EX-13 33 txn-12312011xexhibit13.htm EXHIBIT 13 TXN - 12.31.2011 - Exhibit 13
Exhibit 13

 
 
For Years Ended
December 31,
Consolidated statements of income
 
2011
 
2010
 
2009
[Millions of dollars, except share and per-share amounts]
 
 
 
 
 
 
Revenue
 
$
13,735

 
$
13,966

 
$
10,427

Cost of revenue (COR)
 
6,963

 
6,474

 
5,428

Gross profit
 
6,772

 
7,492

 
4,999

Research and development (R&D)
 
1,715

 
1,570

 
1,476

Selling, general and administrative (SG&A)
 
1,638

 
1,519

 
1,320

Restructuring charges
 
112

 
33

 
212

Acquisition charges/divestiture (gain)
 
315

 
(144
)
 

Operating profit
 
2,992

 
4,514

 
1,991

Other income (expense) net (OI&E)
 
5

 
37

 
26

Interest and debt expense
 
42

 

 

Income before income taxes
 
2,955

 
4,551

 
2,017

Provision for income taxes
 
719

 
1,323

 
547

Net income
 
$
2,236

 
$
3,228

 
$
1,470

 
 
 
 
 
 
 
Earnings per common share:
 
 

 
 

 
 

Basic
 
$
1.91

 
$
2.66

 
$
1.16

Diluted
 
$
1.88

 
$
2.62

 
$
1.15

 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 

 
 

 
 

Basic
 
1,151

 
1,199

 
1,260

Diluted
 
1,171

 
1,213

 
1,269

 
 
 
 
 
 
 
Cash dividends declared per share of common stock
 
$
0.56

 
$
0.49

 
$
0.45


See accompanying notes.

1


 
 
For Years Ended
December 31,
Consolidated statements of comprehensive income
 
2011
 
2010
 
2009
[Millions of dollars]
 
 
 
 
 
 
Net income
 
$
2,236

 
$
3,228

 
$
1,470

Other comprehensive income (loss):
 
 

 
 

 
 

Available-for-sale investments:
 
 

 
 

 
 

Unrealized gains (losses), net of tax benefit (expense) of $1, ($3) and ($9)
 
(2
)
 
7

 
17

Reclassification of recognized transactions, net of tax benefit (expense) of ($7), $0 and ($3)
 
12

 

 
6

Net actuarial gains (losses) of defined benefit plans:
 
 
 
 

 
 

Adjustment, net of tax benefit (expense) of $65, $61 and ($38)
 
(124
)
 
(154
)
 
91

Reclassification of recognized transactions, net of tax benefit (expense) of ($28), ($36) and ($27)
 
48

 
65

 
62

Prior service cost of defined benefit plans:
 
 

 
 

 
 

Adjustment, net of tax benefit (expense) of $5, ($1) and $1
 
(9
)
 
2

 
(1
)
Reclassification of recognized transactions, net of tax benefit (expense) of ($1), $0 and $3
 
2

 

 
(6
)
Change in fair value of derivative instrument, net of tax benefit (expense) of $1

 
(2
)
 

 

Total
 
(75
)
 
(80
)
 
169

Total comprehensive income
 
$
2,161

 
$
3,148

 
$
1,639


See accompanying notes.

2


 
 
December 31,
Consolidated balance sheets
 
2011
 
2010
[Millions of dollars, except share amounts]
 
 
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
992

 
$
1,319

Short-term investments
 
1,943

 
1,753

Accounts receivable, net of allowances of ($19) and ($18)
 
1,545

 
1,518

Raw materials
 
115

 
122

Work in process
 
1,004

 
919

Finished goods
 
669

 
479

Inventories
 
1,788

 
1,520

Deferred income taxes
 
1,174

 
770

Prepaid expenses and other current assets
 
386

 
180

Total current assets
 
7,828

 
7,060

Property, plant and equipment at cost
 
7,133

 
6,907

Less accumulated depreciation
 
(2,705
)
 
(3,227
)
Property, plant and equipment, net
 
4,428

 
3,680

Long-term investments
 
265

 
453

Goodwill
 
4,452

 
924

Acquisition-related intangibles, net
 
2,900

 
76

Deferred income taxes
 
321

 
927

Capitalized software licenses, net
 
206

 
205

Overfunded retirement plans
 
40

 
31

Other assets
 
57

 
45

Total assets
 
$
20,497

 
$
13,401

 
 
 
 
 
Liabilities and stockholders’ equity
 
 

 
 

Current liabilities:
 
 

 
 

Commercial paper borrowings
 
$
999

 
$

Current portion of long-term debt
 
382

 

Accounts payable
 
625

 
621

Accrued compensation
 
597

 
629

Income taxes payable
 
101

 
109

Accrued expenses and other liabilities
 
795

 
622

Total current liabilities
 
3,499

 
1,981

Long-term debt
 
4,211

 

Underfunded retirement plans
 
701

 
519

Deferred income taxes
 
607

 
86

Deferred credits and other liabilities
 
527

 
378

Total liabilities
 
9,545

 
2,964

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: 2011 – 1,740,630,391; 2010 – 1,740,166,101
 
1,741

 
1,740

Paid-in capital
 
1,194

 
1,114

Retained earnings
 
26,278

 
24,695

Less treasury common stock at cost.
       Shares: 2011 – 601,131,631; 2010 – 572,722,397
 
(17,485
)
 
(16,411
)
Accumulated other comprehensive income (loss), net of taxes
 
(776
)
 
(701
)
Total stockholders’ equity
 
10,952

 
10,437

Total liabilities and stockholders’ equity
 
$
20,497

 
$
13,401

 
 
 
 
 

See accompanying notes.

3


 
 
For Years Ended
December 31,
Consolidated statements of cash flows
 
2011
 
2010
 
2009
[Millions of dollars]
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
2,236

 
$
3,228

 
$
1,470

Adjustments to net income:
 
 

 
 

 
 

Depreciation
 
904

 
865

 
877

Stock-based compensation
 
269

 
190

 
186

Amortization of acquisition-related intangibles
 
111

 
48

 
48

Gain on sales of assets and divestiture
 
(5
)
 
(144
)
 

Deferred income taxes
 
(119
)
 
(188
)
 
146

Increase (decrease) from changes in:
 
 

 
 

 
 

Accounts receivable
 
112

 
(231
)
 
(364
)
Inventories
 
(17
)
 
(304
)
 
177

Prepaid expenses and other current assets
 
(29
)
 
(8
)
 
115

Accounts payable and accrued expenses
 
2

 
57

 
5

Accrued compensation
 
(77
)
 
246

 
(38
)
Income taxes payable
 
(85
)
 
(19
)
 
87

Other
 
(46
)
 
80

 
(66
)
Net cash provided by operating activities
 
3,256

 
3,820

 
2,643

 
 
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

 
 

Additions to property, plant and equipment
 
(816
)
 
(1,199
)
 
(753
)
Proceeds from insurance recovery, asset sales and divestiture
 
16

 
148

 

Purchases of short-term investments
 
(3,653
)
 
(2,510
)
 
(2,273
)
Sales, redemptions and maturities of short-term investments
 
3,555

 
2,564

 
2,030

Purchases of long-term investments
 
(6
)
 
(8
)
 
(9
)
Redemptions and sales of long-term investments
 
157

 
147

 
64

Business acquisitions:
 
 
 
 
 
 
Property, plant and equipment
 
(865
)
 
(200
)
 
(3
)
Inventories
 
(225
)
 
(14
)
 
(4
)
Other
 
(4,335
)
 
15

 
(148
)
Business acquisitions, net of cash acquired
 
(5,425
)
 
(199
)
 
(155
)
Net cash used in investing activities
 
(6,172
)
 
(1,057
)
 
(1,096
)
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

 
 

Proceeds from issuance of long-term debt and commercial paper borrowings
 
4,697

 

 

Issuance costs for long-term debt
 
(12
)
 

 

Repayment of commercial paper borrowings
 
(200
)
 

 

Dividends paid
 
(644
)
 
(592
)
 
(567
)
Sales and other common stock transactions
 
690

 
407

 
109

Excess tax benefit from share-based payments
 
31

 
13

 
1

Stock repurchases
 
(1,973
)
 
(2,454
)
 
(954
)
Net cash provided by (used in) financing activities
 
2,589

 
(2,626
)
 
(1,411
)
 
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
 
(327
)
 
137

 
136

Cash and cash equivalents at beginning of year
 
1,319

 
1,182

 
1,046

Cash and cash equivalents at end of year
 
$
992

 
$
1,319

 
$
1,182

 
 
 
 
 
 
 

See accompanying notes.

4


Consolidated statements of stockholders’ equity
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Common
Stock
 
Accumulated Other
Comprehensive
Income (Loss)
[Millions of dollars, except per-share amounts]
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2008
 
$
1,740

 
$
1,022

 
$
21,168

 
$
(13,814
)
 
$
(790
)
 
 
 
 
 
 
 
 
 
 
 
2009
 
 

 
 

 
 

 
 

 
 

Net income
 

 

 
1,470

 

 

Dividends declared and paid ($.45 per share)
 

 

 
(567
)
 

 

Common stock issued on exercise of stock options
 

 
(120
)
 

 
226

 

Stock repurchases
 

 

 

 
(961
)
 

Stock-based compensation
 

 
186

 

 

 

Tax impact from exercise of options
 

 
(2
)
 

 

 

Other comprehensive income (loss), net of tax
 

 

 

 

 
169

Other
 

 

 
(5
)
 

 

Balance, December 31, 2009
 
1,740

 
1,086

 
22,066

 
(14,549
)
 
(621
)
 
 
 
 
 
 
 
 
 
 
 
2010
 
 

 
 

 
 

 
 

 
 

Net income
 

 

 
3,228

 

 

Dividends declared and paid ($.49 per share)
 

 

 
(592
)
 

 

Common stock issued on exercise of stock options
 

 
(182
)
 

 
588

 

Stock repurchases
 

 

 

 
(2,450
)
 

Stock-based compensation
 

 
190

 

 

 

Tax impact from exercise of options
 

 
21

 

 

 

Other comprehensive income (loss), net of tax
 

 

 

 

 
(80
)
Other
 

 
(1
)
 
(7
)
 

 

Balance, December 31, 2010
 
1,740

 
1,114

 
24,695

 
(16,411
)
 
(701
)
 
 
 
 
 
 
 
 
 
 
 
2011
 
 

 
 

 
 

 
 

 
 

Net income
 

 

 
2,236

 

 

  Dividends declared and paid ($.56 per share)
 

 

 
(644
)
 

 

Common stock issued on exercise of stock options
 
1

 
(252
)
 

 
898

 

Stock repurchases
 

 

 

 
(1,973
)
 

Stock-based compensation
 

 
269

 

 

 

Tax impact from exercise of options
 

 
45

 

 

 

Other comprehensive income (loss), net of tax
 

 

 

 

 
(75
)
Other
 

 
18

 
(9
)
 
1

 

Balance, December 31, 2011
 
$
1,741

 
$
1,194

 
$
26,278

 
$
(17,485
)
 
$
(776
)

See accompanying notes.


5


Notes to financial statements

1. Description of business and significant accounting policies and practices
Business
At Texas Instruments (TI), we design and make semiconductors that we sell to electronics designers and manufacturers all over the world. We have three reportable segments, which are established along major categories of products as follows:

Analog – consists of High Volume Analog & Logic (HVAL), Power Management (Power) and High Performance Analog (HPA). Following the acquisition of National Semiconductor Corporation (National), our Analog segment also includes National’s ongoing operations under the name of Silicon Valley Analog (SVA);
Embedded Processing – consists of digital signal processors (DSPs) and microcontrollers used in catalog, communications infrastructure and automotive applications; and
Wireless – consists of OMAP™ applications processors, connectivity products and basebands for wireless applications, including handsets and tablet computers.

We report the results of our remaining business activities in Other. See Note 17 for additional information on our business segments.
Basis of presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. 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 2011 presentation. The preparation of financial statements requires the use of estimates from which final results may vary.

On September 23, 2011, we completed the acquisition of National. The consolidated financial statements include the balances and results of operations of National from the date of acquisition. See Note 2 for more detailed information.

Revenue recognition
We recognize revenue from direct sales of our products to our customers, including shipping fees, when title passes to the customer, which usually occurs upon shipment or delivery, 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. Revenue from sales of our products that are subject to inventory consignment agreements is recognized when the customer pulls product from consignment inventory that we store at designated locations. Estimates of product returns for quality reasons and of price allowances (based on historical experience, product shipment analysis and customer contractual arrangements) are recorded when revenue is recognized. Allowances include volume-based incentives and special pricing arrangements. In addition, we record allowances for accounts receivable that we estimate may not be collected.

We recognize revenue from direct sales of our products to our distributors, net of allowances, consistent with the principles discussed above. Title transfers to the distributors at delivery or when the products are pulled from consignment inventory, and payment is due on our standard commercial terms; payment terms are not contingent upon resale of the products. We also grant discounts to some distributors for prompt payments. We calculate credit allowances based on historical data, current economic conditions and contractual terms. For instance, we sell to distributors at standard published prices, but we may grant them price adjustment credits in response to individual competitive opportunities they may have. To estimate allowances, we use statistical percentages of revenue, determined quarterly, based upon recent historical adjustment trends.

We also provide distributors an allowance to scrap certain slow-moving 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.
We determine the amount and timing of royalty revenue based on our contractual agreements with intellectual property licensees. We recognize royalty revenue when earned under the terms of the agreements and when we consider realization of

6


payment to be probable. Where royalties are based on a percentage of licensee sales of royalty-bearing products, we recognize royalty revenue by applying this percentage to our estimate of applicable licensee sales. We base this estimate on historical experience and an analysis of each licensee’s sales results. Where royalties are based on fixed payment amounts, we recognize royalty revenue ratably over the term of the royalty agreement. Where warranted, revenue from licensees may be recognized on a cash basis.

We include shipping and handling costs in COR.

Advertising costs
We expense advertising and other promotional costs as incurred. This expense was $43 million in 2011, $44 million in 2010 and $42 million in 2009.

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 portion 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 statements of income on a net (excluded from revenue) basis.

Earnings per share (EPS)
Unvested awards of share-based payments with 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):
 
 
2011
 
2010
 
2009
 
 
Net Income
 
Shares
 
EPS
 
Net Income
 
Shares
 
EPS
 
Net Income
 
Shares
 
EPS
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
2,236

 
 
 
 
 
$
3,228

 
 
 
 
 
$
1,470

 
 
 
 
Less income allocated to RSUs
 
(35
)
 
 
 
 
 
(44
)
 
 
 
 
 
(14
)
 
 
 
 
Income allocated to common stock for basic EPS calculation
 
$
2,201

 
1,151

 
$
1.91

 
$
3,184

 
1,199

 
$
2.66

 
$
1,456

 
1,260

 
$
1.16

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustment for dilutive shares:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock-based compensation plans
 
 

 
20

 
 

 
 

 
14

 
 

 
 

 
9

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 
$
2,236

 
 

 
 

 
$
3,228

 
 

 
 

 
$
1,470

 
 

 
 

Less income allocated to RSUs
 
(34
)
 
 

 
 

 
(44
)
 
 

 
 

 
(14
)
 
 

 
 

Income allocated to common stock for diluted EPS calculation
 
$
2,202

 
1,171

 
$
1.88

 
$
3,184

 
1,213

 
$
2.62

 
$
1,456

 
1,269

 
$
1.15

 
Options to purchase 41 million, 88 million and 135 million shares of common stock that were outstanding during 2011, 2010 and 2009, respectively, were not included in the computation of diluted EPS because their exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.




7


Investments
We present investments on our 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 three months or less from the date of our investment to be cash equivalents. We consider investments in debt securities with maturities beyond three months from the date of our investment as being available for use in current operations and include these investments 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, auction-rate securities, venture capital funds and non-marketable equity securities.
Classification of investments: Depending on our reasons for holding the investment and our ownership percentage, we classify investments in securities as available for sale, trading, equity-method or cost-method investments, which are more fully described in Note 9. 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 $129 million and $130 million as of December 31, 2011 and 2010, respectively.

We review inventory quarterly for salability and obsolescence. A specific allowance is provided for inventory considered unlikely to be sold. Remaining inventory includes a salability and obsolescence allowance based on an analysis of historical disposal activity. 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 complete our annual goodwill impairment tests as of October 1 for our reporting units. The test compares the fair value for each reporting unit to its associated carrying value including goodwill. We have had no impairment of goodwill for 2011 or 2010.

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 remeasured at historic 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.

Derivatives and hedging
In connection with the issuance of variable-rate long-term debt in May 2011, as more fully described in Note 13, we entered into an interest rate swap designated as a hedge of the variability of cash flows related to interest payments. Gains and losses

8


from changes in the fair value of the interest rate swap are credited or charged to Accumulated other comprehensive income (loss), net of taxes (AOCI).

We also use derivative financial instruments to manage exposure to foreign exchange risk. These instruments are primarily forward foreign currency exchange contracts that are used as economic hedges to reduce the earnings impact exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures or for specified non-U.S. dollar forecasted transactions. 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.

We do not use derivatives for speculative or trading purposes.

Changes in accounting standards
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This standard results in a common requirement between the FASB and the International Accounting Standards Board (IASB) for measuring fair value and for disclosing information about fair-value measurements. While this new standard will not affect how we measure or account for assets and liabilities at fair value, disclosures will be required for interim and annual periods beginning January 1, 2012. There will be no impact to our financial condition or results of operation from the adoption of this new standard.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This standard is intended to simplify how we will test goodwill for impairment. Prior to the issuance of this standard, we were required to use a two-step quantitative test to assess impairment of goodwill. Under this new standard, we will have the option to first assess qualitative factors to determine whether that two-step quantitative test should be performed. This standard is effective for goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We will adopt this standard effective January 1, 2012.

2. National Semiconductor acquisition
On September 23, 2011, we completed the acquisition of National by acquiring all issued and outstanding common shares in exchange for cash. National designed, developed, manufactured and marketed a wide range of semiconductor products, focused 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 from the acquisition date as SVA.

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


We prepared an initial determination of the fair value of assets acquired and liabilities assumed as of the acquisition date using preliminary information. Adjustments were made during the fourth quarter of 2011 to the fair value of assets acquired and liabilities assumed, as a result of refining our estimates. These were retrospectively applied to the September 23, 2011, acquisition date balance sheet. These adjustments are primarily related to tax matters and netted to an increase of goodwill of $1 million. None of the adjustments had a material impact on TI’s previously reported results of operations.
As of December 31, 2011, the allocation of the consideration transferred to the assets acquired and liabilities assumed from National has been finalized. The determination of fair value reflects the assistance of third-party valuation specialists, as well as our own estimates and assumptions. The final allocation of fair value by major class of the assets acquired and liabilities assumed as of the acquisition date is as follows:

9


 
 
At September 23, 2011
Cash and cash equivalents
 
$
1,145

Current assets
 
451

Inventory
 
225

Property, plant and equipment
 
865

Other assets
 
138

Acquired intangible assets (see details below)
 
2,956

Goodwill
 
3,528

Assumed current liabilities
 
(191
)
Assumed long-term debt
 
(1,105
)
Deferred taxes and other assumed non-current liabilities
 
(1,455
)
Total consideration transferred
 
$
6,557


Identifiable intangible assets acquired and their estimated useful lives as of the acquisition date are as follows:
 
 
Asset Amount
 
Weighted Average
Useful Life (Years)
Developed technology
 
$
2,025

 
10
Customer relationships
 
810

 
8
Other
 
16

 
3
Identified intangible assets subject to amortization
 
2,851

 
 
In-process R&D
 
105

 
(a)
Total identified intangible assets
 
$
2,956

 
 
(a) In-process R&D is not amortized until the associated project has been completed. Alternatively, if the associated project is determined not to be viable, it will be expensed.

The remaining consideration, after adjusting for identified intangible assets and the net assets and liabilities recorded at fair value, was $3.528 billion and was applied to goodwill. 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.

We assumed $1.0 billion of outstanding debt as a result of our acquisition of National and recorded it at its fair value of $1.105 billion. The excess of the fair value over the stated value is amortized as a reduction to Interest and debt expense over the term of the debt. In 2011, we recognized $9 million related to the amortization of the excess fair value.

The amount of National’s revenue included in our Consolidated statements of income for the period from the acquisition date to December 31, 2011, was $312 million. We do not measure net income at or below our segment levels.

The following unaudited summaries of pro forma combined results of operation for the years ended December 31, 2011 and 2010, give effect to the acquisition as if it had been completed on January 1, 2010. 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 charges and retention bonuses that will be incurred within the first 12 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 Years Ended
December 31,
 
 
2011
 
2010
 
 
(unaudited)
Revenue
 
$
14,805

 
$
15,529

Net income
 
2,438

 
3,218

Earnings per common share – diluted
 
2.05

 
2.61



10


Acquisition-related charges
We incurred various costs as a result of the acquisition of National that are included in Other consistent with how management measures the performance of its segments. These total acquisition-related charges are as follows:
 
 
For Year Ended December 31, 2011
Inventory related
 
$
96

Property, plant and equipment related
 
15

As recorded in COR
 
111

Amortization of intangible assets
 
87

Severance and other benefits:
 
 
Change of control
 
41

Announced employment reductions
 
29

Stock-based compensation
 
50

Transaction costs
 
48

Retention bonuses
 
46

Other
 
14

As recorded in Acquisition charges/divestiture (gain)
 
315

Total acquisition-related charges
 
$
426


We recognized costs associated with the adjustments to write up the value of acquired inventory and property, plant and equipment to fair value as of the acquisition date. These costs are in addition to the normal expensing of the acquired assets based on their carrying or book value prior to the acquisition.  The total fair-value write-up for the acquired inventory was expensed as that inventory was sold.  The total fair-value write-up for the acquired property, plant and equipment was $436 million, which is being depreciated at a rate of about $15 million per quarter beginning in the fourth quarter of 2011.

The amount of recognized amortization of acquired intangible assets resulting from the National acquisition was $87 million for the period from the acquisition date to December 31, 2011. Amortization of intangible assets is based on estimated useful lives varying between two and ten years.

Severance and other benefits costs relate to former National employees who have been or will be terminated after the closing date. These costs total $70 million for the year ended December 31, 2011, with $41 million in charges related to change of control provisions under existing employment agreements and $29 million in charges for announced employment reductions affecting about 350 jobs. All of these jobs will be eliminated by the end of 2012 as a result of redundancies and cost efficiency measures, with approximately $20 million of additional expense to be recognized in 2012. Of the $70 million in charges recognized, $14 million was paid in 2011. The remaining $56 million will be paid in 2012.

Stock-based compensation of $50 million was recognized for the accelerated vesting of equity awards upon the termination of employees. Additional stock-based compensation will be recognized over any remaining service periods.

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

Retention bonuses reflect amounts expected to be paid to former National employees who fulfill agreed-upon service period obligations and will be recognized ratably over the required service period.


11


3. Losses associated with the earthquake in Japan
On March 11, 2011, a magnitude 9.0 earthquake struck near two of our three semiconductor manufacturing facilities in Japan. Our manufacturing site in Miho suffered substantial damage during the earthquake, our facility in Aizu experienced significantly less damage and our site in Hiji was undamaged. We maintain earthquake insurance policies in Japan for limited coverage for property damage and business interruption losses.

Assessment and recovery efforts began immediately at these facilities and officially ended in August. Our Aizu factory recovered first and has been in production since the second quarter, while our Miho factory opened a mini-line for products in mid-April and was back to full production in the third quarter of 2011.

During the year ended December 31, 2011, we incurred gross operating losses of $101 million related to property damage, the underutilization expense we incurred from having our manufacturing assets only partially loaded and costs associated with recovery teams assembled from across the world. These losses have been offset by about $23 million in insurance proceeds related to property damage claims. Almost all of these costs and proceeds are included in COR in the Consolidated statements of income and are recorded in Other.

In addition to the costs associated with the earthquake, we also had an impact to revenue. For the year 2011, we recognized $38 million in insurance proceeds related to business interruption claims. These proceeds were recorded as revenue in Other.

We continue to be in discussions with our insurers and their advisors, but at this time we cannot estimate the timing and amount of future proceeds we may ultimately receive from our policies.

4. Restructuring charges
Restructuring charges may consist of voluntary or involuntary severance-related charges, asset-related charges and other costs 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 would be 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 to be sold, we write down the carrying value to its net realizable value and cease depreciation.

Restructuring actions related to the acquisition of National are discussed in Note 2 above and are reflected on the Acquisition charges/divestiture (gain) line of our Consolidated statements of income.

2011 actions
In the fourth quarter of 2011, we recognized restructuring charges associated with the announced plans to close two older semiconductor manufacturing facilities in Hiji, Japan, and Houston, Texas, over the next 18 months. Combined, these facilities supported about 4 percent of TI’s revenue in 2011, and each employs about 500 people. As needed, production from these facilities will be moved to other more advanced TI factories. The total charge for these closures is estimated at $215 million, of which $112 million was recognized in the fourth quarter and the remainder will be incurred over the next seven quarters. The Restructuring charges recognized in the fourth quarter of 2011 are included in Other and consisted of $107 million for severance and benefit costs and $5 million of accelerated depreciation of the facilities’ assets. Of the estimated $215 million total cost, about $135 million will be for severance and related benefits, about $30 million will be for accelerated depreciation of facility assets and about $50 million will be for other exit costs.

Previous actions
In October 2008, we announced actions to reduce expenses in our Wireless segment, especially our baseband operation. In January 2009, we announced actions that included broad-based employment reductions to align our spending with weakened demand. Combined, these actions eliminated about 3,900 jobs; they were completed in 2009.

The table below reflects the changes in accrued restructuring balances associated with these actions:


12


 
 
2011 Actions
 
Previous Actions
 
 
 
 
Severance
and Benefits
 
Other
Charges
 
Severance
and Benefits
 
Other
Charges
 
Total
Accrual at December 31, 2009
 
$

 
$

 
$
84

 
$
10

 
$
94

Restructuring charges
 

 

 
33

 

 
33

Non-cash items (a)
 

 

 
(33
)
 

 
(33
)
Payments
 

 

 
(62
)
 
(2
)
 
(64
)
Remaining accrual at December 31, 2010
 

 

 
22

 
8

 
30

 
 
 
 
 
 
 
 
 
 
 
Restructuring charges
 
107

 
5

 

 

 
112

Non-cash items (a)
 
(11
)
 
(5
)
 

 

 
(16
)
Payments
 

 

 
(9
)
 
(1
)
 
(10
)
Remaining accrual at December 31, 2011
 
$
96

 
$

 
$
13

 
$
7

 
$
116

(a) Reflects charges for stock-based compensation, postretirement benefit plan settlement, curtailment, special
termination benefits and accelerated depreciation.

The accrual balances above are a component of Accrued expenses and other liabilities or Deferred credits and other liabilities on our Consolidated balance sheets, depending on the expected timing of payment.

Restructuring charges recognized by segment from the actions described above are as follows:
 
 
2011
 
2010
 
2009
Analog
 
$

 
$
13

 
$
84

Embedded Processing
 

 
6

 
43

Wireless
 

 
10

 
62

Other
 
112

 
4

 
23

Total
 
$
112

 
$
33

 
$
212


5. Stock-based compensation
We have stock options outstanding to participants under various long-term incentive plans. We also have assumed stock options that were granted by companies that we later acquired, including National. 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 ten-year term and vest ratably over four years. Our options generally continue to vest after the option recipient retires.

We also have restricted stock units (RSUs) outstanding under the 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. RSUs generally do not continue to vest after the recipient’s retirement date.

We have options and RSUs outstanding to non-employee directors under various 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. 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:


13


 
 
2011
 
2010
 
2009
Stock-based compensation expense recognized in:
 
 
 
 
 
 
Cost of revenue (COR)
 
$
40

 
$
36

 
$
35

Research and development (R&D)
 
58

 
53

 
54

Selling, general and administrative (SG&A)
 
121

 
101

 
97

Acquisition charges
 
50

 

 

Total
 
$
269

 
$
190

 
$
186


These amounts include expense 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 generally with graded vesting provisions (e.g., 25 percent per year for four years). We recognize the related compensation cost on a straight-line basis over the minimum service period required for vesting of the award. For awards to employees who are retirement eligible or nearing retirement eligibility, we recognize compensation cost on a straight-line basis over the longer of the service period required to be performed by the employee in order to earn the award, or a six-month period.

Our RSUs generally vest four years after the date of grant. We recognize the related compensation costs on a straight-line basis over the vesting period.

National acquisition-related equity awards
In connection with the acquisition of National, we assumed certain stock options and RSUs granted by National, which were converted into the right to receive TI stock. The awards we assumed were measured at the acquisition date based on the
estimate of fair value, which was a total of $147 million. A portion of that fair value, $22 million, which represented the pre-combination vested service provided by employees to National, was included in the total consideration transferred as part of the acquisition. As of the acquisition date, the remaining portion of the fair value of those awards was $125 million, representing post-combination stock-based compensation expense that would be recognized as these employees provide service over the remaining vesting periods. At December 31, 2011, unrecognized compensation expense was $68 million.

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 under long-term incentive and director compensation plans using the Black-Scholes option-pricing model with the following weighted average assumptions (these assumptions exclude options assumed in connection with the National acquisition):
 
 
2011
 
2010
 
2009
Weighted average grant date fair value, per share
 
$
10.37

 
$
6.61

 
$
5.43

Weighted average assumptions used:
 
 
 
 

 
 

Expected volatility
 
30
%
 
32
%
 
48
%
Expected lives (in years)
 
6.9

 
6.4

 
5.9  

Risk-free interest rates
 
2.61
%
 
2.83
%
 
2.63
%
Expected dividend yields
 
1.51
%
 
2.08
%
 
2.94
%

We determine expected volatility on all options granted after July 1, 2005, 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 ten-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 approved annual dividend rate in effect and the current market price of our

14


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 that we grant 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 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 2011, including stock options and RSUs assumed in connection with the National acquisition, were as follows:
 
 
Stock Options
 
RSUs
 
 
Shares
 
Weighted Average
Exercise Price
per Share
 
Shares
 
Weighted Average
Grant-Date Fair
Value per Share
Outstanding grants, December 31, 2010
 
150,135,013

 
$
27.70

 
18,567,365

 
$
23.06

Granted
 
10,310,816

 
34.55

 
5,879,409

 
33.20

Assumed in National acquisition
 
1,316,283

 
15.75

 
4,884,774

 
27.22

Vested RSUs
 

 

 
(5,359,066
)
 
28.96

Expired and forfeited
 
(22,906,524
)
 
42.59

 
(613,636
)
 
24.43

Exercised
 
(25,582,194
)
 
24.91

 

 

Outstanding grants, December 31, 2011
 
113,273,394

 
$
25.79

 
23,358,846

 
$
25.09


The weighted average grant-date fair value of RSUs granted during the years 2011, 2010 and 2009 was $33.20, $23.47 and $15.78 per share, respectively. For the years ended December 31, 2011, 2010 and 2009, the total fair value of shares vested from RSU grants was $155 million, $51 million and $28 million, respectively.

Summarized information about stock options outstanding at December 31, 2011, including options assumed in connection with the National acquisition, is as follows:
 
 
 
Stock Options Outstanding
 
Options Exercisable
Range of
Exercise
Prices
 
Number
Outstanding
(Shares)
 
Weighted Average
Remaining Contractual
Life (Years)
 
Weighted Average
Exercise Price per
Share
 
Number
Exercisable
(Shares)
 
Weighted Average
Exercise Price per
Share
$
.26 to 10.00
 
13,813

 
1.1

 
$
6.64

 
13,813

 
$
6.64

 
10.01 to 20.00
 
26,219,258

 
3.8

 
15.66

 
18,859,398

 
15.91

 
20.01 to 30.00
 
44,961,810

 
5.1

 
24.98

 
31,390,099

 
25.38

 
30.01 to 38.40
 
42,078,513

 
4.3

 
32.99

 
31,971,009

 
32.49

$
.26 to 38.40
 
113,273,394

 
4.5

 
$
25.79

 
82,234,319

 
$
25.97


During the years ended December 31, 2011, 2010 and 2009, the aggregate intrinsic value (i.e., the difference in the closing market price and the exercise price paid by the optionee) of options exercised was $231 million, $140 million and $21 million, respectively.

Summarized information as of December 31, 2011, about outstanding stock options that are vested and expected to vest, as well as stock options that are currently exercisable, is as follows:


15


 
 
Outstanding Stock Options (Fully
Vested and Expected to Vest) (a)
 
Options
Exercisable
Number of outstanding (shares)
 
112,230,358

 
82,234,319

Weighted average remaining contractual life (in years)
 
4.5

 
3.2

Weighted average exercise price per share
 
$
26.03

 
$
25.97

Intrinsic value (millions of dollars)
 
$
539

 
$
370

(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 $543 million.

As of December 31, 2011, the total future compensation cost related to equity awards not yet recognized in the Consolidated statements of income was $477 million; $144 million related to unvested stock options and $333 million related to RSUs, of which $2 million and $66 million were associated with the National acquisition, respectively. The $477 million will be recognized as follows: $192 million in 2012, $153 million in 2013, $98 million in 2014 and $34 million in 2015.

Employee stock purchase plan
Options outstanding under the employee stock purchase plan at December 31, 2011, had an exercise price of $25.29 per share (85 percent of the fair market value of TI common stock on the date of automatic exercise). Of the total outstanding options, none were exercisable at year-end 2011.

Employee stock purchase plan transactions during 2011 were as follows:
 
 
Employee Stock
Purchase Plan
(Shares)
 
Exercise Price
Outstanding grants, December 31, 2010
 
487,871

 
$
27.83

Granted
 
2,200,718

 
26.04

Exercised
 
(2,108,494
)
 
26.66

Outstanding grants, December 31, 2011
 
580,095

 
$
25.29


The weighted average grant-date fair value of options granted under the employee stock purchase plans during the years 2011, 2010 and 2009 was $4.59, $3.97 and $3.13 per share, respectively. During the years ended December 31, 2011, 2010 and 2009, the total intrinsic value of options exercised under these plans was $10 million, $9 million and $10 million, respectively.

Effect on shares outstanding and treasury shares
Our practice is to issue shares of common stock upon exercise of stock options generally from treasury shares and, on a limited basis, from previously unissued shares. We settled stock option plan exercises using treasury shares of 27,308,311 in 2011; 19,077,274 in 2010 and 6,695,583 in 2009; and previously unissued common shares of 390,438 in 2011; 342,380 in 2010 and 93,648 in 2009.

Upon vesting of RSUs, we issued treasury shares of 3,822,475 in 2011; 1,392,790 in 2010 and 977,728 in 2009, and previously unissued common shares of 73,852 in 2011,with none in 2010 and 2009.

Shares available for future grant and reserved for issuance are summarized below:
 
 
As of December 31, 2011
Shares
 
Long-term Incentive
and Director
Compensation Plans
 
Employee Stock
Purchase Plan
 
Total
Reserved for issuance (a)
 
224,383,737

 
27,967,317

 
252,351,054

Shares to be issued upon exercise of outstanding options and RSUs
 
(136,755,907
)
 
(580,095
)
 
(137,336,002
)
Available for future grants
 
87,627,830

 
27,387,222

 
115,015,052

(a) Includes 123,667 shares credited to directors’ deferred compensation accounts that may settle in shares of TI common stock. These shares are not included as grants outstanding at December 31, 2011.

Effect on cash flows
Cash received from the exercise of options was $690 million in 2011, $407 million in 2010 and $109 million in 2009. The

16


related net tax impact realized was $45 million, $21 million and ($2) million (which includes excess tax benefits realized of $31 million, $13 million and $1 million) in 2011, 2010 and 2009, respectively.
 
6. 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 $143 million, $279 million and $102 million of profit sharing expense under the TI Employee Profit Sharing Plan in 2011, 2010 and 2009, respectively.

7. Income taxes
Income before income taxes
 
U.S.
 
Non-U.S.
 
Total
2011
 
$
1,791

 
$
1,164

 
$
2,955

2010
 
3,769

 
782

 
4,551

2009
 
1,375

 
642

 
2,017

 
Provision (benefit) for income taxes
 
U.S. Federal
 
Non-U.S.
 
U.S. State
 
Total
2011:
 
 
 
 
 
 
 
 
Current
 
$
692

 
$
138

 
$
8

 
$
838

Deferred
 
(154
)
 
24

 
11

 
(119
)
Total
 
$
538

 
$
162

 
$
19

 
$
719

 
 
 
 
 
 
 
 
 
2010:
 
 

 
 

 
 

 
 

Current
 
$
1,401

 
$
92

 
$
18

 
$
1,511

Deferred
 
(188
)
 
(2
)
 
2

 
(188
)
Total
 
$
1,213

 
$
90

 
$
20

 
$
1,323

 
 
 
 
 
 
 
 
 
2009:
 
 

 
 

 
 

 
 

Current
 
$
318

 
$
79

 
$
4

 
$
401

Deferred
 
124

 
23

 
(1
)
 
146

Total
 
$
442

 
$
102

 
$
3

 
$
547


Principal reconciling items from income tax computed at the statutory federal rate follow:
 
 
2011
 
2010
 
2009
Computed tax at statutory rate
 
$
1,034

 
$
1,593

 
$
706

Non-U.S. effective tax rates
 
(245
)
 
(184
)
 
(123
)
U.S. R&D tax credit
 
(58
)
 
(54
)
 
(28
)
U.S. tax benefit for manufacturing
 
(31
)
 
(63
)
 
(21
)
Other
 
19

 
31

 
13

Total provision for income taxes
 
$
719

 
$
1,323

 
$
547


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


17


 
 
December 31,
 
 
2011
 
2010
Deferred income tax assets:
 
 
 
 
Inventories and related reserves
 
$
913

 
$
525

Postretirement benefit costs recognized in AOCI
 
431

 
404

Deferred loss and tax credit carryforwards
 
400

 
220

Stock-based compensation
 
357

 
357

Accrued expenses
 
323

 
251

Other
 
217

 
208

 
 
2,641

 
1,965

Less valuation allowance
 
(178
)
 
(3
)
 
 
2,463

 
1,962

Deferred income tax liabilities:
 
 
 
 

Acquisition-related intangibles and fair-value adjustments
 
(1,096
)
 
(21
)
Accrued retirement costs (defined benefit and retiree health care)
 
(180
)
 
(190
)
Property, plant and equipment
 
(147
)
 
(83
)
International earnings
 
(92
)
 
(26
)
Other
 
(60
)
 
(31
)
 
 
(1,575
)
 
(351
)
Net deferred income tax asset
 
$
888

 
$
1,611


As of December 31, 2011 and 2010, net deferred income tax assets of $888 million and $1.61 billion were presented in the balance sheets, based on tax jurisdiction, as deferred income tax assets of $1.50 billion and $1.70 billion and deferred income tax liabilities of $607 million and $86 million, respectively. The decrease in net deferred income tax assets from December 31, 2010, to December 31, 2011, is due to the recording of $881 million of net deferred tax liabilities associated with the acquisition of National, partially offset by the $119 million deferred tax provision.

We make an ongoing assessment regarding the realization of U.S. and non-U.S. deferred tax assets. In 2011, we recognized a net increase of $175 million in our valuation allowance. This increase was due to valuation allowances on unutilized tax credits associated with the acquisition of National. While the net deferred assets of $2.46 billion at December 31, 2011, are not assured of realization, our assessment is that a valuation allowance is not required on this balance. 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.

We have U.S. and non-U.S. tax loss carryforwards of approximately $202 million, of which $124 million expire through the year 2021.

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 (approximately $4.12 billion at December 31, 2011) have been indefinitely reinvested; therefore, no 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 tangible assets such as inventory 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.

Cash payments made for income taxes, net of refunds, were $902 million, $1.47 billion and $331 million for the years ended December 31, 2011, 2010 and 2009, 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.



18


The changes in the total amounts of uncertain tax positions are summarized as follows:
 
 
2011
 
2010
 
2009
Balance, January 1
 
$
103

 
$
56

 
$
148

Additions based on tax positions related to the current year
 
15

 
12

 
10

Additions from the acquisition of National
 
132

 

 

Additions for tax positions of prior years
 
3

 
50

 
6

Reductions for tax positions of prior years
 
(39
)
 
(12
)
 
(18
)
Settlements with tax authorities
 
(4
)
 
(3
)
 
(90
)
Balance, December 31
 
$
210

 
$
103

 
$
56

Interest income (expense) recognized in the year ended December 31
 
$
1

 
$
(2
)
 
$

Accrued interest payable (receivable) as of December 31
 
$
3

 
$
(5
)
 
$
(9
)

The liability for uncertain tax positions and the accrued interest payable are components of Deferred credits and other liabilities on our December 31, 2011, balance sheet.

Within the $210 million liability for uncertain tax positions as of December 31, 2011, are uncertain tax positions totaling $233 million that, if recognized, would impact the tax rate. If these tax liabilities are ultimately realized, $83 million of deferred tax assets would also be realized, primarily related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation.

Within the $103 million liability for uncertain tax positions as of December 31, 2010, are uncertain tax positions totaling $136 million that, if recognized, would impact the tax rate. If these tax liabilities are ultimately realized, $101 million of 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, 2011, the statute of limitations remains open for U.S. federal tax returns for 1999 and following years. Audits of our U.S. federal tax returns through 2006 have been completed except for certain pending tax treaty procedures for relief from double taxation. These procedures pertain to U.S. federal tax returns for the years 2003 through 2007.

In non-U.S. jurisdictions, the years open to audit represent the years still subject to the statute of limitations. With respect to major jurisdictions outside the U.S., our subsidiaries are no longer subject to income tax audits for years before 2004.

We are unable to estimate the range of any reasonably possible increase or decrease in uncertain tax positions that may occur
within the next 12 months resulting from the eventual outcome of the years currently under audit or appeal. However, we do not anticipate any such outcome will result in a material change to our financial condition or results of operations. U.S. federal tax returns for recently acquired National are currently under audit for tax years through 2009. It is possible that issues that are the subject of that audit could be resolved in the next 12 months and result in a material change in our estimate of uncertain tax positions.


8. Financial instruments and risk concentration
Financial instruments
We hold derivative financial instruments such as forward foreign currency exchange contracts, interest rate swaps and forward purchase contracts, the fair value of which is not material at December 31, 2011. Our forward foreign currency exchange contracts outstanding at December 31, 2011, had a notional value of $516 million to hedge our non-U.S. dollar net balance sheet exposures (including $253 million to sell Japanese yen, $105 million to sell euros and $39 million to sell British pound sterling).

Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our postretirement plan assets, contingent consideration and deferred compensation liabilities are carried at fair value, which is described in Note 9. 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.

Risk concentration
Financial instruments that could subject us to concentrations of credit risk are primarily cash, cash equivalents, short-term

19


investments and accounts receivable. In order 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 forward foreign currency exchange contracts to financial institutions rated no lower than A3/A-.

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 an allowance for losses based on the expected collectability of accounts receivable. These allowances are deducted from accounts receivable on our Consolidated balance sheets.

Details of these allowances are as follows:
Accounts receivable allowances
 
Balance at
Beginning of Year
 
Additions Charged
(Credited) to
Operating Results
 
Recoveries and
Write-offs, Net
 
Balance at
End of Year
2011
 
$
18

 
$
1

 
$

 
$
19

2010
 
23

 
(4
)
 
(1
)
 
18

2009
 
30

 
1

 
(8
)
 
23


9. Valuation of debt and equity investments and certain liabilities
Debt and equity investments
We classify our investments as 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, broker quotes or, when necessary, financial models (see 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 losses (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. Changes in the fair value of debt securities classified as trading securities are recorded in OI&E.

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.

Details of our investments and related unrealized gains and losses included in AOCI are as follows:

20


 
 
December 31, 2011
 
December 31, 2010
 
 
Cash and Cash
Equivalents
 
Short-term
Investments
 
Long-term
Investments
 
Cash and Cash
Equivalents
 
Short-term
Investments
 
Long-term
Investments
Measured at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
55

 
$

 
$

 
$
167

 
$

 
$

Corporate obligations
 
135

 
159

 

 
44

 
649

 

U.S. Government agency and Treasury securities
 
430

 
1,691

 

 
855

 
1,081

 

Auction-rate securities
 

 

 
41

 

 
23

 
257

 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
 
 

 
 

 
 

 
 

 
 

 
 

Auction-rate securities
 

 
93

 

 

 

 

Mutual funds
 

 

 
169

 

 

 
139

Total
 
620

 
1,943

 
210

 
1,066

 
1,753

 
396

 
 
 
 
 
 
 
 
 
 
 
 
 
Other measurement basis: