Essay: T1 background and financial analysis (chip manufacturer)

Introduction:
TI has been ranked as one of the world’s largest cross-functional businesses in the industry, and holds a leading share in both the analog and embedded processing chip market. The company manufactures and supplies customers across multiple industries including; the Automotive industry, Medical Community, Communications Equipment, Enterprise Systems, Industrial Systems, Personal Electronics, Education technology and the Advanced Light Control Solutions industry.
TI has a strong business model, which focuses on four key strategies that they believe allows them to advance their organization and sustain a competitive advantage amongst the world’s leading competitors in the semiconductor industry.  In more than 30 countries and with more than 100,000 customers worldwide, Texas Instruments (TI) is one of the leading providers of semiconductors internationally. The company has enjoyed steady year-over-year growth, which is detailed in this report, and is poised to benefit from its heavy investment in the automotive and industrial sectors, areas of the economy that are increasingly reliant on semiconductors.
Texas Instruments separates its business into three product areas: Analog, Embedded Processing, and Other. While the average consumer might associate TI primarily with calculators, the company recognizes calculators in its Other category, with its Analog and Embedded Processing chips representing close to 90 percent of its business in recent years.
A $53 billion market, analog represents the largest portion of TI’s business at about 66 percent of total revenue in 2017. Analog is essentially the fabric of all modern electronics; it’s the technology that allows people to interact with their favorite devices, and also for devices to talk to each other. Analog products are viewed in three categories: power, signal chain, and high volume. Appropriately named, power products help connect and manage power within electronic systems; signal chain enables the transfer or conversion of signals for processing; and high-volume products typically fall into the personal electronics, industrial, and automotive spaces.
Embedded processing accounts for about 23 percent of total revenue for TI based on 2017 results. These digital processors are the operators that perform specific tasks within electronic devices. TI has two product lines in this segment of its business: connected micro-controllers and processors. Micro-controllers are comprised of a processor core, memory, and peripherals that manage a set of tasks in a device. Processors are more singularly targeted at performing mathematical computations. An interesting and valuable aspect of TI’s embedded processing solutions is that they’re largely customizable for customers. For example, customers are known to invest their own research and development into customizing TI products, which leads to greater, longer connections to TI and its products.
The Other section of TI’s business is represented by tools that are easy and cost-effective to produce, but that deliver very limited profit. These include calculators and other direct-to-consumer items.
In terms of specific end-markets, TI is positioning itself to be the semiconductor provider of choice in the automotive and industrial sectors. Assisted-driving mechanisms, lane-change warnings, and now even fully autonomous vehicles are all evidence of the auto industry becoming more and more centered on chip-enabled technology. In the last few years alone, certain states have begun to require that all vehicles include a backup camera to increase visibility and reduce collisions. This functionality is powered by semiconductors.
Considering industrial work, the possibilities are seemingly endless, with semiconductors powering increasingly popular motion-sensors and various other smart devices that monitor and communicate with each other, often without any human intervention. Texas Instruments senses that it has positioned itself to be perhaps the greatest beneficiary of the growing need for semiconductors in the industrial space – maintaining a diverse set of knowledge and tools, rather than backing itself into a specific niche as many of TI’s competitors have.
Investors will be happy to know that TI places tremendous emphasis on increasing free cash flow, and then using that cash to improve its processes and products and reward its shareholders. For example, the company stated that, as a business headquartered in the U.S., it will benefit significantly from the 2018 tax reform law, and that it will enthusiastically leverage the tax savings to grow and deliver returns to investors.
Current Events:  Succinct but detailed discussions of the significant events in the last 1-2 years that include the impacts and outcomes.
Texas Instruments has been around for many years giving the company many opportunities to make significant impacts on the world. In recent years, technology has boomed and Texas Instruments has been an underlying reason for the boom. Although no recent, in the 1980s and 1990s,  TI Fellow Emeritus Dr. Larry Hornbeck invented the TI DLP Cinema projectors.  “The digital micromirror device (DMD) is the core technology that has enabled Texas Instruments DLP Cinema projection to become the standard of the motion picture industry,” the Academy said in announcing the award. The flexibility and robustness of the DLP chip allows it to be used the industrial, automotive, medical, and 3-D printing industries. This DLP chip has revolutionized the cinema industry. Thanks to his invention more than 8 out of 10 theatres globally project the best Hollywood pictures with vibrant, bright and vivid digital imagery using DLP Cinema technology. Because of DLP Cinema technology, 35-mm motion picture film with its scratches and faded colors is nearly extinct (Larry, 2018).
More recently, TI has been a big player in the development of the internet of things (IoT). The internet of things is a rapidly growing field that has grown more than 30% from 2017. The smart devices that guide and drive everything from road sensors to power turbines need to be cloud-enabled, flexible, remotely managed and extremely secure. This requires chips that are highly capable to run real time operating systems (RTOS) to connect devices. TI has worked with Amazon Web Services (AWS) to bring Amazon Free RTOS to the TI SimpleLink™ MCU platform, which enables customers to  focus on their application development and connect quickly to the cloud while leveraging advanced security features. While there are many real-time operating systems in the market, the FreeRTOS kernel has been one of the consistent market leaders. This puts TI is a great place for continued innovation, more protects and allows the company to increase their profits (TI and Amazon, 2018).
Management
Richard K Templeton is the chairman of Texas Instruments. He has held his position since 2008. Before becoming TI’s chairman, he was the president and CEO of Texas Instruments. He recently stepped down as president in June of 2018. He reshaped TI with the Analog and Embedded Processing. He helped TI acquire National Semiconductor and helped the company focus on long-term value. He has pushed the company to invest in various charities and support many public causes through innovative technology. Templeton has pushed the company to invest in valuable research and development and manufacturing. He has also helped expand the sales and applications engineering team. By doing this, he made it so there were more people available to help customers.
Brian T. Crutcher is the current president and CEO of Texas Instruments and has been with the company for 22 years. He just stepped into this position in June of 2018. Before being promoted to CEO, Crutcher was the executive vice president and COO of Texas Instruments. As CEO, he would like to continue to advance the company’s strategy and really focus on the analog and embedded processing processes. Along with this, he plans to capitalize on the industrial and automotive markets. In the company, he is known for driving financial and operational results throughout the company and really focusing on innovation.
Niels Anderskouv is the senior vice president of TI’s Analog Power Products. Before stepping into this role, he was the senior vice president of the high volume analog and logic business sector of TI. He was previously the president and CEO of Toccata Technology in Denmark before TI acquired the company in 2000 (Leadership, 2018).
Industry Analysis:  Conditions, climate, and competition of the subject company’s industry and segment.
Operations: Products and services, divisions and impact on company, international vs. domestic, major suppliers/customer.
Texas Instruments offers a wide variety of products from Embedded Solutions and Semiconductors.  These products include clock and timer ICs, amplifiers, sensors, integrated circuits, and many other passive components.  Some of the services Texas Instruments offers are different development tools and learning center videos to help develop customer’s knowledge of the products.  This has helped develop international customers and suppliers through the use of webinar videos.  Texas Instruments has facilities in 35 countries.  About 85% of revenue comes from locations that are located outside the United States.  The majority of the international revenue typically comes from China. Some of the major suppliers for Texas Instruments include Toshiba, Samsung, MobiTV, Mentor Graphics, and Notion Ink.  Some of the major customers from Texas Instruments are Google, Intel, Grandstream, and Palm.
Financial Analysis:  Analysis of recent financial statements of the subject company (including tables of significant financial information), noted Red Flags, and any SEC findings or rulings.
Financial Analysis
First thing to point out about Texas Instruments financial statements, the total revenue has gone up every year from 2015-2017.  Through the increase and advancement in technology recently, Texas Instruments has spent more money in Research & Development than before to stay ahead of competitors.  This could explain why there was almost a 1.5 million dollar increase in revenue from 2016 to 2017.  While looking at the Balance Sheet, the information regards to the Inventory and Short Term Investments also have increased.  Texas Instruments were able to increase production and demand for new products which has directly increased their net income.
Reporting and Risks
Texas Instruments splits their business into two reportable segments, Analog and Embedded Processing. All remaining business activities are reported as Other. Within these segments are design, manufacturing, or sales operations in more than 30 countries with their functional currency for reporting in USD.
TI is subject to many different financial risks including taxation, interest rate, foreign exchange rate, and margin variability. They must effectively hedge against these many risks to avoid any negative impacts they will have on their bottom line. TI has facilities in more than 30 countries that are subject to taxation and audit by several taxing authorities. Tax rates vary, and many factors could cause the rate to increase, including changes in jurisdiction, tax credits, tariff regulations, accounting principles, or auditing.
TI is exposed to interest rate risk in two main ways- through the effect of changes in rates on the fair value of investments and the effect of rate changes on their debt. With the large capital requirements and costly R&D to remain competitive, this could greatly harm TI.
TI is exposed to Foreign exchange rate risk through their operations in more than 30 countries. To construct yearly financial statements, all foreign currencies are translated into USD. When the USD strengthens and weakens, their foreign revenues could see some growth or deflations. Factors affecting exchange rate include political stability, inflation, terms of trade, amongst other economic aspects.
Lastly, margin variability limits the consistency and predictability in TI’s forecasts. Factors affecting variability include a decrease in customer demand, obsolescence of inventory, a shift in product mix, or changes in manufacturing processes. A change in margins could adversely impact pricing for products and ultimately profits.
Ratio Analysis
One way to compare the financial well-being of Texas Instruments is through financial ratio analysis. There are 5 categories of financial ratios- liquidity, activity, leverage, performance, and valuation. Within these categories, some of the most important financial indicators to look for when examining a company in the semiconductor industry include the book-to-bill ratio, margins, liquidity, accounts receivable turnover, debt, ROA and ROE, P/E, price-to-sales, and price-to-cashflow.
According to CFRA, one of the largest independent investment research firms, in a field as dynamic as the semiconductors, it is often best to examine results on a sequential basis This type of analysis will give a clearer picture of more recent changes in business conditions.
The book-to-bill ratio measures sales and orders of the company. Order trends are a good leading indicator of sales. A book-to-bill ratio above 1.0 indicates that orders are greater than current sales. Margins vary widely across the industry but can measure underlying factors including capacity utilization, raw material pricing, operational efficiencies, and product mix. Liquidity is important in this industry because it shows a firm’s ability to fund operational needs. In an industry with high fixed costs, it is important for the firm to be able to pay its short-term liabilities. A/R turnover measures the number of times the receivables portfolio has been collected during a time period. A rising ratio indicates that customers are facing cash flow problems and cannot pay their account balances. With the industry being so highly capital intensive, many companies carry a moderate amount of debt. The times-interest-earned ratio measures the ability to pay interest charges and should be closely monitored. Finally, performance and valuation metrics to consider include ROA and ROE which measure operational efficiencies, P/E which weighs the strength of earnings growth relative to peers, and price-to-sales and price-to-cash flow that measure sales and cash flow on a per-share basis. These measures, along with other valuable ratios, are shown below.
Key Ratios
2016 Q1
2016 Q2
2016 Q3
2016 Q4
2017 Q1
2017 Q2
2017 Q3
2017 Q4
Book-to-bill
.94
.94
.94
.94
.94
.97
.97
.97
Net Profit margin
23.64
35.02
27.7
30.67
29.31
28.59
31.22
29.17
Working capital
4239
4698
5011
5193
5438
5634
5936
6476
Current ratio
2.75
3.36
3.31
3.29
4.39
4.00
3.89
3.87
Accounts Rec Turnover
2.37
2.50
2.63
2.51
2.61
2.63
2.70
2.62
Debt-to-equity
.42
.36
.35
.34
.31
.33
.32
.39
Times-interest-earned
47.96
50.87
56.08
62.62
69.72
75.92
80.30
78.95
ROA
18.25%
19.37%
21.05%
22.4%
24.25%
25.5%
26.74%
22.07%
ROE
30.25%
31.73%
33.88%
35.63%
37.94%
39.54%
41.29%
34.64%
P/E
20.36
20.61
21.53
22.38
21.43
19.23
22.2
24.4
Price-to-sales
4.41
4.79
5.28
5.41
5.84
5.74
5.97
6.72
Price-to-cash flow
6.98
7.37
7.94
8.12
8.85
8.5
9.7
10.61
Most of the above ratios have stayed consistent. One difference we notice is the ability for TI to pay back their debts has increased significantly as seen in the times-interest-earned ratio. That is due to a steady increase in cash flows. TI looks like a financially healthy company, and we do not see any red flags. Value Line affirms our conclusion by awarding TI with a financial strength of A++, the highest distinction offered.
Forecasting
According to expert investors at Morningstar and Value Line, Texas Instruments is expected to grow at least 6-7% within the next year consisting of 3% from worldwide GDP, 1-2% from chip content, and 1-2% from focus in the industrial and automotive segments.  After posting a strong 2017 report, Value Line increased their 2018 projections to add $.20 to share-earnings estimates and increased 2019 revenue and profit projections to $16.6, up 9% from 2017 and $5.3, up 22% from 2017, per share respectively. With the industry shifting into new markets including automotive, medical, artificial intelligence, drones, and the internet of things, there is room for TI to expand and grow. Within the strategy sections below is more information on the shift of the industry.
Cost of Capital, Equity & Debt Financing
Weighted Cost of Capital (WACC)
Cost of capital refers to the opportunity cost of making a specific investment. Weighted cost of capital (WACC) considers the capital structure of the company, i.e. the amount of debt and equity and estimates what TI would pay to acquire capital in the form of debt or equity. The rate of debt is calculated by measuring the interest expense relative to long-term debt. The rate of equity is measured by using the capital asset pricing model (CAPM). This model calculates the appropriate return shareholders should expect given TI’s beta and the risk-free rate investors receive on a zero-risk instrument, a 1-year treasury bond.
While many other factors are considered including the condition of the stock market or the relations TI has with the debt issuing institution, this is a rough estimate of their cost of capital and is an important component when constructing a discount cash flow (DCF) valuation model like the one below in the following section.
WACC= rd(1-T)*(D/V)+re*(E/V)
rd= rate of debt (%)
T= tax rate
D= amount of debt ($)
V=total value
re= rate of equity (%)
E= amount of equity ($) using CAPM= rf + B(rm-rf)
CAPM= re= 2.36% + 1.19(9.8%-2.36%)= 11.2% =(78/3577)(1-(2398/6080))*(3577/(3577+100400)) + 11.2%*(100400/(3577+100400))
WACC ≈ 10%
Valuation:  The group’s valuation of the subject company expressed as an intrinsic stock price and a total value. Detailed descriptions of the various methods used to perform the valuation; reasons for choosing the methods; the sources for data collection; and the assumptions used in forecasting
Valuation
Since Texas Instruments is considered an established company, started in 1930, we believe one of the best valuation models is the discount cash flow model (DCF).
Using Appendix C, TI’s most recent statement of cash flows, we can measure the value of the company below. Using a discount value of 10% due to the calculated WACC and a growth rate of 5.5% based on the average growth of revenue from 2012 to 2017, we believe TI is valued at approximately $125.15B or $127.30 per share. Based on market value June 23, 2018, we believe TXN is undervalued.
TEXAS INSTRUMENTS INC (TXN) Statement of CASH FLOW
2013
2014
2015
2016
2017
Free cash flow
$2972
$3507
$3717
$4083
$4668
Revenue
$12205
$13045
$13000
$13370
$14961
Discount Rate
10%
Growth Rate (based on ave revenue growth)
5.50%
Yearly Cash Flows in T0
$3,269.20
$3,857.70
$4,088.70
$4,491.30
$109,438.67
Total Value
$125.15
Market Cap 4/16/2018
$101.90 B
Share Price 4/16/2018
$103.62
Total Value
$125.15 B
Shares Outstanding
983.11 M
Share Price
$127.30
Industry Comparison
Key industry ratios and statistics include global sales report, semiconductor equipment book-to-bill ratio, water fabrication, plant utilization rates, GDP, interest rates, ISM report on business, US index of leading economic indicators, and solar pricing.
It is common for firms in this industry typically carry a moderate amount of debt because of the capital-intensiveness it carries. It is also important to take into account the cyclical and seasonal changes within the industry. Many chip companies experience a slowdown during the summer which picks back up in the fourth quarter.
Below is an interactive chart from Yahoo Finance depicting Texas Instruments against two semiconductor ETFs, VanEck Vectors (SMH) and SPDR S&P (XSD). Each holds a number of different companies including Intel, Broadcom, NVIDIA, Micron, and Texas Instruments amongst others. Over the past 2-year span, SMH had a 34.77% return, XSD 21.94, and TXN 29.78%. It has kept pace with these two ETFs, showing its financial strength in the stock market.
Dividend Payout Policy
For the past five years, TI has raised its quarterly dividend by 24%, which has led to the 14th year in a row of dividend increases. The company began making dividend payments in 1962 and has continued to since. TI’s dividends grow with the company’s free cash flow. In 2017, the dividends only held 45% of free cash flow. Currently, the company pays $2.48 per share of common stock in dividends annually (Investor Relations, 2018).
Derivatives Positions – Basic information on derivatives exposure
International Exposure
TI currently operates in 35 countries. The company has over 100,000 customers throughout the world. TI has employees in the Americas, Europe, and Asia (TI Fact, 2018).
In 2016, TI’s global revenue was $13.37 billion. Since 2007, the international revenue of the company has hovered between 10 and 13 billion dollars annually (Texas Instruments Revenue, 2017). Texas Instruments International Trade Corporation, Wilmington (USA), Zweigniederlassung Zurich is a subsidiary of Texas Instruments Incorporated. This subsidiary distributes various semiconductors to designers of electronics and electronics manufacturers all over the world (Company Overview, 2018).
According to Forbes.com, Texas Instruments is number 412 on the list of the World’s Largest Public Companies. It’s market cap, as of June, 2018, is $106.9 billion. TI is number 647 in sales, 169 is profit, 1,416 in assets, and 82 in market value. Texas Instruments has about 29,714 employees globally (Texas Instruments on the Forbes, 2018).
TI has 15 manufacturing sites in nine different countries. There are manufacturing sites in the US, Mexico, Scotland, Germany, China, Japan, Taiwan, the Philippines, and Malaysia. According to TI’s website, about 80% of the wafers are manufactured in-house at these various plants. TI has strong partnerships across the globe in order to be more flexible. This makes it so TI can dual-source various products and shift production in an easier way in order to effectively address consumer demand. This also enables a continuous supply of service and products to TI’s customers (About TI-Manufacturing, 2018).
Mergers & Acquisitions – Past and any anticipated M&A information
TI acquisitions since 1996
Close Date
Company
Sep 23, 2011
National Semiconductor
May 14, 2009
Luminary Micro
Feb 11, 2009
CICLON Semiconductor
Jun 11, 2008
Innovative Design Solutions
May 13, 2008
Commergy Technologies
Oct 10, 2007
POWERPRECISE Solutions
Aug 15, 2007
Integrated Circuit Designs
Jan 24, 2006
Chipcon AS
Jul 30, 2003
Radia Communications
Jun 20, 2002
Condat AG
Apr 16, 2002
Ditech echo cancellation software unit
Feb 12, 2002
Envoy Networks
Sep 4, 2001
Graychip
Sep 8, 2000
Alantro Communications
Aug 31, 1000
Dot Wireless
Aug 25, 2000
Burr-Brown
Jul 7, 2000
Phoenix VLSI Technologies design team
Mar 16, 2000
Toccata
Nov 22 1999
Power Trends
Oct 15, 1999
Unitrode
Aug 31, 1999
Telogy Networks
Aug 16, 1999
Integrated Sensors Solutions
Jul 1, 1999
ATL Research A/S
Jun 30, 1999
Libit Signal Processing
Feb 4, 1999
Butterfly VLSI
Nov 6, 1998
Adaptec high-end disk drive electronics business
Feb 27, 1998
Amati Communications Corporation
Feb 17, 1998
Spectron Microsystems
Jan 6, 1998
GO DSP Corporation
Dec 31, 1997
Oasix & Arisix Corporations
Jan 2, 1997
Intersect Technologies
Jul 9, 1996
Silicon Systems Incorporated
May 21, 1996
Tartan
(Acquisitions, 2018)
Appendices:  References used
https://www.mouser.com/texas-instruments/resources-support/
http://investor.ti.com/secfiling.cfm?filingID=97476-15-3
https://finance.yahoo.com/quote/TXN/cash-flow?p=TXN
Investor Relations – Dividends – TI.com. (2018). Retrieved July 1, 2018, from http://investor.ti.com/dividends.cfm
TI fact sheet. (2018). Retrieved July 1, 2018, from http://www.ti.com/corp/docs/company/factsheet.shtm
Acquisitions and divestitures. (2018). Retrieved July 1, 2018, from http://www.ti.com/corp/docs/investor_relations/acquisitions_divestitures.html
Texas Instruments revenue worldwide 2007-2017 | Statistic. (2017). Retrieved July 1, 2018, from https://www.statista.com/statistics/276373/texas-instrumentss-revenue-since-2007/
Leadership. (2018). Retrieved July 1, 2018, from http://www.ti.com/corp/docs/investor_relations/leadership.html#templeton_exc
TI and Amazon Web Services collaborate to create end-to-end cloud connection for smart automation. (2018). Retrieved July 1, 2018, from http://e2e.ti.com/blogs_/b/thinkinnovate/archive/2018/02/27/ti-and-amazon-collaborate-to-create-end-to-end-cloud-connection-for-smart-automation
Company Overview of Texas Instruments International Trade Corporation, Wilmington (USA), Zweigniederlassung Zürich. (2018). Retrieved July 1, 2018, from https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=49380975
Texas Instruments on the Forbes Global 2000 List. (2018, June). Retrieved July 1, 2018, from https://www.forbes.com/companies/texas-instruments/
About TI – Manufacturing – TI.com. (2018). Retrieved July 1, 2018, from http://www.ti.com/corp/docs/company/manufacturing.html