National Semiconductor acquisition

9 Months Ended

Sep. 30, 2011

Business Combinations [Abstract]

National Semiconductor acquisition

National Semiconductor acquisition. On September 23, 2011, we completed the acquisition of 100% of National’s issued and outstanding common stock. National designs, develops, manufactures and markets a wide range of semiconductor products, focusing on providing high-performance energy efficient analog and mixed-signal solutions. The purpose of the acquisition was to grow revenue by combining National’s products with TI’s larger sales force and customer base.

We accounted for this transaction under Accounting Standards Codification (ASC) 805 - Business Combinations, and National’s operating results are included in the Analog segment. The amount of National’s revenue included in our consolidated statement of income for the period from the closing date to September 30, 2011, was $18 million.

As of September 30, 2011, the allocation of the consideration transferred to the assets acquired and liabilities assumed from National is not yet complete. The preliminary estimates of fair value by major class of the assets acquired and liabilities assumed at the acquisition date are shown below. Because the acquisition closing was near our September 30 quarter-end date, these amounts are based on preliminary valuations. They include work performed by third-party valuation specialists retained to assist management in its valuation efforts, as well as our own estimates and assumptions. These preliminary fair value estimates are subject to change as valuations are finalized.

Cash and cash equivalents	$	1,145
Current assets	455
Inventory	225
Property, plant and equipment	904
Other assets	227
Acquired intangible assets (see detail below)	2,974
Goodwill	3,527
Assumed current liabilities	(195		)
Assumed long-term debt	(1,105		)
Deferred taxes and other assumed non-current liabilities	(1,600		)
Total consideration transferred	$	6,557

The acquisition date fair value of the consideration transferred is as follows:

Cash payments	$	6,535
Fair value of vested share-based awards assumed by TI	22
Total consideration transferred to National shareholders	$	6,557

The total cash flow impact of $5.390 billion results from the $6.535 billion cash payment offset by $1.145 billion cash balance of National at closing.

Identifiable intangible assets acquired and their estimated useful lives are as follows:

	Asset amount		Weighted average useful life (in years)
Developed technology	$	2,025	10
Customer relationships	810		8
Other	34		5
Identified intangible assets subject to amortization	2,869
In-process research and development	105		*
Total identified intangible assets	$	2,974

* In-process research and development is not amortized until the associated project has been completed. Alternatively, if the associated project is not viable, it will be expensed.

We utilize the straight-line method of amortization for acquired intangible assets. Amortization of acquired intangible assets prior to the National acquisition was $19 million and $38 million for the nine months ended September 30, 2011 and 2010, respectively. Amortization of acquired intangible assets from the National acquisition is a component of acquisition cost, which is detailed later in this note. We recognized $6 million for the period from the acquisition date to September 30, 2011.

The remaining consideration, after adjusting for identified intangible assets and the net assets and liabilities recorded at fair value, was $3.527 billion and was applied to goodwill. This goodwill is attributed to National’s product portfolio and workforce expertise. None of the goodwill related to the National acquisition is deductible for tax purposes.

The following unaudited summaries of pro forma combined results of operation for the three months and nine months ended September 30, 2011 and 2010, give effect to the acquisition as if it had been completed on January 1, 2010. These pro forma summaries combine the historical results of TI for the three months and nine months ended September 30, 2011 and 2010, with the historical results of National (which had a year-end in May) for the three months and nine months ended August 28, 2011, and August 29, 2010, respectively. These pro forma summaries do not reflect any operating efficiencies, cost savings or revenue enhancements that may be achieved by the combined companies. In addition, certain non-recurring expenses, such as restructuring costs and retention bonuses, that are expected to be incurred within the first twelve months after the acquisition are not reflected in the pro forma summaries. These pro forma summaries are presented for informational purposes only and are not necessarily indicative of what the actual results of operations would have been had the acquisition taken place as of that date, nor are they indicative of future consolidated results of operations.

	For Three Months Ended Sept. 30,				For Nine Months Ended Sept. 30,
	2011		2010		2011		2010
Revenue	$	3,818	$	4,152	$	11,385	$	11,613
Net income	589		887		1,930		2,269
Earnings per common share - diluted	$	0.50	$	0.73	$	1.61	$	1.83

Acquisition cost

Included in the acquisition cost line of the Consolidated Statements of Income are the following:

	For Three Months Ended Sept. 30,				For Nine Months Ended Sept. 30,
	2011		2010		2011		2010
Transaction costs	$	30	$	—	$	45	$	—
Restructuring costs	53		—		53		—
Stock-based compensation	41		—		41		—
Accrual of retention bonuses	6		—		6		—
Amortization of intangible assets	6		—		6		—
Other costs	11		—		11		—
Total	$	147	$	—	$	162	$	—

Transaction costs include expenses incurred in connection with the National acquisition, such as investment advisory, legal, accounting and printing fees, as well as the costs associated with the bridge financing obtained in April 2011.

Restructuring costs associated with the National acquisition consist of severance and other benefit payments for former National employees who have been or will be terminated after the closing date. About 350 jobs will be eliminated by the end of 2012. Additional restructuring charges of about $30 million for this action will continue through the third quarter of 2012.

Stock-based compensation of $41 million was recognized for the accelerated vesting on employees being terminated. Additional stock-based compensation will be recognized over any remaining service periods.

The accrual of retention bonuses reflects amounts to be paid to former National employees who fulfill agreed upon service obligations. This expense will be recognized ratably over the service period. We accrued $6 million in the third quarter and the remaining expected charges of about $75 million will be recognized by the end of the first quarter of 2012.

Amortization of intangible assets is based on an estimated average useful life varying between 5 and 10 years. Annual amortization for the next 5 years is about $325 million per year. See Note 3 for additional details.