Texas Instruments Capital Management Strategy: Grow, Generate And Return

Grow, generate and return

  • Texas Instruments is in a unique class of companies: able to grow, generate and return cash to shareholders for a long time to come
  • Our business model is designed around competitive advantages:
    – Broadest portfolio of Analog and Embedded products
    – Anchored in low-cost manufacturing and differentiated technology
    – Broad sales channels
    – All of which results in diverse and long-lived positions (high terminal value)
  • Our capital management strategy reflects our beliefs that:
    – Free cash flow* growth, particularly per share, is most important performance measure to maximizing shareholder value in the long term
    – Free cash flow will only be valued if it is returned to shareholders or productively invested in the business
    – Good execution and disciplined capital allocation are the most important responsibilities for business leaders

Capital management strategy

Texas Instruments

Great business model

Analog and Embedded are in everything electronic

  • Diverse customer base means success dependent on execution, not on a single customer
    – Largest product is only 1% of revenue, product # 100 is less than one-tenth of a percent of revenue
    – >100,000 customers, largest is 8% of revenue and buys hundreds of products
  • Competitively advantaged by scale
    – Breadth and depth of portfolio allow more Texas Instruments chips per customer system
    – More sales and applications engineers calling on more customers
  • 3-4x nearest competitors
    – Manufacturing and technology advantages
  • Leadership position with room to grow
    – #1 in Analog, 18% share in $44B market*
    – #2 in Embedded Processing, 15% share in $18B market*
  • Profitable markets with history of strong cash generation
    – Low capital investment due to fully deployed, long-lasting manufacturing assets
    – Catalog products with long lives•Diverse customer base means success dependent on execution, not on a single customer
    – Largest product is only 1% of revenue, product # 100 is less than one-tenth of a percent of revenue
    – >100,000 customers, largest is 8% of revenue and buys hundreds of products
  • Competitively advantaged by scale
    – Breadth and depth of portfolio allow more Texas Instruments chips per customer system
    – More sales and applications engineers calling on more customers
  • 3-4x nearest competitors
    – Manufacturing and technology advantages
  • Leadership position with room to grow
    – #1 in Analog, 18% share in $44B market*
    – #2 in Embedded Processing, 15% share in $18B market*
  • Profitable markets with history of strong cash generation
    – Low capital investment due to fully deployed, long-lasting manufacturing assets
    – Catalog products with long lives

Free cash flow generation in top 15%

Texas Instruments

Cash availability

  • Repatriate cash at lowest possible tax rates so it can be invested in business or returned to shareholders.
  • Keep >80% onshore
  • Annual effective tax rate for 2015 is expected to be about 30%, which does not assume the reinstatement of the R&D tax credit
  • Assume 35% incremental tax rate as profit before tax changes

Strong balance sheet

Cash strategy

  • Have cash on hand to meet operational needs, pay dividends and re-pay debt
  • Model:

Texas Instruments

  • Status: 82% of cash onshore; cash balance at model

Pension strategy

  • Fully fund on a tax-efficient U.S. GAAP basis, minimize risk of overfunding, and invest using asset-liability matching principles
  • Status: 97% funded, so cash requirement is minimal

Debt strategy

  • Long-term debt will be part of capital structure when borrowing economics make sense
    – Debt balance not to impact credit ratings
    – Consider roll-over when interest rates are less than inflation or dividend yield with maturities in any one year not to exceed $1B
  • Maintain current shelf registration for short lead times to raise capital and keep long-term credit lines with diverse set of banks
  • Status: Current debt $4.6B at 2.15% weighted average; shelf registration current; $2B revolver

Investments for competitive advantage

Technology capability and Manufacturing capacity

  • Extend our competitive advantage with manufacturing assets, analog process technologies and packaging technologies
  • Objective is to maximize long-term free cash flow, not near-term utilization
    – Opportunistically acquire used manufacturing assets at heavily discounted prices, when they are available
    – Wafer fab capacity tooled minimum 3 years ahead, cleanroom 5 years
    – Assembly/test tooled minimum 18 months ahead, space for 3 years
    – Use foundry for all CMOS production 45nm and below, selected analog overflow and selected packaging overflow
  • CapEx model (~4% of revenue) supports technology and growth
    – Last two years CapEx was 3% of revenue, including:

Capacity

• Acquired assembly/test facility
• Upgraded assembly/test for improved productivity with wide leadframe
• Purchased 300mm wafer fab equipment

Technology

• Non-volatile memory, including FRAM
• GaN reactor for high voltage
• Magnetics

Texas Instruments

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