Good day, and welcome to the Texas Instruments Conference Call. At this time, I would like to turn the conference over to Dave Paul. Please go ahead, sir.
Thank you, Mara. Good morning and thank you for joining our conference call and allowing us to share our capital management strategy with you. Kevin March, TI's CFO is with me today to provide details and to answer your questions. For any of you who missed yesterday's release announcing our latest dividend increase, you can find it on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through TI's website.
From the website, you'll be able to see our presentation or if you wish, you can download it from there as well. A replay will be available through the web. This call will include forward looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the press release published yesterday as well as TI's most recent SEC filings for a more complete description. Over the past few years, TI has undergone a strategic transformation.
The consistent direction of that transformation was a focus on better opportunities and markets, namely analog and embedded processing. These continue to be some of the best opportunities inside of semiconductors, offering compelling financial characteristics, growth, diversity and stability. They also offer the best exposure to the growing opportunities inside of the industrial and automotive markets. At this point, our most difficult strategic actions are complete and we now have a company with more than 70% of our revenue coming from analog and embedded processing. As a result, our business model consistently generates cash and the sustainability of this business model gives us confidence in our ability to return more of that cash to shareholders in the form of higher dividends and additional share buybacks.
Consistent with this belief, we announced last night that we're increasing our dividend to an annualized rate of 1 4% as of yesterday's close. This 33% in our dividend follows a 24% increase announced last September and marks our 10th consecutive year of increases. As well, we announced that our Board has authorized us to repurchase an additional $5,000,000,000 of shares bringing the total outstanding authorization to $8,400,000,000 Our share repurchases have resulted in a 36 percent decrease in our shares outstanding since the end of 2004. Our track record of increasing dividends and our continual share repurchases demonstrate a foundation and consistency of returns to our shareholders. Further, the combination of generating and returning sustainable cash to our shareholders puts TI in a unique class of companies, especially when compared to other technology companies.
We appreciate your time today to allow us to provide you a full look at our capital management strategy. With that as a backdrop, let me turn it over to Kevin and he can share the details.
Thank you, Dave, and good morning, everybody. Let me just begin by mentioning that we are pleased that after many years of very hard work, TI's transition to an analog and embedded processing company is essentially complete. And as Dave mentioned, more than 70% of our revenues last year came from analog and embedded processing. And with the legacy wireless products nearing their wind down on the near term horizon, the growth of our analog and embedded processing portfolios will soon be able to shine through benefiting both our top and bottom lines. The transition to analog and embedded processing, we believe, puts TI into a uniquely strong class of growing companies that generate and return cash to their shareholders.
This business model enables TI to consistently convert 20% to 25% of our revenue to free cash flow. And importantly, we are employing a capital management strategy designed to return 100% of our free cash flow, less debt repayments to our shareholders in the form of dividends and share buybacks. We believe that TI's capital management strategy will continue to enhance our competitiveness and maximize our shareholder returns. Let me just take a moment to take a look at a few of the key advantages that TI enjoys that allow us to deliver on this capital management strategy. Right at the top of the list, quite frankly, is a very high margin portfolio that we enjoy as a result of our focus on analog and embedded processing semiconductor technologies.
2nd on the list is that we employ a tax strategy that repatriates cash back to the U. S. Rather than leaving us stranded overseas. The result is we have ample cash to use for our U. S.
Operations and importantly to return to our shareholders. Because we have a strong balance sheet and we maintain certain obligations as fully funded such as our pension obligations, we maximize our access to low cost debt. This results in the ability to leverage our balance sheet when economics make sense or when strategic opportunities present themselves. And finally, as a result of our focus on analog and embedded processing technologies, we enjoy the benefit of very long lived manufacturing assets, further enhanced by active used purchase used equipment purchases over the last few years, which translates into our expectation for low capital expenditures for quite a few years to come. The combination of these advantages results in a couple of very important outcomes that enables our capital management strategy.
1st and foremost, for the company, it allows us to convert 20% to 25% of our revenue into free cash flow. And importantly for investors, it allows us to commit to 100% of our free cash flow less debt repayment to be returned to our shareholders in the form of dividends and stock buybacks. I think it's instructive to note where our advantages place us in the S and P 500 and this chart illustrates it quite clearly that arguably we're in pretty good company and that we're in the 80th percentile, or to put it another way, the top 20% of free cash flow generators in the S and P 500. Other names that are in our neighborhood are pretty respectable companies also, Capital One, Bristol Myers, Pfizer and Apple, just to name a few. And we expect the business model that we now have put in place to keep us well ranked in the S and P 500 for many years to come.
Our capital management strategy, I think it's most nicely it's nicely summed up by this particular graphic. To put it quite simply, we have a great business model because of our focus on analog and embedded processing semiconductors. We employ an effective tax strategy, which brings our cash home to the U. S, making our cash available. That results in a strong balance sheet that allows us to keep our pension funds well funded and thereby maximizes our access to debt when the economics make sense.
This in turn allows us to deploy this cash to continue to invest for our competitive advantage over time, which includes investments in our technology capabilities, our manufacturing capacity, our working capital and acquisitions. And because we will be generating more cash than we need, it also allows us to return cash in the form of dividends and buybacks and periodic debt repayment. There are several elements to a comprehensive capital management strategy and I'll use the next few slides to discuss what our ideas are on these. 1st and foremost is cash availability. To put it quite simply, where your cash is has a meaningful impact on what you can do with it.
We believe the most responsible thing to do is to repatriate our cash, albeit at the lowest possible tax rates, so they can be reinvested in our businesses and returned to our shareholders. As we look out into the future to anticipate future tax rates, we assume the continuation of the current tax laws. And when you do that, off of our current 22% tax rate, we're estimating that when our revenues reach about $15,000,000,000 we'll probably be experiencing about a 25% tax rate. And when our revenues reach $18,000,000,000 we'll probably experience something like a 28% tax rate. After making your cash available, then the question is how much cash should you hold?
Now obviously, this is a somewhat subjective calculation and reasonable people can arrive at different conclusions. But that being said, we employ a policy whereby we expect to maintain sufficient cash on hand to meet our operational needs and pay our expected dividends and debt. This policy is designed to allow us to manage through a wide range of scenarios and be able to fulfill our commitments on dividends and debt obligations. Because of the design of our global footprint, we expect that we can keep more than 80% of our cash onshore. So our model is to average over time about 10% of our trailing 12 months revenue plus our next 12 month dividends and expected debt repayments.
Our status at the end of 2012 was that 83% of our cash was onshore and our total cash on hand was consistent with our model. Turning to our pension strategy, we watch this closely because globally it's a large commitment for us and it has a direct bearing on our debt capacity. So our strategy quite simply put is to maintain our pension plans fully funded on a tax efficient U. S. GAAP basis to minimize any risk of overfunding and to the extent that we do invest cash into those trust funds to invest the assets in those trust funds on an asset and liability matching principle.
Our status at the year end 2012 is that globally our pension plans were 95% funded, so our expectation for future cash requirements are minimal for this obligation. Turning to our debt strategy, I'll remind you that our current debt is about $5,600,000,000 payable through 2019. The coupons on those debt issues range from 0.45 percent to 2.375 percent for TI issued debt and 3.95 percent to 6.6 percent for the debt we assumed with the National acquisition. We expect long term debt will continue to be a part of our capital structure when borrowing economics make sense. I'll note that we believe our high rating of A1A plus provides comfort to our debt and equity owners as to our ability and commitment to fulfill our payment obligations.
So in light of that, we do not expect our debt balances to negatively impact our credit ratings. We'll consider rolling over our debt when interest rates are less than the expected inflation rate or our dividend yield. Also, we expect that if we do roll over, maturities in any one year would not exceed $1,000,000,000 in order to minimize any future rollover risk. To facilitate our access to debt, we intend to maintain a current self registration, which is helpful because it enables a short lead time if you choose to raise capital, including through the debt markets. In addition, we also intend to keep our long term credit lines with a diverse set of high quality banks.
Our status again as of the end of the year is our current debt is at our rate of capacity. Our shelf registration is current and we presently have a 5 year $2,000,000,000 credit revolver with a very high quality set of banks. Turning to investments to maintain our competitive advantage. Our strategy here is really quite simple and that is to extend the competitive lead that we already have with our differentiated analog processes and our 300 millimeter in house manufacturing capability. Our capital expenditures for technology development will be focused on differentiated analog process flows and specialized packaging techniques as well as differentiated embedded memory flows down to 90 nanometers.
Our capital expenditures for manufacturing capacity, in this case, our model is to maintain our wafer fab capacity at a tooled basis, a minimum of 3 years ahead of what we expect demand to be, and clean room for up to 5 years ahead, with a special focus on opportunistically equipping our 300 millimeter analog fab, especially where distressed pricing opportunities materialize. On the assembly test side, we expect to remain tooled capacity at least 18 months ahead of the NAND with open space in our assembly test sites at least 3 years ahead of the NAND. And we expect to continue to use foundries for all of our CMOS production below for 49 nanometer and below and on selected analog and packaging overflow demands. Our capital expenditure journey has actually been a long one, dropping from levels exceeding 20% of revenue coming out of the 90s to the low double digits by the middle of this last decade to where we now expect to operate in the 4% range through $18,000,000,000 and in the 4% to 7% range thereafter. And unlike in the past where our capital expenditures occurred much closer to when we needed the capacity, which subjected us to full priced equipment, we now acquire our capital well before we need it, opportunistically capturing far lower prices, thereby further lowering our cash needed for capacity expansion in the future.
Turning to working capital, it's really quite simple here. It is to stage inventory to maintain very high levels of customer service, obviously necessary to be competitive with our peers. In addition, it's to continue to be very disciplined with how we manage our accounts receivable and our accounts payable. Our inventory model is to have between 105 and 115 days of inventory. As of the end of Q4, we had 103 days.
You might note, if you look over the past year, our peers have operated in the 90 to 130 day range. So this model puts us right in the center of where our peer group operates. Finally, on acquisitions, it will continue to be biased towards analog and smaller acquisitions that bring us attractive products and or Talend engineers or improve our position in attractive growth markets. As has been the case for a while, the financial test for acquisitions for us is that the return on invested capital from the acquisition must be accretive to our weighted average cost of capital within 4 years in order to be affordable. Returning cash to our shareholders is nothing new for us.
We've actually been doing it for many, many years now. In fact, over the past 5 years, we have generated and returned 100 percent of our free cash flow to our shareholders or about $12,500,000,000 What is new is voicing our commitment to continue to return 100 percent of our free cash flow less debt repayment. And we can do this because we are now at a point where our business model not only strengthens our ability to achieve that kind of commitment, but to sustain this commitment over time. Over the last 8 or 9 years, we have actually reduced our total shares outstanding by 36% through a disciplined practice of steady stock repurchases. Going forward, you can expect more of the same, that is repurchasing steadily when our discounted cash flow value of the company exceeds the market stock price for our shares.
Our target allocation for stock buyback is total free cash flow less the amount that we use for dividends and debt repayment. As of yesterday's authorization $5,000,000,000 that brings our total authorization today that's available for future buybacks to $8,400,000,000 as Dave mentioned. Over that same 9 years, we have also consistently increased our dividends as you can see from this chart. With yesterday's announcement, our new dividend annualized rate is 1.12 dollars which represents about 43% of what our 2012 free cash flow was. At yesterday's stock price, that's a yield of about 3.4%.
Our formula for dividends is to target about 50% of our trailing 4 years average free cash flow to be used for dividends. With yesterday's announcement, PI has increased its dividend in each of the last 10 years now. Again, looking at how we are positioned in the S and P 500 with our dividend yield, we are already well positioned in the 69th percentile previous to this increase. But with the new increase that puts us in 84th percentile, actually quite consistent with what we rank on a free cash flow basis. So really just to summarize, our transition to an analog and embedded processing company is quite simply result in a much stronger free cash flow business model.
The combination of a high margin portfolio and a sensible tax strategy means that we have cash available for strategic uses and a return to our shareholders. Our access to low cost debt and the upkeep of obligations mean that we have a balance sheet that is not only strong, but easily available to be leveraged when the opportunity presents itself. The long lived assets in well stage equipment purchases that our model enables means that our capital expenditures going forward will remain to be low as we've seen in the past year. We believe this puts us in a unique class of strong generators and returners of cash. To reiterate, we believe that we will be able to convert 20% to 25 percent of our revenue into free cash flow as a result of the product portfolio that has been and will continue to grow.
You can expect that 100% of our free cash flow less debt repayment will be returned to shareholders. And I would just close by saying that the increases in the dividends and the share buybacks that were announced yesterday reflect management's confidence in our business model and importantly our commitment to shareholder returns. So with that, let me turn
it back over to Dave. Thanks, Kevin. Operator, you can now open the lines up for questions. In order to provide as many of you as possible an opportunity to ask a question, please limit yourself to a single question. After our response, we'll provide you an opportunity for an additional follow-up.
Mar?
Thank you very much, Mr. We go to our first caller, Ambrish Srivastava with BMO Capital Markets.
Thank you. Good morning, guys. That was very detailed and comprehensive. One question and then I had a follow-up as well please. When we Kevin you mentioned that talking about the business model has transitioned and you look forward to the embedded and the analog now shining through.
So the first part we know that the transition has happened. What gives you the confidence about the shining through part? Is it based on the organic TI business getting design wins or national doing better? So just please help us understand that part? And then I
had a quick follow-up. Thanks. Sure. I think it's the combination of the 2. Organically, we have been growing and gaining market share now for a number of years.
And that's quite apparent when you just look at the market available data. In addition, we have the additional leverage from the Silicon Valley Analog or the National acquisition. Recall that when we talked about the acquisition, we expected during the 1st year that they would that business unit would probably continue to lose share as it had been doing prior to when we acquired them during the 2nd year, which we're now into, that it would stabilize from a share standpoint. And then by the 3rd year, we'd expect to start gaining share consistent with the other analog divisions that we operate. And so combined, we look at that and expect that's going to continue to gain share for us going forward, which means even if the market growth rate is unpredictable, our ability to grow inside that market is fully in our control.
Similar on embedded processing, you may recall that we stepped up our investments in embedded processing, especially on engineering and our sales and field apps staffing about 2 years ago now. And it takes several years for those types of step up in investments to begin to yield results. And we would expect to see that business begin to it has been growing nicely and gaining share, but we'd expect to see it continue to grow quite nicely and gain share as we
move forward. You have a
follow-up, Ambrish? Yes, Dave. My follow-up on the buyback, should we be thinking about the level that you guys have been doing the last 2 years? And then also what kind of stock level do you feel your stock is undervalued?
Well, let me start with the first one. We obviously have been actively buying our shares for a long time now. And as you saw from that chart, we reduced our share count by 36% since 2004. The amount that we will allocate stock buyback is really the formula is going to be pretty straightforward. We take a look at our prior 4 years free cash flow, the average free cash flow.
We will allocate half of that free cash flow for dividends. We'll use the balance for paying down debt as it comes due and buying back shares. So I think that the kind of stock buyback activity you've seen us do here recently is probably pretty reflective of what you can expect going forward. As to the valuation question, I would simply say that we believe that the valuation opportunity for TI is substantially above where it currently is as our strategy unfolds in the next few years.
Okay. Operator, next caller, please.
Thank you. And we move now to Glenn Young with Citi.
Thank you. Hey, Kevin, just following up on your last name. Can you provide us the parameters you use in calculating the DCF that you talk about in Slide 14?
Glenn, it's pretty classic business school calculation in that we look at the current value of the company as it relates to our asset base and our free cash flow generation capability over time, and we discount that back at our weighted average cost of capital.
Okay. Nothing unique there then. The other question I had, Kevin, was you talk about in the CMOS process, you're going to outsource below 45 nanometer, but analog and I obviously recognize the analog is not at that node. But do you anticipate analog will eventually get below 45? And if it does, is that something you intend to do in house?
And then related to that, you also mentioned that you want to have a certain amount of tools installed ahead of demand. Is that dependent on the availability of cheap tools? You've always been very good at buying good tools from bankrupt companies. Or are you willing to buy new tools if you need to?
On the tool question, I'll answer that one. I'll let Dave take the focus on the lithography question. On the tool question, Glenn, we're looking there quite frankly, when you buy it before you need it, you actually don't have to pay full price, whether that's a relatively new tool or a used tool. And that's quite simply the essence of the strategy here is to purchase it when you don't need it. You can wait until the price is attractive.
Clearly, we prefer to buy the tools when they're distressed, when certain competitors in the industry find it necessary to get rid of those tools. That's the most attractive pricing opportunity. But again, our strategy is to buy before well before we need it, so we're not subjected to if you will, the catalog price at the time we do need it. Dave, do you want to comment on the thought of the question?
Yes. Glenn, if you look, our total number or percentage of wafers that are outsourced today is around 20%. And again, that's 45 nanometers and below is 100% outsourced for advanced CMOS. And as our wireless business unwinds, obviously, that percentage will decrease and the percentage that we build in house will increase since essentially all of the wireless is built outside. And if you look at where analog is today, there's actually a small portion of the wafers built at 180 nanometers.
We have some newer process technologies at 130 nanometers, but most everything in analog is 250 or above. And you just for most technologies and most applications, you just it's not a Moore's Law game and hence one of the reasons why we can purchase more mature manufacturing assets and keep them employed for decades. So thanks, Glenn. And we'll go to the next caller.
And we now take a question from Vivek Arya with Bank of America Merrill Lynch.
Thanks for taking my question. And I realize Kevin you have a mid quarter update coming up soon. But can you give us your sense of what the state of the industry is right now? I think many of your peers have called for a bottom. But what I've seen is that over the last 2 years, it's been a relatively easy call to call a bottom in December, but then the visibility has tended to be limited after that.
So I understand you won't be TI specific, but how do you see the
Zasik, we'll give more color in a couple of weeks on our mid quarter update as to what our current thinking is certainly near term, which I think is always on people's minds. But do recall that we had given a range that expected our revenue would probably decline slightly in the fourth Q1 versus Q4. And then seasonally, if you look, we typically see the industry, NTI included, seeing sequential growth in the 2nd quarter. Right now, I don't see anything that I could comment on that would cause us to expect anything different than what history has taught us to expect, And we'll give more color on that a little later when we get closer to that time.
Yes. And our mid quarter update is scheduled for March 7. So do you have a follow-up?
Yes. Thanks, Dave. 2nd, I think you mentioned that you are largely done with your restructuring actions. One question we hear very frequently from investors is what is TI's baseline earnings model, I. E, what is your target business model for gross and operating margins?
So now that you are done with all the restructuring actions, how should we think about those particular metrics so we can start forming a long term earnings model for TI? Thank you.
Yes. I think the thing the way to think about this, Vivek, is consistent with our capital management strategy that we just articulated and that is that we're focused on not just growing the top line, but generating and returning cash to our shareholders. So while our gross and operating margins by themselves are important metrics, we don't necessarily prove an enterprise's ability to actually generate free cash flow that can be returned to shareholders. The other important factors that need to be considered are also a company's tax policy and the company's capital expenditure needs. That being said, our mix continues to improve because analog and embedded processes continue to become a bigger part of our revenue as wireless declines.
Combined, that should support all of these metrics improving and given us a better ability to generate cash for our shareholders. So again, I think the value that shareholders will find is in not only the potential appreciation value of the stock price itself, you will, but also the fact that we will continue to return our cash in the form of dividends and stock buybacks. I would just remind you that historically, when we are in a growth phase, our incremental margins tend to fall through about 75% over the course of a cycle. So hopefully that's helpful to
your question. Okay. We'll go to the next caller please.
Thank you. We take our next question from John Pitzer of Credit Suisse.
Yes. Good afternoon guys. I appreciate the detail. Kevin, a lot of what you said was straightforward. If you look at your historic buyback and sort of the return on that buyback, it would appear that the core business generates significantly higher return than the buyback.
So I'm just kind of curious, why not have a greater focus on top line growth through M and A, especially given over the last 5 years that core business has kind of had a negative CAGR. And I know it's been a hard industry a difficult industry environment. But just can you help me understand why not more emphasis on top line growth?
Yes. John, I think we've got plenty of emphasis on top line growth. And I'm I think some issue with the core business having negative CAGR because in fact if you say total TI that would be true when you work in the effect of the wind down of the wireless business over the last 5 years. In fact, the organic areas that we've been investing in, those in fact have been growing quite nicely for multiple years now. To support that growth, you asked the question about acquisitions.
Well, in fact, as you're well aware, we just did a very large acquisition about 1.5 years ago. And frankly, those for us come along probably once every decade or so. To the extent that we will use acquisitions to continue to support our objectives in the future, I'd expect those are going to be pretty small acquisitions certainly for the foreseeable future.
Appreciate it, Kevin. And as my follow-up, just the mix between buyback and dividend, especially with dividend of 50% of last 4 years average free cash flow, anything magical about that target? Or what was the sort of the rationale behind that target?
Quite frankly, we think that it's a strong signal to our investors that you can expect a constant stream of income from TI in the form of dividends And that at a 50% average free cash flow level over the last 4 years, that gives us ample headroom, if you will, to ensure that dividend would be uninterrupted because certainly the other side of that formula can be flexed if it needs to be.
Okay. Thank you, John. And we'll go to the next caller, please.
We'll move now to Tim Arcuri with Cowen and Company.
Hey, guys. This is Ken Lee for Tim. Question on the capacity. You guys have talked about opportunistically acquiring capacity. Can you help me understand the rationale between at up to $18,000,000,000 in revenue when you guys would acquire capacity and kind of just the rationale behind that?
And then I have a follow-up.
Yes. Thanks, Ken. We've talked about before that we've got current installed capacity end to end, so both wafer fab capacity and assembly test capacity to support revenues up to $18,000,000,000 And as you saw last year, we were able to put that capacity in place and yet last year spend less than 4% of our revenue on CapEx. So as we look forward and especially in areas like 300 millimeter tools, There are some of those tools that become available on the market fairly infrequently. So if the opportunity presents itself to acquire that equipment for pennies on the dollar like we have in the past, we want to take advantage of that opportunity and begin to extend that $18,000,000,000 from where it is today.
And we expect to be able to do that and actually have made some acquisitions even here more recently and still do that inside of our current CapEx guidance and therefore continue to run at that 4% range for
the foreseeable future.
So you have a follow-up?
Yes. On the share repurchase, is there an expiration on that? And also how do we think about the run rate in terms of repurchase? I know you guys have talked about in the near term, you guys are going to be at the pace that you guys have been in the last couple of quarters. What are the parameters on whether you guys would accelerate that or decelerate
Yes. Ken, there is no time expiration on the repurchase. It's a budget that the board allocates to management to deploy for this purpose. And so our present budget available is $8,400,000,000 And as you noted, we have talked that the share repurchase activity you've seen in the past few quarters is probably pretty representative of what you can expect going forward. So I think I'd probably just leave it at that.
I don't expect a significant change one way or the other in the size of share repurchases for the foreseeable future.
Okay. Thank you, Ken. We'll go to the next caller, please.
Our next question comes from Stacy Rasgon with Sanford Bernstein.
Hi, guys. Thanks for taking my question. I know you're talking about returning 100 percent of free cash flow less debt repayment, but it really does sound like you are prioritizing cash flow over that debt repayment. You've got about $1,500,000,000 in debt that's maturing in May. You have about $1,000,000,000 maturing every year kind of going forward.
What is your thinking around in particular that sort of short term tranche that's coming due in a few months in terms of paying off? Should we be expecting that to be refinanced? Yes. Stacy, certainly at today's interest rates, it remains very attractive to be looking at rolling over the debt. You may recall, when we initially took out the debt to acquire National Semiconductor, we had intended to repay the debt as it came due.
In fact, as we came into the middle of last year, we were seeing interest rates continuing to be at historically low levels and we decided that it made economic sense for us to go ahead and simply take on debt to capture those levels. And that's really a function of what we're talking about here. When it makes economic sense, we'll go ahead and roll over that debt to take advantage of these kinds of interest rates. And really, the metric we're using is if we can interest rates that are either below expected inflation or below our dividend yield, then it seems like that's an attractive and accretive decision on behalf of our shareholders and a safe decision on behalf of our bond holders because we're quite capable of repaying it. So as long as we continue to see very attractive interest rates, you can probably expect that we will make some allocation to rollovers.
Got it. That's helpful. And for my follow-up, just a question on the tax strategy. I just want to make sure I have the math right. So you're showing your sort of I guess this is your blended tax rate as a function of revenue.
Is this just making the assumption that as revenues grow, you're repatriating more cash at 35% and so the tax rate on this goes up? Are you doing something else around the tax strategy to minimize taxes? No. There's a couple of elements that affect the tax strategy. For example, we enjoy advanced pricing agreement with the IRS that helps us to have a more predictable expectation as to intercompany pricing and that's very important to your tax strategy and tax rate.
And we just negotiated a 6 year deal with them here recently. What that model really just assumes is that incremental profit is taxed at current statutory rate of 35%, and the current tax law remains in effect. It's quite simply, I don't know how to forecast a change in the tax law. And so if you just tax each incremental dollar of profit at 35%, you fall through with those kinds of rates that you see in the sample model I gave.
Okay. Thank you, Stacy. And we'll go to the next caller please.
And the next question is from Tore Svanberg with Stifel.
Yes. Thank you. So this capital management process has been going for a while. I mean the analytic business model has been obviously improving your cash flow every year. So I'm just wondering why now?
I mean, why sort of communicate all this all to us now? I mean, is there more confidence in the business model? Is it because you're exiting all map? Just trying to understand the timing. Well, it's a combination of those things, Troy.
It's the fact that the wireless is winding down and the cash call on that technology is going away. And it's the fact that we're now at more than 70% of our revenues coming from analog and embedded processing, which are much more stable and reliable generators of cash. And so we have reached that point in the transition of the company where we think it makes sense to go ahead and clearly articulate to our stockholders what our capital management strategy is and the fact that they can count on us returning 100 percent of our free cash flow minus any debt repayment that we engage in going forward. That's very fair. And as a follow-up, when you talk about working capital and the
inventory model being 105, 115 days, I'm wondering if you
consignment? Or should we still assume that 105 to 115 days range? Yes, Troy, that comprehends that move to consignments. Let me give a little bit more background on that. We ended last quarter at 103 days.
Keep in mind, we're still winding down the legacy wireless products. So obviously, we don't want any more inventory on those products than we absolutely need. We're also in the process of on our SBA product lines as a result of bringing that division onto our IT systems in the Q4, we've begun the process of migrating their products, their distribution related inventory to our consignment model. So that 105 days to 115 days comprehends this full transition, if you will, over time and we'd expect to probably be closer to that as we go into the future.
Okay. Thank you, Tori. And next caller please.
We go now to Craig Ellis with B. Riley Carus Investment Bank.
Hey, guys. Thanks very much. Question was asked and answered, but I appreciate the unique and helpful presentation. Okay. Thank you.
We'll go to the next caller please.
And the next caller is William Stein with SunTrust.
Great. Thanks very much for taking the question. I appreciate the useful presentation today. The one question that I have remaining is regarding your capital structure and the leverage. You have a little bit of debt outstanding.
I think the consistency of your cash flow could in fact support a more levered balance sheet and that would clearly be good for equity. I wonder what management's thoughts are on that. Yes. It's a good question, William. It's a fine balance that we have here.
Obviously, a company's ability to their capacity for debt is somewhat a function of the credit rating. In our case, we have a credit rating of A1A plus which is a very strong credit rating. And we actually think that that credit rating provides 2 very important care boats to investors. That is it shows that we're a strong company that is committed to and able to pay its obligations. And those obligations would be interest and debt repayment to debt holders and dividend obligations to our stockholders.
So while theoretically it is possible to leverage the balance sheet more, it would be at the expense of lowering our credit rating. And we happen to think that with a company of our size and our global ambitions, this is the right balance and the right mix to be at this credit rating and to manage our debt inside that rate of capacity and not exceed that capacity. That's just simply the plan that we put together and that's how we intend to operate. Fair enough. Thanks for your help.
Thank you, Will. Do you have a follow-up Will?
Okay. We'll go to the next caller please.
And the next caller is David Schwartzman with Sykes Investment Advisors.
Hi, thanks for all the clarity around this. I think you just answered my question. Earlier in the call, you had mentioned that you liked paying your debt down because you then had the ability to flex your balance sheet. And I was going to ask was that all within the current ratings? And I think your answer was yes, but That's correct.
Okay. Thank you very much. Thank you, Tim.
Okay. Well, we'll go ahead and conclude our call today. Thank you for joining us. A replay of this call is available from our website. Good day.
Ladies and gentlemen, that does conclude today's conference. Once again, we thank everyone for joining us.