Texas Instruments 2014 Annual Report Download - page 2

To our shareholders
2014 was a year of strong results – evidence of the soundness of our
strategy and a preview of the performance we believe TI can produce
in the coming years. We delivered solid growth, substantial profits
and robust cash generation, and we returned more than 100 percent
of free cash flow to our shareholders. Fueled by a passion for technology
that impacts lives, we used this financial strength to develop compelling
innovations for our customers to help them take their products to
new levels. We believe these will be hallmark traits of TI in the
years ahead.
The year’s performance is best viewed through the lens of our capital
management strategy. This strategy crystalizes how certain strategic
elements, which we have honed for years, contribute to our unique
ability to grow, generate and return cash to shareholders. So let’s
begin there.
Our beliefs: Our capital management strategy is based on the belief
that free cash flow growth is key to maximizing shareholder value over
the long term. Further, free cash flow will only be valued if it is wisely
invested in our businesses or directly returned to shareholders. Given
these beliefs, we focus on growing free cash flow over the long term.
Since 2004, free cash flow has grown at a compound annual growth
rate of 7 percent, and in 2014, free cash flow was $3.5 billion, up
18 percent from the prior year.
Our business model: The foundation of our capital management strategy
begins with a business model that is built on two core semiconductor
businesses, Analog and Embedded Processing. Their long product
life cycles, intrinsic diversity and need for less capital-intensive
manufacturing provide a combination of stability, profitability and strong
cash generation.
These core businesses, together, have grown an average 9 percent per
year over the last 10 years and comprised 83 percent of our revenue in
2014. Importantly, they drove annual company growth of 7 percent in
2014. This marked the fifth consecutive year of share gains for each.
Cash availability and a healthy balance sheet: We make sure that our
tax practices do not strand cash offshore, and that our balance sheet
holds an appropriate amount of cash to fund operations and meet debt
and other obligations, yet still finance future opportunities. At year-end
2014, U.S. entities owned 82 percent of our cash, and our pension plans
worldwide were 97 percent funded.
Manufacturing: Our strategy of acquiring manufacturing capacity
opportunistically and ahead of demand, combined with a product
portfolio that can be built using long-lived equipment, continues to
serve us well. It enables us to cost effectively maintain our capital
expenditures at about 4 percent of revenue, while allowing us to
become an exceptionally reliable supplier to our customers. In 2014,
we initiated plans to increase Analog production on 300-millimeter
wafers, which will provide cost advantages that will further improve
margins and cash generation over the long term.
Technology: Innovation is our lifeblood at TI, letting us deliver
breakthrough technologies to the world’s design engineers. Our R&D
investments allow us to create entirely new product categories, such
as inductance-to-digital converters; expand our product portfolio into
new areas, such as reinforced isolation, high-voltage and high-power
density solutions with silicon and gallium nitride technologies; and
improve existing capabilities, such as our InstaSPIN™ motor control
technology. In 2014, we invested $1.4 billion in R&D, substantially
more than our best competitors.
Returns to shareholders: Our business model enables us to consistently
generate more cash than we need to fund our future. In 2014, TI’s
free cash flow of $3.5 billion was 27 percent of revenue, and in the
years ahead we expect that rate can improve to 30 percent of revenue
sustainably in good economic markets.
This gets us to the final piece of our capital management strategy –
returning cash to our shareholders. Through dividends and share
repurchases, we are committed to returning 100 percent of our free
cash flow plus proceeds from stock-option exercises except that which
is needed for debt retirement. We have increased our dividends for
11 consecutive years, and we’ve reduced our shares outstanding by
39 percent since 2004. In 2014, we returned $4.2 billion to shareholders.
In conclusion: Over the years, we have created a strong company.
But our goal is to make TI stronger still. We do not intend to squander
the unique position we’ve created, one that is anchored in the diversity
of tens of thousands of products and customers for analog and
embedded processing semiconductors, bolstered by an efficient
manufacturing operation, and supported by the largest sales channels
in the industry. We intend to deliver more value to our customers, to
our shareholders and to society as we bring semiconductors to more
markets than ever before.
Richard K. Templeton
Chairman, President and
Chief Executive Officer
Note: Free cash flow (non-GAAP) = Cash flow from operations minus Capital expenditures. See page 124 for details.
Directors
Richard K. Templeton
Ralph W. Babb, Jr.
Mark A. Blinn
Daniel A. Carp
Carrie S. Cox
Board of directors, executive officers
TI Fellows
Stockholder and other information