Capital management strategy. Comprehensive summary: February 2017

Transcription

1 Capital management strategy Comprehensive summary: February 2017

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 Ten-year view of our capital allocation 5

6 Where we ve allocated $73B of capital over 10 years ( ) R&D, Sales/Mktg, CapEx, Inv 32 Share Repurchases 25 Dividends 9 Acquisitions $B 6

7 Why we ve allocated capital this way Capital allocated: $73B Purpose ( ) R&D, Sales/Mktg, CapEx, Inv 32 Organic growth of business Share Repurchases 25 Accretive capture of future free cash flow for long-term investors Dividends 9 Appeal to broader set of investors Acquisitions 7 Inorganic growth $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 Dividends Appeal to broader set of investors Sustainability and ability to grow the dividend Acquisitions Inorganic growth Strategic match (catalog analog, industrial, auto) that leverages or strengthens our competitive advantages ROIC > WACC within 3-4 years 8

9 R&D investments are allocated to higher-value and growth opportunities 9

10 Disciplined allocation of R&D strengthens portfolio Market segment R&D investments % of TI revenue Industrial Up broadly 30% 31% 31% 33% Automotive Up broadly 12% 13% 15% 18% Personal electronics Communications equipment Down, but more selective Analog up slightly, Embedded down 32% 29% 30% 26% 15% 17% 13% 13% Enterprise systems Flat, at low levels 6% 6% 6% 6% Other Flat, at low levels 5% 4% 5% 4% 10

11 and is driving growth in best markets Market segment R&D investments % of TI revenue Industrial Up broadly 30% 31% 31% 33% 42% 51% Automotive Up broadly 12% 13% 15% 18% Personal electronics Communications equipment Down, but more selective Analog up slightly, Embedded down 32% 29% 30% 26% 15% 17% 13% 13% Enterprise systems Flat, at low levels 6% 6% 6% 6% Other Flat, at low levels 5% 4% 5% 4% 11

12 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 12

13 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. Focused on best markets within the semiconductor industry: analog and embedded Large and fragmented: $48B analog, $18B embedded* Used in everything electronic: diverse customers and diverse products TI has leading share in both: 18% and #1 in analog, 17% 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: 2016 WSTS* and TI estimates 13

14 Free cash flow generation in top 15% 50% 40% 30% Free cash flow as % of revenue S&P 500 TI 88 th percentile 20% 10% 0% -10% Source: S&P Capital IQ, TTM as of 1/16/

15 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 15

16 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, which does not include the impact of discrete tax items, is expected to be about 30% in 2017 Assume 35% incremental tax rate as profit before tax changes 16

17 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 17

18 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: 79% 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: 99% funded, so cash requirement is minimal As of 12/31/

19 Balance sheet is a strength /cont. Debt strategy Long-term debt will be part of capital structure when borrowing economics make sense 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 $3.625B at 2.22% weighted average; shelf registration current; $2B revolver As of 12/31/

20 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 20

21 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 21

22 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 22

23 Progress on 300mm Analog RFAB DMOS RFAB capacity ~$5B/year RFAB + DMOS6 capacity ~$8B/year Utilization % ~45% Utilization % (combined) ~30% 300mm Analog revenue ~$2.2B 300mm Analog revenue ~$2.5B 23

24 Chip cost is ~40% less on 300mm 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% *Unpackaged 24

25 Investments for competitive advantage Reach of channel advantages 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 WACC within about 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 free cash flow 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 Sustainability and growth of dividends Dividends per share ($) Q16x4 x4 Increased dividend 13 consecutive years, including 32% increase in 4Q16 23% CAGR over last 5 years compared to S&P500 CAGR of 8% 2016 dividend payments used 40% of 2016 free cash flow Yield is 2.6%* * As of 2/6/

29 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 1.5% over the last year, with $2.1B bought back in 2016, including $475M in 4Q16; shares outstanding now less than 1.0B $5.8B of authorization remaining as of end of 4Q16 29

30 Cash return in top 10% 40% 30% Cash returns as a % of revenue S&P 500 TI 91 st percentile 20% 10% 0% Source: S&P Capital IQ, TTM as of 1/16/2017 Cash returns = dividends + share repurchases 30

31 Free cash flow growth and outlook 31

32 Double-digit growth continues in FCF/share $ year on year: FCF margin up 90 basis points to 30.5% Share count reduced by 1.5% FCF/share increased 9.0% 12% CAGR

33 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 per share drives returns Top-line growth driven by Analog and Embedded Free cash flow margin expansion as we build more 300mm Analog Continued returns through share repurchases and dividends 33

34 Capital management scorecards 34

35 2016 capital management scorecard Metric 2016 target Result Free cash flow generation 20 30% of revenue (TTM) 30.5% Inventory days 126 Cash owned by U.S. entities ~80% 79% Cash plus short-term investments 10% TTM revenue + NTM dividends + NTM debt 88% Pensions Fully fund on tax-efficient basis 99% Debt When economics make sense average 2.22% Capital expenditures ~4% of revenue 4% Cash return FCF + proceeds from exercises net debt retirement (TTM) 93% Dividends 50 80% trailing 4 years average FCF 48% Repurchases Cash return target dividends (TTM) 89% * As reported on February 8,

36 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% * As reported on February 9,

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 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% * As reported on February 4,

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 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% * As reported on February 22,

39 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. 39

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