Texas Instruments (TXN) 2025 — FCF Collapsed 56%, $4.6B CapEx for New Fabs

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed February 6, 2026) + Yahoo Finance

Auditor: Ernst & Young LLP — Unqualified opinion (1 critical audit matter: uncertain tax positions)

One-line verdict: Texas Instruments' F grade is driven by three mechanical fails — AR outpacing revenue for two consecutive years, FCF below 50% of net income for two years, and cash covering only 35% of $14.0B in debt — but the underlying business is recovering strongly. Revenue grew 13% to $17.7B after two years of cyclical decline, and the M-Score of -2.67 is clean. The real story is the massive capacity expansion: TXN is "nearing the end of our six-year elevated capital expenditures cycle" that consumed $4.55B in FY2025 and $4.82B in FY2024, temporarily crushing FCF from $5.9B (FY2022) to $1.3B-$2.6B. Ernst & Young flagged uncertain tax positions as their sole critical audit matter. With the CHIPS Act providing investment tax credits and direct funding, TXN is betting that its 300mm wafer fab buildout will drive long-term competitive advantage. The F grade reflects the heavy investment phase, not business deterioration.

The Analog Semiconductor Leader's Numbers

Texas Instruments is the world's largest analog semiconductor company, operating through two main segments: Analog (the dominant segment) and Embedded Processing. The 10-K notes: "About 60% of our revenue comes from customers with headquarter locations outside the United States. Revenue from end customers headquartered in China represented about 20% of our revenue in 2025, while revenue from products shipped into China represented about 50% of our revenue in 2025."

From the income statement: "Revenue $17,682 [million]" for 2025 vs "$15,641" for 2024. The 13% revenue recovery reflects the semiconductor cycle turning: the industry experienced a severe downturn in 2023-2024 and is now recovering.

Operating profit by segment: Analog $5,412M, Embedded Processing $304M, Other $307M, for a total of $6,023M vs $5,465M in FY2024. Embedded Processing is notably weak at only $304M operating profit on what was historically a larger contributor.

The gross margin decline from 68.8% (FY2022) to 57.0% (FY2025) is directly tied to the capacity expansion: "Because we own much of our manufacturing capacity, a significant portion of our operating costs is fixed. With our capacity expansions, capital expenditures and depreciation have increased." Depreciation is eating into margins while the new fabs are not yet fully loaded.

The $4.55 Billion CapEx Cycle

The defining feature of TXN's current financial profile is the massive capacity investment. From the 10-K: "Capital expenditures were $4.55 billion compared with $4.82 billion in 2024 and were primarily for semiconductor manufacturing equipment and facilities in both periods."

The 10-K provides critical forward guidance: "We are nearing the end of our six-year elevated capital expenditures cycle, and consistent with our capital management strategy, we are expecting to spend about $2 billion to $3 billion in 2026. Beyond 2026, capital expenditures will be dependent on revenue and growth expectations."

The CHIPS Act is a significant offset: "We expect to continue benefiting from the CHIPS Act, including the 35% ITC on qualifying manufacturing investments for assets placed in service after December 31, 2025, and direct funding of up to $1.6 billion for our three large-scale 300mm wafer fabs located in Sherman, Texas, and Lehi, Utah."

From the cash flow statement: "Investment tax credit (ITC) used to reduce income taxes payable" was $335M in FY2025 and $588M in FY2024. "Proceeds from CHIPS Act incentives" was $335M in FY2025.

Why this matters: The FCF fail is temporary. Once CapEx normalizes to $2-3B in 2026, FCF should rebound significantly. At FY2025 CFFO of $7.2B minus $2.5B CapEx, normalized FCF would be approximately $4.7B — well above the current $2.6B.

Inventory Strategy: 222 Days and Intentional

TXN's inventory of $4.8B ($465M raw materials + $2,372M work in process + $1,967M finished goods) represents 222 days of inventory. From the 10-K: "Inventory was $4.80 billion, an increase of $277 million from the end of 2024. Days of inventory at the end of 2025 were 222 compared with 241 at the end of 2024, which reflects the continued execution of our inventory strategy."

This is a deliberate strategy. TXN maintains high inventory levels to ensure rapid delivery to customers, differentiating itself from competitors who rely on foundry models with longer lead times. The screening engine rates inventory as "Pass" because inventory growth of 6.1% is below COGS growth of 16.1% — the company is actually improving inventory efficiency despite the high absolute level.

The Silicon Labs Acquisition: $7.5 Billion Bet

The 10-K discloses a subsequent event: "As announced on February 4, 2026, we have entered into a definitive agreement to acquire Silicon Labs for $231.00 per share in an all-cash transaction, representing a total enterprise value of approximately $7.5 billion."

Current goodwill by segment: Analog $4,158M, Embedded Processing $172M, Other $32M (after a $32M impairment in FY2025). The Silicon Labs acquisition will add substantial goodwill — the current goodwill of $4.3B (28% of equity) could roughly double.

Why this matters: TXN has historically been conservative on acquisitions. The Silicon Labs deal is the company's largest and will significantly increase balance sheet risk. The all-cash transaction will require substantial debt issuance, further pressuring the cash-to-debt ratio that already triggers a fail.

Shareholder Returns: Dividends and Buybacks

From the 10-K: "Dividends paid in 2025 were $5.00 billion compared with $4.80 billion in 2024, reflecting an increased dividend rate" of $5.52 per share. Share repurchases were $1.48B in FY2025 vs $0.93B in FY2024.

Total shareholder returns of $6.5B significantly exceeded FCF of $2.6B. The difference was funded by debt: "we received net proceeds of $1.20 billion from the issuance of fixed-rate, long-term debt." Total debt grew from $13.6B to $14.0B.

The company's stated philosophy: "free cash flow per share is the ultimate measure to generate value." As CapEx normalizes, the gap between shareholder returns and FCF should narrow.

The 18-Point Screening

Revenue Quality

A2: AR outpacing revenue for 2 years reflects the cyclical dynamics. During the downturn (FY2023-2024), revenue fell faster than receivables (customers slow-paid as orders declined). Now in recovery, AR growth is normalizing — DSO is stable at 41 days with minimal YoY change.

A3: CFFO grew in lockstep with revenue at 13.2% vs 13.0%, confirming revenue quality. From the 10-K: "Cash flows from operating activities for 2025 were $7.15 billion, an increase of $835 million primarily due to higher net income and non-cash items, partially offset by higher cash used for working capital."

Expense Quality

B3: SG&A of only 18.4% of gross profit is exceptional and reflects TXN's lean operating model. R&D was $2,083M (11.8% of revenue), SG&A was $1,860M (10.5% of revenue) — both disciplined relative to industry peers.

B4: Gross margin of 57% remains strong despite the decline from the 68.8% peak in FY2022. The compression is driven by rising depreciation from new fabs. As new capacity is utilized, margin expansion should follow.

Cash Flow Quality

C2: FCF has been suppressed by the CapEx cycle. FY2023 FCF/NI was 21%, FY2024 was 31%, FY2025 improved to 52%. With CapEx expected to drop to $2-3B in 2026, this metric should normalize.

C4: Cash of $4.9B (including $3.2B cash + $1.7B short-term investments) covers 35% of $14.0B debt. Leverage metrics are better: Debt/EBITDA of 1.7x and interest coverage of 11.3x are both healthy. The Z-Score of 9.08 confirms strong financial health.

Balance Sheet

D1: Goodwill of $4.3B is primarily from the 2011 National Semiconductor acquisition ($4.16B in Analog). The 10-K notes a $32M goodwill impairment in Other "due to a decline in the expected present value of future cash flows from certain products."

D3: Soft assets actually declined 20.7%, driven by a reduction in CHIPS Act incentives receivables from $2,246M to $1,639M as incentives were received.

M&A Risk

Beneish M-Score

All M-Score components are benign. The DEPI of 0.876 (below 1.0) indicates depreciation is growing faster than assets — consistent with new fab assets being depreciated. The SGAI of 0.917 shows SG&A is declining relative to revenue, reflecting operating leverage.

Key Risks from Item 1A

1. China exposure. "Revenue from products shipped into China represented about 50% of our revenue in 2025." The 10-K warns about "geopolitical tensions and administrative measures that affect global trade and macroeconomic conditions through the imposition of tariffs, including tariffs specific to the products that we sell, import or export restrictions, trade embargoes and sanctions."

2. Semiconductor cyclicality. Revenue declined from $20.0B (2022) to $15.6B (2024) before recovering to $17.7B — a 22% peak-to-trough swing. "We face intense technological and pricing competition in the markets in which we operate."

3. Fixed cost leverage. "Because we own much of our manufacturing capacity, a significant portion of our operating costs is fixed. With our capacity expansions, capital expenditures and depreciation have increased. In general, these fixed costs do not decline with reductions in customer demand or factory loadings, and can adversely affect profit margins as a result."

4. Silicon Labs integration risk. The $7.5B acquisition announced February 2026 is TXN's largest deal. Integration of a company focused on IoT and connectivity into TXN's analog-centric operation carries execution risk.

Altman Z-Score and F-Score

The Z-Score of 9.08 is exceptionally strong — the highest in this batch by far. It reflects TXN's strong equity base ($16.3B), high retained earnings, and solid profitability relative to total assets. The F-Score confirms extremely low fraud probability.

Summary

Grade: F. Three mechanical fails, but this is a cyclical investment story, not an accounting problem.

Texas Instruments is arguably the highest-quality business in this F-grade batch. The three fails are all explained by the same factor: the six-year, multi-billion-dollar capacity expansion that is now nearing completion.

The forward-looking risks are:

The M-Score (-2.67), Z-Score (9.08), and F-Score (0.30% fraud probability) all signal a clean, financially strong company. The F grade is a timing artifact of the investment cycle.

**Disclaimer**: This report is based on Texas Instruments' FY2025 10-K (SEC EDGAR) and public financial data. This is NOT investment advice.

Data: SEC EDGAR 10-K (Filed February 6, 2026) + Yahoo Finance

Auditor: Ernst & Young LLP (Unqualified opinion, 1 critical audit matter)