Capital Management Strategy. Comprehensive summary: 2016

Transcription

1 Capital Management Strategy Comprehensive summary: 2016

2 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 2

3 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

4 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 Debt Manufacturing capacity Channel advantages Working capital Dividends Repurchases Debt repayment Acquisitions Uses of cash 4

5 Five-year view of our capital allocation 5

6 Where we ve allocated $39B of capital over 5 years ( ) R&D, Sales/Mktg, CapEx, Inv 15.1 Share Repurchases 12.2 Acquisitions 6.5 Dividends $B 6

7 Why we ve allocated capital this way Capital allocated: $39B Purpose ( ) R&D, Sales/Mktg, CapEx, Inv 15.1 Organic growth of business Share Repurchases 12.2 Accretive capture of future free cash flow for long-term investors Acquisitions 6.5 Inorganic growth Dividends 5.4 Appeal to broader set of investors $B 7

8 What we get from disciplined capital allocation Category Purpose Focus R&D, sales and marketing, CapEx and inventory Organic growth of business New products and technologies Strengthen competitive advantages Portfolio adjustments and re-alignment Execution (more output per $ input) Share repurchases Accretive capture of future free cash flow for long-term investors Consistent repurchase when present stock price is below the intrinsic value, using reasonable growth assumptions Acquisitions Inorganic growth 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

9 Disciplined allocation of R&D strengthens portfolio Market segment R&D investments % of TI revenue Industrial 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% 9

10 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% 10

11 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 Debt Manufacturing capacity Channel advantages Working capital Dividends Repurchases Debt repayment Acquisitions Uses of cash 11

12 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) 12

13 Analog and Embedded generate a lot of cash 50% 40% 30% Free cash flow as % of revenue S&P 500 TI 87 th 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 13

14 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 Debt Manufacturing capacity Channel advantages Working capital Dividends Repurchases Debt repayment Acquisitions Uses of cash 14

15 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 15

16 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 Debt Manufacturing capacity Channel advantages Working capital Dividends Repurchases Debt repayment Acquisitions Uses of cash 16

17 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 17

18 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 18

19 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 Debt Manufacturing capacity Channel advantages Working capital Dividends Repurchases Debt repayment Acquisitions Uses of cash 19

20 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 Convert portion of existing 300mm fab to Analog Purchased 300mm wafer fab equipment Acquired assembly/test facility Upgraded assembly/test for improved productivity with wide leadframe Technology GaN reactor for high voltage Magnetics Non-volatile memory, including FRAM 20

21 Lower capital requirements 16 Capital expenditures as % revenue* Model is ~4% of revenue 0 Transition to Analog and Embedded allows for lower levels of CapEx * Continuing operations 21

22 $8B revenue plan for 300mm Analog RFAB DMOS6 Opened in K square feet of clean-room space 300mm Analog Currently utilizing 45% of planned capacity, up from 40% in 2014 Will support $5B annual Analog revenue Opened in K square feet of clean-room space 300mm; previously supported wireless products Currently utilizing 25% for Embedded, Analog production started in 4Q15 Will support $3B annual Analog revenue 22

23 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

24 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 Gross margin % 60% 68% Vast majority of next $6 billion in Analog will be produced on *Unpackaged 300mm 24

25 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 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 25

26 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 Debt Manufacturing capacity Channel advantages Working capital Dividends Repurchases Debt repayment Acquisitions Uses of cash 26

27 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 27

28 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 28

29 Growth and sustainability of dividends Dividends per share ($) Q16x4 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 29

30 Accretive capture of future free cash flow for long-term investors % reduction in shares outstanding (B shares) 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 30

31 Excess cash valued only when returned 40% 30% 20% Cash return* as % of revenue S&P 500 TI 92 nd percentile 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

32 Free cash flow growth and outlook 32

33 Double-digit growth continues in FCF/share % CAGR $ year on year: FCF margin up 170 points to 28.6% Share count reduced by 3.4%

34 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 34

35 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

36 Capital management scorecard 36

37 2015 capital management scorecard Metric 2015 target Result Free cash flow generation 20 30% of revenue (TTM) 28.6% Inventory days; updating to 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 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% 37

38 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 average 2.15% Capital expenditures ~4% of revenue 3% Inventory 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

39 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 average 2.0% Capital expenditures ~4% of revenue 3% Inventory 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% 39

40 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 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 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. 40

41