents.
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Level 1 Level 2 Other (a) Total
Assets of U.S. defined benefit plan:
Fixed income securities and cash equivalents $ — $ — $ 272 $ 272
Assets of U.S. retiree health care plan:
Fixed income securities and cash equivalents $ 7 $ — $ 175 $ 182
Equity securities — — 98 98
Assets of non-U.S. defined benefit plans:
Fixed income securities and cash equivalents $ 40 $ 60 $ 1,282 $ 1,382
(a)Consists of bond index and equity index funds, measured at net asset value per share, as well as cash equivalents.
The investments in our major benefit plans largely consist of low-cost, broad-market index funds to mitigate risks of concentration within market sectors. Our investment policy is designed to better match the interest rate sensitivity of the plan assets and liabilities. The appropriate mix of equity and bond investments is determined primarily through the use of detailed asset-liability modeling studies that look to balance the impact of changes in the discount rate against the need to provide asset growth to cover future service cost. Most of our plans around the world have a greater proportion of fixed income securities with return characteristics that are more closely aligned with changes in the liabilities caused by discount rate volatility.
Assumptions and investment policies
U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit
Weighted average assumptions used to determine benefit obligations:
Weighted average assumptions used to determine net periodic benefit cost:
We utilize a variety of methods to select an appropriate discount rate depending on the depth of the corporate bond market in the country in which the benefit plan operates. In the United States, we use a settlement approach whereby a portfolio of bonds is selected from the universe of actively traded high-quality U.S. corporate bonds. The selected portfolio is designed to simulate a portfolio that would provide cash flows sufficient to pay the plan’s expected benefit payments when due. The resulting discount rate reflects the rate of return of the selected portfolio of bonds. For our non-U.S. locations with a sufficient number of actively traded high-quality bonds, an analysis is performed in which the projected cash flows from the defined benefit plans are discounted against a yield curve constructed with an appropriate universe of high-quality corporate bonds available in each country. In this manner, a present value is developed. The discount rate selected is the single equivalent rate that produces the same present value. For countries that lack a sufficient corporate bond market, a government bond index is used to establish the discount rate.
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Assumptions for the expected long-term rate of return on plan assets are based on future expectations for returns for each asset class and the effect of periodic target asset allocation rebalancing. We adjust the results for the payment of reasonable expenses of the plan from plan assets. We believe our assumptions are appropriate based on the investment mix and long-term nature of the plans’ investments. Assumptions used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries.
The target allocation ranges for the plans that hold a substantial majority of the defined benefit assets are as follows:
U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit
Fixed income securities and cash equivalents 65% – 80% 75% – 85% 60% – 100%
We rebalance the plans’ investments when they are outside the target allocation ranges.
Weighted average asset allocations as of December 31 are as follows:
U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit
Fixed income securities and cash equivalents 65% 65% 80% 65% 77% 76%
None of the plan assets related to the defined benefit pension plans and retiree health care benefit plan are directly invested in TI common stock.
The following assumed future benefit payments to plan participants in the next 10 years are used to measure our benefit obligations. Almost all of the payments, which may vary significantly from these assumptions, will be made from plan assets and not from company assets.
Assumed health care cost trend rates for the U.S. retiree health care benefit plan as of December 31 are as follows:
Assumed health care cost trend rate for next year 7.00% 7.00%
Ultimate trend rate 5.00% 5.00%
Year in which ultimate trend rate is reached 2032 2031
Deferred compensation plans
We have deferred compensation plans that allow U.S. employees whose base salary and management responsibility exceed a certain level to defer receipt of a portion of their cash compensation. Payments under these plans are made based on the participant’s distribution election and plan balance. Participants can earn a return on their deferred compensation based on notional investments in the same investment funds that are offered in our defined contribution plans.
As of December 31, 2023, our liability to participants of the deferred compensation plans was $393 million and is recorded in other long-term liabilities on our Consolidated Balance Sheets. This amount reflects the accumulated participant deferrals and earnings thereon as of that date. We utilize total return swaps and investments in mutual funds that serve as economic hedges of our exposure to changes in the fair value of these liabilities. We record changes in the fair value of the liability and the related total return swaps and mutual funds in SG&A, as discussed in Note 6. As of December 31, 2023, we held $12 million in mutual funds related to these plans that are recorded in long-term investments on our Consolidated Balance Sheets.
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8. Debt and lines of credit
Short-term borrowings
We maintain a line of credit to provide additional liquidity through bank loans and, if necessary, to support commercial paper borrowings. As of December 31, 2023, the aforementioned line of credit was a variable-rate, revolving credit facility from a consortium of investment-grade banks that allows us to borrow up to $1 billion until March 2024. The interest rate on borrowings under this credit facility, if drawn, is indexed to the applicable Term Secured Overnight Financing Rate (Term SOFR). As of December 31, 2023, our credit facility was undrawn, and we had no commercial paper outstanding.
Long-term debt
In March 2023, we issued two series of senior unsecured notes for an aggregate principal amount of $1.4 billion, consisting of $750 million of 4.90% notes due in 2033 and $650 million of 5.00% notes due in 2053. We incurred $11 million of issuance and other related costs. The proceeds of the offering were $1.4 billion, net of the original issuance discounts, which will be used for general corporate purposes.
In May 2023, we issued three series of senior unsecured notes for an aggregate principal amount of $1.6 billion, consisting of $200 million of 4.60% notes due in 2028, $200 million of 4.90% notes due in 2033 and $1.2 billion of 5.05% notes due in 2063. We incurred $7 million of issuance and other related costs. The proceeds of the offering were $1.6 billion, net of the original issuance discounts and premiums, which will be used for general corporate purposes.
In May 2023, we retired $500 million of maturing debt.
In April 2022, we retired $500 million of maturing debt.
In August 2022, we issued two series of senior unsecured notes for an aggregate principal amount of $700 million, consisting of $400 million of 3.65% notes due in 2032 and $300 million of 4.10% notes due in 2052. We incurred $3 million of issuance and other related costs. The proceeds of the offering were $695 million, net of the original issuance discounts, which will be used for general corporate purposes.
In November 2022, we issued two series of senior unsecured notes for an aggregate principal amount of $800 million, consisting of $300 million of 4.70% notes due in 2024 and $500 million of 4.60% notes due in 2028. We incurred $3 million of issuance and other related costs. The proceeds of the offering were $799 million, net of the original issuance discounts, which will be used for general corporate purposes.
In February 2021, we retired $550 million of maturing debt.
In September 2021, we issued three series of senior unsecured notes for an aggregate principal amount of $1.5 billion, consisting of $500 million of 1.125% notes due in 2026, $500 million of 1.90% notes due in 2031 and $500 million of 2.70% notes due in 2051. We incurred $10 million of issuance costs. The proceeds of the offering were $1.5 billion, net of the original issuance discounts, which will be used for general corporate purposes.
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Long-term debt outstanding is as follows:
December 31,
Net unamortized discounts, premiums and issuance costs (77) (65)
Current portion of long-term debt (599) (500)
Interest and debt expense was $353 million, $214 million and $184 million in 2023, 2022 and 2021, respectively. This was net of the amortized discounts, premiums and issuance and other related costs. Cash payments for interest on long-term debt were $321 million, $198 million and $181 million in 2023, 2022 and 2021, respectively. Capitalized interest was $11 million, $6 million and $8 million in 2023, 2022 and 2021, respectively.
9. Leases
We conduct certain operations in leased facilities and also lease a portion of our data processing and other equipment. In addition, certain long-term supply agreements to purchase industrial gases are accounted for as operating leases. Lease agreements frequently include renewal provisions and require us to pay real estate taxes, insurance and maintenance costs.
Our leases are included as a component of the following balance sheet lines:
December 31,
Other long-term assets $ 579 $ 431
Accrued expenses and other liabilities $ 88 $ 75
Other long-term liabilities 478 344
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Details of our operating leases are as follows:
For Years Ended December 31,
Lease cost related to lease liabilities $ 73 $ 67 $ 69
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for lease cost $ 65 $ 61 $ 61
Lease assets obtained in exchange for new lease liabilities $ 285 $ 37 $ 210
As of December 31, 2023, we had committed to make the following minimum payments under our noncancelable operating leases:
Imputed lease interest (164)
Total lease liabilities $ 566
The weighted average remaining lease term was 11.7 years and 8.8 years as of December 31, 2023 and 2022, respectively. The weighted average discount rate was 4.22% and 2.71% as of December 31, 2023 and 2022, respectively.
10. Commitments and contingencies
Purchase commitments
Our purchase commitments include payments for software licenses and contractual arrangements with suppliers when there is a fixed, noncancelable payment schedule or when minimum payments are due with a reduced delivery schedule.
As of December 31, 2023, we had committed to make the following minimum payments under our purchase commitments:
Indemnification guarantees
We routinely sell products with an intellectual property indemnification included in the terms of sale. Historically, we have had only minimal, infrequent losses associated with these indemnities. Consequently, we cannot reasonably estimate any future liabilities that may result.
Warranty costs/product liabilities
Our stated warranties for semiconductor products obligate us to repair, replace or credit the purchase price of a covered product back to the buyer. Product claim consideration may exceed the price of our products. Historically, we have experienced a low rate of payments on product claims. Although we cannot predict the likelihood or amount of any future claims, we do not believe they will have a material adverse effect on our consolidated financial statements. We accrue for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability.
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General
We are subject to various legal and administrative proceedings. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect on our consolidated financial statements.
11. Supplemental financial information
Restructuring charges/other
Restructuring charges/other are included in Other for segment reporting purposes and are comprised of the following components:
For Years Ended December 31,
Integration charges (a) $ — $ 257 $ 104
Gains on sales of assets (b) — — (50)
Restructuring charges/other $ — $ 257 $ 54
(a)Includes costs related to our purchase of the Lehi, Utah, manufacturing facility, as well as preproduction costs before December 2022.
(b)Includes a $50 million gain from the sale of property in October 2021.
Other income (expense), net (OI&E)
For Years Ended December 31,
Other expense (b) (43) (63) (2)
(a)Other income includes interest, royalty and lease income, as well as investment gains and losses.
(b)Otherexpense includes a portion of pension and other retiree benefit costs, lease expense, tax interest, currency gains and losses and miscellaneous items.
Prepaid expenses and other current assets
December 31,
U.S. CHIPS and Science Act investment tax credit $ 497 $ —
Property, plant and equipment at cost
Depreciable Lives (Years) December 31,
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Goodwill
Goodwill by segment as of December 31, 2023 and 2022, is as follows: