Texas Instruments 2015 Annual Report Download - page 12

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6
FORM 10-K
Conversely,฀as฀factory฀loadings฀increase,฀our฀fixed฀costs฀are฀spread฀over฀increased฀output฀and,฀absent฀other฀circumstances,฀our฀profit฀
margins฀increase.฀However,฀our฀operating฀focus฀is฀more฀on฀maximizing฀long-term฀free฀cash฀flow฀than฀minimizing฀short-term฀variations฀
in฀profit฀margins฀caused฀by฀factory฀loadings.฀Free฀cash฀flow฀is฀cash฀flow฀from฀operations฀less฀capital฀expenditures.
To฀this฀end,฀we฀seek฀to฀maximize฀long-term฀free฀cash฀flow฀by฀keeping฀capital฀expenditures฀low฀through฀opportunistic฀purchases฀of฀
facilities฀and฀equipment฀ahead฀of฀demand.฀For฀example,฀in฀2013,฀we฀purchased฀an฀assembly/test฀facility฀in฀Chengdu,฀China.฀In฀2014,฀we฀
initiated plans to adapt existing facilities to manufacture more products, including new products, using 300 -millimeter wafers, our most
cost-effective฀manufacturing฀process.฀These฀activities฀may฀have฀near-term฀effects฀on฀our฀profit฀margins,฀but฀we฀believe฀they฀will฀result฀
in฀long-term฀benefits฀to฀free฀cash฀flow.
We฀expect฀to฀maintain฀sufficient฀internal฀manufacturing฀capacity฀to฀meet฀the฀vast฀majority฀of฀our฀production฀needs.฀To฀supplement฀our฀
manufacturing฀capacity฀and฀maximize฀our฀responsiveness฀to฀customer฀demand฀and฀return฀on฀capital,฀we฀utilize฀the฀capacity฀of฀outside฀
suppliers,฀commonly฀known฀as฀foundries,฀and฀subcontractors.฀In฀2014,฀we฀sourced฀about฀20฀percent฀of฀our฀total฀wafers฀from฀external฀
foundries฀and฀about฀40฀percent฀of฀our฀assembly/test฀services฀from฀subcontractors.
Inventory
Our฀inventory฀practices฀differ฀by฀product,฀but฀we฀generally฀maintain฀inventory฀levels฀that฀are฀consistent฀with฀our฀expectations฀of฀
customer฀demand.฀We฀carry฀proportionally฀more฀inventory฀of฀products฀with฀long฀life฀cycles฀and฀a฀broad฀customer฀base.฀Additionally,฀we฀
sometimes maintain product inventory in unfinished wafer form, as well as higher finished-goods inventory of low-volume products,
allowing฀greater฀flexibility฀in฀periods฀of฀high฀demand.฀We฀also฀have฀consignment฀inventory฀programs฀in฀place฀for฀our฀largest฀customers฀
and฀distributors.
Design centers
Our design centers provide design, engineering and product application support as well as after-sales customer service. The design
centers are strategically located around the world to take advantage of key technical and engineering talent and proximity to
key customers.
Customers
We฀estimate฀that฀we฀sell฀our฀products฀to฀more฀than฀100,000฀customers.฀Our฀customer฀base฀is฀diverse,฀with฀one-third฀of฀our฀revenue฀
deriving from customers outside our top 100. In addition, no single customer accounts for 10 percent or more of our revenue. Most of
our฀customers฀purchase฀our฀products฀through฀distributors.
Sales and distribution
We฀market฀and฀sell฀our฀semiconductor฀products฀through฀a฀direct฀sales฀force฀and฀distributors.฀We฀have฀sales฀or฀marketing฀offices฀in฀
34฀countries.฀About฀60฀percent฀of฀our฀revenue฀comes฀through฀distribution฀channels.฀Our฀distributors฀maintain฀an฀inventory฀of฀our฀
products฀and฀sell฀directly฀to฀a฀wide฀range฀of฀customers.฀They฀also฀sell฀products฀from฀our฀competitors.฀Our฀distribution฀network฀holds฀
a฀mix฀of฀TI-consigned฀and฀distributor-owned฀inventory.฀Over฀time,฀we฀expect฀this฀mix฀will฀continue฀to฀shift฀more฀toward฀consignment.฀
About฀60฀percent฀of฀our฀distributor฀revenue฀is฀generated฀from฀sales฀of฀consigned฀inventory.
Acquisitions, divestitures and investments
From฀time฀to฀time฀we฀consider฀acquisitions฀and฀divestitures฀that฀may฀strengthen฀or฀better฀focus฀our฀business฀portfolio.฀We฀also฀make฀
investments directly or indirectly in private companies. Investments are focused primarily on next-generation technologies and markets
strategic฀to฀us.฀In฀September฀2011,฀we฀acquired฀National฀Semiconductor฀Corporation.
Backlog
We฀define฀backlog฀as฀of฀a฀particular฀date฀as฀purchase฀orders฀with฀a฀customer-requested฀delivery฀date฀within฀a฀specified฀length฀of฀
time.฀Our฀backlog฀at฀any฀particular฀date฀may฀not฀be฀indicative฀of฀revenue฀for฀any฀future฀period.฀As฀customer฀requirements฀and฀industry฀
conditions฀change,฀orders฀may฀be฀subject฀to฀cancellation฀or฀modification฀of฀terms฀such฀as฀pricing,฀quantity฀or฀delivery฀date.฀Customer฀
order฀placement฀practices฀continually฀evolve฀based฀on฀customers’฀individual฀business฀needs฀and฀capabilities,฀as฀well฀as฀industry฀
supply฀and฀capacity฀considerations.฀Further,฀our฀consignment฀programs฀do฀not฀result฀in฀backlog฀because฀the฀order฀occurs฀at฀the฀
same฀time฀as฀delivery,฀i.e.,฀when฀the฀customer฀pulls฀the฀product฀from฀consigned฀inventory.฀Our฀backlog฀of฀orders฀was฀$0.94฀billion฀at฀
December฀31,฀2014,฀and฀$1.06฀billion฀at฀December฀31,฀2013.