Capital Management Strategy Comprehensive summary: 2016
Grow, generate and return • TI 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: – Approach to manufacturing and differentiated technology – Broadest portfolio of Analog and Embedded products – Reach of market 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 *Free cash flow (FCF) = cash flow from operations minus capital expenditures
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Capital management: objective and strategy Objective: Maximize long-term growth of free cash flow per share
Strategy: Disciplined allocation of resources to generate the best returns 3
Capital management strategy Great business model
Cash availability
Strong balance sheet
Investments for competitive advantage
Cash returns
Technology capability
Analog & Embedded
Effective tax strategy
Funded pensions
Manufacturing capacity
Dividends
Channel advantages
Repurchases
Working capital
Debt repayment
Debt
Acquisitions
Uses of cash
4
Five-year view of our capital allocation
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Where we’ve allocated $39B of capital over 5 years (2011–2015)
R&D, Sales/Mktg, CapEx, Inv
15.1
Share Repurchases
12.2
Acquisitions
6.5
Dividends
5.4 0
5
10
15
20
$B 6
Why we’ve allocated capital this way Purpose
Capital allocated: $39B (2011–2015) R&D, Sales/Mktg, CapEx, Inv
15.1
Share Repurchases
Accretive capture of future free cash flow for long-term investors
12.2
Acquisitions
Inorganic growth
6.5
Dividends
Appeal to broader set of investors
5.4
0
5
Organic growth of business
10
15
20
$B 7
What we get from disciplined capital allocation Category
Purpose
Focus New products and technologies
R&D, sales and marketing, CapEx and inventory
Organic growth of business
Strengthen competitive advantages Portfolio adjustments and re-alignment
Execution (more output per $ input)
Share repurchases
Acquisitions
Accretive capture of future free cash flow for long-term investors
Inorganic growth
Consistent repurchase when present stock price is below the intrinsic value, using reasonable growth assumptions Strategic match (catalog analog, industrial, auto) that leverages or strengthens our competitive advantages ROIC > WACC within 3-4 years
Dividends
Appeal to broader set of investors
Sustainability and ability to grow the dividend 8
Disciplined allocation of R&D strengthens portfolio Market segment
R&D investments
Industrial
% of TI revenue 2013
2014
2015
Up broadly
30%
31%
31%
Automotive
Up broadly
12%
13%
15%
Personal electronics
Down, but more selective
32%
29%
30%
Communications equipment
Analog up slightly, Embedded down
15%
17%
13%
Enterprise systems
Flat, at low levels
6%
6%
6%
Other
Flat, at low levels
5%
4%
5%
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National acquisition has met our objectives Strategic objectives: • Leveraged and strengthened our competitive advantages • Strengthened our catalog Analog business, particularly in industrial and automotive markets
Financial objectives: • • • •
Purchase price of $6.5B, closed September 2011 Free cash flow before deal = $318M* (4.9% yield at purchase price) 2015 ROIC >8% Long-term internal rate of return is estimated at >10% (using modest growth assumptions)
* FY2009/2010 average, tax rate at 26%
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Capital management strategy Great business model
Cash availability
Strong balance sheet
Investments for competitive advantage
Cash returns
Technology capability
Analog & Embedded
Effective tax strategy
Funded pensions
Manufacturing capacity
Dividends
Channel advantages
Repurchases
Working capital
Debt repayment
Debt
Acquisitions
Uses of cash
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Focused on best markets: analog and embedded • Analog and embedded are in everything electronic – Large and fragmented: $45B analog, $18B embedded* – Diverse customers and diverse products – TI has leading share in both: 18% and #1 in analog, 15% and #3 in embedded – Very profitable, strong cash generation
• Our business model is designed around competitive advantages – Approach to manufacturing and differentiated technology – Broadest portfolio of analog and embedded products – Reach of market channels
– All of which results in diverse and long-lived positions (high terminal value)
* Source: 2015 WSTS
Market share from 2015 WSTS, ranking from 2014 IHS (adjusted for NXPI/FSL merger)
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Analog and Embedded generate a lot of cash 50% 40% 30%
Free cash flow as % of revenue S&P 500 TI 87th percentile
20% 10% 0% -10%
Top 15% of S&P 500 in cash generation
Source: S&P Capital IQ, data is last 4 reported quarters as of 02/04/16
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Capital management strategy Great business model
Cash availability
Strong balance sheet
Investments for competitive advantage
Cash returns
Technology capability
Analog & Embedded
Effective tax strategy
Funded pensions
Manufacturing capacity
Dividends
Channel advantages
Repurchases
Working capital
Debt repayment
Debt
Acquisitions
Uses of cash
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Making cash available • 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 2016 is expected to be about 30%
• Assume 35% incremental tax rate as profit before tax changes
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Capital management strategy Great business model
Cash availability
Strong balance sheet
Investments for competitive advantage
Cash returns
Technology capability
Analog & Embedded
Effective tax strategy
Funded pensions
Manufacturing capacity
Dividends
Channel advantages
Repurchases
Working capital
Debt repayment
Debt
Acquisitions
Uses of cash
16
Balance sheet is a strength Cash strategy • Have cash on hand to meet operational needs, pay dividends and re-pay debt
• Model:
10% of TTM revenue
NTM dividends and debt
• Status: 82% of cash onshore Pension strategy • Fully fund on a tax-efficient U.S. GAAP basis, minimize risk of overfunding, and invest using asset-liability matching principles • Status: 96% funded, so cash requirement is minimal
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Balance sheet is a strength /cont. 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 $4.125B at 2.30% weighted average; shelf registration current; $2B revolver
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Capital management strategy Great business model
Cash availability
Strong balance sheet
Investments for competitive advantage
Cash returns
Technology capability
Analog & Embedded
Effective tax strategy
Funded pensions
Manufacturing capacity
Dividends
Channel advantages
Repurchases
Working capital
Debt repayment
Debt
Acquisitions
Uses of cash
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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 few years CapEx investments include: Capacity
Technology
•
Convert portion of existing 300mm fab to Analog
•
GaN reactor for high voltage
•
Purchased 300mm wafer fab equipment
•
Magnetics
•
Acquired assembly/test facility
•
Non-volatile memory, including FRAM
•
Upgraded assembly/test for improved productivity with wide leadframe
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Lower capital requirements 16
Capital expenditures as % revenue*
12
8
4
Model is ~4% of revenue
0
Transition to Analog and Embedded allows for lower levels of CapEx * Continuing operations
21
$8B revenue plan for 300mm Analog DMOS6
RFAB
•
Opened in 2009
•
Opened in 2001
•
220K square feet of clean-room space
•
190K square feet of clean-room space
•
300mm Analog
•
300mm; previously supported wireless products
•
Currently utilizing 45% of planned capacity, up from 40% in 2014
•
Currently utilizing 25% for Embedded, Analog production started in 4Q15
•
Will support $5B annual Analog revenue
•
Will support $3B annual Analog revenue 22
Why 300mm wafers really matter
200mm wafer
If… 10,000 chips
300mm wafer
Then… 23,000 chips
300mm vs. 200mm Area
2.25x
Chips per wafer
~2.3x
Cost of wafer
~1.4x
Cost per chip
1.4/2.3 = 0.61
Chip cost is ~40% less on 300mm wafers than on 200mm 23
Illustration of the GPM impact from 300mm Built on 200mm wafer
Built on 300mm wafer
Sales price of example part
$1.00
$1.00
Cost of goods:
Chip cost
$.20
$.12
Assembly, test, other
$.20
$.20
Total
$.40
$.32
60%
68%
Gross margin %
Vast majority of next $6 billion in Analog will be produced on *Unpackaged 300mm 24
Investments for competitive advantage • Scale advantages in the channel – More sales and applications engineers calling on more customers, which enables us to identify more new projects – TI.com becoming more critical for design decisions
• Working capital – Disciplined accounts receivable and payable – Inventory staged for high levels of service, model 105-135 days
• Acquisitions – Biased to analog: catalog, diverse customer base, high-quality and long-lived products – ROIC accretive to weighted average cost of capital within 4 years
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Capital management strategy Great business model
Cash availability
Strong balance sheet
Investments for competitive advantage
Cash returns
Technology capability
Analog & Embedded
Effective tax strategy
Funded pensions
Manufacturing capacity
Dividends
Channel advantages
Repurchases
Working capital
Debt repayment
Debt
Acquisitions
Uses of cash
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Committed to returning 100% free cash flow
100% of free cash flow
Proceeds from exercises*
Net debt retirement
•
Exercises dilute shares outstanding, yet are an additional source of cash
•
Cash return formula includes proceeds from exercises
•
Objective is reduction of shares outstanding every year, regardless of exercises**
* Exercises of equity compensation. Dilution is from stock options, restricted stock units and employee stock purchase plan. ** When discounted cash flow value exceeds stock price
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Continued disciplined use of equity compensation •
Goal is to keep annual equity compensation grants under 2% of outstanding shares, net of forfeitures −
•
•
2015 grants, net of forfeitures, were 1.3% of outstanding shares
Share repurchases resulted in share count reduction of 3.4% in 2015
Exercises in 2015 would have resulted in 1.6% dilution without share repurchases
Cash return formula includes proceeds from exercises, which minimizes the impact to dilution
Expect future average exercise dilution to typically be 1-2% per year without share repurchases
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Growth and sustainability of dividends Dividends per share
2.00
($)
1.64 1.40 1.24 1.07 0.72
0.30 0.089
0.105
0.41
0.45
0.49
0.56
0.13
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 4Q16x4 4Q16 x4
•
Increased dividend 13 consecutive years including 32% increase in 4Q16; 23% CAGR over last 5 years
•
Dividend budget is targeted to be 50 – 80% of trailing 4 years’ average free cash flow depending on share price
•
New annualized dividend would be about 52 percent of trailing 12 month free cash flow
•
Yield is 2.8%*
* As of 10/26/16
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Accretive capture of future free cash flow for long-term investors 41% reduction in shares outstanding
1.8
(B shares)
1.4
1.0 2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
•
Repurchase steadily when discounted cash flow value exceeds stock price
•
Shares outstanding reduced by 3.4% over the last year
•
$7.9B of authorization remaining as of end of 4Q15
2014
2015
30
Excess cash valued only when returned 40%
Cash return* as % of revenue S&P 500
30%
TI 92nd percentile 20% Top 10% of S&P 500 in cash return 10%
0% * Cash return = dividends + share repurchases Source: S&P Capital IQ, data is last 4 reported quarters as of 2/4/16
Free cash flow growth and outlook
32
Double-digit growth continues in FCF/share 4.00
12% CAGR 3.00
$
2.00
2015 year on year: 1.00
•
FCF margin up 170 points to 28.6%
•
Share count reduced by 3.4%
0.00 2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015 33
Drivers of FCF/share growth • Looking back: 12% CAGR = No top-line contribution as portfolio shifted to Analog and Embedded + Expanded free cash flow margin + Product mix and 300mm
+ Lower CapEx: long-lived assets, opportunistically purchasing capacity + Steady accretive repurchases resulted in 41% fewer shares outstanding
• Looking forward: help from the top line + Top-line growth driven by Analog and Embedded + Continued expansion of free cash flow margin to 30% of revenue on a sustained basis in good markets + Expanding 300mm and product mix = CapEx holds steady ~4% of revenue + Continue share repurchases, assuming appropriate economics
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Summary • TI 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: – Approach to manufacturing and differentiated technology – Broadest portfolio of Analog and Embedded products – Reach of market channels – All of which results in diverse and long-lived positions (high terminal value)
• Looking forward: continued growth of free cash flow – Top-line growth driven by Analog and Embedded – 300mm manufacturing is a growing advantage – Free cash flow margin expansion to 30% of revenue on a sustained basis in good markets 35
Capital management scorecard
36
2015 capital management scorecard Metric
2015 target
Result 28.6%
105–115 days; updating to 105-135 days
115
Cash owned by U.S. entities
>80%; updating to ~80%
82%
Cash plus short-term investments
10% TTM revenue + NTM dividends + NTM debt
83%
Pensions
Fully fund on tax-efficient basis
96%
Debt
When economics make sense
$4.125B @ average 2.30%
Capital expenditures
~4% of revenue
4%
Cash return
FCF + proceeds from exercises – net debt retirement (TTM)
114%
Dividends
~50% trailing 4 years average FCF
49%
Repurchases
Cash return target – dividends (TTM)
124%
Free cash flow generation
20–30% of revenue (TTM)
Inventory
37
2014 capital management scorecard Metric
2014 target
Result
Free cash flow generation
20-30% of revenue (TTM)
27%
Cash plus short-term investments
10% TTM revenue + NTM dividends + NTM debt
95%
Cash owned by U.S. entities
>80%
82%
Pensions
Fully fund on tax-efficient basis
97%
Debt
When economics make sense
$4.6B @ average 2.15%
Capital expenditures
~4% of revenue
3%
Inventory
105 – 115 days
117
Cash return
FCF + proceeds from exercises – net debt retirement (TTM)
115%
Dividends
~50% trailing 4 years average FCF
52%
Repurchases
Cash return target – dividends (TTM)
123%
38
2013 capital management scorecard Metric
2013 target
Result
Free cash flow generation
20-25% of revenue
24%
Cash plus short-term investments
10% TTM revenue + NTM dividends + NTM debt
109%
Cash owned by U.S. entities
>80%
82%
Pensions
Fully fund on tax-efficient basis
97%
Debt
When economics make sense
$5.6B @ average 2.0%
Capital expenditures
~4% of revenue
3%
Inventory
105 – 115 days
112 days
Cash return
FCF – net debt retirement
164%
Dividends
~50% trailing 4 years average FCF
53%
Repurchases
FCF – net debt retirement – dividends
224%
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Risk factors and non-GAAP measures This presentation is a statement of management’s intentions and describes a strategy that TI intends to pursue as management, in its judgment, deems appropriate. The application of this strategy during any given period may vary depending on market conditions and other factors that management deems relevant. This presentation includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. See Item 1A of TI’s most recent Form 10-K for a detailed discussion of risk factors that may cause results to differ materially from the forward-looking statements. TI undertakes no obligation to update forward-looking statements to reflect subsequent events or circumstances. This presentation contains non-GAAP financial measures, specifically free cash flow (FCF) and ratios based on it. See www.ti.com/ir for reconciliation to GAAP. FCF/share is not an alternative to earnings per share as an indicator of TI’s performance, and investors should not consider presentation of FCF/share as implying that stockholders have a contractual or other right to the cash.
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