Texas Instruments Incorporated (NASDAQ: TXN) Converts Capex Into Cash Flow

What happened

Texas Instruments Incorporated (NASDAQ: TXN) converted its recent manufacturing investment into a sharp cash-flow rebound in the third quarter.

Trailing twelve-month free cash flow reached $8.42 billion, up from $2.42 billion, while capital expenditures fell to $2.58 billion from $4.82 billion. The company defines free cash flow as cash from operations less capital expenditures.

Quarterly revenue rose 28% to $6.06 billion. Analog revenue grew 32%, embedded processing revenue grew 21%, and diluted earnings increased 77% to $2.62 per share.

Read more: Texas Instruments (TXN) stock analysis and investment case

Why it matters

The key change is that revenue growth and lower investment spending are reaching cash flow at the same time. Operating profit of $2.87 billion divided by revenue produces a 47.5% operating margin, up about 12.4 percentage points from a year earlier.

That strengthens the case that the expanded internal manufacturing network can support higher cash generation after a capital-intensive buildout. Trailing free cash flow improved by $6.01 billion, and free cash flow represented 40.6% of trailing revenue compared with 14.0% in the prior period.

The harder question is utilization. Semiconductor factories carry high fixed costs, so weaker demand can reduce returns even after capital spending falls. Texas Instruments Incorporated (NASDAQ: TXN) also continued returning cash to shareholders while funding a larger asset base.

Fourth-quarter guidance calls for revenue of $5.80 billion to $6.30 billion and earnings of $2.45 to $2.79 per share. That range leaves meaningful uncertainty about near-term demand.

Stock perps: every US stock that trades as a perpetual future, by leverage, live

What's next

Watch fourth-quarter revenue, gross margin and factory loadings. Cash conversion should remain strong if revenue holds near the upper half of guidance while capital spending stays below the prior buildout pace.

Also compare capital returns with free cash flow and debt. The current quarter shows better economics, but one period does not prove that all new capacity will earn attractive through-cycle returns.

The results improve the cash-flow case. They do not remove cyclical demand, pricing or utilization risk.

More from OptimistFi

• TXN stock: the Texas Instruments thesis, its status and the next test to watch
• Stock research on every company OptimistFi covers

From OptimistFi Perps