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TEXAS INSTRUMENTS INC - Annual Report: 2015 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from                         to                            

Commission File Number 1-3761

 

TEXAS INSTRUMENTS INCORPORATED

(Exact name of Registrant as specified in its charter)

 

 

Delaware

75-0289970

(State of Incorporation)

(I.R.S. Employer Identification No.)

 

 

12500 TI Boulevard, Dallas, Texas

75243

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code: 214-479-3773

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $1.00

 

The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

x

 

Accelerated filer

o

 

Non-accelerated filer

o

 

Smaller reporting company

o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $53,229,272,810 as of June 30, 2015.

1,005,257,723 (Number of shares of common stock outstanding as of February 22, 2016)

Part III hereof incorporates information by reference to the Registrant’s proxy statement for the 2016 annual meeting of stockholders.

 

 

 

 

 


 

PART I

ITEM 1.

Business.

 

We design and make semiconductors that we sell to electronics designers and manufacturers all over the world. We began operations in 1930. We are incorporated in Delaware, headquartered in Dallas, Texas, and have design, manufacturing or sales operations in more than 30 countries. We have two reportable segments: Analog and Embedded Processing. We report the results of our remaining business activities in Other. In 2015, we generated $13 billion of revenue.

 

We focus our resources on Analog and Embedded Processing because we believe that these segments’ long product life cycles, intrinsic diversity and need for less capital-intensive manufacturing provide a combination of stability, profitability and strong cash generation. This business model is the foundation of our capital management strategy, which is based on our belief that free cash flow growth is important for maximizing shareholder value over the long term. Free cash flow is cash flow from operations less capital expenditures.

 

Product information

 

Semiconductors are electronic components that serve as the building blocks inside modern electronic systems and equipment. Semiconductors, generally known as “chips,” combine multiple transistors on a single piece of material to form a complete electronic circuit. We have tens of thousands of products that are used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution. This broad portfolio includes products that are integral to almost all electronic equipment.

 

We sell catalog and application-specific standard semiconductor products, both of which we market to multiple customers. Catalog products are designed for use by many customers and/or many applications. The life cycles of catalog products generally span multiple years, with some products continuing to sell for decades after their initial release. Application-specific standard products (ASSPs) are designed for use by a smaller number of customers and are targeted to a specific application. The life cycles of ASSPs are generally determined by end-equipment upgrade cycles and can be as short as 12 to 24 months, although some can be used across multiple generations of customers’ products. We also sell custom semiconductor products, which are designed for a specific customer to use in a specific application and are sold only to that customer. The vast majority of our revenue is derived from products that are differentiated from competitors’ products. Our products are sold through distribution channels and directly to customers.

 

Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels. Our segments also reflect how management allocates resources and measures results. Additional information regarding each segment follows.

 

Analog

 

Analog generated $8.3 billion of revenue in 2015. Analog semiconductors change real-world signals, such as sound, temperature, pressure or images, by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors. Analog semiconductors also are used to manage power in every electronic device by converting, distributing, storing, discharging, isolating and measuring electrical energy, whether the device is plugged into a wall or running off a battery. Our Analog products are used in many markets, particularly personal electronics and industrial.

 

Sales of our Analog products generated about 64 percent of our revenue in 2015. According to external sources, the market for analog semiconductors was $45 billion in 2015. Our Analog segment’s revenue in 2015 was 18 percent of this fragmented market, the leading position. We believe we are well positioned to increase our market share over time.

 

Our Analog segment includes the following major product lines: High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA).

 

HVAL

These include high-volume integrated ASSPs and high-volume catalog products. HVAL products support applications like automotive safety devices, touchscreen controllers, low-voltage motor drivers and integrated motor controllers.

 

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Power

These include both catalog products and ASSPs that help customers manage power in electronic systems. Our broad portfolio of Power products is designed to enhance the efficiency of powered devices using battery management solutions, portable power devices, power supply controls and point-of-load products.

 

HPA

These include catalog products that we market to many different customers who use them in manufacturing a wide range of products. HPA products include high-speed data converters, amplifiers, sensors, high-reliability products, interface products and precision products that are typically used in systems that require high performance. HPA products generally have long life cycles, often more than 10 years.

 

SVA

These include a broad portfolio of industrial, high-voltage power management, data converter, interface and operational amplifier catalog products used in manufacturing a wide range of electronic systems. SVA products support applications like video and data interface products, high voltage power conversion, and mobile lighting and display systems. SVA products generally have long life cycles, often more than 10 years. SVA consists primarily of products that we acquired through our purchase of National Semiconductor Corporation in 2011.

 

Embedded Processing

 

Embedded Processing generated $2.8 billion of revenue in 2015. Embedded Processing products are the “brains” of many electronic devices. Embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. The devices vary from simple, low-cost products used in electric toothbrushes to highly specialized, complex devices used in automotive applications such as infotainment systems and advanced driver assistance systems (ADAS). Our Embedded Processing products are used in many markets, particularly industrial and automotive.

 

An important characteristic of our Embedded Processing products is that our customers often invest their own research and development (R&D) to write software that operates on our products. This investment tends to increase the length of our customer relationships because many customers prefer to re-use software from one product generation to the next.

 

Sales of Embedded Processing products generated about 21 percent of our revenue in 2015. According to external sources, the market for embedded processors was $18 billion in 2015. Our 15 percent share of this fragmented market is among the leaders. We believe we are well positioned to increase our market share over time.

 

Our Embedded Processing segment includes the following major product lines: Microcontrollers, Processors and Connectivity.

 

Microcontrollers

These include self-contained systems with a processor core, memory and peripherals that are designed to control a set of specific tasks for electronic equipment. Microcontrollers tend to have minimal requirements for memory and program length, with no operating system and low software complexity. Analog components that control or interface with sensors and other systems are often integrated into microcontrollers.

 

Processors

These include digital signal processors (DSPs) and applications processors. DSPs perform mathematical computations almost instantaneously to process or improve digital data. Processors are typically tailored for a specific class of applications such as industrial (factory automation or grid infrastructure) and automotive (infotainment and ADAS). They are also sold into broad industrial applications.

 

Connectivity

These include products that enable electronic devices to seamlessly connect and transfer data, and the requirements for speed, data capability, distance, power and security vary depending on the application. Our Connectivity products support many wireless technologies to meet these requirements, including low-power wireless network standards like Zigbee® and other technologies like

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Bluetooth®, WiFi and GPS. Our Connectivity products are usually designed into customer devices alongside our processor and microcontroller products, enabling data to be collected, transmitted and acted upon.

 

Other

 

We report the results of our remaining business activities in Other, which generated $1.9 billion of revenue in 2015 and includes:

 

 

·

Revenue from our smaller product lines, such as DLP® products (primarily used in projectors to create high-definition images), calculators and certain custom semiconductors known as application-specific integrated circuits (ASICs).

 

 

·

Royalties received from agreements involving license rights to our patent portfolio.

 

We also include in Other items that are not used in evaluating the results of or in allocating resources to our segments. Examples of these items include acquisition charges; restructuring charges; revenue from our legacy wireless products; and certain corporate-level items, such as litigation expenses, environmental costs, insurance settlements, and gains and losses from other activities, including asset dispositions.

 

Financial information with respect to our segments and our operations outside the United States is contained in Note 1 to the financial statements, which is included in Item 8, “Financial Statements and Supplementary Data.” Risks attendant to our foreign operations are described in Item 1A, “Risk Factors.”

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Markets for our products

The table below lists the major markets that used our products in 2015 and the estimated percentage of our 2015 revenue that the market represented. The chart also lists, in decreasing order of our revenue, the sectors within each market.

 

Markets

 

Sectors

Industrial

(31% of TI revenue)

 

Factory automation and control

Medical/healthcare/fitness

Building automation

Grid infrastructure

Test and measurement

Motor drives

Electronic point of sale

Space/avionics/defense

Display

Power delivery

Appliances

Lighting

Industrial transportation

Industrial other

 

 

 

Automotive

(15% of TI revenue)

 

Infotainment and cluster

Passive safety

ADAS

Body electronics and lighting

Hybrid/electric vehicle and powertrain

 

 

 

Personal electronics

(30% of TI revenue)

 

Mobile phones

Personal and notebook computers

TV/set-top box/audio

Storage

Printers and other peripherals

Tablets

Wearables (non-medical)

Gaming

 

 

 

Communications equipment

(13% of TI revenue)

 

Wireless infrastructure

Telecom infrastructure

Enterprise switching

Residential

 

 

 

Enterprise systems

(6% of TI revenue)

 

Projectors

Servers

High-performance computing

Multi-function printers

Thin client

 

 

 

Other (calculators, royalties and other)

(5% of TI revenue)

 

 

 

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Market characteristics

Competitive landscape

The analog and embedded processing markets are highly fragmented. As a result, we face significant global competition from dozens of large and small companies, including both broad-based suppliers and niche suppliers. Our competitors also include emerging companies, particularly in Asia, that sell products into the same markets in which we operate.

 

We believe that competitive performance in the semiconductor market generally depends on several factors, including the breadth of a company’s product line, the strength and depth of the sales network, technological innovation, product development execution, technical support, customer service, quality, reliability, price and scale. The primary competitive factors for our Analog products include design proficiency, a diverse product portfolio to meet wide-ranging customer needs, manufacturing process technologies that provide differentiated levels of performance, applications and sales support, and manufacturing expertise and capacity. The primary competitive factors for our Embedded Processing products are the ability to design and cost-effectively manufacture products, system-level knowledge about targeted end markets, installed base of software, software expertise, applications and sales support, and a product’s performance, integration and power characteristics.

 

Product cycle

The global semiconductor market is characterized by constant, though generally incremental, advances in product designs and manufacturing processes. Semiconductor prices and manufacturing costs tend to decline over time as manufacturing processes and product life cycles mature.

 

Market cycle

The “semiconductor cycle” refers to the ebb and flow of supply and demand. The semiconductor market historically has been characterized by periods of tight supply caused by strengthening demand and/or insufficient manufacturing capacity, followed by periods of surplus inventory caused by weakening demand and/or excess manufacturing capacity. These are typically referred to as upturns and downturns in the semiconductor cycle. The semiconductor cycle is affected by the significant time and money required to build and maintain semiconductor manufacturing facilities.

 

We employ several strategies to dampen the effect of the semiconductor cycle on TI. We acquire our facilities and equipment ahead of demand, which usually allows us to acquire this capacity at lower costs. We focus our resources on our Analog and Embedded Processing segments, which serve diverse markets and diverse customers. This diversity reduces our dependence on the performance of a single market or small group of customers. Additionally, we utilize consignment inventory programs with our customers and distributors.

 

Seasonality

Our revenue is subject to some seasonal variation. Historically, our semiconductor revenue growth rate tends to be weaker in the first and fourth quarters when compared to the second and third quarters. Calculator revenue is tied to the U.S. back-to-school season and is therefore at its highest in the second and third quarters.

 

Manufacturing

 

Semiconductor manufacturing begins with a sequence of photolithographic and chemical processing steps that fabricate a number of semiconductor devices on a thin silicon wafer. Each device on the wafer is packaged and tested. The entire process takes place in highly specialized facilities and requires an average of 12 weeks, with most products completing within 7 to 16 weeks.

 

The cost and lifespan of the equipment and processes we use to manufacture semiconductors vary by technology. Our Analog products and most of our Embedded Processing products can be manufactured using mature and stable, and therefore less expensive, equipment than is needed for manufacturing advanced logic products, such as some of our processor products.

 

We own and operate semiconductor manufacturing facilities in North America, Asia, Japan and Europe. These include both wafer fabrication and assembly/test facilities. Our facilities require substantial investment to construct and are largely fixed-cost assets once in operation. We own much of our manufacturing capacity; therefore, a significant portion of our operating cost is fixed and changes in factory loadings can cause short-term variations in profit margins. When factory loadings decrease, our fixed costs are spread over reduced output and, absent other circumstances, our profit margins decrease. Conversely, as factory loadings increase, our fixed costs

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are spread over increased output and, absent other circumstances, our profit margins increase. Our operating focus is more on maximizing long-term free cash flow than minimizing short-term variations in profit margins caused by factory loadings.

 

To this end, we seek to maximize long-term free cash flow by keeping capital expenditures low through opportunistic purchases of facilities and equipment ahead of demand. For example, in 2013 we purchased an assembly/test facility in Chengdu, China. In 2015 we began production at an existing facility in Dallas, Texas, that we adapted to manufacture analog products using 300-millimeter wafers, our most cost-effective manufacturing process. These activities may have near-term effects on our profit margins, but we believe they will result in long-term benefits to free cash flow.

 

We expect to maintain sufficient internal manufacturing capacity to meet the vast majority of our production needs. To supplement our manufacturing capacity and maximize our responsiveness to customer demand and return on capital, we utilize the capacity of outside suppliers, commonly known as foundries, and subcontractors. In 2015, we sourced about 20 percent of our total wafers from external foundries and about 40 percent of our assembly/test services from subcontractors.

 

Customers

 

We estimate that we sell our products to more than 100,000 customers. Our customer base is diverse, with one-third of our revenue deriving from customers outside our largest 100. Our largest single end customer in 2015 was Apple Inc. Apple accounted for approximately 11 percent of revenue, recognized primarily in our Analog segment.

 

Sales and distribution

 

We market and sell our semiconductor products through a direct sales force and distributors. We have sales or marketing offices in more than 30 countries. About 60 percent of our revenue comes through distribution channels. Our distributors maintain an inventory of our products and sell directly to a wide range of customers. They also sell products from our competitors.

 

Inventory

 

Our inventory practices differ by product, but we generally maintain inventory levels that are consistent with our expectations of customer demand. We carry proportionally more inventory of products with long life cycles and a broad customer base. Additionally, we sometimes maintain product inventory in unfinished wafer form, as well as higher finished-goods inventory of low-volume products, allowing greater flexibility in periods of high demand.

 

We generate about 55 percent of our revenue from consignment inventory programs that we have in place for our large customers and distributors. With these programs, we own inventory that is stored at our customers’ and distributors’ locations, and we recognize revenue when the product is pulled from consigned inventory. These consignment programs give us improved insight into demand, allowing us to better manage our factory loadings. About 60 percent of our distributor revenue is generated from sales of consigned inventory.

 

Backlog

 

We define backlog as of a particular date as purchase orders with a customer-requested delivery date within a specified length of time. Our backlog at any particular date may not be indicative of revenue for any future period. As customer requirements and industry conditions change, orders may be subject to cancellation or modification of terms such as pricing, quantity or delivery date. Customer order placement practices continually evolve based on customers’ individual business needs and capabilities, as well as industry supply and capacity considerations. Further, our consignment programs do not result in backlog because the order occurs at the same time as delivery, i.e., when the customer pulls the product from consigned inventory. Our backlog of orders was $0.95 billion at December 31, 2015, and $0.94 billion at December 31, 2014.

 

Acquisitions, divestitures and investments

 

From time to time we consider acquisitions and divestitures that may strengthen our business portfolio. We also make investments directly or indirectly in private companies. Investments are focused primarily on next-generation technologies and markets strategic to us.

 

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Raw materials

 

We purchase materials, parts and supplies from a number of suppliers. In some cases we purchase such items from sole source suppliers. The materials, parts and supplies essential to our business are generally available at present, and we believe that such materials, parts and supplies will be available in the foreseeable future.

 

Intellectual property

 

We own many patents, and have many patent applications pending, in the United States and other countries in fields relating to our business. We have developed a strong, broad-based patent portfolio and continually add patents to that portfolio. We also have agreements with numerous companies involving license rights to our portfolio and anticipate that other license agreements may be negotiated in the future. In general, our license agreements have multi-year terms and may be renewed after renegotiation.

Our patent portfolio is an ongoing contributor to our revenue. We do not consider our business materially dependent upon any one patent or patent license, although taken as a whole, our rights and the products made and sold under patents and patent licenses are important to our business.

 

We often participate in industry initiatives to set technical standards. Our competitors may participate in the same initiatives. Participation in these initiatives may require us to license certain of our patents to other companies on reasonable and non-discriminatory terms.

 

We own trademarks that are used in the conduct of our business. These trademarks are valuable assets, the most important of which are “Texas Instruments” and our corporate monogram. DLP® is another valuable trademark.

 

Research and development

 

Our R&D expense was $1.28 billion in 2015, compared with $1.36 billion in 2014 and $1.52 billion in 2013. Our primary areas of R&D investment are Analog and Embedded Processing products.

 

We conduct most of our R&D internally. However, we also closely engage with a wide range of third parties, including software suppliers, universities and select industry consortia, and we collaborate with our foundry suppliers on semiconductor manufacturing technology.

 

Executive officers of the Registrant

 

The following is an alphabetical list of the names and ages of the executive officers of the company and the positions or offices with the company held by each person named:

 

Name

Age

Position

Stephen A. Anderson

54

Senior Vice President

Brian T. Crutcher

43

Executive Vice President

R. Gregory Delagi

53

Senior Vice President

Kevin P. March

58

Senior Vice President and Chief Financial Officer

Kevin J. Ritchie

59

Senior Vice President

Richard K. Templeton

57

Director; Chairman of the Board; President and Chief Executive Officer

Cynthia Hoff Trochu

52

Senior Vice President, Secretary and General Counsel

Teresa L. West

55

Senior Vice President

Darla H. Whitaker

50

Senior Vice President

Bing Xie

48

Senior Vice President

 

The term of office of these officers is from the date of their election until their successor shall have been elected and qualified. All have been employees of the company for more than five years. Messrs. Anderson, Crutcher, Delagi, March, Ritchie and Templeton and Mses. West and Whitaker have served as executive officers of the company for more than five years. Ms. Trochu and Mr. Xie became executive officers of the company in 2015.

 

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Employees

 

At December 31, 2015, we had 29,977 employees.

 

Available information

 

Our Internet address is www.ti.com. Information on our web site is not a part of this report. We make available free of charge through our Investor Relations web site our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed with the SEC. Also available through the TI Investor Relations web site are reports filed by our directors and executive officers on Forms 3, 4 and 5, and amendments to those reports.

Available on our web site at www.ti.com/corporategovernance are: (i) our Corporate Governance Guidelines; (ii) charters for the Audit, Compensation, and Governance and Stockholder Relations Committees of our board of directors; (iii) our Code of Conduct; and (iv) our Code of Ethics for TI Chief Executive Officer and Senior Finance Officers. Stockholders may request copies of these documents free of charge by writing to Texas Instruments Incorporated, P.O. Box 660199, MS 8657, Dallas, Texas, 75266-0199, Attention: Investor Relations.

 

ITEM 1A.

Risk Factors.

 

You should read the following risk factors in conjunction with the factors discussed elsewhere in this and other of our filings with the Securities and Exchange Commission (SEC) and in materials incorporated by reference into these filings. These risk factors are intended to highlight certain factors that may affect our financial condition and results of operations and are not meant to be an exhaustive discussion of risks that apply to companies like TI with broad international operations. Like other companies, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate and our performance and the performance of our customers. Similarly, the price of our securities is subject to volatility due to fluctuations in general market conditions, actual financial results that do not meet our and/or the investment community’s expectations, changes in our and/or the investment community’s expectations for our future results and other factors, many of which are beyond our control.

 

We face substantial competition that requires us to respond rapidly to product development and pricing pressures.

 

We face intense technological and pricing competition in the markets in which we operate. We expect this competition will continue to increase from large competitors and from smaller competitors serving niche markets, and also from emerging companies, particularly in Asia, that sell products into the same markets in which we operate. For example, the China market is highly competitive, and both international and domestic competitors are aggressively seeking to increase their market share. Additionally, we may face increased competition as a result of China’s adoption of policies designed to promote its domestic semiconductor industry. Certain of our competitors possess sufficient financial, technical and management resources to develop and market products that may compete favorably against our products, and consolidation among our competitors may allow them to compete more effectively. Additionally, traditional intellectual property licensors are increasingly providing functionality, designs and complete hardware or software solutions that compete with our products. The price and product development pressures that result from competition may lead to reduced profit margins and lost business opportunities in the event that we are unable to match the price declines or cost efficiencies, or meet the technological, product, support, software or manufacturing advancements of our competitors.

 

Rapid technological change in markets we serve requires us to develop new technologies and products.

 

Rapid technological change in markets we serve could contribute to shortened product life cycles and a decline in average selling prices of our products. Our results of operations depend in part upon our ability to successfully develop, manufacture and market innovative products. We require significant investments to develop new technologies and products that meet changing customer demands, and we might not realize a return on our investments because they are generally made before commercial viability can be assured. Further, projects that are commercially viable may not contribute significant revenue until at least a few years after they are completed.

 

Changes in expected demand for our products could have a material adverse effect on  our results of operations.

 

Our customers include companies in a wide range of end markets and sectors within those markets. If demand in one or more sectors within our end markets declines or grows at a significantly slower pace than management expects, our results of operations may be adversely affected. Additionally, the loss or significant curtailment of purchases by one or more of our large customers, including curtailments due to a change in the design or manufacturing sourcing policies or practices of these customers, or the timing of customer or distributor inventory adjustments, may adversely affect our results of operations and financial condition.

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Our results of operations also might suffer because of a general decline in customer demand resulting from, for example: uncertainty regarding the stability of global credit and financial markets; natural events or domestic or international political, social, economic or other conditions; breaches of customer information technology systems that disrupt customer operations; or a customer’s inability to access credit markets and other sources of needed liquidity.

 

Our ability to match inventory and production with the product mix needed to fill orders may affect our ability to meet a quarter’s revenue forecast. In addition, when responding to customers’ requests for shorter shipment lead times, we manufacture products based on forecasts of customers’ demands. These forecasts are based on multiple assumptions. If we inaccurately forecast customer demand, we may hold inadequate, excess or obsolete inventory that would reduce our profit margins and adversely affect our results of operations and financial condition.

 

Our margins may vary over time.

 

Our profit margins may be adversely affected by a number of factors, including decreases in customer demand and shipment volume; obsolescence of our inventory; and shifts in our product mix. In addition, we operate in a highly competitive market environment that might adversely affect pricing for our products. Because we own much of our manufacturing capacity, a significant portion of our operating costs is fixed. 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.

 

Cyclicality in the semiconductor market may affect our performance.

 

Semiconductor products are the principal source of our revenue. The cyclical nature of the semiconductor market may lead to significant and often rapid increases and decreases in product demand. These changes could have adverse effects on our results of operations, and on the market price of our securities.

Our global operations subject us to risks associated with domestic or international political, social, economic or other conditions.

We have facilities in more than 30 countries. About 85 percent of our revenue comes from shipments to locations outside the United States; in particular, shipments of products into China typically represent a large portion of our revenue. We are exposed to political, social and economic conditions, security risks, terrorism or other hostile acts, health conditions, labor conditions, and possible disruptions in transportation, communications and information technology networks of the various countries in which we operate. Any of these could result in an adverse effect on our operations and our financial results. Additionally, in periods when the U.S. dollar significantly fluctuates in relation to the non-U.S. currencies in which we transact business, the remeasurement of non-U.S. dollar transactions can have an adverse effect on our results of operations and financial condition.

 

Our results of operations could be affected by natural events in the locations in which we operate.

 

We have manufacturing, data and design facilities and other operations in locations subject to natural occurrences such as severe weather, geological events or health epidemics that could disrupt operations. A natural disaster that results in a prolonged disruption to our operations may adversely affect our results and financial condition.

 

We face supply chain and manufacturing risks.

 

We rely on third parties to supply us with goods and services in a cost-effective and timely manner. Our access to needed goods and services may be adversely affected if our suppliers’ operations were disrupted as a result of, for example: quality excursions; uncertainty regarding the stability of global credit and financial markets; domestic or international political, social, economic and other conditions; natural events in the locations in which our suppliers operate; or limited or delayed access to key raw materials, natural resources, and utilities. Additionally, a breach of our suppliers’ information technology systems could result in a release of our confidential or proprietary information. If our suppliers are unable to access credit markets and other sources of needed liquidity, we may be unable to obtain needed supplies, collect accounts receivable or access needed technology.

 

In particular, our manufacturing processes and critical manufacturing equipment require that certain key raw materials, natural resources and utilities be available. Limited or delayed access to and high costs of these items could adversely affect our results of operations. Our products contain materials that are subject to conflict minerals reporting requirements. Our relationships with customers and suppliers may be adversely affected if we are unable to describe our products as conflict-free. Additionally, our costs may increase if one or more of our customers demands that we change the sourcing of materials we cannot identify as conflict-free.

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Our inability to timely implement new manufacturing technologies or install manufacturing equipment could adversely affect our results of operations. We subcontract a portion of our wafer fabrication and assembly and testing of our products, and we depend on third parties to provide advanced logic manufacturing process technology development. We do not have long-term contracts with all of these suppliers, and the number of alternate suppliers is limited. Reliance on these suppliers involves risks, including possible shortages of capacity in periods of high demand, suppliers’ inability to develop and deliver advanced logic manufacturing process technology in a timely, cost effective, and appropriate manner and the possibility of suppliers’ imposition of increased costs on us.

 

Our operating results and our reputation could be adversely affected by breaches of our information technology systems.

Breaches of our information technology systems could be caused by computer viruses, unauthorized access, sabotage, vandalism or terrorism. These breaches could compromise our information technology networks and could result in unauthorized release of our, our customers’ or our suppliers’ confidential or proprietary information, cause a disruption to our manufacturing and other operations, result in release of employee personal data, or cause us to incur increased information technology protection costs, any of which could adversely affect our operating results and our reputation.

 

Our performance depends in part on our ability to enforce our intellectual property rights and to develop and license new intellectual property.

 

Access to worldwide markets depends in part on the continued strength of our intellectual property portfolio. There can be no assurance that, as our business expands into new areas, we will be able to independently develop the technology, software or know-how necessary to conduct our business or that we can do so without infringing the intellectual property rights of others. To the extent that we have to rely on licensed technology from others, there can be no assurance that we will be able to obtain licenses at all or on terms we consider reasonable. The lack of a necessary license could expose us to claims for damages and/or injunction from third parties, as well as claims for indemnification by our customers in instances where we have a contractual or other legal obligation to indemnify them against damages resulting from infringement claims.

 

We actively enforce and protect our own intellectual property rights. However, there can be no assurance that our efforts will be adequate to prevent misappropriation or improper use of our protected technology. Moreover, the laws of countries where we operate may not protect our intellectual property rights to the same extent as U.S. laws.

 

We benefit from royalty revenue generated from various patent license agreements. The amount of such revenue depends in part on negotiations with new licensees, and with existing licensees in connection with renewals of their licenses. There is no guarantee that such negotiations will be successful. Future royalty revenue also depends on the strength and enforceability of our patent portfolio and our enforcement efforts, and on the sales and financial stability of our licensees. Additionally, consolidation of our licensees may negatively affect our royalty revenue. Royalty revenue from licensees is not always uniform or predictable, in part due to the performance of our licensees and in part due to the timing of new license agreements or the expiration and renewal of existing agreements.

 

Our operations could be affected by the complex laws, rules and regulations to which our business is subject.

 

We are subject to complex laws, rules and regulations affecting our domestic and international operations relating to, for example, the environment, safety and health; exports and imports; bribery and corruption; tax; data privacy and protection; labor and employment; competition; and intellectual property ownership and infringement. Compliance with these laws, rules and regulations may be onerous and expensive, and if we fail to comply or if we become subject to enforcement activity, our ability to manufacture our products and operate our business could be restricted and we could be subject to fines, penalties or other legal liability. Furthermore, should these laws, rules and regulations be amended or expanded, or new ones enacted, we could incur materially greater compliance costs or restrictions on our ability to manufacture our products and operate our business.

 

Some of these complex laws, rules and regulations – for example, those related to environmental, safety and health requirements – may particularly affect us in the jurisdictions in which we manufacture products, especially if such laws and regulations: require the use of abatement equipment beyond what we currently employ; require the addition or elimination of a raw material or process to or from our current manufacturing processes; or impose costs, fees or reporting requirements on the direct or indirect use of energy, natural resources, or materials or gases used or emitted into the environment in connection with the manufacture of our products. A substitute for a prohibited raw material or process might not be available, or might not be available at reasonable cost.

 

11


 

Our results of operations and our reputation could be affected by warranty claims, product recalls, product liability claims, or legal proceedings.

 

We could be subject to claims based on warranty, product liability, epidemic or delivery failures, or other grounds relating to our products, manufacturing, services, designs or communications that could lead to significant expenses as we defend such claims or pay damage awards or settlements. In the event of a claim, we may also incur costs if we decide to compensate the affected customer or end consumer. We maintain product liability insurance, but there is no guarantee that such insurance will be available or adequate to protect against all such claims. In addition, it is possible for one of our customers to recall a product containing a TI part. In such instances, we may incur costs and expenses relating to the recall. Costs or payments we may make in connection with warranty, epidemic failure and delivery claims, product recalls or other legal proceedings may adversely affect our results of operations and financial condition and our reputation.

 

Our results of operations could be affected by changes in tax-related matters.

 

We have facilities in more than 30 countries and as a result are subject to taxation and audit by a number of taxing authorities. Tax rates vary among the jurisdictions in which we operate. If our tax rate increases, our results of operations could be adversely affected. A number of factors could cause our tax rate to increase, including a change in the jurisdictions in which our profits are earned and taxed; a change in the mix of profits from those jurisdictions; changes in available tax credits; changes in applicable tax rates; or adverse resolution of audits by taxing authorities.

 

In addition, we are subject to laws and regulations in various jurisdictions that determine how much profit has been earned and when it is subject to taxation in that jurisdiction. Changes in these laws and regulations could affect the locations where we are deemed to earn income, which could in turn affect our results of operations. We have deferred tax assets on our balance sheet. Changes in applicable tax laws and regulations or in our business performance could affect our ability to realize those deferred tax assets, which could also affect our results of operations. Each quarter we forecast our tax liability based on our forecast of our performance for the year. If that performance forecast changes, our forecasted tax liability will change.

 

We have not made a provision for U.S. income tax on the portion of our undistributed earnings of our non-U.S. subsidiaries that is considered permanently reinvested outside the United States. If in the future we repatriate any of these foreign earnings, we might incur incremental U.S. income tax, which could affect our results of operations.

 

Our results of operations could be adversely affected by our distributors’ promotion of competing product lines or our distributors’ financial performance.

 

In 2015, about 60 percent of our revenue was generated from sales of our products through distributors. Our distributors carry competing product lines, and our sales could be affected if our distributors promote competing products over our products. Moreover, our results of operations could be affected if our distributors suffer financial difficulties that result in their inability to pay amounts owed to us.

 

Our results of operations and financial condition could be adversely affected if a customer or a distributor suffers a loss with respect to our inventory.

 

We have consignment inventory programs in place for some of our largest customers and distributors. If a customer or distributor were to experience a loss with respect to TI-consigned inventory, our results of operations and financial condition may be adversely affected if we do not recover the full value of the lost inventory from the customer, distributor or insurer, or if our recovery is delayed.

 

Our debt could affect our operations and financial condition.

 

From time to time, we issue debt securities with various interest rates and maturities. While we believe we will have the ability to service this debt, our ability to make principal and interest payments when due depends upon our future performance, which will be subject to general economic conditions, industry cycles, and business and other factors affecting our operations, including the other risk factors described under Item 1A, many of which are beyond our control. In addition, our obligation to make principal and interest payments could divert funds that otherwise would be invested in our operations or returned to shareholders, or could cause us to raise funds by, for example, issuing new debt or equity or selling assets.

 

12


 

Our results of operations and liquidity could be affected by changes in the financial markets.

 

We maintain bank accounts, one or more multi-year revolving credit agreements, and a portfolio of investments to support the financing needs of the company. Our ability to fund our operations, invest in our business, make strategic acquisitions, service our debt obligations and meet our cash return objectives depends upon continuous access to our bank and investment accounts, and may depend on access to our bank credit lines that support commercial paper borrowings and provide additional liquidity through short-term bank loans. If we are unable to access these accounts and credit lines (for example, due to instability in the financial markets), our results of operations and financial condition could be adversely affected and our ability to access the capital markets or redeem our investments could be restricted.

 

Increases in health care and pension benefit costs could affect our results of operations and financial condition.

 

Federal and state health care reform programs could increase our costs with regard to medical coverage of our employees, which could reduce profitability and affect our results of operations and financial condition. In addition, obligations related to our pension and other postretirement plans reflect assumptions that affect the planned funding and costs of these plans, including the actual return on plan assets, discount rates, plan participant population demographics and changes in pension regulations. Changes in these assumptions may affect plan funding, cash flow and results of operations, and our costs and funding obligations could increase significantly if our plans’ actual experience differs from these assumptions.

 

Our continued success depends in part on our ability to retain and recruit a sufficient number of qualified employees in a competitive environment.

 

Our continued success depends in part on the retention and recruitment of skilled personnel, including technical, marketing, management and staff personnel. There can be no assurance that we will be able to successfully retain and recruit the key personnel that we require.

 

Our ability to successfully implement business and organizational changes could affect our business plans and results of operations.

 

From time to time, we undertake business and organizational changes, including acquisitions, divestitures and restructuring actions, to support or carry out our strategic objectives. Our failure to successfully implement these changes could adversely affect our business plans and operating results. For example, we may not realize the expected benefits of an acquisition if we are unable to timely and successfully integrate acquired operations, product lines and technology, and our pre-acquisition due diligence may not identify all possible issues and risks that might arise with respect to an acquisition. Further, we may not achieve or sustain the expected growth or cost savings benefits of business and organizational changes, and restructuring charges could differ materially in amount and timing from our expectations.

 

Material impairments of our goodwill or intangible assets could adversely affect our results of operations.

 

Charges associated with impairments of our goodwill or intangible assets could adversely affect our financial condition and results of operations. Goodwill is reviewed for impairment annually or more frequently if certain impairment indicators arise or upon the disposition of a significant portion of a reporting unit. The review compares the fair value for each reporting unit to its associated book value including goodwill. A decrease in the fair value associated with a reporting unit resulting from, among other things, unfavorable changes in the estimated future discounted cash flow of the reporting unit, may require us to recognize impairments of goodwill. Most of our intangible assets are amortized over their estimated useful lives, but they are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the future undiscounted cash flows expected to result from the use of the intangible asset and its eventual disposition is less than the carrying amount of the asset, we would recognize an impairment loss to the extent the carrying amount of the asset exceeds its fair value.

ITEM 1B.

Unresolved Staff Comments.

Not applicable.

13


 

ITEM 2.

Properties. 

Our principal executive offices are located at 12500 TI Boulevard, Dallas, Texas. The following table indicates the general location of our principal manufacturing and design operations and the reportable segments that make major use of them. Except as otherwise indicated, we own these facilities.

 

 

 

Analog

 

Embedded

Processing

Dallas, Texas

 

X

 

X

Sherman, Texas

 

X

 

 

Houston, Texas

 

 

 

X

Tucson, Arizona*

 

X

 

 

Santa Clara, California

 

X

 

 

South Portland, Maine

 

X

 

 

Aguascalientes, Mexico*

 

X

 

 

Aizu, Japan

 

X

 

X

Miho, Japan

 

X

 

X

Chengdu, China

 

X

 

X

Shanghai, China*

 

X

 

X

Bangalore, India

 

X

 

X

Kuala Lumpur, Malaysia

 

X

 

X

Melaka, Malaysia

 

X

 

 

Baguio, Philippines

 

X

 

X

Pampanga (Clark), Philippines

 

X

 

X

Taipei, Taiwan

 

X

 

X

Freising, Germany

 

X

 

X

Greenock, Scotland

 

X

 

 

 

*

Leased.

Portions of the facilities are leased and owned.  This may include land leases, particularly for our non-U.S. sites.

 

Our facilities in the United States contained approximately 13.7 million square feet at December 31, 2015, of which approximately 1.2 million square feet were leased. Our facilities outside the United States contained approximately 10.2 million square feet at December 31, 2015, of which approximately 1.6 million square feet were leased.

 

At the end of 2015, we occupied substantially all of the space in our facilities.

 

Leases covering our currently occupied leased facilities expire at varying dates generally within the next five years. We believe our current properties are suitable and adequate for both their intended purpose and our current and foreseeable future needs.

 

ITEM 3.

Legal Proceedings.

We are involved in various inquiries and proceedings that arise in the ordinary course of our business. We believe that the amount of our liability, if any, will not have a material adverse effect upon our financial condition, results of operations or liquidity.

ITEM 4.

Mine Safety Disclosures.

Not applicable.

 

 

14


 

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The information concerning the number of stockholders of record at December 31, 2015, is contained in Item 6, “Selected Financial Data.”

Common stock prices and dividends

TI common stock is listed on The NASDAQ Global Select Market.  The table below shows the high and low closing prices of TI common stock as reported by Bloomberg L.P. and the dividends paid per common share in each quarter during the past two years.

 

 

 

 

 

Quarter

 

 

 

 

 

1st

 

 

2nd

 

 

3rd

 

 

4th

 

Stock prices:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

High

 

$

59.94

 

 

$

58.73

 

 

$

52.08

 

 

$

58.98

 

 

 

Low

 

 

51.78

 

 

 

51.51

 

 

 

43.52

 

 

 

48.44

 

2014

 

High

 

 

47.16

 

 

 

48.47

 

 

 

49.29

 

 

 

55.62

 

 

 

Low

 

 

40.89

 

 

 

44.89

 

 

 

45.67

 

 

 

41.93

 

Dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

$

0.34

 

 

$

0.34

 

 

$

0.34

 

 

$

0.38

 

2014

 

 

 

 

0.30

 

 

 

0.30

 

 

 

0.30

 

 

 

0.34

 

 

Issuer purchases of equity securities

The following table contains information regarding our purchases of our common stock during the fourth quarter of 2015.

 

 

 

 

 

 

 

 

 

 

 

 

Total Number

 

 

 

Approximate

 

 

 

 

 

 

 

 

 

 

 

 

of Shares

 

 

 

Dollar Value

 

 

 

 

 

 

 

 

 

 

 

 

Purchased as

 

 

 

of Shares that

 

 

 

 

 

 

 

 

 

 

 

 

Part of

 

 

 

May Yet Be

 

 

 

Total

 

 

 

 

 

 

 

Publicly

 

 

 

Purchased

 

 

 

Number of

 

 

 

Average

 

 

Announced

 

 

 

Under the

 

 

 

Shares

 

 

 

Price Paid

 

 

Plans or

 

 

 

Plans or

 

Period

 

Purchased

 

 

 

per Share

 

 

Programs (1)

 

 

 

Programs (1)

 

October 1, 2015 through October 31, 2015

 

 

8,220,390

 

 

 

$

52.16

 

 

 

8,220,390

 

 

 

$

8.13 billion

 

November 1, 2015 through November 30, 2015

 

 

3,028,345

 

 

 

 

57.09

 

 

 

3,028,345

 

 

 

 

7.96 billion

 

December 1, 2015 through December 31, 2015

 

 

458,008

 

 

 

 

55.41

 

 

 

458,008

 

 

 

 

7.93 billion

 

Total

 

 

11,706,743

(2)

 

 

$

53.56

 

 

 

11,706,743

(2)

 

 

$

7.93 billion

(3)

 

(1)

All purchases during the quarter were made under the authorization from our board of directors to purchase up to $5.0 billion of additional shares of TI common stock announced on February 21, 2013. On September 17, 2015, our board of directors authorized the purchase of an additional $7.5 billion of our common stock. No expiration date has been specified for these authorizations.

(2)

All purchases during the quarter were open-market purchases.

(3)

As of December 31, 2015, this amount consisted of the remaining portion of the $5.0 billion authorized in February 2013 and the $7.5 billion authorized in September 2015.


15


 

ITEM 6.

Selected Financial Data. 

 

 

 

For Years Ended December 31,

 

(Millions of dollars, except share and per-share amounts)

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

Cash flow data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

$

4,268

 

 

$

3,892

 

 

$

3,384

 

 

$

3,414

 

 

$

3,256

 

Capital expenditures

 

 

551

 

 

 

385

 

 

 

412

 

 

 

495

 

 

 

816

 

Free cash flow (a)

 

 

3,717

 

 

 

3,507

 

 

 

2,972

 

 

 

2,919

 

 

 

2,440

 

Dividends paid

 

 

1,444

 

 

 

1,323

 

 

 

1,175

 

 

 

819

 

 

 

644

 

Stock repurchases

 

 

2,741

 

 

 

2,831

 

 

 

2,868

 

 

 

1,800

 

 

 

1,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income statement data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analog

 

 

8,339

 

 

 

8,104

 

 

 

7,194

 

 

 

6,998

 

 

 

6,375

 

Embedded Processing

 

 

2,787

 

 

 

2,740

 

 

 

2,450

 

 

 

2,257

 

 

 

2,381

 

Other

 

 

1,874

 

 

 

2,201

 

 

 

2,561

 

 

 

3,570

 

 

 

4,979

 

Revenue

 

 

13,000

 

 

 

13,045

 

 

 

12,205

 

 

 

12,825

 

 

 

13,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

7,560

 

 

 

7,427

 

 

 

6,364

 

 

 

6,368

 

 

 

6,772

 

Operating expenses (R&D and SG&A)

 

 

3,028

 

 

 

3,201

 

 

 

3,380

 

 

 

3,681

 

 

 

3,353

 

Acquisition charges

 

 

329

 

 

 

330

 

 

 

341

 

 

 

450

 

 

 

315

 

Restructuring charges/other

 

 

(71

)

 

 

(51

)

 

 

(189

)

 

 

264

 

 

 

112

 

Operating profit

 

 

4,274

 

 

 

3,947

 

 

 

2,832

 

 

 

1,973

 

 

 

2,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,986

 

 

$

2,821

 

 

$

2,162

 

 

$

1,759

 

 

$

2,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a result of accounting rule ASC 260, which requires a portion of Net income to be allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents, diluted earnings per share (EPS) is calculated using the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,986

 

 

$

2,821

 

 

$

2,162

 

 

$

1,759

 

 

$

2,236

 

Income allocated to RSUs

 

 

(42

)

 

 

(43

)

 

 

(36

)

 

 

(31

)

 

 

(34

)

Income allocated to common shares for diluted EPS

 

$

2,944

 

 

$

2,778

 

 

$

2,126

 

 

$

1,728

 

 

$

2,202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average diluted shares outstanding, in millions

 

 

1,043

 

 

 

1,080

 

 

 

1,113

 

 

 

1,146

 

 

 

1,171

 

Diluted earnings per common share

 

$

2.82

 

 

$

2.57

 

 

$

1.91

 

 

$

1.51

 

 

$

1.88

 

Cash dividends declared per common share

 

$

1.40

 

 

$

1.24

 

 

$

1.07

 

 

$

0.72

 

 

$

0.56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Free cash flow is a non-GAAP measure derived by subtracting Capital expenditures from Cash flows from operating activities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

(Millions of dollars, except Other data items)

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

3,218

 

 

$

3,541

 

 

$

3,829

 

 

$

3,965

 

 

$

2,935

 

Total assets (b)

 

 

16,230

 

 

 

17,372

 

 

 

18,554

 

 

 

19,565

 

 

 

19,901

 

Current portion of long-term debt and commercial paper

   borrowings

 

 

1,000

 

 

 

1,001

 

 

 

1,000

 

 

 

1,500

 

 

 

1,381

 

Long-term debt (b)

 

 

3,120

 

 

 

3,630

 

 

 

4,145

 

 

 

4,175

 

 

 

4,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data – Number of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees

 

 

29,977

 

 

 

31,003

 

 

 

32,209

 

 

 

34,151

 

 

 

34,759

 

Stockholders of record

 

 

15,563

 

 

 

16,361

 

 

 

17,213

 

 

 

18,128

 

 

 

19,733

 

 

(b) Prior periods reclassified to conform to the 2015 presentation, having adopted certain accounting standards. See Note 2.

See Notes to the financial statements and Management’s discussion and analysis of financial condition and results of operations.

 

 

16


 

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

Overview

We design, make and sell semiconductors to electronics designers and manufacturers all over the world. Our business model is carefully constructed around the following attributes:

 

·

Industry’s broadest portfolio of differentiated analog and embedded processing semiconductors. Our customers’ design engineers need at least one, and most times multiple, chips for their systems. The breadth of our portfolio means we can solve more of these needs than can our competitors, which gives us access to more customers and the opportunity to generate more revenue per system. We invest more than $1 billion each year to develop new products for our portfolio.

 

·

A strong foundation of manufacturing technology and low-cost production. We invest in manufacturing technologies that differentiate the features of our semiconductors, and we do most of our own production in-house, as opposed to outsourcing it. This ability to directly control our manufacturing helps ensure a consistent supply of products for our customers. We produce billions of semiconductors each year on a mixture of 150-, 200- and 300-millimeter wafers, and we are able to keep costs low for manufacturing facilities and equipment because our analog and much of our embedded processing semiconductors can be made using mature assets that we acquire ahead of demand when their prices are most attractive. In 2015, we produced approximately 25 percent of our Analog semiconductors on 300-millimeter wafers, the industry’s largest wafers, which have a 40 percent cost advantage per unpackaged chip over 200-millimeter wafers. The majority of our future Analog growth will be produced on 300-millimeter wafers, which will be meaningful to the growth of our margins and cash flow over the long term.

 

·

Industry’s largest market channels. Our global sales force is larger than those of our competitors, and the breadth of our portfolio attracts tens of millions of visits to our web site each year where customers often begin their initial product searches and design-in journey. These capabilities combine to provide us unique access to more than 100,000 customers.

 

·

Diversity and longevity in our products and in the markets we serve. The attributes above result in diverse and long-lived positions that deliver high terminal value to our shareholders. Because of the breadth of our portfolio we are not dependent on any single product, and because of the breadth of our markets we are not dependent on any single application or customer. Some of our products generate revenue for decades, which strengthens the return on our investments.

The combined effect of these attributes is that we have consistently grown free cash flow and gained market share in Analog and Embedded Processing. These attributes put us in a unique class of companies with the ability to grow, generate cash, and return that cash to shareholders. 

Management’s discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. In the following discussion of our results of operations:

 

·

All dollar amounts in the tables are stated in millions of U.S. dollars.

 

·

When we discuss our results:

 

o

Unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are evidenced by fluctuations in shipment volumes.

 

o

New products tend not to have a significant impact on our revenue in any given period because we sell such a large number of products.

 

o

From time to time, our revenue and gross profit are affected by changes in demand for higher-priced or lower-priced products, which we refer to as changes in the “mix” of products shipped.

 

o

Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed.  When factory loadings decrease, our fixed costs are spread over reduced output and, absent other circumstances, our profit margins decrease. Conversely, as factory loadings increase, our fixed costs are spread over increased output and, absent other circumstances, our profit margins increase. Increases and decreases in factory loadings tend to correspond to increases and decreases in demand.

 

o

The term “legacy wireless products” refers to our baseband products, OMAPTM applications processors and connectivity products sold into smartphones and consumer tablets. Our exit from legacy wireless products was complete in 2013.

17


 

 

·

Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels, and how management allocates resources and measures results. See Note 1 to the financial statements for more information regarding our segments. 

Results of operations

We continued to perform well in 2015, reflecting our focus on Analog and Embedded Processing semiconductors. These products serve highly diverse markets with thousands of applications, and we believe have dependable long-term growth opportunities. In 2015, Analog and Embedded Processing represented 86 percent of revenue, up from 83 percent in 2014. Gross margin of 58.2 percent for the year, a new record, reflects the quality of our product portfolio, as well as the efficiency of our manufacturing strategy.

Our focus on Analog and Embedded Processing allows us to generate strong cash flow from operations. In 2015, free cash flow, also a record, was 28.6 percent of revenue, up from 26.9 percent a year ago and consistent with our targeted range of 20-30 percent of revenue. During the year, we returned $4.2 billion of cash to investors through a combination of stock repurchases and dividends. Free cash flow is a non-GAAP financial measure. For a reconciliation to GAAP and an explanation of the reason for providing this non-GAAP measure, see the Non-GAAP financial information section after the Liquidity and capital resources section.

Details of financial results – 2015 compared with 2014

Revenue of $13.00 billion was about even with 2014, as higher revenue from Analog and Embedded Processing was offset by lower revenue from Other. Our 2015 revenue was negatively affected by about $150 million from changes in foreign currency exchange rates.

Gross profit was $7.56 billion, an increase of $133 million, or 2 percent, due to lower manufacturing costs. Gross profit margin was 58.2 percent of revenue compared with 56.9 percent.

Operating expenses were $1.28 billion for R&D and $1.75 billion for SG&A. R&D expense decreased $78 million, or 6 percent, and SG&A decreased $95 million, or 5 percent. Both comparisons reflect savings from ongoing efforts across the company to align costs with growth opportunities, including the completed restructuring actions in Embedded Processing and Japan. These decreases were partially offset by higher compensation-related costs.

Acquisition charges were related to our 2011 acquisition of National Semiconductor and were $329 million, about even with 2014. These non-cash charges were primarily from the amortization of intangible assets. See Note 13 to the financial statements.

Restructuring charges/other was a net credit of $71 million, which included gains on sales of assets of $83 million that were partially offset by $12 million related to restructuring charges and other credits. This compared with a net credit of $51 million in 2014, reflecting gains on sales of assets of $75 million that were partially offset by restructuring charges and other expenses of $24 million. These amounts are included in Other for segment reporting purposes. See Note 3 to the financial statements.

Operating profit was $4.27 billion, or 32.9 percent of revenue, compared with $3.95 billion, or 30.3 percent of revenue.

The income tax provision was $1.23 billion compared with $1.05 billion. The increase in the total tax provision was due to higher income before income taxes and, to a lesser extent, a lower benefit from non-U.S. effective tax rates. Our annual effective tax rate was 29 percent in 2015 and 27 percent in 2014. See Note 6 to the financial statements for a reconciliation of the income tax provision to the statutory federal tax.

Net income was $2.99 billion, an increase of $165 million, or 6 percent. EPS was $2.82 compared with $2.57. EPS benefited $0.07 due to a lower number of average shares outstanding as a result of our stock repurchase program.

In the near term, for the first quarter of 2016, we expect about a $150 million decline in revenue from the first quarter of 2015 within a sector of the personal electronics market.

18


 

Segment results – 2015 compared with 2014

Analog (includes High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA) product lines)

 

 

 

2015

 

 

2014

 

 

Change

 

Revenue

 

$

8,339

 

 

$

8,104

 

 

 

3

%

Operating profit

 

 

3,048

 

 

 

2,786

 

 

 

9

%

Operating profit % of revenue

 

 

36.6

%

 

 

34.4

%

 

 

 

 

 

Analog revenue increased primarily due to HVAL. Power and SVA also grew, but to a lesser extent. HPA declined due to the mix of products shipped. Operating profit increased due to higher revenue and associated gross profit and, to a lesser extent, lower manufacturing costs.

Embedded Processing (includes Microcontrollers, Processors and Connectivity product lines)

 

 

 

2015

 

 

2014

 

 

Change

 

Revenue

 

$

2,787

 

 

$

2,740

 

 

 

2

%

Operating profit

 

 

596

 

 

 

384

 

 

 

55

%

Operating profit % of revenue

 

 

21.4

%

 

 

14.0

%

 

 

 

 

 

Embedded Processing revenue increased due about equally to Connectivity and Microcontrollers, which together offset a decline in Processors. Operating profit increased primarily due to lower operating expenses.

Other (includes DLP products, calculators, custom ASICs and royalties)

 

 

 

2015

 

 

2014

 

 

Change

 

Revenue

 

$

1,874

 

 

$

2,201

 

 

 

(15

)%

Operating profit*

 

 

630

 

 

 

777

 

 

 

(19

)%

Operating profit % of revenue

 

 

33.6

%

 

 

35.3

%

 

 

 

 

 

*Includes Acquisition charges and Restructuring charges/other

 

Other revenue declined primarily due to custom ASICs. Revenue from DLP products also declined, but to a lesser extent. Operating profit declined primarily due to lower revenue and associated gross profit.

Prior results of operations

In 2014, Analog revenue grew 13 percent and Embedded Processing revenue grew 12 percent. Gross margin of 56.9 percent for 2014 reflected the diversity and longevity of our product portfolio, as well as the efficiency of our manufacturing strategy. In 2014, free cash flow was 26.9 percent of revenue, up from 24.4 percent in 2013. During 2014, we returned $4.2 billion of cash to investors through a combination of stock repurchases and dividends.

Details of financial results – 2014 compared with 2013

Revenue was $13.05 billion, up $840 million, or 7 percent, from 2013 due to higher revenue from Analog and Embedded Processing. These increases more than offset lower revenue from legacy wireless products.

Gross profit was $7.43 billion, an increase of $1.06 billion, or 17 percent, from 2013 primarily due to higher revenue and, to a lesser extent, the mix of products shipped. Gross profit margin was 56.9 percent of revenue compared with 52.1 percent in 2013.

Operating expenses were $1.36 billion for R&D and $1.84 billion for SG&A. R&D expense decreased $164 million, or 11 percent, from 2013 primarily due to savings from ongoing efforts across the company to align costs with growth opportunities, including the wind-down of our legacy wireless products and restructuring actions in Embedded Processing and Japan. SG&A expense was about even, as higher variable compensation costs were offset by savings from our cost alignment efforts.

Acquisition charges were related to our 2011 acquisition of National Semiconductor and were $330 million compared with $341 million in 2013. The charges were primarily from the amortization of intangible assets.

19


 

Restructuring charges/other was a net credit of $51 million, which included gains on sales of assets of $75 million that were partially offset by restructuring charges and other expenses of $24 million. This compared with a net credit of $189 million in 2013, reflecting a $315 million gain from our transfer of wireless connectivity technology to a customer that was partially offset by restructuring charges of $126 million.

Operating profit was $3.95 billion, or 30.3 percent of revenue, compared with $2.83 billion, or 23.2 percent, in 2013.

The income tax provision was $1.05 billion compared with $592 million in 2013. The increase in the total tax provision was due to higher income before income taxes and, to a lesser extent, the effect of the retroactive reinstatement of the federal research tax credit for 2012 in 2013. Our annual effective tax rate was 27 percent in 2014 and 24 percent in 2013.

Net income was $2.82 billion, an increase of $659 million, or 30 percent, from 2013. EPS was $2.57 compared with $1.91 in 2013. EPS benefited $0.07 from 2013 due to a lower number of average shares outstanding as a result of our stock repurchase program.

Segment results – 2014 compared with 2013

Analog

 

 

 

2014

 

 

2013

 

 

Change

 

Revenue

 

$

8,104

 

 

$

7,194

 

 

 

13

%

Operating profit

 

 

2,786

 

 

 

1,859

 

 

 

50

%

Operating profit % of revenue

 

 

34.4

%

 

 

25.8

%

 

 

 

 

 

Analog revenue increased in all products lines. Revenue from Power grew the most, followed by revenue from, in decreasing order, HPA, HVAL and SVA. Operating profit increased primarily due to higher revenue and associated gross profit.

Embedded Processing

 

 

 

2014

 

 

2013

 

 

Change

 

Revenue

 

$

2,740

 

 

$

2,450

 

 

 

12

%

Operating profit

 

 

384

 

 

 

185

 

 

 

108

%

Operating profit % of revenue

 

 

14.0

%

 

 

7.6

%

 

 

 

 

 

Embedded Processing revenue increased primarily due to Microcontrollers and Processors, which contributed about equally to the increase. Connectivity increased to a lesser extent. Revenue from Processors increased as a result of the mix of products shipped. Operating profit increased primarily due to higher revenue and associated gross profit.

Other

 

 

 

2014

 

 

2013

 

 

Change

 

Revenue

 

$

2,201

 

 

$

2,561

 

 

 

(14

)%

Operating profit*

 

 

777

 

 

 

788

 

 

 

(1

)%

Operating profit % of revenue

 

 

35.3

%

 

 

30.8

%

 

 

 

 

 

*Includes Acquisition charges and Restructuring charges/other

 

Other revenue decreased due to legacy wireless products. Operating profit was about even as reductions in operating expenses were offset by changes in Restructuring charges/other.

Financial condition

At the end of 2015, total cash (Cash and cash equivalents plus Short-term investments) was $3.22 billion, a decrease of $323 million from the end of 2014.

Accounts receivable were $1.17 billion at the end of 2015. This was a decrease of $81 million compared with the end of 2014. Days sales outstanding were 33 at the end of 2015 compared with 34 at the end of 2014.

20


 

Inventory was $1.69 billion at the end of 2015. This was a decrease of $93 million from the end of 2014. Days of inventory at the end of 2015 were 115 compared with 117 at the end of 2014.

Liquidity and capital resources

Our primary source of liquidity is cash flow from operations. Additional sources of liquidity are Cash and cash equivalents, Short-term investments and a variable rate revolving credit facility. Cash flows from operating activities for 2015 was $4.27 billion, an increase of $376 million from 2014 primarily due to an increase in cash provided by working capital.

Our revolving credit facility is with a consortium of investment-grade banks and allows us to borrow up to $2 billion until March 2020. This credit facility also serves as support for the issuance of commercial paper. As of December 31, 2015, our credit facility was undrawn, and we had no commercial paper outstanding.

In 2015, investing activities used $302 million compared with $377 million in 2014. For 2015, Capital expenditures were $551 million compared with $385 million in 2014. Capital expenditures in both periods were primarily for semiconductor manufacturing equipment. In 2015, we had sales of short-term investments, net of purchases, that provided cash of $125 million. In comparison, in 2014 we had purchases of short-term investments, net of sales, that used cash of $141 million. In addition, we had proceeds from sales of assets of $110 million in 2015 compared with $142 million in 2014.

In 2015, financing activities used $4.17 billion compared with $3.94 billion in 2014. In both 2015 and 2014, we received proceeds of $498 million from the issuance of fixed-rate long-term debt (net of original issuance discount) and repaid $1.00 billion of maturing debt. Dividends paid in 2015 were $1.44 billion compared with $1.32 billion in 2014, reflecting increases in the dividend rate. During 2015, the quarterly dividend increased from $0.34 to $0.38 per share, resulting in an annualized dividend payment of $1.52 per share. During 2014, we increased our quarterly dividend from $0.30 to $0.34 per share. In 2015, we used $2.74 billion to repurchase 51.4 million shares of our common stock. This compared with $2.83 billion used in 2014 to repurchase 61.7 million shares. Employee exercises of stock options are also reflected in Cash flows from financing activities. In 2015, these exercises provided cash proceeds of $442 million compared with $616 million in 2014.

We had $1.00 billion of Cash and cash equivalents and $2.22 billion of Short-term investments as of December 31, 2015, with our U.S. entities owning about 80 percent of these amounts combined at the end of 2015. We believe we have the necessary financial resources and operating plans to fund our working capital needs, capital expenditures, dividend and debt-related payments, and other business requirements for at least the next 12 months.

Non-GAAP financial information

This MD&A includes references to free cash flow and ratios based on that measure. These are financial measures that were not prepared in accordance with generally accepted accounting principles in the United States (GAAP). Free cash flow was calculated by subtracting Capital expenditures from the most directly comparable GAAP measure, Cash flows from operating activities (also referred to as cash flow from operations). We believe that free cash flow and the associated ratios provide insight into our liquidity, our cash-generating capability and the amount of cash potentially available to return to investors, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures. Reconciliation to the most directly comparable GAAP-based measures is provided in the table below.

 

 

 

For Years Ended

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

2013

 

Cash flow from operations (GAAP)

 

$

4,268

 

 

$

3,892

 

 

$

3,384

 

Capital expenditures

 

 

(551

)

 

 

(385

)

 

 

(412

)

Free cash flow (non-GAAP)

 

$

3,717

 

 

$

3,507

 

 

$

2,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

13,000

 

 

$

13,045

 

 

$

12,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from operations as a percent of revenue (GAAP)

 

 

32.8

%

 

 

29.8

%

 

 

27.7

%

Free cash flow as a percent of revenue (non-GAAP)

 

 

28.6

%

 

 

26.9

%

 

 

24.4

%

 

21


 

Long-term contractual obligations

 

 

 

Payments Due by Period

 

Contractual Obligations

 

2016

 

 

2017/2018

 

 

2019/2020

 

 

Thereafter

 

 

Total

 

Long-term debt obligations (a)

 

$

1,083

 

 

$

1,224

 

 

$

1,312

 

 

$

782

 

 

$

4,401

 

Operating lease obligations (b)

 

 

69

 

 

 

90

 

 

 

40

 

 

 

62

 

 

 

261

 

Software license obligations (c)

 

 

30

 

 

 

2

 

 

 

 

 

 

 

 

 

32

 

Purchase obligations (d)

 

 

95

 

 

 

94

 

 

 

50

 

 

 

1

 

 

 

240

 

Deferred compensation plan (e)

 

 

13

 

 

 

39

 

 

 

35

 

 

 

82

 

 

 

169

 

Total (f)

 

$

1,290

 

 

$

1,449

 

 

$

1,437

 

 

$

927

 

 

$

5,103

 

 

(a) Includes the related interest payments and amounts classified as the current portion of long-term debt, specifically obligations that will mature within 12 months.

(b) Includes minimum payments for leased facilities and equipment and purchases of industrial gases under contracts accounted for as operating leases.

(c) Includes payments under license agreements for electronic design automation software.

(d) Includes contractual arrangements with suppliers where there is a fixed, non-cancellable payment schedule or minimum payments due with a reduced delivery schedule. Excluded from the table are cancellable arrangements. However, depending on when certain purchase arrangements may be cancelled, an additional $4 million of cancellation penalties may be required to be paid, which are not reflected in the table.

(e) Includes an estimate of payments under this plan for the liability that existed at December 31, 2015.

(f) Excluded from the table are $84 million of uncertain tax liabilities under ASC 740, as well as any planned future funding contributions to retirement benefit plans. Amounts associated with uncertain tax liabilities have been excluded because of the difficulty in making reasonably reliable estimates of the timing of cash settlements with the respective taxing authorities. Regarding future funding of retirement benefit plans, we plan to contribute about $100 million in 2016, but funding projections beyond 2016 are not practical to estimate due to the rules affecting tax-deductible contributions and the impact from the plans’ asset performance, interest rates and potential U.S. and non-U.S. legislation.

Critical accounting policies

In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we use statistical analyses, estimates and projections that affect the reported amounts and related disclosures and may vary from actual results. We consider the following accounting policies to be those that are most important to the portrayal of our financial condition and that require the most subjective judgment. If actual results differ significantly from management’s estimates and projections, there could be a significant effect on our financial statements.

Revenue recognition

We recognize revenue from sales of our products, including direct sales to our distributors, when title and risk of loss pass, which usually occurs upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order; when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. For sales to distributors, payment is due on our standard commercial terms and is not contingent upon resale of the products.

We recognize revenue net of allowances, which are management’s estimates of future credits to be granted to customers or distributors under programs common in the semiconductor industry. These allowances are based on analysis of historical data, current economic conditions and contractual terms, and are recorded when revenue is recognized. Allowances may include volume-based incentives, product returns due to quality issues, incentives designed to maximize growth opportunities and special pricing arrangements. For instance, we sell to distributors at standard published prices, but we may grant them price adjustment credits in response to individual competitive opportunities. To estimate allowances, we use statistical percentages of revenue, which are determined quarterly based upon recent historical adjustment trends. Historical claims data are maintained for each of the programs, with differences among geographic regions taken into consideration. We continually monitor the actual claimed allowances against our estimates, and we adjust our estimates as appropriate to reflect trends in distributor revenue and inventory levels. Allowances are also adjusted when recent historical data do not represent anticipated future activity.

We may also provide distributors an allowance to scrap certain slow-selling or obsolete products in their inventory, estimated as a negotiated fixed percentage of each distributor’s purchases from us. In addition, if we publish a new price for a product that is lower than that paid by distributors for the same product still remaining in each distributor’s on-hand inventory, we may credit them for the

22


 

difference between those prices. The allowance for this type of credit is based on the identified product price difference applied to our estimate of each distributor’s on-hand inventory of that product.

We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner.

Revenue from sales of our products that are subject to inventory consignment agreements, including consignment arrangements with distributors, is recognized in accordance with the principles discussed above, but delivery occurs when the customer or distributor pulls product from consignment inventory that we store at designated locations.

We determine the amount and timing of royalty revenue related to licenses of our patent portfolio based on our contractual agreements with licensees. We recognize royalty revenue when earned under the terms of the agreements and when we consider realization of payment to be probable.

In addition, we record allowances for accounts receivable that we estimate may not be collected. We monitor collectability of accounts receivable primarily through review of the accounts receivable aging. When collection is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. We include amounts received from customers for reimbursement of shipping fees in revenue. We include the costs of shipping and handling in COR.

Income taxes

In determining Net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax provisions and the resultant tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense.

In the ordinary course of global business, there may be many transactions and calculations where the ultimate tax outcome is uncertain. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.

As part of our financial process, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to be ultimately recoverable. In this process, certain relevant criteria are evaluated including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior years that can be used to absorb net operating losses and credit carrybacks, and taxable income in future years. Our judgment regarding future recoverability of our deferred tax assets based on these criteria may change due to various factors, including changes in U.S. or international tax laws and changes in market conditions and their impact on our assessment of taxable income in future periods. These changes, if any, may require material adjustments to the deferred tax assets and an accompanying reduction or increase in Net income in the period when such determinations are made. Also, our plans for the permanent reinvestment or eventual repatriation of the accumulated earnings of certain of our non-U.S. operations could change. Such changes could have a material effect on tax expense in future years.

In addition to the factors described above, the effective tax rate reflected in forward-looking statements is based on then-current tax law. Significant changes in tax law enacted during the year could affect these estimates. Retroactive changes in tax law enacted subsequent to the end of a reporting period are reflected in the period of enactment as a discrete tax item.

Inventory valuation allowances

Inventory is valued net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. Statistical allowances are determined quarterly for raw materials and work-in-process based on historical disposals of inventory for salability and obsolescence reasons. For finished goods, quarterly statistical allowances are determined by comparing inventory levels of individual parts to historical shipments, current backlog and estimated future sales in order to identify inventory judged unlikely to be sold. A specific allowance for each material type will be carried if there is a significant event not captured by the statistical allowance. Examples are an end-of-life part or demand with imminent risk of cancellation.  Allowances are also calculated quarterly for instances where inventoried costs for individual products are in excess of market prices for those products. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and other factors.

23


 

Changes in accounting standards

See Note 2 to the financial statements for information on new accounting standards.

Off-balance sheet arrangements

As of December 31, 2015, we had no significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Commitments and contingencies

See Note 12 to the financial statements for a discussion of our commitments and contingencies.

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Foreign exchange risk

The U.S. dollar is the functional currency for financial reporting. Our non-U.S. entities own assets or liabilities denominated in U.S. dollars or other currencies. Exchange rate fluctuations can have a significant impact on taxable income in those jurisdictions, and consequently on our effective tax rate.

Our balance sheet also reflects amounts remeasured from non-U.S. dollar currencies. Because most of the aggregate non-U.S. dollar balance sheet exposure is hedged by forward currency exchange contracts, based on year-end 2015 balances and currency exchange rates, a hypothetical 10 percent plus or minus fluctuation in non-U.S. currency exchange rates relative to the U.S. dollar would result in a pre-tax currency exchange gain or loss of less than $1 million.

We use these forward currency exchange contracts to reduce the earnings impact exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. For example, at year-end 2015, we had forward currency exchange contracts outstanding with a notional value of $464 million to hedge net balance sheet exposures (including $175 million to sell Japanese yen and $139 million to sell euros). Similar hedging activities existed at year-end 2014.

Interest rate risk

We have the following potential exposure to changes in interest rates: (1) the effect of changes in interest rates on the fair value of our investments in cash equivalents and short-term investments, which could produce a gain or a loss; and (2) the effect of changes in interest rates on the fair value of our debt.

As of December 31, 2015, a hypothetical 100 basis point increase in interest rates would decrease the fair value of our investments in cash equivalents and short-term investments by $6 million and decrease the fair value of our long-term debt by $111 million. Because interest rates on our long-term debt are fixed, changes in interest rates would not affect the cash flows associated with long-term debt.

Equity risk

Long-term investments at year-end 2015 include the following:

 

·

Investments in mutual funds – includes mutual funds that were selected to generate returns that offset changes in certain liabilities related to deferred compensation arrangements. The mutual funds hold a variety of debt and equity investments.

 

·

Investments in venture capital funds – includes investments in limited partnerships (accounted for under either the equity or cost method).

 

·

Equity investments – includes non-marketable (non-publicly traded) equity securities.

Investments in mutual funds are stated at fair value. Changes in prices of the mutual fund investments are expected to offset related changes in deferred compensation liabilities such that a 10 percent increase or decrease in the investments' fair values would not materially affect operating results. Non-marketable equity securities and some venture capital funds are stated at cost. Impairments deemed to be other-than-temporary are expensed in Net income. Investments in the remaining venture capital funds are stated using the equity method. See Note 8 to the financial statements for details of equity and other long-term investments.

 

 

24


 

ITEM 8.

Financial Statements and Supplementary Data. 

List of Financial Statements (Item 15(a))

 

 

 

 

 

 

 

Income for each of the three years in the period ended December 31, 2015

 

Comprehensive income for each of the three years in the period ended December 31, 2015

 

Balance sheets at December 31, 2015 and 2014

 

Cash flows for each of the three years in the period ended December 31, 2015

 

Stockholders’ equity for each of the three years in the period ended December 31, 2015

 

Schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. 

 

25


 

 

Consolidated Statements of Income

 

For Years Ended December 31,

 

(Millions of dollars, except share and per-share amounts)

 

2015

 

 

2014

 

 

2013

 

Revenue

 

$

 

13,000

 

 

$

 

13,045

 

 

$

 

12,205

 

Cost of revenue (COR)

 

 

 

5,440

 

 

 

 

5,618

 

 

 

 

5,841

 

Gross profit

 

 

 

7,560

 

 

 

 

7,427

 

 

 

 

6,364

 

Research and development (R&D)

 

 

 

1,280

 

 

 

 

1,358

 

 

 

 

1,522

 

Selling, general and administrative (SG&A)

 

 

 

1,748

 

 

 

 

1,843

 

 

 

 

1,858

 

Acquisition charges

 

 

 

329

 

 

 

 

330

 

 

 

 

341

 

Restructuring charges/other

 

 

 

(71

)

 

 

 

(51

)

 

 

 

(189

)

Operating profit

 

 

 

4,274

 

 

 

 

3,947

 

 

 

 

2,832

 

Other income (expense), net (OI&E)

 

 

 

32

 

 

 

 

21

 

 

 

 

17

 

Interest and debt expense

 

 

 

90

 

 

 

 

94

 

 

 

 

95

 

Income before income taxes

 

 

 

4,216

 

 

 

 

3,874

 

 

 

 

2,754

 

Provision for income taxes

 

 

 

1,230

 

 

 

 

1,053

 

 

 

 

592

 

Net income

 

$

 

2,986

 

 

$

 

2,821

 

 

$

 

2,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share (EPS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 

2.86

 

 

$

 

2.61

 

 

$

 

1.94

 

Diluted

 

$

 

2.82

 

 

$

 

2.57

 

 

$

 

1.91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding (millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

1,030

 

 

 

 

1,065

 

 

 

 

1,098

 

Diluted

 

 

 

1,043

 

 

 

 

1,080

 

 

 

 

1,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

 

1.40

 

 

$

 

1.24

 

 

$

 

1.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a result of accounting rule ASC 260, which requires a portion of Net income to be allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents, diluted EPS is calculated using the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

 

2,986

 

 

$

 

2,821

 

 

$

 

2,162

 

Income allocated to RSUs

 

 

 

(42

)

 

 

 

(43

)

 

 

 

(36

)

Income allocated to common stock for diluted EPS

 

$

 

2,944

 

 

$

 

2,778

 

 

$

 

2,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26


 

 

Consolidated Statements of Comprehensive Income

 

For Years Ended December 31,

 

(Millions of dollars)

 

2015

 

 

2014

 

 

2013

 

Net income

 

$

 

2,986

 

 

$

 

2,821

 

 

$

 

2,162

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial gains (losses) of defined benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment, net of tax benefit (expense) of $36, $25 and ($60)

 

 

 

(74

)

 

 

 

(46

)

 

 

 

105

 

Recognized within Net income, net of tax benefit (expense) of ($25), ($21) and ($37)

 

 

 

53

 

 

 

 

42

 

 

 

 

71

 

Prior service (cost) credit of defined benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment, net of tax benefit (expense) of ($11), $0 and $1

 

 

 

20

 

 

 

 

(1

)

 

 

 

(3

)

Recognized within Net income, net of tax benefit (expense) of $0, $0 and $2

 

 

 

 

 

 

 

 

 

 

 

(3

)

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized within Net income, net of tax benefit (expense) of ($1), ($1) and ($1)

 

 

 

1

 

 

 

 

1

 

 

 

 

1

 

Other comprehensive income (loss), net of taxes

 

 

 

 

 

 

 

(4

)

 

 

 

171

 

Total comprehensive income

 

$

 

2,986

 

 

$

 

2,817

 

 

$

 

2,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27


 

 

Consolidated Balance Sheets

 

December 31,

 

(Millions of dollars, except share amounts)

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

1,000

 

 

$

 

1,199

 

Short-term investments

 

 

 

2,218

 

 

 

 

2,342

 

Accounts receivable, net of allowances of ($7) and ($12)

 

 

 

1,165

 

 

 

 

1,246

 

Raw materials

 

 

 

109

 

 

 

 

101

 

Work in process

 

 

 

846

 

 

 

 

896

 

Finished goods

 

 

 

736

 

 

 

 

787

 

Inventories

 

 

 

1,691

 

 

 

 

1,784

 

Prepaid expenses and other current assets

 

 

 

1,000

 

 

 

 

850

 

Total current assets

 

 

 

7,074

 

 

 

 

7,421

 

Property, plant and equipment at cost

 

 

 

5,465

 

 

 

 

6,266

 

Accumulated depreciation

 

 

 

(2,869

)

 

 

 

(3,426

)

Property, plant and equipment, net

 

 

 

2,596

 

 

 

 

2,840

 

Long-term investments

 

 

 

221

 

 

 

 

224

 

Goodwill, net

 

 

 

4,362

 

 

 

 

4,362

 

Acquisition-related intangibles, net

 

 

 

1,583

 

 

 

 

1,902

 

Deferred income taxes

 

 

 

201

 

 

 

 

180

 

Capitalized software licenses, net

 

 

 

46

 

 

 

 

83

 

Overfunded retirement plans

 

 

 

85

 

 

 

 

127

 

Other assets

 

 

 

62

 

 

 

 

233

 

Total assets

 

$

 

16,230

 

 

$

 

17,372

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

1,000

 

 

$

 

1,001

 

Accounts payable

 

 

 

386

 

 

 

 

437

 

Accrued compensation

 

 

 

664

 

 

 

 

651

 

Income taxes payable

 

 

 

95

 

 

 

 

71

 

Accrued expenses and other liabilities

 

 

 

410

 

 

 

 

498

 

Total current liabilities

 

 

 

2,555

 

 

 

 

2,658

 

Long-term debt

 

 

 

3,120

 

 

 

 

3,630

 

Underfunded retirement plans

 

 

 

196

 

 

 

 

225

 

Deferred income taxes

 

 

 

37

 

 

 

 

64

 

Deferred credits and other liabilities

 

 

 

376

 

 

 

 

405

 

Total liabilities

 

 

 

6,284

 

 

 

 

6,982

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

Preferred stock, $25 par value. Authorized – 10,000,000 shares

 

 

 

 

 

 

 

 

 

 

Participating cumulative preferred. None issued.

 

 

 

 

 

 

 

 

Common stock, $1 par value. Authorized – 2,400,000,000 shares

 

 

 

 

 

 

 

 

 

 

Shares issued – 1,740,815,939

 

 

 

1,741

 

 

 

 

1,741

 

Paid-in capital

 

 

 

1,629

 

 

 

 

1,368

 

Retained earnings

 

 

 

31,176

 

 

 

 

29,653

 

Treasury common stock at cost

 

 

 

 

 

 

 

 

 

 

Shares: 2015 – 729,547,527; 2014 – 694,189,127

 

 

 

(24,068

)

 

 

 

(21,840

)

Accumulated other comprehensive income (loss), net of taxes (AOCI)

 

 

 

(532

)

 

 

 

(532

)

Total stockholders’ equity

 

 

 

9,946

 

 

 

 

10,390

 

Total liabilities and stockholders’ equity

 

$

 

16,230

 

 

$

 

17,372

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

28


 

 

Consolidated Statements of Cash Flows

 

For Years Ended December 31,

 

(Millions of dollars)

 

2015

 

 

2014

 

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

 

2,986

 

 

$

 

2,821

 

 

$

 

2,162

 

Adjustments to Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

766

 

 

 

 

850

 

 

 

 

879

 

Amortization of acquisition-related intangibles

 

 

 

319

 

 

 

 

321

 

 

 

 

336

 

Amortization of capitalized software

 

 

 

48

 

 

 

 

59

 

 

 

 

82

 

Stock-based compensation

 

 

 

286

 

 

 

 

277

 

 

 

 

287

 

Gains on sales of assets

 

 

 

(85

)

 

 

 

(73

)

 

 

 

(6

)

Deferred income taxes

 

 

 

(55

)

 

 

 

(61

)

 

 

 

50

 

Increase (decrease) from changes in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

77

 

 

 

 

(49

)

 

 

 

16

 

Inventories

 

 

 

93

 

 

 

 

(53

)

 

 

 

26

 

Prepaid expenses and other current assets

 

 

 

94

 

 

 

 

65

 

 

 

 

(136

)

Accounts payable and accrued expenses

 

 

 

(188

)

 

 

 

(194

)

 

 

 

(284

)

Accrued compensation

 

 

 

7

 

 

 

 

89

 

 

 

 

18

 

Income taxes payable

 

 

 

11

 

 

 

 

(81

)

 

 

 

78

 

Changes in funded status of retirement plans

 

 

 

(23

)

 

 

 

(58

)

 

 

 

28

 

Other

 

 

 

(68

)

 

 

 

(21

)

 

 

 

(152

)

Cash flows from operating activities

 

 

 

4,268

 

 

 

 

3,892

 

 

 

 

3,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

(551

)

 

 

 

(385

)

 

 

 

(412

)

Proceeds from asset sales

 

 

 

110

 

 

 

 

142

 

 

 

 

21

 

Purchases of short-term investments

 

 

 

(2,767

)

 

 

 

(3,107

)

 

 

 

(3,907

)

Proceeds from short-term investments

 

 

 

2,892

 

 

 

 

2,966

 

 

 

 

4,249

 

Other

 

 

 

14

 

 

 

 

7

 

 

 

 

46

 

Cash flows from investing activities

 

 

 

(302

)

 

 

 

(377

)

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

498

 

 

 

 

498

 

 

 

 

986

 

Repayment of debt

 

 

 

(1,000

)

 

 

 

(1,000

)

 

 

 

(1,500

)

Dividends paid

 

 

 

(1,444

)

 

 

 

(1,323

)

 

 

 

(1,175

)

Stock repurchases

 

 

 

(2,741

)

 

 

 

(2,831

)

 

 

 

(2,868

)

Proceeds from common stock transactions

 

 

 

442

 

 

 

 

616

 

 

 

 

1,314

 

Excess tax benefit from share-based payments

 

 

 

83

 

 

 

 

100

 

 

 

 

80

 

Other

 

 

 

(3

)

 

 

 

(3

)

 

 

 

(7

)

Cash flows from financing activities

 

 

 

(4,165

)

 

 

 

(3,943

)

 

 

 

(3,170

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in Cash and cash equivalents

 

 

 

(199

)

 

 

 

(428

)

 

 

 

211

 

Cash and cash equivalents at beginning of period

 

 

 

1,199

 

 

 

 

1,627

 

 

 

 

1,416

 

Cash and cash equivalents at end of period

 

$

 

1,000

 

 

$

 

1,199

 

 

$

 

1,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29


 

 

Consolidated Statements of Stockholders' Equity

 

Common

 

 

Paid-in

 

 

Retained

 

 

Treasury

Common

 

 

 

 

(Millions of dollars, except per-share amounts)

 

Stock

 

 

Capital

 

 

Earnings

 

 

Stock

 

 

AOCI

 

Balance, December 31, 2012

 

$

 

1,741

 

 

$

 

1,176

 

 

$

 

27,205

 

 

$

 

(18,462

)

 

$

 

(699

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,162

 

 

 

 

 

 

 

 

 

Dividends declared and paid ($1.07 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,175

)

 

 

 

 

 

 

 

 

Common stock issued for stock-based awards

 

 

 

 

 

 

 

(273

)

 

 

 

 

 

 

 

1,540

 

 

 

 

 

Stock repurchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,868

)

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

287

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax impact from exercise of options

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

171

 

Dividend equivalents paid on restricted stock units

 

 

 

 

 

 

 

 

 

 

 

(19

)

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

 

 

1,741

 

 

 

 

1,211

 

 

 

 

28,173

 

 

 

 

(19,790

)

 

 

 

(528

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,821

 

 

 

 

 

 

 

 

 

Dividends declared and paid ($1.24 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,323

)

 

 

 

 

 

 

 

 

Common stock issued for stock-based awards

 

 

 

 

 

 

 

(226

)

 

 

 

 

 

 

 

781

 

 

 

 

 

Stock repurchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,831

)

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

277

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax impact from exercise of options

 

 

 

 

 

 

 

110

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

Dividend equivalents paid on restricted stock units

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

 

 

1,741

 

 

 

 

1,368

 

 

 

 

29,653

 

 

 

 

(21,840

)

 

 

 

(532

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,986

 

 

 

 

 

 

 

 

 

Dividends declared and paid ($1.40 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,444)

 

 

 

 

 

 

 

 

 

Common stock issued for stock-based awards

 

 

 

 

 

 

 

(116)

 

 

 

 

 

 

 

 

513

 

 

 

 

 

Stock repurchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,741)

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

286

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax impact from exercise of options

 

 

 

 

 

 

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend equivalents paid on restricted stock units

 

 

 

 

 

 

 

 

 

 

 

(19)

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

$

 

1,741

 

 

$

 

1,629

 

 

$

 

31,176

 

 

$

 

(24,068)

)

 

$

 

(532

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30


 

Notes to financial statements

 

 

1. Description of business, including segment and geographic area information

We design, make and sell semiconductors to electronics designers and manufacturers all over the world. We have two reportable segments, which are established along major categories of products as follows:

 

·

Analog – consists of the following product lines: High Volume Analog & Logic; Power Management; High Performance Analog; and Silicon Valley Analog, which consists primarily of products that we acquired through our purchase of National Semiconductor Corporation (National) in 2011.

 

·

Embedded Processing – consists of the following product lines: Microcontrollers, Processors and Connectivity.

We report the results of our remaining business activities in Other. Other includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other includes DLP® products, calculators, custom ASICs and royalties received from agreements involving license rights to our patent portfolio.

We also include in Other items that are not used in evaluating the results of or in allocating resources to our segments. Examples of these items include Acquisition charges (see Note 13); restructuring charges (see Note 3); revenue from our legacy wireless products; and certain corporate-level items, such as litigation expenses, environmental costs, insurance settlements, and gains and losses from other activities, including asset dispositions. We allocate the remainder of our expenses associated with corporate activities to our operating segments based on specific methodologies, such as percentage of operating expenses or headcount.

Our centralized manufacturing and support organizations, such as facilities, procurement and logistics, provide support to our operating segments, including those in Other. Costs incurred by these organizations, including depreciation, are charged to the segments on a per-unit basis. Consequently, depreciation expense is not an independently identifiable component within the segments’ results and, therefore, is not provided. The assets and liabilities associated with these organizations are included in Other.

With the exception of goodwill, we do not identify or allocate assets by operating segment, nor does the chief operating decision maker evaluate operating segments using discrete asset information. We have no material intersegment revenue. The accounting policies of the segments are the same as those described below in the summary of significant accounting policies and practices.

Segment information

 

 

For Years Ended December 31,

 

 

2015

 

 

2014

 

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analog

$

 

8,339

 

 

$

 

8,104

 

 

$

 

7,194

 

Embedded Processing

 

 

2,787

 

 

 

 

2,740

 

 

 

 

2,450

 

Other

 

 

1,874

 

 

 

 

2,201

 

 

 

 

2,561

 

Total revenue

$

 

13,000

 

 

$

 

13,045

 

 

$

 

12,205

 

Operating profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analog

$

 

3,048

 

 

$

 

2,786

 

 

$

 

1,859

 

Embedded Processing

 

 

596

 

 

 

 

384

 

 

 

 

185

 

Other

 

 

630

 

 

 

 

777

 

 

 

 

788

 

Total operating profit

$

 

4,274

 

 

$

 

3,947

 

 

$

 

2,832

 

 

31


 

Geographic area information

The following geographic area information includes revenue, based on product shipment destination and royalty payor location, and property, plant and equipment, based on physical location. The revenue information is not necessarily indicative of the geographic area in which the end applications containing our products are ultimately consumed because our products tend to be shipped to the locations where our customers manufacture their products. Specifically, many of our products are shipped to our customers in China who may include these parts in the manufacture of their own end products, which they may in turn export to their customers around the world.

 

 

For Years Ended December 31,

 

 

2015

 

 

2014

 

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

 

1,612

 

 

$

 

1,625

 

 

$

 

1,666

 

Asia (a)

 

 

7,910

 

 

 

 

7,915

 

 

 

 

7,370

 

Europe, Middle East and Africa

 

 

2,163

 

 

 

 

2,294

 

 

 

 

1,926

 

Japan

 

 

1,127

 

 

 

 

1,032

 

 

 

 

1,072

 

Rest of world

 

 

188

 

 

 

 

179

 

 

 

 

171

 

Total revenue

$

 

13,000

 

 

$

 

13,045

 

 

$

 

12,205

 

 

(a) Revenue from products shipped into China, including Hong Kong, was $5.8 billion in 2015, $5.7 billion in 2014 and $5.2 billion in 2013.

 

 

December 31,

 

 

2015

 

 

2014

 

 

2013

 

Property, plant and equipment, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

 

1,370

 

 

$

 

1,436

 

 

$

 

1,765

 

Asia (a)

 

 

958

 

 

 

 

1,096

 

 

 

 

1,277

 

Europe, Middle East and Africa

 

 

130

 

 

 

 

162

 

 

 

 

196

 

Japan

 

 

122

 

 

 

 

124

 

 

 

 

144

 

Rest of world

 

 

16

 

 

 

 

22

 

 

 

 

17

 

Total property, plant and equipment, net

$

 

2,596

 

 

$

 

2,840

 

 

$

 

3,399

 

 

(a) Property, plant and equipment at our two sites in the Philippines was $471 million in 2015, $546 million in 2014 and $678 million in 2013.

Major customer

Our largest single end customer in 2015 was Apple Inc., accounting for approximately 11 percent of revenue, recognized primarily in our Analog segment. No customer accounted for 10 percent or more of revenue in 2014 or 2013.

 

 

2. Basis of presentation and significant accounting policies and practices

Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The basis of these financial statements is comparable for all periods presented herein.

The consolidated financial statements include the accounts of all subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in these notes, except per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated. We have reclassified certain amounts in the prior periods’ financial statements to conform to the 2015 presentation, including to apply retrospectively the following:

 

·

A new standard on classifying deferred income taxes (see Changes in accounting standards below and Note 6), and

 

·

A new standard on classifying debt issuance costs (see Changes in accounting standards below and Note 11).

The preparation of financial statements requires the use of estimates from which final results may vary.

32


 

Significant accounting policies and practices

Revenue recognition

We recognize revenue from sales of our products, including direct sales to our distributors, when title and risk of loss pass, which usually occurs upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order; when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. For sales to distributors, payment is due on our standard commercial terms and is not contingent upon resale of the products.

We recognize revenue net of allowances, which are management’s estimates of future credits to be granted to customers or distributors under programs common in the semiconductor industry. These allowances are based on analysis of historical data, current economic conditions, and contractual terms and are recorded when revenue is recognized.  Allowances may include volume-based incentives, product returns due to quality issues, incentives designed to maximize growth opportunities and special pricing arrangements. For instance, we sell to distributors at standard published prices, but we may grant them price adjustment credits in response to individual competitive opportunities. To estimate allowances, we use statistical percentages of revenue, which are determined quarterly based upon recent historical adjustment trends. Historical claims data are maintained for each of the programs, with differences among geographic regions taken into consideration. We continually monitor the actual claimed allowances against our estimates, and we adjust our estimates as appropriate to reflect trends in distributor revenue and inventory levels. Allowances are also adjusted when recent historical data do not represent anticipated future activity.

We may also provide distributors an allowance to scrap certain slow-selling or obsolete products in their inventory, estimated as a negotiated fixed percentage of each distributor’s purchases from us. In addition, if we publish a new price for a product that is lower than that paid by distributors for the same product still remaining in each distributor’s on-hand inventory, we may credit them for the difference between those prices. The allowance for this type of credit is based on the identified product price difference applied to our estimate of each distributor’s on-hand inventory of that product.

We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner.

Revenue from sales of our products that are subject to inventory consignment agreements, including consignment arrangements with distributors, is recognized in accordance with the principles discussed above, but delivery occurs when the customer or distributor pulls product from consignment inventory that we store at designated locations.

We determine the amount and timing of royalty revenue related to licenses of our patent portfolio based on our contractual agreements with licensees. We recognize royalty revenue when earned under the terms of the agreements and when we consider realization of payment to be probable.

In addition, we record allowances for accounts receivable that we estimate may not be collected. We monitor collectability of accounts receivable primarily through review of the accounts receivable aging. When collection is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made.

We recognize shipping fees received from customers in revenue, and we include the shipping and handling costs in COR.

Advertising costs

We expense advertising and other promotional costs as incurred. This expense was $46 million in 2015, $45 million in 2014 and $46 million in 2013.

Restructuring charges

Restructuring charges may consist of voluntary or involuntary severance-related charges, asset-related charges and other costs due to exit activities. We recognize voluntary termination benefits when the employee accepts the offered benefit arrangement. We recognize involuntary severance-related charges depending on whether the termination benefits are provided under an ongoing benefit arrangement or under a one-time benefit arrangement. If the former, we recognize the charges once they are probable and the amounts are estimable. If the latter, we recognize the charges once the benefits have been communicated to employees.

Restructuring activities associated with assets are recorded as an adjustment to the basis of the asset, not as a liability. When we commit to a plan to abandon a long-lived asset before the end of its previously estimated useful life, we accelerate the recognition of depreciation to reflect the use of the asset over its shortened useful life. When an asset is held for sale, we write down the carrying value to its net realizable value and cease depreciation. Restructuring actions may be viewed as an impairment indicator requiring testing of the recoverability of intangible assets, including goodwill.

33


 

Income taxes

We account for income taxes using an asset and liability approach. We record the amount of taxes payable or refundable for the current year and the deferred tax assets and liabilities for future tax consequences of events that have been recognized in the financial statements or tax returns. We record a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized.

Other assessed taxes

Some transactions require us to collect taxes such as sales, value-added and excise taxes from our customers. These transactions are presented in our Consolidated Statements of Income on a net (excluded from revenue) basis.

Earnings per share (EPS)

Unvested share-based payment awards that contain non-forfeitable rights to receive dividends or dividend equivalents, such as our restricted stock units (RSUs), are considered to be participating securities and the two-class method is used for purposes of calculating EPS. Under the two-class method, a portion of Net income is allocated to these participating securities and, therefore, is excluded from the calculation of EPS allocated to common stock, as shown in the table below. 

Computation and reconciliation of earnings per common share are as follows (shares in millions):

 

 

For Years Ended December 31,

 

 

2015

 

 

2014

 

 

2013

 

 

Net

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

Income

 

 

Shares

 

 

EPS

 

 

Income

 

 

Shares

 

 

EPS

 

 

Income

 

 

Shares

 

 

EPS

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

 

2,986

 

 

 

 

 

 

 

 

 

 

 

$

 

2,821

 

 

 

 

 

 

 

 

 

 

 

$

 

2,162

 

 

 

 

 

 

 

 

 

 

Income allocated to RSUs

 

 

(43

)

 

 

 

 

 

 

 

 

 

 

 

 

(44

)

 

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

 

 

 

 

 

 

 

Income allocated to common stock for basic EPS calculation

$

 

2,943

 

 

 

1,030

 

 

$

 

2.86

 

 

$

 

2,777

 

 

 

1,065

 

 

$

 

2.61

 

 

$

 

2,125

 

 

 

1,098

 

 

$

 

1.94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for dilutive shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation plans

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

 

2,986

 

 

 

 

 

 

 

 

 

 

 

$

 

2,821

 

 

 

 

 

 

 

 

 

 

 

$

 

2,162

 

 

 

 

 

 

 

 

 

 

Income allocated to RSUs

 

 

(42

)

 

 

 

 

 

 

 

 

 

 

 

 

(43

)

 

 

 

 

 

 

 

 

 

 

 

 

(36

)

 

 

 

 

 

 

 

 

 

Income allocated to common stock for diluted EPS calculation

$

 

2,944

 

 

 

1,043

 

 

$

 

2.82

 

 

$

 

2,778

 

 

 

1,080

 

 

$

 

2.57

 

 

$

 

2,126

 

 

 

1,113

 

 

$

 

1.91

 

 

Potentially dilutive securities representing 12 million and 11 million shares of common stock that were outstanding during 2015 and 2014, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive.  There were no potentially dilutive securities to exclude from the computation of diluted earnings per common share during 2013.

Investments

We present investments on our Consolidated Balance Sheets as cash equivalents, short-term investments or long-term investments. Specific details are as follows:

 

·

Cash equivalents and short-term investments: We consider investments in debt securities with maturities of 90 days or less from the date of our investment to be cash equivalents. We consider investments in debt securities with maturities beyond 90 days from the date of our investment as being available for use in current operations and include them in short-term investments. The primary objectives of our cash equivalent and short-term investment activities are to preserve capital and maintain liquidity while generating appropriate returns.

 

·

Long-term investments: Long-term investments consist of mutual funds, venture capital funds and non-marketable equity securities.

34


 

 

·

Classification of investments: Depending on our reasons for holding the investment and our ownership percentage, we classify our investments as either available for sale, trading, equity method or cost method, which are more fully described in Note 8. We determine cost or amortized cost, as appropriate, on a specific identification basis. 

Inventories

Inventories are stated at the lower of cost or estimated net realizable value. Cost is generally computed on a currently adjusted standard cost basis, which approximates cost on a first-in first-out basis. Standard cost is based on the normal utilization of installed factory capacity. Cost associated with underutilization of capacity is expensed as incurred. Inventory held at consignment locations is included in our finished goods inventory. Consigned inventory was $275 million and $258 million as of December 31, 2015 and 2014, respectively.

We review inventory quarterly for salability and obsolescence. A statistical allowance is provided for inventory considered unlikely to be sold. The statistical allowance is based on an analysis of historical disposal activity, historical customer shipments, as well as estimated future sales. A specific allowance for each material type will be carried if there is a significant event not captured by the statistical allowance. We write off inventory in the period in which disposal occurs.

Property, plant and equipment; acquisition-related intangibles and other capitalized costs

Property, plant and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Our cost basis includes certain assets acquired in business combinations that were initially recorded at fair value as of the date of acquisition. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. We amortize acquisition-related intangibles on a straight-line basis over the estimated economic life of the assets. Capitalized software licenses generally are amortized on a straight-line basis over the term of the license. Fully depreciated or amortized assets are written off against accumulated depreciation or amortization.

Impairments of long-lived assets

We regularly review whether facts or circumstances exist that indicate the carrying values of property, plant and equipment or other long-lived assets, including intangible assets, are impaired. We assess the recoverability of assets by comparing the projected undiscounted net cash flows associated with those assets to their respective carrying amounts. Any impairment charge is based on the excess of the carrying amount over the fair value of those assets. Fair value is determined by available market valuations, if applicable, or by discounted cash flows.

Goodwill and indefinite-lived intangibles

Goodwill is not amortized but is reviewed for impairment annually or more frequently if certain impairment indicators arise. We perform our annual goodwill impairment test as of October 1 for our reporting units, which compares the fair value for each reporting unit to its associated carrying value, including goodwill. See Note 9 for additional information.

Foreign currency

The functional currency for our non-U.S. subsidiaries is the U.S. dollar. Accounts recorded in currencies other than the U.S. dollar are remeasured into the functional currency. Current assets (except inventories), deferred income taxes, other assets, current liabilities and long-term liabilities are remeasured at exchange rates in effect at the end of each reporting period. Property, plant and equipment with associated depreciation and inventories are valued at historical exchange rates. Revenue and expense accounts other than depreciation for each month are remeasured at the appropriate daily rate of exchange. Currency exchange gains and losses from remeasurement are credited or charged to OI&E. See Note 13 for additional information.

Derivatives and hedging

We use derivative financial instruments to manage exposure to foreign exchange risk. These instruments are primarily forward foreign currency exchange contracts, which are used as economic hedges to reduce the earnings impact that exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. Gains and losses from changes in the fair value of these forward foreign currency exchange contracts are credited or charged to OI&E. We do not apply hedge accounting to our foreign currency derivative instruments.

35


 

In connection with the issuance of long-term debt, we use financial derivatives such as treasury rate lock agreements that are recognized in AOCI and amortized over the life of the related debt. The results of these derivative transactions have not been material.

We do not use derivatives for speculative or trading purposes.

Changes in accounting standards

Adopted standards for current period

In April and August 2015, respectively, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)  No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. These standards require that costs associated with the issuance of debt, except for costs associated with line-of-credit arrangements, be reported as a direct reduction of the related debt balance. Previously, such costs were recorded as deferred assets. Costs associated with line-of-credit arrangements may continue to be recorded as deferred assets. We adopted these standards as of December 31, 2015, and retrospectively applied the standards to prior periods presented herein. The effect of the reclassification on our Consolidated Balance Sheets is quantified in Note 11. The reclassification we made to address these standards had no impact on our Consolidated Statements of Income.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This standard requires that companies classify all deferred tax assets and liabilities within a taxing jurisdiction as noncurrent on their consolidated balance sheets. The effect of this new requirement is that deferred income taxes previously reported in either current assets or current liabilities shall be reclassified to noncurrent assets or liabilities. This standard can be applied either prospectively or retrospectively, and is effective for annual and interim periods beginning after December 15, 2016. Early adoption is allowed. We adopted this standard as of December 31, 2015, and retrospectively applied it to prior periods presented herein. The effect of the reclassifications on our Consolidated Balance Sheets is quantified in Note 6.

Standards not yet adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. In July 2015, the FASB deferred the effective date by one year to December 15, 2017, for annual and interim reporting periods beginning after that date. This standard permits early adoption, but not before the original effective date of December 15, 2016, and permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the potential impact of this standard on our financial position and results of operations, as well as our selected transition method. Based on our preliminary assessment, we believe the new standard will not have a material impact on our financial position and results of operations as we do not expect to change the manner or timing of recognizing revenue on a majority of our revenue transactions. We recognize revenue on sales to customers, including sales to distributors, upon satisfaction of our performance obligations when the goods are shipped. For consignment sales, we recognize revenue when the goods are pulled from consignment inventory.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis, which changes the way reporting entities evaluate certain investment holdings for possible consolidation and also includes possible changes in disclosures resulting from that evaluation. This standard is effective for annual and interim reporting periods beginning January 1, 2016, and will have no material impact on our financial position and results of operations.

36


 

In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on whether a cloud-computing arrangement contains a software license, and whether that license should be accounted for separately as an asset or solely as a service contract. This standard also aligns the accounting for licenses of internal-use software with the accounting for licenses of other acquired intangible assets. This standard is effective beginning January 1, 2016, and we will adopt it prospectively to all arrangements entered into or materially modified after the effective date. We do not expect this standard to have a material impact on our financial position and results of operations.

 

 

3. Restructuring charges/other

Restructuring charges/other is comprised of the following components:

 

 

For Years Ended December 31,

 

 

2015

 

 

2014

 

 

2013

 

Restructuring charges (a)

$

 

14

 

 

$

 

20

 

 

$

 

126

 

Gains on sales of assets

 

 

(83

)

 

 

 

(75

)

 

 

 

 

Gain on technology transfer

 

 

 

 

 

 

 

 

 

 

(315

)

Other

 

 

(2

)

 

 

 

4

 

 

 

 

 

Restructuring charges/other

$

 

(71

)

 

$

 

(51

)

 

$

 

(189

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Includes severance and benefits, along with changes in estimates; 2014 and 2013 also include other exit costs and accelerated depreciation.

 

 

Restructuring charges/other are recognized in Other for segment reporting purposes.

Restructuring charges

As a result of management’s decision in the fourth quarter of 2015, we announced in January 2016 our intentions to phase out a small, older manufacturing facility in Greenock, Scotland, over the next three years. Plans are to move production from this facility to more cost-effective 200-millimeter TI manufacturing facilities in Germany, Japan and Maine, resulting in annualized savings of about $35 million per year. Total restructuring charges, primarily severance and related benefit costs associated with the expected reduction of about 350 jobs, are estimated to be about $40 million. We recognized charges of $17 million in the fourth quarter of 2015. The remaining charges are expected to be recognized over the next three years. As of December 31, 2015, no payments have been made.

The 2014 and 2013 restructuring charges related to prior actions in Embedded Processing, Japan, our former Wireless business and factory closures in Houston, Texas, and Hiji, Japan. These actions have been completed.

Changes in accrued restructuring balances  

 

2015

 

 

2014

 

 

2013

 

Balance, January 1

$

 

57

 

 

$

 

161

 

 

$

 

349

 

Restructuring charges

 

 

14

 

 

 

 

20

 

 

 

 

126

 

Non-cash items (a)

 

 

 

 

 

 

 

 

 

 

(22

)

Payments

 

 

(39

)

 

 

 

(124

)

 

 

 

(292

)

Balance, December 31

$

 

32

 

 

$

 

57

 

 

$

 

161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Reflects charges for impacts of accelerated depreciation and postretirement benefit plans.

 

The restructuring accrual balances are primarily reported as a component of either Accrued expenses and other liabilities or Deferred credits and other liabilities on our Consolidated Balance Sheets, depending on the expected timing of payment. The $32 million as of December 31, 2015 is composed of $17 million related to the 2015 action and $15 million related to prior actions.

37


 

Other

Gains on sales of assets

We recognized $83 million of gains on sales of assets in 2015. This included $48 million associated with the sale of a site in Plano, Texas, and $34 million associated with the sale of a manufacturing facility in Houston, Texas.

We recognized $75 million of gains on sales of assets in 2014. This consisted of $30 million associated with the sale of a site in Nice, France; $28 million associated with the sales of real estate in Santa Clara, California; and $17 million of asset sales associated primarily with the factory closures in Houston, Texas, and Hiji, Japan.

Gain on technology transfer

During 2013, we recognized a gain of $315 million on the transfer of wireless connectivity technology to a customer. This technology was associated with the former Wireless business.

 

 

4. Stock-based compensation

We have stock options outstanding to participants under long-term incentive plans. We also have assumed stock options that were granted by companies that we later acquired. Unless the options are acquisition-related replacement options, the option price per share may not be less than 100 percent of the fair market value of our common stock on the date of the grant. Substantially all the options have a 10-year term and vest ratably over four years. Our options generally continue to vest after the option recipient retires.

We also have RSUs outstanding under long-term incentive plans. Each RSU represents the right to receive one share of TI common stock on the vesting date, which is generally four years after the date of grant. Upon vesting, the shares are issued without payment by the grantee. Beginning with 2013 grants, RSUs generally continue to vest after the recipient retires. Holders of most RSUs receive an annual cash payment equivalent to the dividends paid on our common stock.

We have options and RSUs outstanding to non-employee directors under director compensation plans. The plans generally provide for annual grants of stock options and RSUs, a one-time grant of RSUs to each new non-employee director and the issuance of TI common stock upon the distribution of stock units credited to deferred compensation accounts established for such directors.

We also have an employee stock purchase plan under which options are offered to all eligible employees in amounts based on a percentage of the employee’s compensation, subject to a cap. Under the plan, the option price per share is 85 percent of the fair market value on the exercise date, and options have a three-month term.

Total stock-based compensation expense recognized was as follows:

 

 

For Years Ended December 31,

 

 

2015

 

 

2014

 

 

2013

 

COR

$

 

47

 

 

$

 

48

 

 

$

 

49

 

R&D

 

 

60

 

 

 

 

62

 

 

 

 

67

 

SG&A

 

 

169

 

 

 

 

156

 

 

 

 

160

 

Acquisition charges

 

 

10

 

 

 

 

11

 

 

 

 

11

 

Total

$

 

286

 

 

$

 

277

 

 

$

 

287

 

 

These amounts include expenses related to non-qualified stock options, RSUs and stock options offered under our employee stock purchase plan and are net of expected forfeitures.

We issue awards of non-qualified stock options with graded vesting provisions (e.g., 25 percent per year for four years). Generally, we recognize the related compensation expense on a straight-line basis over the minimum service period required for vesting of the award, adjusting for expected forfeiture activity. Awards issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis.

Our RSUs generally vest four years after the date of grant. We recognize the related compensation expense on a straight-line basis over the vesting period, adjusting for expected forfeiture activity. Beginning with 2013 grants, RSUs issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis.

38


 

Fair-value methods and assumptions

We account for all awards granted under our various stock-based compensation plans at fair value. We estimate the fair values for non-qualified stock options using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions.

 

 

For Years Ended December 31,

 

 

2015

 

 

2014

 

 

2013

 

Weighted average grant date fair value, per share

$

 

9.49

 

 

$

 

8.13

 

 

$

 

6.78

 

Weighted average assumptions used:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected volatility

 

 

22

%

 

 

 

22

%

 

 

 

26

%

Expected lives (in years)

 

 

7.3

 

 

 

 

7.3

 

 

 

 

7.4

 

Risk-free interest rates

 

 

1.64

%

 

 

 

2.45

%

 

 

 

1.43

%

Expected dividend yields

 

 

2.52

%

 

 

 

2.72

%

 

 

 

2.56

%

 

We determine expected volatility on all options granted using available implied volatility rates. We believe that market-based measures of implied volatility are currently the best available indicators of the expected volatility used in these estimates.

We determine expected lives of options based on the historical option exercise experience of our optionees using a rolling 10-year average. We believe the historical experience method is the best estimate of future exercise patterns currently available.

Risk-free interest rates are determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options.

Expected dividend yields are based on the annualized approved quarterly dividend rate and the current market price of our common stock at the time of grant. No assumption for a future dividend rate change is included unless there is an approved plan to change the dividend in the near term.

The fair value per share of RSUs is determined based on the closing price of our common stock on the date of grant.

Our employee stock purchase plan is a discount-purchase plan and consequently the Black-Scholes-Merton option-pricing model is not used to determine the fair value per share of these awards. The fair value per share under this plan equals the amount of the discount.

Long-term incentive and director compensation plans

Stock option and RSU transactions under our long-term incentive and director compensation plans during 2015 were as follows:

 

 

Stock Options

 

 

RSUs

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Exercise Price

 

 

 

 

 

 

Grant Date Fair

 

 

Shares

 

 

per Share

 

 

Shares

 

 

Value per Share

 

Outstanding grants, December 31, 2014

 

57,647,446

 

 

$

 

32.84

 

 

 

17,303,815

 

 

$

 

35.24

 

Granted

 

11,913,832

 

 

 

 

53.95

 

 

 

2,679,437

 

 

 

 

53.22

 

Vested RSUs

 

 

 

 

 

 

 

 

(3,386,415

)

 

 

 

33.72

 

Forfeited and expired

 

(833,840

)

 

 

 

42.71

 

 

 

(541,295

)

 

 

 

36.94

 

Exercised

 

(11,953,455

)

 

 

 

31.33

 

 

 

 

 

 

 

 

Outstanding grants, December 31, 2015

 

56,773,983

 

 

 

 

37.45

 

 

 

16,055,542

 

 

 

 

38.51

 

 

The weighted average grant date fair value of RSUs granted during the years 2015, 2014 and 2013 was $53.22, $44.71 and $33.70 per share, respectively. For the years ended December 31, 2015, 2014 and 2013, the total grant date fair value of shares vested from RSU grants was $114 million, $133 million and $98 million, respectively.

39


 

Summarized information about stock options outstanding at December 31, 2015, is as follows:

 

 

 

 

Stock Options Outstanding

 

 

Options Exercisable

 

 

 

Number

 

 

Weighted Average

Weighted Average

 

 

Number

 

 

Weighted Average

 

Exercise Price

 

Outstanding

 

Remaining Contractual

Exercise Price

 

 

Exercisable

 

 

Exercise Price

 

Range

 

(Shares)

 

 

Life (Years)

per Share

 

 

(Shares)

 

 

per Share

 

$

14.47 to 20.00

 

 

3,499,029

 

 

 

3.1

 

 

$

 

14.96

 

 

 

3,499,029

 

 

$

 

14.96

 

 

20.01 to 30.00

 

 

8,385,885

 

 

 

3.1

 

 

 

 

25.56

 

 

 

8,377,295

 

 

 

 

25.56

 

 

30.01 to 40.00

 

 

21,215,903

 

 

 

6.0

 

 

 

 

33.00

 

 

 

12,732,409

 

 

 

 

33.21

 

 

40.01 to 50.00

 

 

12,012,519

 

 

 

8.1

 

 

 

 

44.11

 

 

 

2,229,828

 

 

 

 

44.10

 

 

50.01 to 58.98

 

 

11,660,647

 

 

 

9.1

 

 

 

 

53.96

 

 

 

1,521

 

 

 

 

55.41

 

 

14.47 to 58.98

 

 

56,773,983

 

 

 

6.5

 

 

 

 

37.45

 

 

 

26,840,082

 

 

 

 

29.35

 

 

During the years ended December 31, 2015, 2014 and 2013, the aggregate intrinsic value (i.e., the difference in the closing market price on the date of exercise and the exercise price paid by the optionee) of options exercised was $290 million, $367 million and $427 million, respectively.

Summarized information as of December 31, 2015, about outstanding stock options that are vested and expected to vest, as well as stock options that are currently exercisable, is as follows:

 

 

Outstanding Stock Options

 

 

 

 

 

(Fully Vested and

 

 

Options

 

 

Expected to Vest) (a)

 

 

Exercisable

 

Number of outstanding (shares)

 

 

55,421,103

 

 

 

 

26,840,082

 

Weighted average remaining contractual life (in years)

 

 

6.4

 

 

 

 

4.6

 

Weighted average exercise price per share

$

 

37.17

 

 

$

 

29.35

 

Intrinsic value (millions of dollars)

$

 

978

 

 

$

 

683

 

 

 

 

 

 

 

 

 

 

 

(a) Includes effects of expected forfeitures of approximately 1 million shares. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $986 million.

 

 

As of December 31, 2015, the total future compensation cost related to equity awards not yet recognized in the Consolidated Statements of Income was $273 million, consisting of $112 million related to unvested stock options and $161 million related to unvested RSUs. The $273 million is expected to be recognized as follows: $140 million in 2016, $86 million in 2017, $42 million in 2018 and $5 million in 2019.

Director deferred compensation

Directors who retire or resign from the board may receive stock distributions for compensation they elected to defer. For these stock distributions, we issue treasury shares. Director deferred stock activity during 2015 was as follows:

 

 

Director Deferred Stock (Shares)

 

Outstanding, December 31, 2014

 

135,722

 

New shares deferred

 

14,722

 

Issued

 

(7,531

)

Outstanding, December 31, 2015

 

142,913

 

 

Employee stock purchase plan

Options outstanding under the employee stock purchase plan at December 31, 2015, had an exercise price equal to 85 percent of the fair market value of TI common stock on the date of automatic exercise. The automatic exercise occurred on January 4, 2016, resulting in an exercise price of $46.19 per share. Of the total outstanding options, none were exercisable at year-end 2015.

40


 

Employee stock purchase plan transactions during 2015 were as follows:

 

 

Employee Stock

 

 

 

 

 

Purchase Plan

 

 

 

 

 

(Shares)

 

 

Exercise Price

 

Outstanding grants, December 31, 2014

 

374,703

 

 

$

 

45.46

 

Granted

 

1,530,127

 

 

 

 

44.75

 

Exercised

 

(1,532,264

)

 

 

 

44.57

 

Outstanding grants, December 31, 2015

 

372,566

 

 

 

 

46.19

 

 

The weighted average grant date fair value of options granted under the employee stock purchase plans during the years 2015, 2014 and 2013 was $7.89, $7.34 and $5.71 per share, respectively. During the years ended December 31, 2015, 2014 and 2013, the total intrinsic value of options exercised under these plans was $12 million, $12 million and $13 million, respectively.

Effect on shares outstanding and treasury shares

Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2015, $7.93 billion of stock repurchase authorizations remain, and no expiration date has been specified.

Our current practice is to issue shares of common stock from treasury shares upon exercise of stock options, distribution of director deferred compensation and vesting of RSUs. The table below reflects the changes in our treasury shares:

 

 

Stock Options

 

 

RSUs

 

 

Treasury Shares

 

Balance, December 31, 2012

 

 

 

 

 

 

 

 

 

632,636,970

 

Repurchases

 

 

 

 

 

 

 

 

 

77,564,013

 

Shares used for:

 

 

 

 

 

 

 

 

 

 

 

Stock options/RSUs

 

(45,507,711

)

 

 

(5,741,981

)

 

 

 

 

Stock applied to taxes

 

 

 

 

1,461,422

 

 

 

 

 

ESPP

 

(2,386,834

)

 

 

 

 

 

 

 

Director deferred stock

 

 

 

 

 

 

 

(12,909

)

Total issued

 

(47,894,545

)

 

 

(4,280,559

)

 

 

(52,175,104

)

Balance, December 31, 2013

 

 

 

 

 

 

 

 

 

658,012,970

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchases

 

 

 

 

 

 

 

 

 

61,665,209

 

Shares used for:

 

 

 

 

 

 

 

 

 

 

 

Stock options/RSUs

 

(19,503,382

)

 

 

(5,609,627

)

 

 

 

 

Stock applied to exercises or taxes

 

6,618

 

 

 

1,408,701

 

 

 

 

 

ESPP

 

(1,784,184

)

 

 

 

 

 

 

 

Director deferred stock

 

 

 

 

 

 

 

(7,178

)

Total issued

 

(21,280,948

)

 

 

(4,200,926

)

 

 

(25,481,874

)

Balance, December 31, 2014

 

 

 

 

 

 

 

 

 

694,189,127

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchases

 

 

 

 

 

 

 

 

 

51,384,339

 

Shares used for:

 

 

 

 

 

 

 

 

 

 

 

Stock options/RSUs

 

(11,953,455

)

 

 

(3,386,415

)

 

 

 

 

Stock applied to exercises or taxes

 

8,562

 

 

 

845,164

 

 

 

 

 

ESPP

 

(1,532,264

)

 

 

 

 

 

 

 

Director deferred stock

 

 

 

 

 

 

 

(7,531

)

Total issued

 

(13,477,157

)

 

 

(2,541,251

)

 

 

(16,018,408

)

Balance, December 31, 2015

 

 

 

 

 

 

 

 

 

729,547,527

 

 

41


 

Shares available for future grants and reserved for issuance are summarized below:

 

 

 

December 31, 2015

 

 

 

Long-Term Incentive

 

 

 

 

 

 

 

 

 

 

 

and Director

 

 

Employee Stock

 

 

 

 

 

Shares

 

Compensation Plans

 

 

Purchase Plan

 

 

Total

 

Reserved for issuance (a)

 

 

105,793,583

 

 

 

38,032,774

 

 

 

143,826,357

 

Shares to be issued upon exercise of outstanding options and RSUs (a)

 

 

(72,972,438

)

 

 

(372,566

)

 

 

(73,345,004

)

Available for future grants

 

 

32,821,145

 

 

 

37,660,208

 

 

 

70,481,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Includes 142,913 shares credited to directors’ deferred stock accounts that settle in shares of TI common stock. These shares are not included as grants outstanding at December 31, 2015.

 

 

The effects on cash flows were as follows:

 

 

For Years Ended December 31,

 

 

2015

 

 

2014

 

 

2013

 

Proceeds from common stock transactions

$

 

442

 

 

$

 

616

 

 

$

 

1,314

 

Tax benefit realized from stock options exercised

 

 

171

 

 

 

 

218

 

 

 

 

227

 

 

 

5. Profit sharing plans

Profit sharing benefits are generally formulaic and determined by one or more subsidiary or company-wide financial metrics. We pay profit sharing benefits primarily under the company-wide TI Employee Profit Sharing Plan. This plan provides for profit sharing to be paid based solely on TI’s operating margin for the full calendar year. Under this plan, TI must achieve a minimum threshold of 10 percent operating margin before any profit sharing is paid. At 10 percent operating margin, profit sharing will be 2 percent of eligible payroll. The maximum amount of profit sharing available under the plan is 20 percent of eligible payroll, which is paid only if TI’s operating margin is at or above 35 percent for a full calendar year.

We recognized $309 million, $269 million and $161 million of profit sharing expense under the TI Employee Profit Sharing Plan in 2015, 2014 and 2013, respectively.

 

 

6. Income taxes

Income before Income Taxes

 

 

U.S.

 

 

Non-U.S.

 

 

Total

 

2015

$

 

3,218

 

 

$

 

998

 

 

$

 

4,216

 

2014

 

 

2,684

 

 

 

 

1,190

 

 

 

 

3,874

 

2013

 

 

1,507

 

 

 

 

1,247

 

 

 

 

2,754

 

 

42


 

Provision (Benefit) for Income Taxes

 

 

U.S. Federal

 

 

Non-U.S.

 

 

U.S. State

 

 

Total

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

$

 

1,110

 

 

$

 

168

 

 

$

 

7

 

 

$

 

1,285

 

Deferred

 

 

(72

)

 

 

 

14

 

 

 

 

3

 

 

 

 

(55

)

Total

$

 

1,038

 

 

$

 

182

 

 

$

 

10

 

 

$

 

1,230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

$

 

911

 

 

$

 

194

 

 

$

 

9

 

 

$

 

1,114

 

Deferred

 

 

(73

)

 

 

 

11

 

 

 

 

1

 

 

 

 

(61

)

Total

$

 

838

 

 

$

 

205

 

 

$

 

10

 

 

$

 

1,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

$

 

291

 

 

$

 

247

 

 

$

 

4

 

 

$

 

542

 

Deferred

 

 

17

 

 

 

 

33

 

 

 

 

 

 

 

 

50

 

Total

$

 

308

 

 

$

 

280

 

 

$

 

4

 

 

$

 

592

 

 

Principal reconciling items from income tax computed at the statutory federal rate follow:

 

 

For Years Ended December 31,

 

 

2015

 

 

2014

 

 

2013

 

Computed tax at statutory rate

$

 

1,476

 

 

$

 

1,356

 

 

$

 

964

 

Non-U.S. effective tax rates

 

 

(167

)

 

 

 

(212

)

 

 

 

(156

)

U.S. tax benefit for manufacturing

 

 

(69

)

 

 

 

(51

)

 

 

 

(66

)

U.S. R&D tax credit

 

 

(56

)

 

 

 

(59

)

 

 

 

(129

)

Non-deductible expenses

 

 

13

 

 

 

 

6

 

 

 

 

13

 

Impact of changes to uncertain tax positions

 

 

8

 

 

 

 

3

 

 

 

 

(14

)

Other

 

 

25

 

 

 

 

10

 

 

 

 

(20

)

Total provision for income taxes

$

 

1,230

 

 

$

 

1,053

 

 

$

 

592

 

 

The total provision for 2013 in the reconciliation above includes $79 million of discrete tax benefits primarily for the reinstatement of the U.S. R&D tax credit retroactive to 2012.

Our annual effective tax rate benefits from lower rates (compared to the U.S. statutory rate) applicable to our operations in many of the jurisdictions in which we operate and from U.S. tax benefits. These lower non-U.S. tax rates are generally statutory in nature, without expiration and available to companies that operate in those taxing jurisdictions. Also included in the non-U.S. effective tax rates reconciling item above are benefits from tax holidays of $60 million, $44 million and $40 million in 2015, 2014 and 2013, respectively. The tax benefits relate to our operations in Malaysia and the Philippines, and expire in 2018 and 2017, respectively. The terms of the Malaysia tax holiday are currently under governmental review as required for the end of the first five years of the holiday period. We do not expect any potential change in the holiday to have a material impact on the financial statements.

43


 

The primary components of deferred income tax assets and liabilities were as follows:

 

 

December 31,

 

 

2015

 

 

2014

 

Deferred income tax assets:

 

 

 

 

 

 

 

 

 

Stock-based compensation

$

 

244

 

 

$

 

229

 

Deferred loss and tax credit carryforwards

 

 

226

 

 

 

 

289

 

Accrued expenses

 

 

215

 

 

 

 

246

 

Inventories and related reserves

 

 

147

 

 

 

 

156

 

Retirement costs for defined benefit and retiree health care

 

 

87

 

 

 

 

80

 

Other

 

 

101

 

 

 

 

87

 

Total deferred income tax assets, before valuation allowance

 

 

1,020

 

 

 

 

1,087

 

Valuation allowance

 

 

(186

)

 

 

 

(195

)

Total deferred income tax assets, after valuation allowance

 

 

834

 

 

 

 

892

 

Deferred income tax liabilities:

 

 

 

 

 

 

 

 

 

Acquisition-related intangibles and fair-value adjustments

 

 

(565

)

 

 

 

(672

)

International earnings

 

 

(105

)

 

 

 

(104

)

Total deferred income tax liabilities

 

 

(670

)

 

 

 

(776

)

Net deferred income tax asset

$

 

164

 

 

$

 

116

 

 

The deferred income tax assets and liabilities based on tax jurisdictions are presented on the Consolidated Balance Sheets as follows:

 

 

December 31,

 

 

2015

 

 

2014

 

Noncurrent deferred income tax assets

$

 

201

 

 

$

 

180

 

Noncurrent deferred income tax liabilities

 

 

(37

)

 

 

 

(64

)

Net deferred income tax asset

$

 

164

 

 

$

 

116

 

 

As a result of our early adoption of ASU 2015-17, Balance Sheet Classification of Deferred Taxes, we have adjusted the presentation of deferred taxes on the Consolidated Balance Sheets. We have retrospectively adjusted the 2014 Consolidated Balance Sheets to conform to the 2015 presentation by reclassifying current deferred income tax assets and liabilities to noncurrent deferred income tax assets and liabilities. The effect of applying the new standard, as shown in the following table, is the result of netting Current deferred income tax assets with Noncurrent deferred income tax liabilities, by tax jurisdiction. See Note 2 for additional information.

 

 

2014

As Reported

 

 

Effect of Applying New Standard

 

 

2014

As Adjusted

 

Current deferred income tax assets

$

 

347

 

 

$

 

(347

)

 

$

 

 

Noncurrent deferred income tax assets

 

 

172

 

 

 

 

8

 

 

 

 

180

 

Current deferred income tax liabilities

 

 

(4

)

 

 

 

4

 

 

 

 

 

Noncurrent deferred income tax liabilities

 

 

(399

)

 

 

 

335

 

 

 

 

(64

)

Net deferred income tax asset

$

 

116

 

 

$

 

 

 

$

 

116

 

 

We make an ongoing assessment regarding the realization of U.S. and non-U.S. deferred tax assets. This assessment is based on our evaluation of relevant criteria, including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, taxable income in prior carryback years and expectations for future taxable income. Changes in valuation allowance balances in the years 2015, 2014 and 2013 of $9 million, $24 million and $2 million, respectively, had no impact on Net income.

We have U.S. and non-U.S. tax loss carryforwards of approximately $35 million, none of which will expire before the year 2025.

A provision has been made for deferred taxes on undistributed earnings of non-U.S. subsidiaries to the extent that dividend payments from these subsidiaries are expected to result in additional tax liability. The remaining undistributed earnings of approximately $8.35 billion at December 31, 2015, have been indefinitely reinvested outside of the United States; therefore, no U.S. tax provision has been made for taxes due upon remittance of these earnings. The indefinitely reinvested earnings of our non-U.S. subsidiaries are primarily invested in working capital and property, plant and equipment. Determination of the amount of unrecognized deferred income tax liability is not practical because of the complexities associated with its hypothetical calculation.

44


 

Cash payments made for income taxes, net of refunds, were $1.167 billion, $1.104 billion and $569 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Uncertain tax positions

We operate in a number of tax jurisdictions, and our income tax returns are subject to examination by tax authorities in those jurisdictions who may challenge any item on these tax returns. Because the matters challenged by authorities are typically complex, their ultimate outcome is uncertain. Before any benefit can be recorded in the financial statements, we must determine that it is “more likely than not” that a tax position will be sustained by the appropriate tax authorities. We recognize accrued interest related to uncertain tax positions and penalties as components of OI&E.

The changes in the total amounts of uncertain tax positions are summarized as follows:

 

 

2015

 

 

2014

 

 

2013

 

Balance, January 1

$

 

108

 

 

$

 

91

 

 

$

 

184

 

Additions based on tax positions related to the current year

 

 

11

 

 

 

 

10

 

 

 

 

7

 

Additions for tax positions of prior years

 

 

3

 

 

 

 

52

 

 

 

 

19

 

Reductions for tax positions of prior years

 

 

(21

)

 

 

 

(9

)

 

 

 

(10

)

Settlements with tax authorities

 

 

(17

)

 

 

 

(36

)

 

 

 

(96

)

Expiration of the statute of limitations for assessing taxes

 

 

 

 

 

 

 

 

 

 

(13

)

Balance, December 31

$

 

84

 

 

$

 

108

 

 

$

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense) recognized in the year ended December 31

$

 

8

 

 

$

 

6

 

 

$

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest receivable (payable) as of December 31

$

 

9

 

 

$

 

 

 

$

 

(5

)

 

The liability for uncertain tax positions is a component of Deferred credits and other liabilities on our Consolidated Balance Sheets.

All of the $84 million liability for uncertain tax positions as of December 31, 2015, is comprised of positions that, if recognized, would impact the tax rate. If these tax liabilities are ultimately realized, $12 million of existing deferred tax assets would also be realized, related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation. It is reasonably possible that the liability could increase in 2016 by up to $150 million for a tax depreciation-related position. The increase would offset the tax benefit realized with no net profit impact.

All of the $108 million liability for uncertain tax positions as of December 31, 2014, is comprised of positions that, if recognized, would impact the tax rate. If these tax liabilities are ultimately realized, $56 million of existing deferred tax assets would also be realized, primarily related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation.

As of December 31, 2015, the statute of limitations remains open for U.S. federal tax returns for 2010 and following years. Audit activities related to our U.S. federal tax returns through 2009 have been completed except for certain pending tax treaty procedures for relief from double taxation and the review of refunds claimed on amended returns for years prior to 2010. The procedures for relief from double taxation pertain to U.S. federal tax returns for the years 2006 through 2009.

In non-U.S. jurisdictions, the years open to audit represent the years still open under the statute of limitations. With respect to major jurisdictions outside the United States, our subsidiaries are no longer subject to income tax audits for years before 2007.

 

 

7. Financial instruments and risk concentration

Financial instruments

We hold derivative financial instruments such as forward foreign currency exchange contracts, the fair value of which was not material as of December 31, 2015. Our forward foreign currency exchange contracts outstanding as of December 31, 2015, had a notional value of $464 million to hedge our non-U.S. dollar net balance sheet exposures, including $175 million to sell Japanese yen and $139 million to sell euros.

45


 

Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our postretirement plan assets and deferred compensation liabilities, are carried at fair value. The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. The carrying value of our long-term debt approximates the fair value as measured using broker-dealer quotes, which are Level 2 inputs. See Note 8 for a description of fair value and the definition of Level 2 inputs.

Risk concentration

We are subject to counterparty risks from financial institutions, customers and issuers of debt securities. Financial instruments that could subject us to concentrations of credit risk are primarily cash deposits, cash equivalents, short-term investments and accounts receivable. To manage our credit risk exposure, we place cash investments in investment-grade debt securities and limit the amount of credit exposure to any one issuer. We also limit counterparties on cash deposits and financial derivative contracts to financial institutions with investment-grade ratings.

Concentrations of credit risk with respect to accounts receivable are limited due to our large number of customers and their dispersion across different industries and geographic areas. We maintain allowances for expected returns, disputes, adjustments, incentives and collectability. These allowances are deducted from accounts receivable on our Consolidated Balance Sheets.

Details of these accounts receivable allowances are as follows:

 

 

2015

 

 

2014

 

 

2013

 

Balance, January 1

$

 

12

 

 

$

 

22

 

 

$

 

31

 

Additions charged (credited) to operating results

 

 

(5

)

 

 

 

(9

)

 

 

 

(9

)

Recoveries and write-offs, net

 

 

 

 

 

 

(1

)

 

 

 

 

Balance, December 31

$

 

7

 

 

$

 

12

 

 

$

 

22

 

 

 

8. Valuation of debt and equity investments and certain liabilities

Debt and equity investments

We classify our investments as either available for sale, trading, equity method or cost method. Most of our investments are classified as available for sale.

Available-for-sale and trading securities are stated at fair value, which is generally based on market prices or broker quotes. See the fair-value discussion below. Unrealized gains and losses on available-for-sale securities are recorded as an increase or decrease, net of taxes, in AOCI on our Consolidated Balance Sheets. We record other-than-temporary impairments on available-for-sale securities in OI&E in our Consolidated Statements of Income.

We classify certain mutual funds as trading securities. These mutual funds hold a variety of debt and equity investments intended to generate returns that offset changes in certain deferred compensation liabilities. We record changes in the fair value of these mutual funds and the related deferred compensation liabilities in SG&A.

Our other investments are not measured at fair value but are accounted for using either the equity method or cost method. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity-method investments are reflected in OI&E based on our ownership share of the investee’s financial results. Gains and losses on cost-method investments are recorded in OI&E when realized or when an impairment of the investment’s value is warranted based on our assessment of the recoverability of each investment.

46


 

Details of our investments are as follows:

 

 

December 31, 2015

 

 

December 31, 2014

 

 

Cash and Cash

 

 

Short-Term

 

 

Long-Term

 

 

Cash and Cash

 

 

Short-Term

 

 

Long-Term

 

 

Equivalents

 

 

Investments

 

 

Investments

 

 

Equivalents

 

 

Investments

 

 

Investments

 

Measured at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

 

395

 

 

$

 

 

 

$

 

 

 

$

 

522

 

 

$

 

 

 

$

 

 

Corporate obligations

 

 

132

 

 

 

 

285

 

 

 

 

 

 

 

 

97

 

 

 

 

390

 

 

 

 

 

U.S. Government agency and Treasury securities

 

 

245

 

 

 

 

1,933

 

 

 

 

 

 

 

 

365

 

 

 

 

1,952

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

 

 

 

 

 

 

 

 

 

187

 

 

 

 

 

 

 

 

 

 

 

 

185

 

Total

 

 

772

 

 

 

 

2,218

 

 

 

 

187

 

 

 

 

984

 

 

 

 

2,342

 

 

 

 

185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other measurement basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-method investments

 

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

27

 

Cost-method investments

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

12

 

Cash on hand

 

 

228

 

 

 

 

 

 

 

 

 

 

 

 

215

 

 

 

 

 

 

 

 

 

Total

$

 

1,000

 

 

$

 

2,218

 

 

$

 

221

 

 

$

 

1,199

 

 

$

 

2,342

 

 

$

 

224

 

 

At December 31, 2015 and 2014, unrealized gains and losses associated with our available-for-sale investments were not material. We did not recognize any credit losses related to available-for-sale investments for the years ended December 31, 2015, 2014 and 2013.

For the years ended December 31, 2015, 2014 and 2013, the proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $2.89 billion, $2.97 billion and $4.25 billion, respectively. Gross realized gains and losses from these sales were not material.

The following table presents the aggregate maturities of investments in debt securities classified as available for sale at December 31, 2015:

 

Due

 

Fair Value

 

One year or less

 

$

 

2,970

 

One to two years

 

 

 

20

 

 

Gross realized gains and losses from sales of long-term investments were not material for 2015, 2014 and 2013. Other-than-temporary declines and impairments in the values of these investments recognized in OI&E were not material in 2015, 2014 and 2013.

Fair-value considerations

We measure and report certain financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The three-level hierarchy discussed below indicates the extent and level of judgment used to estimate fair-value measurements.

 

·

Level 1 – Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date.

 

·

Level 2 – Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. We utilize a third-party data service to provide Level 2 valuations. We verify these valuations for reasonableness relative to unadjusted quotes obtained from brokers or dealers based on observable prices for similar assets in active markets.

47


 

 

·

Level 3 – Uses inputs that are unobservable, supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models that utilize management estimates of market participant assumptions. As of December 31, 2015 and 2014, we had no Level 3 assets or liabilities, other than certain assets held by our postretirement plans. 

The following are our assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2015 and 2014. These tables do not include cash on hand, assets held by our postretirement plans, or assets and liabilities that are measured at historical cost or any basis other than fair value.

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

Level 1

 

 

Level 2

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

 

395

 

 

$

 

395

 

 

$

 

 

Corporate obligations

 

 

417

 

 

 

 

 

 

 

 

417

 

U.S. Government agency and Treasury securities

 

 

2,178

 

 

 

 

1,828

 

 

 

 

350

 

Mutual funds

 

 

187

 

 

 

 

187

 

 

 

 

 

Total assets

$

 

3,177

 

 

$

 

2,410

 

 

$

 

767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation

$

 

198

 

 

$

 

198

 

 

$

 

 

Total liabilities

$

 

198

 

 

$

 

198

 

 

$

 

 

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

Level 1

 

 

Level 2

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

 

522

 

 

$

 

522

 

 

$

 

 

Corporate obligations

 

 

487

 

 

 

 

 

 

 

 

487

 

U.S. Government agency and Treasury securities

 

 

2,317

 

 

 

 

1,762

 

 

 

 

555

 

Mutual funds

 

 

185

 

 

 

 

185

 

 

 

 

 

Total assets

$

 

3,511

 

 

$

 

2,469

 

 

$

 

1,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation

$

 

202

 

 

$

 

202

 

 

$

 

 

Total liabilities

$

 

202

 

 

$

 

202

 

 

$

 

 

 

 

9. Goodwill and acquisition-related intangibles

The following table summarizes goodwill, net, by segment for the years ended December 31, 2015 and 2014.

 

 

Goodwill

 

Analog

$

 

4,158

 

Embedded Processing

 

 

172

 

Other

 

 

32

 

Total

$

 

4,362

 

 

We perform our annual goodwill impairment test as of October 1 and determine whether the fair value of each of our reporting units is in excess of its carrying value. Determination of fair value is based upon management estimates and judgment, using unobservable inputs in discounted cash flow models to calculate the fair value of each reporting unit. These unobservable inputs are considered Level 3 measurements. For the years ended December 31, 2015, 2014 and 2013, we determined no impairment was indicated. See Note 8 for additional information.

48


 

The components of Acquisition-related intangibles, net, as of December 31, 2015 and 2014, are as follows:

 

 

 

Amortization

 

December 31, 2015

 

 

December 31, 2014

 

Acquisition-Related

 

Period

 

Gross Carrying

 

 

Accumulated

 

 

 

 

 

 

 

Gross Carrying

 

 

Accumulated

 

 

 

 

 

 

Intangibles

 

(Years)

 

Amount

 

 

Amortization

 

 

Net

 

 

Amount

 

 

Amortization

 

 

Net

 

Developed technology

 

7 - 10

 

$

 

2,131

 

 

$

 

928

 

 

$

 

1,203

 

 

$

 

2,135

 

 

$

 

714

 

 

$

 

1,421

 

Customer relationships

 

8

 

 

 

810

 

 

 

 

431

 

 

 

 

379

 

 

 

 

810

 

 

 

 

330

 

 

 

 

480

 

Other intangibles

 

5

 

 

 

3

 

 

 

 

2

 

 

 

 

1

 

 

 

 

3

 

 

 

 

2

 

 

 

 

1

 

Total

 

 

 

$

 

2,944

 

 

$

 

1,361

 

 

$

 

1,583

 

 

$

 

2,948

 

 

$

 

1,046

 

 

$

 

1,902

 

 

Amortization of acquisition-related intangibles was $319 million, $321 million and $336 million for 2015, 2014 and 2013, respectively, primarily related to developed technology. Fully amortized assets are written off against accumulated amortization. Future estimated amortization of acquisition-related intangibles for the years ended December 31 is as follows:

 

 

Amortization of

Acquisition-Related Intangibles

 

2016

$

 

319

 

2017

 

 

318

 

2018

 

 

318

 

2019

 

 

288

 

2020

 

 

198

 

Thereafter

 

 

142

 

 

 

10. Postretirement benefit plans

Plan descriptions

We have various employee retirement plans, including defined contribution, defined benefit and retiree health care benefit plans. For qualifying employees, we offer deferred compensation arrangements.

U.S. retirement plans

Our principal retirement plans in the U.S. are a defined contribution plan; an enhanced defined contribution plan; and qualified and non-qualified defined benefit pension plans. The defined benefit plans were closed to new participants in 1997, and then-current participants were allowed to make a one-time election to continue accruing a benefit in the plans, or to cease accruing a benefit and instead to participate in the enhanced defined contribution plan described below.

Both defined contribution plans offer an employer-matching savings option that allows employees to make pre-tax contributions to various investment choices, including a TI common stock fund. Employees who elected to continue accruing a benefit in the qualified defined benefit pension plans may also participate in the defined contribution plan, where employer-matching contributions are provided for up to 2 percent of the employee’s annual eligible earnings. Employees who elected not to continue accruing a benefit in the defined benefit pension plans, and employees hired after November 1997 and through December 31, 2003, may participate in the enhanced defined contribution plan. This plan provides for a fixed employer contribution of 2 percent of the employee’s annual eligible earnings, plus an employer-matching contribution of up to 4 percent of the employee’s annual eligible earnings. Employees hired after December 31, 2003, do not receive the fixed employer contribution of 2 percent of the employee’s annual eligible earnings.

At December 31, 2015 and 2014, as a result of employees’ elections, TI’s U.S. defined contribution plans held shares of TI common stock totaling 13 million shares and 14 million shares valued at $704 million and $740 million, respectively. Dividends paid on these shares for both 2015 and 2014 were $19 million.

Our aggregate expense for the U.S. defined contribution plans was $60 million in both 2015 and 2014 and $62 million in 2013.

49


 

The defined benefit pension plans include employees still accruing benefits, as well as employees and participants who no longer accrue service-related benefits, but instead, may participate in the enhanced defined contribution plan. Benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation. We intend to contribute amounts to this plan to meet the minimum funding requirements of applicable local laws and regulations, plus such additional amounts as we deem appropriate. The non-qualified defined benefit plans are unfunded and closed to new participants.

U.S. retiree health care benefit plan

U.S. employees who meet eligibility requirements are offered medical coverage during retirement. We make a contribution toward the cost of those retiree medical benefits for certain retirees and their dependents. The contribution rates are based upon various factors, the most important of which are an employee’s date of hire, date of retirement, years of service and eligibility for Medicare benefits. The balance of the cost is borne by the plan’s participants. Employees hired after January 1, 2001, are responsible for the full cost of their medical benefits during retirement.

Non-U.S. retirement plans

We provide retirement coverage for non-U.S. employees, as required by local laws or to the extent we deem appropriate, through a number of defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances.

As of December 31, 2015 and 2014, as a result of employees’ elections, TI’s non-U.S. defined contribution plans held TI common stock valued at $17 million. Dividends paid on these shares of TI common stock for 2015 and 2014 were not material.

Effects on the Consolidated Statements of Income and Balance Sheets

Expense related to defined benefit and retiree health care benefit plans was as follows:

 

 

U.S. Defined Benefit

 

 

U.S. Retiree Health Care

 

 

Non-U.S. Defined Benefit

 

 

2015

 

 

2014

 

 

2013

 

 

2015

 

 

2014

 

 

2013

 

 

2015

 

 

2014

 

 

2013

 

Service cost

$

 

22

 

 

$

 

21

 

 

$

 

26

 

 

$

 

5

 

 

$

 

4

 

 

$

 

5

 

 

$

 

35

 

 

$

 

39

 

 

$

 

41

 

Interest cost

 

 

43

 

 

 

 

45

 

 

 

 

45

 

 

 

 

20

 

 

 

 

22

 

 

 

 

20

 

 

 

 

53

 

 

 

 

68

 

 

 

 

61

 

Expected return on plan assets

 

 

(48

)

 

 

 

(42

)

 

 

 

(48

)

 

 

 

(22

)

 

 

 

(20

)

 

 

 

(24

)

 

 

 

(76

)

 

 

 

(80

)

 

 

 

(67

)

Amortization of prior service cost (credit)

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

2

 

 

 

 

4

 

 

 

 

4

 

 

 

 

(2

)

 

 

 

(2

)

 

 

 

(3

)

Recognized net actuarial loss

 

 

19

 

 

 

 

26

 

 

 

 

21

 

 

 

 

8

 

 

 

 

7

 

 

 

 

11

 

 

 

 

24

 

 

 

 

24

 

 

 

 

31

 

Net periodic benefit costs

 

 

36

 

 

 

 

50

 

 

 

 

45

 

 

 

 

13

 

 

 

 

17

 

 

 

 

16

 

 

 

 

34

 

 

 

 

49

 

 

 

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Settlement losses

 

 

25

 

 

 

 

5

 

 

 

 

41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

1

 

 

 

 

4

 

Curtailment gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

(7

)

Total, including other postretirement losses (gains)

$

 

61

 

 

$

 

55

 

 

$

 

86

 

 

$

 

13

 

 

$

 

17

 

 

$

 

16

 

 

$

 

36

 

 

$

 

48

 

 

$

 

60

 

 

For the U.S. qualified pension and retiree health care plans, the expected return on plan assets component of net periodic benefit cost is based upon a market-related value of assets. In accordance with U.S. GAAP, the market-related value of assets is the fair value adjusted by a smoothing technique whereby certain gains and losses are phased in over a period of three years.

50


 

Changes in the benefit obligations and plan assets for defined benefit and retiree health care benefit plans were as follows:

 

 

U.S.

 

 

U.S.

 

 

Non-U.S.

 

 

Defined Benefit

 

 

Retiree Health Care

 

 

Defined Benefit

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Change in plan benefit obligation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit obligation at beginning of year

$

 

1,076

 

 

$

 

955

 

 

$

 

513

 

 

$

 

472

 

 

$

 

2,316

 

 

$

 

2,276

 

Service cost

 

 

22

 

 

 

 

21

 

 

 

 

5

 

 

 

 

4

 

 

 

 

35

 

 

 

 

39

 

Interest cost

 

 

43

 

 

 

 

45

 

 

 

 

20

 

 

 

 

22

 

 

 

 

53

 

 

 

 

68

 

Participant contributions

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

19

 

 

 

 

6

 

 

 

 

5

 

Benefits paid

 

 

(8

)

 

 

 

(66

)

 

 

 

(46

)

 

 

 

(45

)

 

 

 

(73

)

 

 

 

(84

)

Medicare subsidy

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

4

 

 

 

 

 

 

 

 

 

Actuarial loss (gain)

 

 

(6

)

 

 

 

133

 

 

 

 

(21

)

 

 

 

37

 

 

 

 

14

 

 

 

 

275

 

Settlements

 

 

(94

)

 

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

 

(7

)

Curtailments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11

)

Plan amendments

 

 

 

 

 

 

 

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(102

)

 

 

 

(245

)

Benefit obligation at end of year (BO)

$

 

1,033

 

 

$

 

1,076

 

 

$

 

463

 

 

$

 

513

 

 

$

 

2,231

 

 

$

 

2,316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in plan assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

$

 

1,082

 

 

$

 

941

 

 

$

 

497

 

 

$

 

485

 

 

$

 

2,213

 

 

$

 

2,179

 

Actual return on plan assets

 

 

(24

)

 

 

 

132

 

 

 

 

 

 

 

 

24

 

 

 

 

25

 

 

 

 

295

 

Employer contributions (funding of qualified plans)

 

 

52

 

 

 

 

75

 

 

 

 

1

 

 

 

 

10

 

 

 

 

72

 

 

 

 

64

 

Employer contributions (payments for non-qualified plans)

 

 

11

 

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Participant contributions

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

19

 

 

 

 

6

 

 

 

 

5

 

Benefits paid

 

 

(8

)

 

 

 

(66

)

 

 

 

(46

)

 

 

 

(45

)

 

 

 

(73

)

 

 

 

(84

)

Medicare subsidy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

Settlements

 

 

(94

)

 

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

 

(7

)

Effects of exchange rate changes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(91

)

 

 

 

(239

)

Other

 

 

 

 

 

 

 

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at end of year (FVPA)

$

 

1,019

 

 

$

 

1,082

 

 

$

 

441

 

 

$

 

497

 

 

$

 

2,134

 

 

$

 

2,213

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funded status (FVPA – BO) at end of year

$

 

(14

)

 

$

 

6

 

 

$

 

(22

)

 

$

 

(16

)

 

$

 

(97

)

 

$

 

(103

)

 

Amounts recognized on the Consolidated Balance Sheets as of December 31, 2015, were as follows:

 

 

U.S. Defined

 

 

U.S. Retiree

 

 

Non-U.S.

 

 

 

 

 

 

 

Benefit

 

 

Health Care

 

 

Defined Benefit

 

 

Total

 

Overfunded retirement plans

$

 

51

 

 

$

 

 

 

$

 

34

 

 

$

 

85

 

Accrued expenses and other liabilities

 

 

(16

)

 

 

 

 

 

 

 

(6

)

 

 

 

(22

)

Underfunded retirement plans

 

 

(49

)

 

 

 

(22

)

 

 

 

(125

)

 

 

 

(196

)

Funded status (FVPA – BO) at end of year

$

 

(14

)

 

$

 

(22

)

 

$

 

(97

)

 

$

 

(133

)

 

Amounts recognized on the Consolidated Balance Sheets as of December 31, 2014, were as follows:

 

 

U.S. Defined

 

 

U.S. Retiree

 

 

Non-U.S.

 

 

 

 

 

 

 

Benefit

 

 

Health Care

 

 

Defined Benefit

 

 

Total

 

Overfunded retirement plans

$

 

72

 

 

$

 

 

 

$

 

55

 

 

$

 

127

 

Accrued expenses and other liabilities

 

 

(9

)

 

 

 

 

 

 

 

(6

)

 

 

 

(15

)

Underfunded retirement plans

 

 

(57

)

 

 

 

(16

)

 

 

 

(152

)

 

 

 

(225

)

Funded status (FVPA – BO) at end of year

$

 

6

 

 

$

 

(16

)

 

$

 

(103

)

 

$

 

(113

)

 

Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute about $100 million to our retirement benefit plans in 2016. The amounts shown for underfunded U.S. defined benefit plans were for non-qualified pension plans, which we do not fund because contributions to them are not tax deductible.

51


 

Accumulated benefit obligations, which are generally less than the projected benefit obligations as they exclude the impact of future salary increases, were $948 million and $968 million at December 31, 2015 and 2014, respectively, for the U.S. defined benefit plans, and $2.09 billion and $2.15 billion at December 31, 2015 and 2014, respectively, for the non-U.S. defined benefit plans.

The amounts recorded in AOCI for the years ended December 31, 2015 and 2014, are detailed below by plan type:

 

 

U.S. Defined

 

 

U.S. Retiree

 

 

Non-U.S.

 

 

 

 

 

 

 

 

 

 

 

 

Benefit

 

 

Health Care

 

 

Defined Benefit

 

 

Total

 

 

Net Actuarial Loss

 

 

Net Actuarial Loss

 

 

Prior Service Cost (Credit)

 

 

Net Actuarial Loss

 

 

Prior Service Cost (Credit)

 

 

Net Actuarial Loss

 

 

Prior Service Cost (Credit)

 

AOCI balance, net of taxes,

December 31, 2014

$

 

153

 

 

$

 

85

 

 

$

 

8

 

 

$

 

291

 

 

$

 

(8

)

 

$

 

529

 

 

$

 

 

Changes in AOCI by category

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments

 

 

65

 

 

 

 

 

 

 

 

(30

)

 

 

 

45

 

 

 

 

(1

)

 

 

 

110

 

 

 

 

(31

)

Recognized within Net income

 

 

(43

)

 

 

 

(8

)

 

 

 

(2

)

 

 

 

(27

)

 

 

 

2

 

 

 

 

(78

)

 

 

 

 

Tax effect

 

 

(8

)

 

 

 

3

 

 

 

 

11

 

 

 

 

(6

)

 

 

 

 

 

 

 

(11

)

 

 

 

11

 

Total change to AOCI

 

 

14

 

 

 

 

(5

)

 

 

 

(21

)

 

 

 

12

 

 

 

 

1

 

 

 

 

21

 

 

 

 

(20

)

AOCI balance, net of taxes,

December 31, 2015

$

 

167

 

 

$

 

80

 

 

$

 

(13

)

 

$

 

303

 

 

$

 

(7

)

 

$

 

550

 

 

$

 

(20

)

 

The estimated amounts of net actuarial loss and unrecognized prior service cost (credit) included in AOCI as of December 31, 2015, that are expected to be amortized into net periodic benefit cost over the next fiscal year are: $20 million and none for the U.S. defined benefit plans; $7 million and ($4) million for the U.S. retiree health care benefit plan; and $24 million and ($2) million for the non-U.S. defined benefit plans.

Information on plan assets

We report and measure the plan assets of our defined benefit pension and other postretirement plans at fair value. The tables below set forth the fair value of our plan assets as of December 31, 2015 and 2014, using the same three-level hierarchy of fair-value inputs described in Note 8.

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets of U.S. defined benefit plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities and cash equivalents

$

 

664

 

 

$

 

 

 

$

 

664

 

 

$

 

 

Equity securities

 

 

355

 

 

 

 

 

 

 

 

355

 

 

 

 

 

Total

$

 

1,019

 

 

$

 

 

 

$

 

1,019

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets of U.S. retiree health care plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities and cash equivalents

$

 

220

 

 

$

 

178

 

 

$

 

42

 

 

$

 

 

Equity securities

 

 

221

 

 

 

 

 

 

 

 

221

 

 

 

 

 

Total

$

 

441

 

 

$

 

178

 

 

$

 

263

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets of non-U.S. defined benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities and cash equivalents

$

 

1,498

 

 

$

 

440

 

 

$

 

1,058

 

 

$

 

 

Equity securities

 

 

632

 

 

 

 

6

 

 

 

 

626

 

 

 

 

 

Other

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

4

 

Total

$

 

2,134

 

 

$

 

446

 

 

$

 

1,684

 

 

$

 

4

 

52


 

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets of U.S. defined benefit plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities and cash equivalents

$

 

707

 

 

$

 

 

 

$

 

707

 

 

$

 

 

Equity securities

 

 

375

 

 

 

 

 

 

 

 

375

 

 

 

 

 

Total

$

 

1,082

 

 

$

 

 

 

$

 

1,082

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets of U.S. retiree health care plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities and cash equivalents

$

 

243

 

 

$

 

200

 

 

$

 

43

 

 

$

 

 

Equity securities

 

 

254

 

 

 

 

 

 

 

 

254

 

 

 

 

 

Total

$

 

497

 

 

$

 

200

 

 

$

 

297

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets of non-U.S. defined benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities and cash equivalents

$

 

1,608

 

 

$

 

430

 

 

$

 

1,178

 

 

$

 

 

Equity securities

 

 

600

 

 

 

 

6

 

 

 

 

594

 

 

 

 

 

Other

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

5

 

Total

$

 

2,213

 

 

$

 

436

 

 

$

 

1,772

 

 

$

 

5

 

 

The investments in our major benefit plans largely consist of low-cost, broad-market index funds to mitigate risks of concentration within market sectors. Our investment policy is designed to better match the interest rate sensitivity of the plan assets and liabilities. The appropriate mix of equity and bond investments is determined primarily through the use of detailed asset-liability modeling studies that look to balance the impact of changes in the discount rate against the need to provide asset growth to cover future service cost. Most of our plans around the world have a greater proportion of fixed income securities with return characteristics that are more closely aligned with changes in the liabilities caused by discount rate volatility. For the U.S. plans, we utilize an option collar strategy to reduce the volatility of returns on investments in U.S. equity funds.

 

The only Level 3 asset in our worldwide benefit plans for the periods presented is a diversified property fund in a non-U.S. pension plan; we sold assets related to private equity limited partnerships in our U.S. pension plan in 2014. These investments are valued using inputs from the fund managers and internal models.

 

The following table summarizes the change in the fair values for Level 3 plan assets for the years ending December 31, 2015 and 2014:

 

 

Level 3 Plan Assets

 

 

U.S. Defined

 

 

Non-U.S.

 

 

Benefit

 

 

Defined Benefit

 

Balance, December 31, 2013

$

 

37

 

 

$

 

8

 

Redemptions and sales

 

 

(45

)

 

 

 

(2

)

Unrealized gain (loss)

 

 

8

 

 

 

 

(1

)

Balance, December 31, 2014

 

 

 

 

 

 

5

 

Redemptions

 

 

 

 

 

 

(1

)

Balance, December 31, 2015

$

 

 

 

$

 

4

 

53


 

Assumptions and investment policies

 

 

 

 

 

 

 

 

 

 

U.S. Retiree

 

 

Defined Benefit

 

 

Health Care

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted average assumptions used to determine benefit obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. discount rate

 

4.62%

 

 

 

4.23%

 

 

 

4.40%

 

 

 

4.07%

 

Non-U.S. discount rate

 

2.41%

 

 

 

2.34%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. average long-term pay progression

 

3.30%

 

 

 

3.30%

 

 

 

 

 

 

 

 

 

Non-U.S. average long-term pay progression

 

3.21%

 

 

 

3.27%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average assumptions used to determine net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. discount rate

 

4.33%

 

 

 

5.11%

 

 

 

4.15%

 

 

 

4.83%

 

Non-U.S. discount rate

 

2.34%

 

 

 

3.01%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. long-term rate of return on plan assets

 

5.10%

 

 

 

5.25%

 

 

 

4.70%

 

 

 

4.50%

 

Non-U.S. long-term rate of return on plan assets

 

3.55%

 

 

 

3.75%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. average long-term pay progression

 

3.30%

 

 

 

3.50%

 

 

 

 

 

 

 

 

 

Non-U.S. average long-term pay progression

 

3.27%

 

 

 

3.11%

 

 

 

 

 

 

 

 

 

 

We utilize a variety of methods to select an appropriate discount rate depending on the depth of the corporate bond market in the country in which the benefit plan operates. In the United States, we use a settlement approach whereby a portfolio of bonds is selected from the universe of actively traded high-quality U.S. corporate bonds. The selected portfolio is designed to provide cash flows sufficient to pay the plan’s expected benefit payments when due. The resulting discount rate reflects the rate of return of the selected portfolio of bonds. For our non-U.S. locations with a sufficient number of actively traded high-quality bonds, an analysis is performed in which the projected cash flows from the defined benefit plans are discounted against a yield curve constructed with an appropriate universe of high-quality corporate bonds available in each country. In this manner, a present value is developed. The discount rate selected is the single equivalent rate that produces the same present value. For countries that lack a sufficient corporate bond market, a government bond index adjusted for an appropriate risk premium is used to establish the discount rate.

Assumptions for the expected long-term rate of return on plan assets are based on future expectations for returns for each asset class and the effect of periodic target asset allocation rebalancing. We adjust the results for the payment of reasonable expenses of the plan from plan assets. We believe our assumptions are appropriate based on the investment mix and long-term nature of the plans’ investments. Assumptions used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries.

The table below shows target allocation ranges for the plans that hold a substantial majority of the defined benefit assets.

 

 

 

U.S. Defined

 

 

U.S. Retiree

 

 

Non-U.S.

Asset Category

 

Benefit

 

 

Health Care

 

 

Defined Benefit

Fixed income securities and cash equivalents

 

 

65%

 

 

 

50%

 

 

60% - 100%

Equity securities

 

 

35%

 

 

 

50%

 

 

0% - 40%

 

We rebalance the plans’ investments when they are not within the target allocation ranges.

Weighted average asset allocations as of December 31, are as follows:

 

 

 

U.S. Defined

 

 

U.S. Retiree

 

 

Non-U.S. Defined

 

 

 

Benefit

 

 

Health Care

 

 

Benefit

 

Asset Category

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Fixed income securities and cash equivalents

 

 

65%

 

 

 

65%

 

 

 

50%

 

 

 

49%

 

 

 

70%

 

 

 

73%

 

Equity securities

 

 

35%

 

 

 

35%

 

 

 

50%

 

 

 

51%

 

 

 

30%

 

 

 

27%

 

 

None of the plan assets related to the defined benefit pension plans and retiree health care benefit plan are directly invested in TI common stock. As of December 31, 2015, we do not expect to return any of the defined benefit pension plans’ assets to TI in the next 12 months.

 

54


 

The following assumed future benefit payments to plan participants in the next 10 years are used to measure our benefit obligations and assume that retirement eligible participants take their benefits immediately. Almost all of the payments, which may vary significantly from these assumptions, will be made from plan assets and not from company assets.

 

 

 

U.S. Defined

 

 

U.S. Retiree

 

 

Non-U.S.

 

 

 

Benefit

 

 

Health Care

 

 

Defined Benefit

 

2016

 

$

 

245

 

 

$

 

34

 

 

$

 

83

 

2017

 

 

 

90

 

 

 

 

34

 

 

 

 

84

 

2018

 

 

 

91

 

 

 

 

35

 

 

 

 

87

 

2019

 

 

 

91

 

 

 

 

36

 

 

 

 

91

 

2020

 

 

 

89

 

 

 

 

36

 

 

 

 

92

 

2021 - 2025

 

 

 

422

 

 

 

 

170

 

 

 

 

501

 

 

Assumed health care cost trend rates for the U.S. retiree health care benefit plan at December 31 are as follows:

 

 

 

2015

 

 

2014

 

Assumed health care cost trend rate for next year

 

 

7.0%

 

 

 

7.0%

 

Ultimate trend rate

 

 

5.0%

 

 

 

5.0%

 

Year in which ultimate trend rate is reached

 

 

2024

 

 

 

2023

 

 

A one percentage point increase or decrease in health care cost trend rates over all future periods would have increased or decreased the accumulated postretirement benefit obligation for the U.S. retiree health care benefit plan at December 31, 2015, by $8 million. The service cost and interest cost components of 2015 plan expense would have increased by $2 million or decreased by $1 million.

Deferred compensation arrangements

We have a deferred compensation plan that allows U.S. employees whose base salary and management responsibility exceed a certain level to defer receipt of a portion of their cash compensation. Payments under this plan are made based on the participant’s distribution election and plan balance. Participants can earn a return on their deferred compensation based on notional investments in the same investment funds that are offered in our defined contribution plans.

As of December 31, 2015, our liability to participants of the deferred compensation plans was $198 million and is recorded in Deferred credits and other liabilities on our Consolidated Balance Sheets. This amount reflects the accumulated participant deferrals and earnings thereon as of that date. As of December 31, 2015, we held $187 million in mutual funds related to these plans that are recorded in Long-term investments on our Consolidated Balance Sheets, and serve as an economic hedge against changes in fair values of our other deferred compensation liabilities. We record changes in the fair value of the liability and the related investment in SG&A as discussed in Note 8.

 

 

11. Debt and lines of credit

Short-term borrowings

We maintain a line of credit to support commercial paper borrowings, if any, and to provide additional liquidity through bank loans. As of December 31, 2015, we had a variable-rate revolving credit facility from a consortium of investment-grade banks that allows us to borrow up to $2 billion until March 2020. The interest rate on borrowings under this credit facility, if drawn, is indexed to the applicable London Interbank Offered Rate (LIBOR). As of December 31, 2015, our credit facility was undrawn and we had no commercial paper outstanding.

Long-term debt

We retired $250 million of maturing debt in April 2015 and another $750 million in August 2015.

In May 2015, we issued a principal amount of $500 million of fixed-rate long-term debt due in 2020. We incurred $3 million of issuance and other related costs, which are amortized to Interest and debt expense over the term of the debt. The proceeds of the offering were $498 million, net of the original issuance discount, and were used toward the repayment of a portion of the debt that matured in August 2015.

55


 

In March 2014, we issued an aggregate principal amount of $500 million of fixed-rate long-term debt, with $250 million due in 2017 and $250 million due in 2021. We incurred $3 million of issuance and other related costs, which are amortized to Interest and debt expense over the term of the debt. The proceeds of the offering were $498 million, net of the original issuance discount and were used toward the repayment of the $1.0 billion of debt that matured in May 2014.

In May 2013, we issued an aggregate principal amount of $1.0 billion of fixed-rate long-term debt, with $500 million due in 2018 and $500 million due in 2023. We incurred $6 million of issuance and other related costs, which are amortized to Interest and debt expense over the term of the debt. The proceeds of the offering were $986 million, net of the original issuance discount and were used toward the repayment of $1.5 billion of maturing debt, including floating-rate notes. In connection with this repayment, we settled a floating-to-fixed interest rate swap associated with the maturing debt.

Long-term debt outstanding as of December 31, 2015 and 2014 is as follows:

 

 

December 31,

 

 

2015

 

 

2014

 

Notes due 2015 at 3.95% (assumed with National acquisition)

$

 

 

 

$

 

250

 

Notes due 2015 at 0.45%

 

 

 

 

 

 

750

 

Notes due 2016 at 2.375%

 

 

1,000

 

 

 

 

1,000

 

Notes due 2017 at 6.60% (assumed with National acquisition)

 

 

375

 

 

 

 

375

 

Notes due 2017 at 0.875%

 

 

250

 

 

 

 

250

 

Notes due 2018 at 1.00%

 

 

500

 

 

 

 

500

 

Notes due 2019 at 1.65%

 

 

750

 

 

 

 

750

 

Notes due 2020 at 1.75%

 

 

500

 

 

 

 

 

Notes due 2021 at 2.75%

 

 

250

 

 

 

 

250

 

Notes due 2023 at 2.25%

 

 

500

 

 

 

 

500

 

Total debt

 

 

4,125

 

 

 

 

4,625

 

Net unamortized (discount) premium and debt issuance costs

 

 

(5

)

 

 

 

6

 

Total debt, including net unamortized (discount) premium and debt issuance costs

 

 

4,120

 

 

 

 

4,631

 

Current portion of long-term debt

 

 

(1,000

)

 

 

 

(1,001

)

Long-term debt

$

 

3,120

 

 

$

 

3,630

 

 

As of December 31, 2015, we retrospectively applied the provisions of ASU 2015-03 and ASU 2015-15 regarding the classification of debt issuance costs. See Note 2 for additional information. As a result, we reclassified $11 million of applicable debt issuance costs as of December 31, 2014, from Other assets to Long-term debt, as comprehended in Net unamortized (discount) premium and debt issuance costs, in the table above.

Interest and debt expense was $90 million in 2015, $94 million in 2014 and $95 million in 2013. This was net of the amortization of the debt (discount) premium and other debt issuance costs. Cash payments for interest on long-term debt were $99 million in 2015 and $102 million in both 2014 and 2013. Capitalized interest was not material.

 

 

12. Commitments and contingencies

Operating leases

We conduct certain operations in leased facilities and also lease a portion of our data processing and other equipment. In addition, certain long-term supply agreements to purchase industrial gases are accounted for as operating leases. Lease agreements frequently include purchase and renewal provisions and require us to pay taxes, insurance and maintenance costs. Rental and lease expense incurred was $98 million, $113 million and $120 million in 2015, 2014 and 2013, respectively.

Capitalized software licenses

We have licenses for certain internal-use electronic design automation software that we account for as capital leases. The related liabilities are apportioned between Accounts payable and Deferred credits and other liabilities on our Consolidated Balance Sheets, depending on the contractual timing of payments.

Purchase commitments

Some of our purchase commitments entered in the ordinary course of business provide for minimum payments.

56


 

As of December 31, 2015, we had committed to make the following minimum payments under our non-cancellable operating leases, capitalized software licenses and purchase commitments:

 

 

 

 

 

 

 

 

Capitalized

 

 

 

 

 

 

 

 

Operating

 

 

Software

 

 

Purchase

 

 

 

Leases

 

 

Licenses

 

 

Commitments

 

2016

 

$

 

69

 

 

$

 

30

 

 

$

 

95

 

2017

 

 

 

53

 

 

 

 

2

 

 

 

 

54

 

2018

 

 

 

37

 

 

 

 

 

 

 

 

40

 

2019

 

 

 

21

 

 

 

 

 

 

 

 

33

 

2020

 

 

 

19

 

 

 

 

 

 

 

 

17

 

Thereafter

 

 

 

62

 

 

 

 

 

 

 

 

1

 

 

Indemnification guarantees

We routinely sell products with an intellectual property indemnification included in the terms of sale. Historically, we have had only minimal, infrequent losses associated with these indemnities. Consequently, we cannot reasonably estimate any future liabilities that may result.

Warranty costs/product liabilities

We accrue for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability. Historically, we have experienced a low rate of payments on product claims. Although we cannot predict the likelihood or amount of any future claims, we do not believe they will have a material adverse effect on our financial condition, results of operations or liquidity. Typically, our warranties for semiconductor products obligate us to repair, replace or credit the purchase price of a covered product back to the buyer. Product claims may exceed the price of our products.

General

We are subject to various legal and administrative proceedings. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity.

 

 

13. Supplemental financial information

Acquisition charges

We incurred various costs as a result of the 2011 acquisition of National that are included in Other for segment reporting purposes, consistent with how management measures the performance of its segments. For the years ended December 31, 2015, 2014 and 2013, Acquisition charges were primarily from the ongoing amortization of intangible assets resulting from the National acquisition. See Note 9 for additional information.

Other Income (Expense), Net (OI&E)

 

 

For Years Ended December 31,

 

 

2015

 

 

2014

 

 

2013

 

Lease income

$

 

14

 

 

$

 

14

 

 

$

 

14

 

Tax interest income (expense)

 

 

8

 

 

 

 

6

 

 

 

 

(10

)

Interest income

 

 

6

 

 

 

 

7

 

 

 

 

10

 

Currency exchange gains (losses)

 

 

5

 

 

 

 

(4

)

 

 

 

(2

)

Investment gains (losses)

 

 

3

 

 

 

 

5

 

 

 

 

18

 

Other

 

 

(4

)

 

 

 

(7

)

 

 

 

(13

)

Total

$

 

32

 

 

$

 

21

 

 

$

 

17

 

 

57


 

Prepaid Expenses and Other Current Assets

 

 

December 31,

 

 

2015

 

 

2014

 

Prepaid taxes on intercompany inventory profits, net

$

 

801

 

 

$

 

693

 

Other prepaid expenses and current assets

 

 

199

 

 

 

 

157

 

Total

$

 

1,000

 

 

$

 

850

 

 

Property, Plant and Equipment at Cost

 

 

Depreciable

 

December 31,

 

 

Lives (Years)

 

2015

 

 

2014

 

Land

n/a

 

$

 

127

 

 

$

 

137

 

Buildings and improvements

5 - 40

 

 

 

2,789

 

 

 

 

2,801

 

Machinery and equipment

3 - 10

 

 

 

2,549

 

 

 

 

3,328

 

Total

 

 

$

 

5,465

 

 

$

 

6,266

 

 

Accumulated Other Comprehensive Income (Loss), Net of Taxes (AOCI)

 

 

December 31,

 

 

2015

 

 

2014

 

Postretirement benefit plans:

 

 

 

 

 

 

 

 

 

Net actuarial loss

$

 

(550

)

 

$

 

(529

)

Prior service credit

 

 

20

 

 

 

 

 

Cash flow hedge derivative

 

 

(2

)

 

 

 

(3

)

Total

$

 

(532

)

 

$

 

(532

)

 

Details on amounts reclassified out of Accumulated other comprehensive income (loss), net of taxes, to Net income

Our Consolidated Statements of Comprehensive Income include items that have been recognized within Net income during the years ended December 31, 2015, 2014 and 2013. The table below details where on the Consolidated Statements of Income these transactions are recorded.

 

 

 

For Years Ended

 

 

Impact to

 

 

December 31,

 

 

Related Statement

Details about AOCI Components

 

2015

 

 

2014

 

 

2013

 

 

of Income Line

Net actuarial gains (losses) of defined benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized net actuarial loss and Settlement losses (a)

 

$

 

78

 

 

$

 

63

 

 

$

 

108

 

 

Increase to Pension expense (b)

Tax effect

 

 

 

(25

)

 

 

 

(21

)

 

 

 

(37

)

 

Decrease to Provision for income taxes

Recognized within Net income, net of taxes

 

$

 

53

 

 

$

 

42

 

 

$

 

71

 

 

Decrease to Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service (cost) credit of defined benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost (credit) and Curtailment gain (a)

 

$

 

 

 

$

 

 

 

$

 

(5

)

 

Decrease to Pension expense (b)

Tax effect

 

 

 

 

 

 

 

 

 

 

 

2

 

 

Increase to Provision for income taxes

Recognized within Net income, net of taxes

 

$

 

 

 

$

 

 

 

$

 

(3

)

 

Increase to Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of treasury rate locks

 

$

 

2

 

 

$

 

2

 

 

$

 

2

 

 

Increase to Interest and debt expense

Tax effect

 

 

 

(1

)

 

 

 

(1

)

 

 

 

(1

)

 

Decrease to Provision for income taxes

Recognized within Net income, net of taxes

 

$

 

1

 

 

$

 

1

 

 

$

 

1

 

 

Decrease to Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Detailed in Note 10.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(b) Pension expense is included in COR, R&D, SG&A and Restructuring charges/other in the Consolidated Statements of Income.

 

 

58


 

14. Quarterly financial data (unaudited)

 

 

 

Quarter

 

2015

 

1st

 

 

2nd

 

 

3rd

 

 

4th

 

Revenue

 

$

 

3,150

 

 

$

 

3,232

 

 

$

 

3,429

 

 

$

 

3,189

 

Gross profit

 

 

 

1,816

 

 

 

 

1,881

 

 

 

 

1,997

 

 

 

 

1,866

 

Included in Operating profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition charges

 

 

 

83

 

 

 

 

82

 

 

 

 

83

 

 

 

 

81

 

Restructuring charges/other

 

 

 

(2

)

 

 

 

(1

)

 

 

 

 

 

 

 

(68

)

Operating profit

 

 

 

958

 

 

 

 

1,010

 

 

 

 

1,164

 

 

 

 

1,142

 

Net income

 

 

 

656

 

 

 

 

696

 

 

 

 

798

 

 

 

 

836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

 

0.62

 

 

$

 

0.66

 

 

$

 

0.77

 

 

$

 

0.81

 

Diluted earnings per common share

 

 

 

0.61

 

 

 

 

0.65

 

 

 

 

0.76

 

 

 

 

0.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter

 

2014

 

1st

 

 

2nd

 

 

3rd

 

 

4th

 

Revenue

 

$

 

2,983

 

 

$

 

3,292

 

 

$

 

3,501

 

 

$

 

3,269

 

Gross profit

 

 

 

1,607

 

 

 

 

1,881

 

 

 

 

2,044

 

 

 

 

1,895

 

Included in Operating profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition charges

 

 

 

83

 

 

 

 

82

 

 

 

 

83

 

 

 

 

82

 

Restructuring charges/other

 

 

 

(11

)

 

 

 

(4

)

 

 

 

(9

)

 

 

 

(27

)

Operating profit

 

 

 

690

 

 

 

 

982

 

 

 

 

1,175

 

 

 

 

1,100

 

Net income

 

 

 

487

 

 

 

 

683

 

 

 

 

826

 

 

 

 

825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

 

0.44

 

 

$

 

0.63

 

 

$

 

0.77

 

 

$

 

0.78

 

Diluted earnings per common share

 

 

 

0.44

 

 

 

 

0.62

 

 

 

 

0.76

 

 

 

 

0.76

 

 

59


 

Report of independent registered public accounting firm

The Board of Directors and Stockholders

Texas Instruments Incorporated

We have audited the accompanying consolidated balance sheets of Texas Instruments Incorporated and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Texas Instruments Incorporated and subsidiaries at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of classifying deferred tax assets and liabilities effective December 31, 2015.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2016, expressed an unqualified opinion thereon.

 

Dallas, Texas

February 24, 2016

 

 

60


 

ITEM 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 

Not applicable.

ITEM 9A.

Controls and Procedures.

Disclosure controls and procedures

An evaluation as of the end of the period covered by this report was carried out under the supervision and with the participation of TI’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of TI’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures were effective.

Internal control over financial reporting

Report by management on internal control over financial reporting

The management of TI is responsible for establishing and maintaining effective internal control over financial reporting. TI’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements issued for external purposes in accordance with generally accepted accounting principles. There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the fourth quarter of 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

TI management assessed the effectiveness of internal control over financial reporting as of December 31, 2015. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria) in Internal Control − Integrated Framework. Based on our assessment we believe that, as of December 31, 2015, our internal control over financial reporting is effective based on the COSO criteria.

TI’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which immediately follows this report.

61


 

Report of independent registered public accounting firm on internal control over financial reporting

The Board of Directors and Stockholders

Texas Instruments Incorporated

We have audited Texas Instruments Incorporated’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control − Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Texas Instruments Incorporated’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report by management on internal control over financial reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Texas Instruments Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Texas Instruments Incorporated and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015, and our report dated February 24, 2016, expressed an unqualified opinion thereon.

 

 

Dallas, Texas

February 24, 2016

62


 

ITEM 9B.

Other Information. 

Not applicable.

 

63


 

PART III

ITEM 10.

Directors, Executive Officers and Corporate Governance.

The information with respect to directors’ names, ages, positions, term of office and periods of service, which is contained under the caption “Election of directors” in our proxy statement for the 2016 annual meeting of stockholders, is incorporated herein by reference to such proxy statement.

The information with respect to directors’ business experience, which is contained under the caption “Board diversity and nominee qualifications” in our proxy statement for the 2016 annual meeting of stockholders, is incorporated herein by reference to such proxy statement.

The information with respect to Section 16(a) beneficial ownership reporting compliance contained under the caption of the same name in our proxy statement for the 2016 annual meeting of stockholders is incorporated herein by reference to such proxy statement.

A list of our executive officers and their biographical information appears in Part I, Item 1 of this report.

Code of Ethics

We have adopted the Code of Ethics for TI Chief Executive Officer and Senior Finance Officers. A copy of the Code can be found on our web site at www.ti.com/corporategovernance. We intend to satisfy the disclosure requirements of the SEC regarding amendments to, or waivers from, the Code by posting such information on the same web site.

Audit Committee

The information contained under the caption “Committees of the board” with respect to the audit committee and the audit committee financial expert in our proxy statement for the 2016 annual meeting of stockholders is incorporated herein by reference to such proxy statement.

ITEM 11.

Executive Compensation.

The information contained under the captions “Director compensation” and “Executive compensation” in our proxy statement for the 2016 annual meeting of stockholders is incorporated herein by reference to such proxy statement, provided that the Compensation Committee report shall not be deemed filed with this Form 10-K.

The information contained under the caption “Compensation committee interlocks and insider participation” in our proxy statement for the 2016 annual meeting of stockholders is incorporated herein by reference to such proxy statement.

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Equity compensation plan information

The information contained under the caption “Equity compensation plan information” in our proxy statement for the 2016 annual meeting of stockholders is incorporated herein by reference to such proxy statement.

Security ownership of certain beneficial owners and management

The information that is contained under the captions “Security ownership of certain beneficial owners” and “Security ownership of directors and management” in our proxy statement for the 2016 annual meeting of stockholders is incorporated herein by reference to such proxy statement.

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence.

The information contained under the caption “Related person transactions” in our proxy statement for the 2016 annual meeting of stockholders is incorporated herein by reference to such proxy statement.

The information contained under the caption “Director independence” in our proxy statement for the 2016 annual meeting of stockholders is incorporated herein by reference to such proxy statement.

64


 

ITEM 14.

Principal Accountant Fees and Services.  

The information with respect to principal accountant fees and services contained under the caption “Proposal to ratify appointment of independent registered public accounting firm” in our proxy statement for the 2016 annual meeting of stockholders is incorporated herein by reference to such proxy statement.

 

 

65


 

PART IV

ITEM 15.

Exhibits, Financial Statement Schedules.

The financial statements are listed in the index included in Item 8, “Financial Statements and Supplementary Data.”

 

Designation of Exhibit

Description of Exhibit

Incorporated by Reference

Filed or Furnished Herewith

Form

File Number

Date of Filing

Exhibit Number

3(a)

Restated Certificate of Incorporation of the Registrant, dated April 18, 1985, as amended

10-K

001-3761

February 24, 2015

3(a)

 

3(b)

By-Laws of the Registrant

10-K

001-3761

February 24, 2015

3(b)

 

4(a)

Indenture

8-K

001-3761

May 23, 2011

4.2

 

4(b)

Officer’s Certificate

8-K

001-3761

May 23, 2011

4.3

 

4(c)

Officer’s Certificate

8-K

001-3761

May 8, 2013

4.2

 

4(d)

Officer’s Certificate

8-K

001-3761

March 12, 2014

4.2

 

4(e)

Officer’s Certificate

8-K

001-3761

May 6, 2015

4.1

 

4(f)

The Registrant has omitted certain instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). The Registrant undertakes to furnish a copy of such instruments to the Securities and Exchange Commission upon request.

10(a)

TI Deferred Compensation Plan, as amended*

 

 

 

 

X

10(b)

TI Employees Non-Qualified Pension Plan, effective January 1, 2009, as amended*

 

 

 

 

X

10(c)

TI Employees Non-Qualified Pension Plan II*

 

 

 

 

X

10(d)

Texas Instruments Long-Term Incentive Plan, adopted April 15, 1993*

10-K

001-3761

February 24, 2012

10(c)

 

10(e)

Texas Instruments 2000 Long-Term Incentive Plan as amended October 16, 2008*

10-K

001-3761

February 24, 2015

10(e)

 

10(f)

Texas Instruments 2003 Long-Term Incentive Plan as amended October 16, 2008

10-K

001-3761

February 24, 2015

10(f)

 

10(g)

Texas Instruments Executive Officer Performance Plan as amended September 17, 2009*

10-K

001-3761

February 24, 2015

10(g)

 

10(h)

Texas Instruments Restricted Stock Unit Plan for Directors, as amended, dated April 16, 1998

10-K

001-3761

February 24, 2012

10(h)

 

10(i)

Texas Instruments Directors Deferred Compensation Plan, as amended, dated April 16, 1998

10-K

001-3761

February 24, 2012

10(i)

 

10(j)

Texas Instruments 2003 Director Compensation Plan as amended January 19, 2012

10-K

001-3761

February 24, 2015

10(j)

 

10(k)

Form of Non-Qualified Stock Option Agreement for Executive Officers under the Texas Instruments 2009 Long-Term Incentive Plan*

10-K

001-3761

February 22, 2013

10(l)

 

10(l)

Form of Restricted Stock Unit Award Agreement under the Texas Instruments 2009 Long-Term Incentive Plan*

10-K

001-3761

February 22, 2013

10(m)

 

10(m)

Texas Instruments 2009 Long-Term Incentive Plan as amended January 19, 2012 *

10-K

001-3761

February 24, 2015

10(m)

 

10(n)

Texas Instruments 2009 Director Compensation Plan as amended December 2, 2010

8-K

001-3761

December 7, 2010

10

 

12

Ratio of Earnings to Fixed Charges

 

 

 

 

X

21

List of Subsidiaries of the Registrant

 

 

 

 

X

23

Consent of Independent Registered Public Accounting Firm

 

 

 

 

X

31(a)

Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer

 

 

 

 

X

31(b)

Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer

 

 

 

 

X

66


 

32(a)

Section 1350 Certification of Chief Executive Officer

 

 

 

 

X

32(b)

Section 1350 Certification of Chief Financial Officer

 

 

 

 

X

101.ins

Instance Document

 

 

 

 

X

101.sch

XBRL Taxonomy Schema

 

 

 

 

X

101.cal

XBRL Taxonomy Calculation Linkbase

 

 

 

 

X

101.Def

XBRL Taxonomy Definitions Document

 

 

 

 

X

101.lab

XBRL Taxonomy Labels Linkbase

 

 

 

 

X

101.pre

XBRL Taxonomy Presentation Linkbase

 

 

 

 

X

 

* Management compensation plans and arrangements

Notice regarding forward-looking statements

This report includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as TI or its management “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of similar import. Similarly, statements herein that describe TI’s business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in forward-looking statements.

We urge you to carefully consider the following important factors that could cause actual results to differ materially from the expectations of TI or its management:

 

·

Market demand for semiconductors, particularly in TI’s end markets;

 

·

TI’s ability to compete in products and prices in an intensely competitive industry;

 

·

Losses or curtailments of purchases from key customers and the timing and amount of distributor and other customer inventory adjustments;

 

·

Customer demand that differs from forecasts and the financial impact of inadequate or excess TI inventory that results from demand that differs from projections;

 

·

TI’s ability to maintain or improve profit margins, including its ability to utilize its manufacturing facilities at sufficient levels to cover its fixed operating costs, in an intensely competitive and cyclical industry;

 

·

TI’s ability to develop, manufacture and market innovative products in a rapidly changing technological environment;

 

·

Economic, social and political conditions in the countries in which TI, its customers or its suppliers operate, including security risks, health conditions, possible disruptions in transportation, communications and information technology networks and fluctuations in foreign currency exchange rates;

 

·

Natural events such as severe weather, geological events or health epidemics in the locations in which TI, its customers or its suppliers operate;

 

·

Breaches of TI’s information technology systems or those of its customers or suppliers;

 

·

Availability and cost of raw materials, utilities, manufacturing equipment, third-party manufacturing services and manufacturing technology;

 

·

Timely implementation of new manufacturing technologies and installation of manufacturing equipment, and the ability to obtain needed third-party foundry and assembly/test subcontract services;

 

·

TI’s ability to maintain and enforce a strong intellectual property portfolio and obtain needed licenses from third parties, expiration of license agreements between TI and its patent licensees, and market conditions reducing royalty payments to TI;

 

·

Compliance with or changes in the complex laws, rules and regulations to which TI is or may become subject, or actions of enforcement authorities, that restrict TI’s ability to manufacture its products or operate its business, or subject us to fines, penalties, or other legal liability;

67


 

 

·

Product liability or warranty claims, claims based on epidemic or delivery failure, or other claims relating to TI products, manufacturing, services, design or communications, or recalls by TI customers for a product containing a TI part;  

 

·

Changes in the tax rate applicable to TI as the result of changes in tax law, the jurisdictions in which profits are determined to be earned and taxed, adverse resolution of tax audits and the ability to realize deferred tax assets;

 

·

Financial difficulties of distributors or their promotion of competing product lines to TI’s detriment;

 

·

A loss suffered by a customer or distributor of TI with respect to TI-consigned inventory;

 

·

Instability in the global credit and financial markets that affects TI’s ability to fund its daily operations, invest in the business, make strategic acquisitions, or make principal and interest payments on its debt;

 

·

Increases in health care and pension benefit costs;

 

·

TI’s ability to recruit and retain skilled personnel;

 

·

TI’s ability to successfully integrate and realize opportunities for growth from acquisitions, and its ability to realize its expectations regarding the amount and timing of restructuring charges and associated cost savings; and

 

·

Impairments of TI’s non-financial assets.

For a more detailed discussion of these factors see the Risk Factors discussion in Item 1A of this report. The forward-looking statements included in this report are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

TEXAS INSTRUMENTS INCORPORATED

 

 

 

By:

 

/s/ Kevin P. March

 

 

Kevin P. March

Senior Vice President,

Chief Financial Officer

and Chief Accounting Officer

Date: February 24, 2016

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Each person whose signature appears below constitutes and appoints each of Richard K. Templeton, Kevin P. March, and Cynthia Hoff Trochu, or any of them, each acting alone, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in his or her name, place and stead, in any and all capacities in connection with the annual report on Form 10-K of Texas Instruments Incorporated for the year ended December 31, 2015, to sign any and all amendments to the Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 24th day of February 2016.

 

Signature

 

Title

 

 

 

/s/ Ralph W. Babb, Jr.

 

 

Ralph W. Babb, Jr.

 

Director

 

 

 

/s/ Mark A. Blinn

 

 

Mark A. Blinn

 

Director

 

 

 

/s/ Daniel A. Carp

 

 

Daniel A. Carp

 

Director

 

 

 

/s/ Janet F. Clark

 

 

Janet F. Clark

 

Director

 

 

 

/s/ Carrie S. Cox

 

 

Carrie S. Cox

 

Director

 

 

 

/s/ Ronald Kirk

 

 

Ronald Kirk

 

Director

 

 

 

/s/ Pamela H. Patsley

 

 

Pamela H. Patsley

 

Director

 

 

 

/s/ Robert E. Sanchez

 

 

Robert E. Sanchez

 

Director

 

 

 

/s/ Wayne R. Sanders

 

 

Wayne R. Sanders

 

Director

 

 

 

/s/ Ruth J. Simmons

 

 

Ruth J. Simmons

 

Director

 

 

 

/s/ Richard K. Templeton

 

 

Richard K. Templeton

 

Chairman of the Board; Director; President;

Chief Executive Officer

 

 

 

/s/ Christine Todd Whitman

 

 

Christine Todd Whitman

 

Director

 

 

 

/s/ Kevin P. March

 

 

Kevin P. March

 

Senior Vice President; Chief Financial Officer;

Chief Accounting Officer

 

 

 

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