Texas Instruments’ cash flows
Texas Instruments (TXN) manufactures analog chips that generate high-profit margins and cash flows. It has been increasing its mix in the industrial and automotive markets, which have long product cycles and diverse segments. By focusing on diversity and longevity, the company aims to create a portfolio with a high terminal value that can deliver higher FCF (free cash flow) per share for a long time.
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Even though TXN’s revenue fell 5% YoY (year-over-year) in the fourth quarter of 2018, its free cash flow rose 7% YoY as its FCF margin rose from 44.8% to 50.7%. The FCF margin rose because of its increasing shift to the automotive and industrial markets. TXN’s cash flows are high in the fourth quarter and low in the first quarter due to seasonal weakness.
In the first quarter, TXN’s operating cash flow was flat YoY at $1.1 billion. It spent $251 million on capital expenditure which resulted in an FCF of $850 million. However, it returned $1.87 billion to its shareholders; $724 million in dividend and $1.15 billion in the stock buyback.
Other balance sheet items
At the end of the first quarter, TXN’s cash and short-term investments stood at $4.09 billion and the debt stood at $5.8 billion, resulting in net debt of $1.71 billion. The company reduced its production output to manage inventory according to demand. This effort sequentially reduced its inventory by eight days in the first quarter.
Management’s efficiency ratio
TXN’s management aims to deliver maximum returns to shareholders and this is visible from its RoE (return on equity), which shows the profit a company can generate from shareholder capital in a particular time period. A company can improve its ROE by repurchasing shares or improving net income.
TXN’s ROE of 54.7% is higher than peers Analog Devices’ (ADI) and Maxim Integrated’s (MXIM) ROE of 14% and 38%, respectively. TXN’s ROE is high as it has a higher profit margin and has been spending a large amount on stock buyback.
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