10-K 1 txn-12312014x10xk.htm 10-K TXN - 12.31.2014 - 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, 2014
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.  ¨
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 ¨
Non-accelerated filer ¨
Smaller reporting company ¨
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 $50,978,062,488 as of June 30, 2014.
1,047,142,301 (Number of shares of common stock outstanding as of February 17, 2015)
Part III hereof incorporates information by reference to the Registrant’s proxy statement for the 2015 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 35 countries. We have two reportable segments: Analog and Embedded Processing. We report the results of our remaining business activities in Other. We expect Analog and Embedded Processing to be our primary growth engines in the years ahead, and we therefore focus our resources on these segments. In 2014, we generated $13.05 billion of revenue.
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 and are sold through both distribution and direct channels. 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. The vast majority of our revenue is derived from products that are differentiated from competitors’ products.
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 $8.1 billion of revenue in 2014. 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, whether 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 62 percent of our revenue in 2014. According to external sources, the market for analog semiconductors was $44 billion in 2014. Our Analog segment’s revenue in 2014 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 product lines: High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA).
HVAL products
These include high-volume integrated analog products for specific applications and high-volume catalog products. HVAL products support applications like automotive safety devices, touchscreen controllers, low-voltage motor drivers and integrated motor controllers.
Power products
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 conversion devices, power supply controls and point-of-load products.
HPA products
These include catalog analog 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 analog products that are typically used in systems that require high performance. HPA products generally have long life cycles, often more than 10 years.


2


SVA products
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, electrical arc/fault detection systems, 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 (National) in 2011.
Embedded Processing
Embedded Processing generated $2.7 billion of revenue in 2014. 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 communications infrastructure equipment. 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 21 percent of our revenue in 2014. According to external sources, the market for embedded processors was $18 billion in 2014. We held the number two position, which represented 15 percent of this fragmented market. We believe we are well positioned to increase our market share over time.
Our Embedded Processing segment includes the following major product lines: Processor, Microcontrollers and Connectivity.
Processor products
These include digital signal processors (DSPs) and applications processors. DSPs perform mathematical computations almost instantaneously to process or improve digital data. Applications processors are typically tailored for a specific class of applications such as communications infrastructure and automotive (infotainment and advanced driver assistance systems). They are also sold into broad industrial applications.

Microcontroller products
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.

Connectivity products
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 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
Other generated $2.2 billion of revenue in 2014 and includes:
Revenue from our smaller product lines, such as DLP® products (primarily used in projectors to create high-definition images), certain custom semiconductors known as application-specific integrated circuits (ASICs) and calculators.
Revenue from our baseband products and from our OMAPTM applications processors and connectivity products sold into smartphones and consumer tablets. Our exit from these “legacy wireless products” was completed in 2013.
Royalties received for our patented technology that we license to other electronics companies.

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

3


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.”
Markets for our products
The table below lists the major markets that used our products in 2014 and the estimated percentage of our 2014 revenue that the market represented. The chart also lists, in decreasing order of our revenue, the sectors within each market.
Market
Sectors
Industrial
(31% of TI revenue)

Factory automation and control
Medical/healthcare/fitness
Building automation
Smart grid and energy
Test and measurement
Motor drives
Display
Space/avionics/defense
Appliance
Other power delivery
Electronic point of sale
Lighting
Industrial transportation
Other (education, toys, musical instruments, etc.)

No single sector in this market accounted for more than 4% of TI revenue.
Automotive
(13% of TI revenue)
Infotainment and cluster
Passive safety
Body
Advanced driver assistance systems (ADAS)
Hybrid/electric vehicle and powertrain

No single sector in this market accounted for more than 5% of TI revenue.
Personal electronics
(29% of TI revenue)
Mobile phones
Personal and notebook computers
TV/set-top box/audio
Storage
Printers and other peripherals
Tablets
Wearables (non-medical)
Gaming

No single sector in this market accounted for more than 9% of TI revenue.
Communications equipment
(17% of TI revenue)
Wireless infrastructure
Telecom infrastructure
Enterprise switching
Residential gateway

No single sector in this market accounted for more than 10% of TI revenue.
Enterprise systems
(6% of TI revenue)
Projectors
Servers
Multi-function printers
High-performance computing
Thin client

No single sector in this market accounted for more than 4% of TI revenue.
Other (calculators, royalties and other)
(4% of TI revenue)
 
 
 

4


Market 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, which gives us real-time insight into end-market demand, allowing us to better manage our factory loadings.
Seasonality
Our revenue is subject to some seasonal variation. Our semiconductor revenue 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.
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.
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 8 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. When factory loadings decrease, our fixed costs are spread over reduced output and, absent other circumstances,

5


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. However, our operating focus is more on maximizing long-term free cash flow than minimizing short-term variations in profit margins caused by factory loadings. Free cash flow is cash flow from operations less capital expenditures.
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 2014, we initiated plans to adapt existing facilities to manufacture more products, including new 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 2014, we sourced about 20 percent of our total wafers from external foundries and about 40 percent of our assembly/test services from subcontractors.
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 also have consignment inventory programs in place for our largest customers and distributors.
Design centers
Our design centers provide design, engineering and product application support as well as after-sales customer service. The design centers are strategically located around the world to take advantage of key technical and engineering talent and proximity to key customers.
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 top 100. In addition, no single customer accounts for 10 percent or more of our revenue. Most of our customers purchase our products through distributors.
Sales and distribution
We market and sell our semiconductor products through a direct sales force and distributors. We have sales or marketing offices in 34 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. Our distribution network holds a mix of TI-consigned and distributor-owned inventory. Over time, we expect this mix will continue to shift more toward consignment. About 60 percent of our distributor revenue is generated from sales of consigned inventory.
Acquisitions, divestitures and investments
From time to time we consider acquisitions and divestitures that may strengthen or better focus 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. In September 2011, we acquired National Semiconductor Corporation.
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 $0.94 billion at December 31, 2014, and $1.06 billion at December 31, 2013.

6


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 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 semiconductor 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. Other valuable trademarks include DLP®.
Research and development
Our R&D expense was $1.36 billion in 2014, compared with $1.52 billion in 2013 and $1.88 billion in 2012. Our primary areas of R&D investment are Analog and Embedded Processing products. Our R&D has been declining primarily as a result of our decision to wind down investments in legacy wireless products. This wind-down is now complete.
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 and those chosen to become executive officers of the company and the positions or offices with the company held by each person named:
Name
Age
Position
Stephen A. Anderson
53
Senior Vice President
Brian T. Crutcher
42
Executive Vice President
R. Gregory Delagi
52
Senior Vice President
Joseph F. Hubach*
57
Senior Vice President, Secretary and General Counsel
Kevin P. March
57
Senior Vice President and Chief Financial Officer
Kevin J. Ritchie
58
Senior Vice President
Richard K. Templeton
56
Director; Chairman of the Board; President and Chief Executive Officer
Cynthia Hoff Trochu*
51
Elected to become Senior Vice President, Secretary and General Counsel
Teresa L. West
54
Senior Vice President
Darla H. Whitaker
49
Senior Vice President
Bing Xie
47
Senior Vice President
*Effective August 3, 2015, Mr. Hubach will retire from the company, and Ms. Trochu will succeed him.

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. Mses. West and Whitaker and Messrs. Anderson, Delagi,

7


Hubach, March, Ritchie and Templeton have served as executive officers of the company for more than five years. Mr. Crutcher became an executive officer of the company in 2010. Mr. Xie became an executive officer of the company in 2015.
Employees
At December 31, 2014, we had 31,003 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 Business 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 in 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.
Cyclicality in the semiconductor market may affect our performance.
Semiconductor products are the principal source of our revenue. The semiconductor market historically has been cyclical and subject 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 results of operations may be adversely affected in the future if demand for our semiconductors decreases or if this market or key end-equipment markets grow at a significantly slower pace than management expects.
Our margins may vary over time.
Our profit margins may be adversely affected in the future by a number of factors, including decreases in our shipment volume, reductions in, or obsolescence of our inventory and shifts in our product mix. In addition, the highly competitive market environment in which we operate 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.
The markets we serve are characterized by rapid technological change that requires us to develop new technologies and products.
Our results of operations depend in part upon our ability to successfully develop, manufacture and market innovative products in a rapidly changing technological environment. We require significant capital to develop new technologies and products to meet changing customer demands that, in turn, may result in shortened product life cycles and a decline in average selling prices of our products. Moreover, expenditures for technology and product development are generally made before the commercial viability for such developments can be assured, so we may not be able to successfully develop and market these new products. We do not expect that all of our R&D projects will result in products that are ultimately released for sale, or that our projects will contribute significant revenue until at least a few years after they are completed. Further, the products we do

8


develop and market might not be well-received by customers, and we might not realize a return on the capital expended to develop such products.
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. 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.
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.
With regard to our own intellectual property, we actively enforce and protect our rights. However, there can be no assurance that our efforts will be adequate to prevent the misappropriation or improper use of our protected technology.
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.
A decline in demand in certain markets or sectors could have a material adverse effect on the demand for our products and results of operations.
Our customer base includes companies in a wide range of markets and sectors within those markets, but we generate a significant amount of revenue from sales to customers in the personal electronics and communications equipment markets. Decline in one or more sectors within these markets could have a material adverse effect on the demand for our products and our results of operations and financial condition.
Our global operations subject us to risks associated with international political, economic or other conditions.
We have facilities in 35 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. Operating internationally exposes us to political and economic conditions, security risks, health 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 business 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.

9


Our results of operations could be affected by natural events in the locations in which we or our customers or suppliers operate.
We have manufacturing, data and design facilities and other operations in locations subject to natural occurrences such as health epidemics, severe weather and geological events that could disrupt operations. In addition, our suppliers and customers have similar facilities and operations in such locations. A natural disaster that results in a prolonged disruption to our operations, or the operations of our customers or suppliers, may adversely affect our results and financial condition.
The loss of or significant curtailment of purchases by any of our largest customers could adversely affect our results of operations.
We generate revenue from thousands of customers worldwide. The loss of or significant curtailment of purchases by one or more of our top 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.
Our results of operations could be adversely affected by our distributors’ promotion of competing product lines or our distributors’ financial performance.
In 2014, 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.
Incorrect forecasts of customer demand could adversely affect our results of operations.
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 performance depends on the availability and cost of raw materials, utilities, critical manufacturing equipment, manufacturing processes and third-party manufacturing services.
Our manufacturing processes and critical manufacturing equipment, and those of some of our customers and suppliers, 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 customers demand that we change the sourcing of materials we cannot identify as conflict-free.
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. We also depend on third parties to provide advanced logic manufacturing process technology development. A limited number of third parties perform these functions, and we do not have long-term contracts with all of them. Reliance on these third parties involves risks, including possible shortages of capacity in periods of high demand, the third parties’ inability to develop and deliver advanced logic manufacturing process technology in a timely, cost effective, and appropriate manner and the possibility of third parties imposing increased costs on us.

10


Our results of operations could be affected by changes in tax-related matters.
We have facilities in 35 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. Our results of operations could be affected by market opportunities or decisions we make that cause us to increase or decrease operations in one or more countries, or by changes in applicable tax rates or audits by the taxing authorities in countries in which we operate.
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 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, environmental, safety and health; exports and imports; bribery and corruption; tax; data privacy; 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, or of materials or gases used or emitted into the environment, in connection with the manufacture of our products. There can be no assurance that in all instances a substitute for a prohibited raw material or process would be available, or be available at reasonable cost.
Our results of operations 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 daily operations, invest in our business, make strategic acquisitions, service our debt obligations and meet our cash return objectives requires continuous access to our bank and investment accounts, as well as 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. Similarly, such circumstances could also restrict our ability to access the capital markets or redeem our investments. If our customers or suppliers are unable to access credit markets and other sources of needed liquidity, we may receive fewer customer orders or be unable to obtain needed supplies, collect accounts receivable or access needed technology.
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

11


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.
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 warranty or product liability claims or claims based on epidemic or delivery failures that could lead to significant expenses as we defend such claims or pay damage awards or settlements. In the event of a warranty 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 legal proceedings may adversely affect our results of operations and financial condition and our reputation.
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 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 cause us to raise funds through such means as the issuance of new debt or equity, or the disposition of assets.
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.
Our operating results and our reputation could be adversely affected by breaches of our information technology systems or those of our customers or suppliers.
Breaches of our information technology systems or those of our customers or suppliers could be caused by computer viruses, unauthorized access, sabotage, vandalism or terrorism. These breaches could compromise our information technology networks or those of our customers or suppliers 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.
ITEM 1B. Unresolved Staff Comments.

 Not applicable.

12


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 (1)
X
 
Santa Clara, California
X
 
South Portland, Maine
X
 
Aguascalientes, Mexico (1)
X
 
Aizu, Japan
X
X
Miho, Japan
X
X
Tokyo, Japan (1)
X
 
Chengdu, China (2)
X
 
Shanghai, China (1)
X
X
Bangalore, India (2)
X
X
Kuala Lumpur, Malaysia (2)
X
X
Melaka, Malaysia (2)
X
 
Baguio, Philippines (2)
X
X
Pampanga (Clark), Philippines (2)
X
X
Taipei, Taiwan (2)
X
X
Freising, Germany
X
X
Greenock, Scotland
X
 

(1)    Leased.
(2)    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 15.1 million square feet at December 31, 2014, of which approximately 0.8 million square feet were leased. Our facilities outside the United States contained approximately 10.3 million square feet at December 31, 2014, of which approximately 1.7 million square feet were leased.
At the end of 2014, 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.

13


The Internal Revenue Code requires that companies disclose in their Form 10-K whether they have been required to pay penalties to the Internal Revenue Service for certain transactions that have been identified by the IRS as abusive or that have a significant tax avoidance purpose. We have not been required to pay any such penalties.
ITEM 4. Mine Safety Disclosures.

  Not applicable.

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, 2014, 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:
 
 
 
 
 
 
 
 
 
2014
 
High
 
$
47.16
 
 
$
48.47

 
$
49.29
 
 
$
55.62
 
 
 
Low
 
40.89
 
 
44.89
 
 
45.67
 
 
41.93
 
2013
 
High
 
 
35.62
 
 
 
37.09

 
 
40.85
 
 
 
43.91
 
 
 
Low
 
31.55
 
 
33.92
 
 
35.05
 
 
39.24
 
Dividends paid:
 
 
 
 
 
 
 
2014
 
 
 
$
0.30
 
 
$
0.30
 
$
0.30
 
 
$
0.34
 
2013
 
 
 
 
0.21
 
 
 
0.28
 
 
0.28
 
 
 
0.30
 


14


Issuer purchases of equity securities

The following table contains information regarding our purchases of our common stock during the fourth quarter of 2014.
 
 
 
 
 
 
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, 2014 through October 31, 2014
11,317,506
 
 
$
45.62
 
11,317,506
 
$
3.35
billion
November 1, 2014 through November 30, 2014
2,820,815
 
 
 
50.94
 
2,820,815
 
 
3.21
billion
December 1, 2014 through December 31, 2014
695,093
 
 
 
53.71
 
695,093
 
 
3.17
billion
Total
14,833,414
(2) 
 
$
47.01
 
14,833,414
(2) 
$
3.17
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.
(2) 
All purchases during the quarter were open-market purchases.
(3) 
As of December 31, 2014, this amount consisted of the remaining portion of the $5.0 billion authorized in February 2013. No expiration date has been specified for this authorization.


15


ITEM 6. Selected Financial Data.
 
 
For Years Ended December 31,
(Millions of dollars, except share and per-share amounts)
 
2014
 
2013
 
2012
 
2011
 
2010
Cash flow data
 
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
 
$
3,892

 
$
3,384

 
$
3,414

 
$
3,256

 
$
3,820

Capital expenditures
 
385

 
412

 
495

 
816

 
1,199

Free cash flow (a)
 
3,507

 
2,972

 
2,919

 
2,440

 
2,621

Dividends paid
 
1,323

 
1,175

 
819

 
644

 
592

Stock repurchases
 
2,831

 
2,868

 
1,800

 
1,973

 
2,454

 
 
 
 
 
 
 
 
 
 
 
Income statement data
 
 
 
 
 
 
 
 
 
 
Revenue by segment:
 
 
 
 
 
 
 
 
 
 
Analog
 
8,104

 
7,194

 
6,998

 
6,375

 
5,979

Embedded Processing
 
2,740

 
2,450

 
2,257

 
2,381

 
2,359

Other
 
2,201

 
2,561

 
3,570

 
4,979

 
5,628

Revenue
 
13,045

 
12,205

 
12,825

 
13,735

 
13,966

 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
7,427

 
6,364

 
6,368

 
6,772

 
7,492

Operating expenses (R&D and SG&A)
 
3,201

 
3,380

 
3,681

 
3,353

 
3,089

Acquisition charges
 
330

 
341

 
450

 
315

 

Restructuring charges/other
 
(51
)
 
(189
)
 
264

 
112

 
(111
)
Operating profit
 
3,947

 
2,832

 
1,973

 
2,992

 
4,514

 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
2,821

 
$
2,162

 
$
1,759

 
$
2,236

 
$
3,228


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
 
$
2,821

 
$
2,162

 
$
1,759

 
$
2,236

 
$
3,228

Income allocated to RSUs
 
(43
)
 
(36
)
 
(31
)
 
(34
)
 
(44
)
Income allocated to common shares for diluted EPS
 
$
2,778

 
$
2,126

 
$
1,728

 
$
2,202

 
$
3,184

 
 
 
 
 
 
 
 
 
 
 
Average diluted shares outstanding, in millions
 
1,080

 
1,113

 
1,146

 
1,171

 
1,213

Diluted earnings per common share
 
$
2.57

 
$
1.91

 
$
1.51

 
$
1.88

 
$
2.62

Cash dividends declared per common share
 
$
1.24

 
$
1.07

 
$
0.72

 
$
0.56

 
$
0.49


(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)
 
2014
 
2013
 
2012
 
2011
 
2010
Balance sheet data
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
 
$
3,541

 
$
3,829

 
$
3,965

 
$
2,935

 
$
3,072

Total assets
 
17,722

 
18,938

 
20,021

 
20,497

 
13,401

Current portion of long-term debt and commercial paper borrowings
 
1,001

 
1,000

 
1,500

 
1,381

 

Long-term debt
 
3,641

 
4,158

 
4,186

 
4,211

 

 
 
 
 
 
 
 
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
 
Number of:
 
 
 
 
 
 
 
 
 
 
Employees
 
31,003

 
32,209

 
34,151

 
34,759

 
28,412

Stockholders of record
 
16,361

 
17,213

 
18,128

 
19,733

 
20,525


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 several advantages that are unique to TI:
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 2014 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. Together, the advantages 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.
These advantages have resulted in consistent share gains and free cash flow growth, and they 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, except per-share amounts.
When we discuss our results:
Unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are evidenced by fluctuations in shipment volumes.
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.
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.
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.

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.
Our exit from legacy wireless products and the elimination (effective January 1, 2013) of the Wireless segment resulted in changes to our corporate-level expense allocations, which negatively affected Analog and Embedded Processing profitability in the year ended December 31, 2013 and, to a less significant extent, in 2014. We allocate our corporate-level expenses, which are largely fixed, among our product lines in proportion to the operating expenses directly generated by them. Legacy wireless products generated lower operating expenses in 2014 and 2013 than in 2012 because we stopped investing in them. The corporate-level expenses allocated to those products were, therefore, proportionately lower, and the corporate-level expenses allocated to the remaining product lines were proportionately higher. This allocation change affects the profitability of each of our segments, but does not impact operating expense or profitability trends at the consolidated level.

Results of operations

We continued to perform well in 2014, reflecting our focus on Analog and Embedded Processing semiconductors. We believe these products serve highly diverse markets with thousands of applications and have dependable long-term growth opportunities. In 2014, Analog revenue grew 13 percent and Embedded Processing revenue grew 12 percent. These two segments represented 83 percent of TI revenue for the year, up from 79 percent in 2013. Gross margin of 56.9 percent for the year reflects the diversity and longevity of our product portfolio, as well as the efficiency of our manufacturing strategy. Our business model focused on Analog and Embedded Processing allows us to generate strong cash flow from operations. In 2014, free cash flow was 27 percent of revenue, up 3 percentage points from a year ago. 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 – 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, a more favorable 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 previously announced wind-down of our legacy wireless products and restructuring actions in Embedded Processing and Japan. R&D expense as a percent of revenue was 10.4 percent compared with 12.5 percent in 2013. SG&A expense was about even, as higher variable compensation costs were offset by savings from our cost alignment efforts. SG&A expense as a percent of revenue was 14.1 percent compared with 15.2 percent in 2013.
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. See Note 3 to the financial statements for detailed information.
Restructuring charges/other was a net credit of $51 million, which included gains on sales of assets of $75 million, 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, partially offset by restructuring charges of $126 million. These amounts are included in Other for segment reporting purposes. For details on the types of costs incurred and the amounts associated with each restructuring action, see Note 4 to the financial statements.
Operating profit was $3.95 billion, or 30.3 percent of revenue, compared with $2.83 billion, or 23.2 percent, in 2013.

18


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 rates were 27 percent in 2014 and 24 percent in 2013. The federal research tax credit included in the annual effective tax rates for 2014 and 2013 expired at the end of 2014. See Note 7 to the financial statements for a reconciliation of the income tax provision to the statutory federal tax.
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. We benefit to a lesser extent from tax holidays in non-U.S. jurisdictions, in particular, Malaysia and the Philippines. Pre-tax income related to assembly/test manufacturing facilities in those jurisdictions is included in the non-U.S. effective tax rates reconciling item. 
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 (includes High Volume Analog & Logic, Power Management, High Performance Analog and Silicon Valley Analog product lines)
 
 
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 (includes Processor, Microcontrollers and Connectivity product lines)
 
 
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 Processor, which contributed about equally to the increase. Connectivity increased to a lesser extent. Revenue from Processor increased as a result of a more favorable mix of products shipped. Operating profit increased primarily due to higher revenue and associated gross profit.
Other (includes DLP products, custom ASIC products, calculators, royalties and legacy wireless products)
 
 
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. See Note 4 to the financial statements for information regarding Restructuring charges/other.
Prior results of operations

Our performance in 2013 was strong, reflecting our increased focus on Analog and Embedded Processing. During 2013, 79 percent of our revenue came from Analog and Embedded Processing, with Analog revenue increasing 3 percent from 2012 and Embedded Processing revenue increasing 9 percent from 2012. Operating margin for Analog was 25.8 percent, and it exceeded

19


30 percent during the second half of 2013. Operating margin for Embedded Processing was 7.6 percent. Additionally, we completed our exit from legacy wireless products. Our business model continued to generate strong cash flow from operations, with free cash flow for 2013 of $3 billion, or 24 percent of revenue. During 2013 we returned over $4 billion of cash to investors through a combination of stock repurchases and dividends.

Details of financial results 2013 compared with 2012

Revenue was $12.20 billion, down $620 million, or 5 percent, from 2012 due to lower revenue from legacy wireless products.
Despite the decline in overall revenue, gross profit of $6.36 billion was about even with 2012 due to a more favorable mix of products shipped and, to a lesser extent, lower manufacturing costs. Gross profit margin was 52.1 percent of revenue compared with 49.6 percent in 2012.
Operating expenses were $1.52 billion for R&D and $1.86 billion for SG&A. R&D expense decreased $355 million, or 19 percent, from 2012 primarily reflecting the wind-down of our legacy wireless products. R&D expense as a percent of revenue was 12.5 percent compared with 14.6 percent in 2012. SG&A expense increased $54 million, or 3 percent, from 2012 primarily due to higher variable compensation and other support costs, partially offset by reduced costs from the wind-down of our legacy wireless products. SG&A expense as a percent of revenue was 15.2 percent compared with 14.1 percent in 2012.
Acquisition charges were related to our 2011 acquisition of National and were $341 million in 2013 compared with $450 million in 2012. The charges were primarily from the amortization of intangible assets. The decrease from 2012 was due to the nonrecurrence of integration-related expenses.
Restructuring charges/other was a net credit of $189 million, reflecting the $315 million gain from the technology transfer, partially offset by restructuring charges of $126 million. This compared with a net charge of $264 million in 2012, which included restructuring and other charges of $408 million, partially offset by a $144 million gain from the transfer of the obligations and assets of a portion of our Japan pension program from the pension trust to the government of Japan. These net amounts are all included in Other. For details on restructuring actions, see Note 4 to the financial statements.
Operating profit was $2.83 billion, or 23.2 percent of revenue, compared with $1.97 billion, or 15.4 percent of revenue, in 2012.
The income tax provision was $592 million compared with $176 million for 2012. The increase in the total tax provision was due to higher income before income taxes and, to a lesser extent, lower discrete tax benefits. The discrete tax benefits were $79 million in 2013, primarily due to the effect of the reinstatement of the federal research tax credit for 2012. In 2012, the discrete tax benefits were $252 million, primarily due to additional U.S. tax benefits for manufacturing related to prior years. Our annual effective tax rates were 24 percent in 2013 and 22 percent in 2012.
Net income was $2.16 billion, an increase of $403 million, or 23 percent, from 2012. EPS was $1.91 compared with $1.51 for 2012. EPS benefited $0.06 from 2012 due to a lower number of average shares outstanding as a result of our stock repurchase program.
Segment results– 2013 compared with 2012

Analog
 
 
2013
 
2012
 
Change
Revenue
 
$
7,194
 
$
6,998
 
 
3%
Operating profit
 
 
1,859
 
 
1,650
 
 
13%
Operating profit % of revenue
 
 
25.8%
 
 
23.6%
 
 
 

Analog revenue increased primarily due to growth in Power. Revenue from SVA and HPA also increased, but to a lesser extent. HVAL revenue decreased primarily due to a less favorable mix of products shipped. Operating profit increased primarily due to higher gross profit that benefited from higher revenue and lower manufacturing costs. This increase in gross profit was partially offset by higher operating expenses.

20


Embedded Processing
 
 
2013
 
2012
 
Change
Revenue
 
$
2,450
 
$
2,257
 
 
9%
Operating profit
 
 
185
 
 
158
 
 
17%
Operating profit % of revenue
 
 
7.6%
 
 
7.0%
 
 
 

Embedded Processing revenue increased primarily due to higher revenue from Microcontrollers, and to a lesser extent, Processor and Connectivity. Operating profit increased due to higher revenue and associated gross profit, partially offset by higher operating expenses.
Other
 
 
2013
 
2012
 
Change
Revenue
 
$
2,561
 
$
3,570
 
 
-28%
Operating profit*
 
 
788
 
 
165
 
 
378%
Operating profit % of revenue
 
 
30.8%
 
 
4.6%
 
 
 
 
 
 
 
 
 
 
 
 
 
*Includes Acquisition charges and Restructuring charges/other

Revenue from Other decreased primarily due to lower revenue from legacy wireless products. Operating profit from Other increased due to lower operating expenses and Restructuring charges/other. These decreases were partially offset by lower revenue and associated gross profit.

Financial condition

At the end of 2014, total cash (Cash and cash equivalents plus Short-term investments) was $3.54 billion, a decrease of $288 million from the end of 2013.
Accounts receivable were $1.25 billion at the end of 2014. This was an increase of $43 million compared with the end of 2013 due to higher revenue. Days sales outstanding were 34 at the end of 2014 compared with 36 at the end of 2013.
Inventory was $1.78 billion at the end of 2014. This was an increase of $53 million from the end of 2013. Days of inventory at the end of 2014 were 117 compared with 112 at the end of 2013. As sales to distributors become a larger portion of our revenue, we expect consignment inventory to become a larger portion of our total inventory. This may lead to changes in the level of inventory we carry in the future.

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 revolving credit facilities. Cash flow from operating activities for 2014 was $3.89 billion, an increase of $508 million from 2013 due to an increase in Net income.
We had $1.20 billion of Cash and cash equivalents and $2.34 billion of Short-term investments as of December 31, 2014. Our U.S. entities owned 82 percent of total cash at the end of 2014.
We have a variable-rate revolving credit facility with a consortium of investment-grade banks that allows us to borrow up to $2 billion until March 2019. This credit facility also serves as support for the issuance of commercial paper. As of December 31, 2014, our credit facility was undrawn and we had no commercial paper outstanding.
In 2014, investing activities used $377 million compared with $3 million in 2013. For 2014, Capital expenditures were $385 million compared with $412 million in 2013. Capital expenditures in both periods were primarily for semiconductor manufacturing equipment. In 2014, we had purchases of short-term investments, net of sales, that used cash of $141 million. In comparison, in 2013, we had sales of short-term investments, net of purchases, that provided cash proceeds of $342 million. In addition, we had proceeds from sales of assets of $142 million in 2014 compared with $21 million in 2013.

21


In 2014, financing activities used net cash of $3.94 billion compared with $3.17 billion in 2013. In 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. In 2013, we received proceeds of $986 million from the issuance of fixed-rate long-term debt (net of original issuance discount) and repaid $1.50 billion of maturing debt. Dividends paid in 2014 were $1.32 billion compared with $1.18 billion in 2013, reflecting increases in the dividend rate. During 2014, the quarterly dividend increased from $0.30 to $0.34 per share, resulting in an annualized dividend payment of $1.36 per share. In 2013, we announced two increases in our quarterly dividend, increasing from $0.21 to $0.30 per share. In 2014, we used $2.83 billion to repurchase 61.7 million shares of our common stock. This compared with $2.87 billion used in 2013 to repurchase 77.6 million shares. Employee exercises of stock options are also reflected in Cash flows from financing activities. In 2014, these exercises provided cash proceeds of $616 million compared with $1.31 billion in 2013. Stock option exercises in 2013 were higher than historical averages.
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,
 
2014
 
2013
Cash flow from operations (GAAP)
$
3,892
 
$
3,384
Capital expenditures
 
(385)
 
 
(412)
Free cash flow (non-GAAP)
$
3,507
 
$
2,972
 
 
 
 
 
 
Revenue
$
13,045
 
$
12,205
 
 
 
 
 
 
Cash flow from operations as a percent of revenue (GAAP)
 
30%
 
 
28%
Free cash flow as a percent of revenue (non-GAAP)
 
27%
 
 
24%



22


Long-term contractual obligations
 
 
Payments Due by Period
Contractual Obligations
 
2015
 
2016/2017
 
2018/2019
 
Thereafter
 
Total
Long-term debt obligations (a)
 
$
1,000
 
$
1,625
 
$
1,250

 
$
750

 
$
4,625
Operating lease obligations (b)
 
 
87
 
 
111
 
 
54

 
 
80

 
 
332
Software license obligations (c)
 
 
39
 
 
27
 
 

 
 

 
 
66
Purchase obligations (d)
 
 
96
 
 
87
 
 
24

 
 
2

 
 
209
Deferred compensation plan (e)
 
 
16
 
 
40
 
 
32

 
 
80

 
 
168
Total (f)
 
$
1,238
 
$
1,890
 
$
1,360

 
$
912

 
$
5,400
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) Includes amounts classified as the current portion of long-term debt, specifically obligations that will mature within 12 months. The related interest payments are not included.
(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 $2 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, 2014.
(f) Excluded from the table are $108 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 2015, but funding projections beyond 2015 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 both 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. In 2014, about 60 percent of our revenue was generated from sales of our products to distributors.
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

23


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. About 60 percent of our distributor revenue is generated from sales of consigned inventory. The allowances we record against this revenue are not material.
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 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.

24


Impairment of acquisition-related intangibles and goodwill
We review acquisition-related intangible assets for impairment when certain indicators suggest an asset’s carrying amount may not be recoverable. Factors considered include the asset’s underperformance compared with expectations and shortened useful life due to planned changes in its use. Recoverability is determined by comparing the carrying amount of the asset to the estimated future undiscounted cash flow. If the future undiscounted cash flow is less than the carrying amount, an impairment charge would be recognized for the excess of the carrying amount over fair value, determined by utilizing a discounted cash flow technique. Additionally, in the case of an intangible asset that will continue to be used in future periods, a shortened useful life may be utilized if appropriate, resulting in accelerated amortization based upon the expected net realizable value of the asset at the date the asset will no longer be utilized.
We review goodwill for impairment annually, or more frequently if certain impairment indicators arise, such as significant changes in business climate, operating performance or competition, or upon the disposition of a significant portion of a reporting unit. A significant amount of judgment is involved in determining if an indicator of impairment has occurred between annual test dates. This impairment review compares the fair value for each reporting unit containing goodwill to its carrying value. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions, including projected future cash flows, discount rates based on weighted average cost of capital and future economic and market conditions. We base our fair-value estimates on assumptions we believe to be reasonable.
Actual cash flow amounts for future periods may differ from estimates used in impairment testing.

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, 2014, 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 13 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 2014 balances and currency exchange rates, a hypothetical 10 percent plus or minus fluctuation in non-U.S. currency exchange rates 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 2014, we had forward currency exchange contracts outstanding with a notional value of $504 million to hedge net balance sheet exposures (including $183 million to sell Japanese yen, $163 million to sell euros and $29 million to sell British pound sterling). Similar hedging activities existed at year-end 2013.
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.

25


As of December 31, 2014, 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 $12 million and decrease the fair value of our long-term debt by $128 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 2014 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 9 to the financial statements for details of equity and other long-term investments.

26


ITEM 8. Financial Statements and Supplementary Data.
Texas Instruments Incorporated and Subsidiaries
Index to Financial Statements (Item 15(a))

Consolidated financial statements
 
Income for each of the three years in the period ended December 31, 2014
28
Comprehensive income for each of the three years in the period ended December 31, 2014
29
Balance sheets at December 31, 2014 and 2013
30
Cash flows for each of the three years in the period ended December 31, 2014
31
Stockholders’ equity for each of the three years in the period ended December 31, 2014
32
Notes to financial statements
33
Report of independent registered public accounting firm
67

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. 


27



 
 
For Years Ended December 31,
Consolidated Statements of Income
 
2014
 
2013
 
2012
(Millions of dollars, except share and per-share amounts)
 
 
 
 
 
 
Revenue
 
$
13,045

 
$
12,205

 
$
12,825

Cost of revenue (COR)
 
5,618

 
5,841

 
6,457

Gross profit
 
7,427

 
6,364

 
6,368

Research and development (R&D)
 
1,358

 
1,522

 
1,877

Selling, general and administrative (SG&A)
 
1,843

 
1,858

 
1,804

Acquisition charges
 
330

 
341

 
450

Restructuring charges/other
 
(51
)
 
(189
)
 
264

Operating profit
 
3,947

 
2,832

 
1,973

Other income (expense), net (OI&E)
 
21

 
17

 
47

Interest and debt expense
 
94

 
95

 
85

Income before income taxes
 
3,874

 
2,754

 
1,935

Provision for income taxes
 
1,053

 
592

 
176

Net income
 
$
2,821

 
$
2,162

 
$
1,759

 
 
 
 
 
 
 
Earnings per common share (EPS):
 
 

 
 

 
 

Basic
 
$
2.61

 
$
1.94

 
$
1.53

Diluted
 
$
2.57

 
$
1.91

 
$
1.51

 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 

 
 

 
 

Basic
 
1,065

 
1,098

 
1,132

Diluted
 
1,080

 
1,113

 
1,146

 
 
 
 
 
 
 
Cash dividends declared per common share
 
$
1.24

 
$
1.07

 
$
0.72

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
 
$
2,821

 
$
2,162

 
$
1,759

Income allocated to RSUs
 
(43
)
 
(36
)
 
(31
)
Income allocated to common stock for diluted EPS
 
$
2,778

 
$
2,126

 
$
1,728


See accompanying notes.

28


 
 
For Years Ended
December 31,
Consolidated Statements of Comprehensive Income
 
2014
 
2013
 
2012
(Millions of dollars)
 
 
 
 
 
 
Net income
 
$
2,821

 
$
2,162

 
$
1,759

Other comprehensive income (loss)
 
 

 
 

 
 

Net actuarial gains (losses) of defined benefit plans:
 
 
 
 

 
 

Adjustment, net of tax benefit (expense) of $25, ($60) and $29
 
(46
)
 
105

 
(81
)
Recognized within Net income, net of tax benefit (expense) of ($21), ($37) and ($104)
 
42

 
71

 
160

Prior service cost of defined benefit plans:
 
 

 
 

 
 

Adjustment, net of tax benefit (expense) of $0, $1 and $1
 
(1
)
 
(3
)
 
(2
)
Recognized within Net income, net of tax benefit (expense) of $0, $2 and $0
 

 
(3
)
 

Derivative instruments:
 
 
 
 
 
 
Change in fair value, net of tax benefit (expense) of $0, $0 and $1
 

 

 
(3
)
Recognized within Net income, net of tax benefit (expense) of ($1), ($1) and $0
 
1

 
1

 

Available-for-sale investments:
 
 

 
 

 
 

Unrealized gains (losses), net of tax benefit (expense) of $0, $0 and ($1)
 

 

 
3

Other comprehensive income (loss), net of taxes
 
(4
)
 
171

 
77

Total comprehensive income
 
$
2,817

 
$
2,333

 
$
1,836


See accompanying notes.

29


 
 
December 31,
Consolidated Balance Sheets
 
2014
 
2013
(Millions of dollars, except share amounts)
 
 
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,199

 
$
1,627

Short-term investments
 
2,342

 
2,202

Accounts receivable, net of allowances of ($12) and ($22)
 
1,246

 
1,203

Raw materials
 
101

 
102

Work in process
 
896

 
919

Finished goods
 
787

 
710

Inventories
 
1,784

 
1,731

Deferred income taxes
 
347

 
393

Prepaid expenses and other current assets
 
850

 
863

Total current assets
 
7,768

 
8,019

Property, plant and equipment at cost
 
6,266

 
6,556

Accumulated depreciation
 
(3,426
)
 
(3,157
)
Property, plant and equipment, net
 
2,840

 
3,399

Long-term investments
 
224

 
216

Goodwill, net
 
4,362

 
4,362

Acquisition-related intangibles, net
 
1,902

 
2,223

Deferred income taxes
 
172

 
207

Capitalized software licenses, net
 
83

 
118

Overfunded retirement plans
 
127

 
130

Other assets
 
244

 
264

Total assets
 
$
17,722

 
$
18,938

 
 
 
 
 
Liabilities and stockholders’ equity
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of long-term debt
 
$
1,001

 
$
1,000

Accounts payable
 
437

 
422

Accrued compensation
 
651

 
554

Income taxes payable
 
71

 
119

Deferred income taxes
 
4

 
1

Accrued expenses and other liabilities
 
498

 
651

Total current liabilities
 
2,662

 
2,747

Long-term debt
 
3,641

 
4,158

Underfunded retirement plans
 
225

 
216

Deferred income taxes
 
399

 
548

Deferred credits and other liabilities
 
405

 
462

Total liabilities
 
7,332

 
8,131

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
 
1,368

 
1,211

Retained earnings
 
29,653

 
28,173

Treasury common stock at cost.
       Shares: 2014 – 694,189,127; 2013 – 658,012,970
 
(21,840
)
 
(19,790
)
Accumulated other comprehensive income (loss), net of taxes (AOCI)
 
(532
)
 
(528
)
Total stockholders’ equity
 
10,390

 
10,807

Total liabilities and stockholders’ equity
 
$
17,722

 
$
18,938

See accompanying notes.

30


 
 
For Years Ended
December 31,
Consolidated Statements of Cash Flows
 
2014
 
2013
 
2012
(Millions of dollars)
 
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
 
 
Net income
 
$
2,821

 
$
2,162

 
$
1,759

Adjustments to Net income:
 
 

 
 

 
 

Depreciation
 
850

 
879

 
957

Amortization of acquisition-related intangibles
 
321

 
336

 
342

Amortization of capitalized software
 
59

 
82

 
102

Stock-based compensation
 
277

 
287

 
263

Gains on sales of assets
 
(73
)
 
(6
)
 

Deferred income taxes
 
(61
)
 
50

 
130

Gain on transfer of Japan substitutional pension
 

 

 
(144
)
Increase (decrease) from changes in:
 
 

 
 

 
 

Accounts receivable
 
(49
)
 
16

 
311

Inventories
 
(53
)
 
26

 
5

Prepaid expenses and other current assets
 
65

 
(136
)
 
162

Accounts payable and accrued expenses
 
(194
)
 
(284
)
 
99

Accrued compensation
 
89

 
18

 
(82
)
Income taxes payable
 
(81
)
 
78

 
(229
)
Changes in funded status of retirement plans
 
(58
)
 
28

 
(198
)
Other
 
(21
)
 
(152
)
 
(63
)
Cash flows from operating activities
 
3,892

 
3,384

 
3,414

 
 
 
 
 
 
 
Cash flows from investing activities
 
 

 
 

 
 

Capital expenditures
 
(385
)
 
(412
)
 
(495
)
Proceeds from asset sales
 
142

 
21

 

Purchases of short-term investments
 
(3,107
)
 
(3,907
)
 
(2,802
)
Proceeds from short-term investments
 
2,966

 
4,249

 
2,198

Other
 
7

 
46

 
60

Cash flows from investing activities
 
(377
)
 
(3
)
 
(1,039
)
 
 
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

 
 

Proceeds from issuance of long-term debt
 
498

 
986

 
1,492

Repayment of debt and commercial paper borrowings
 
(1,000
)
 
(1,500
)
 
(1,375
)
Dividends paid
 
(1,323
)
 
(1,175
)
 
(819
)
Stock repurchases
 
(2,831
)
 
(2,868
)
 
(1,800
)
Proceeds from common stock transactions
 
616

 
1,314

 
523

Excess tax benefit from share-based payments
 
100

 
80

 
38

Other
 
(3
)
 
(7
)
 
(10
)
Cash flows from financing activities
 
(3,943
)
 
(3,170
)
 
(1,951
)
 
 
 
 
 
 
 
Net change in Cash and cash equivalents
 
(428
)
 
211

 
424

Cash and cash equivalents at beginning of period
 
1,627

 
1,416

 
992

Cash and cash equivalents at end of period
 
$
1,199

 
$
1,627

 
$
1,416

 
 
 
 
 
 
 

See accompanying notes.

31


Consolidated Statements of Stockholders’ Equity
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Common
Stock
 
AOCI
(Millions of dollars, except per-share amounts)
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2011
 
$
1,741

 
$
1,194

 
$
26,278

 
$
(17,485
)
 
$
(776
)
 
 
 
 
 
 
 
 
 
 
 
2012
 
 

 
 

 
 

 
 

 
 

Net income
 

 

 
1,759

 

 

Dividends declared and paid ($0.72 per share)
 

 

 
(819
)
 

 

Common stock issued for stock-based awards
 

 
(337
)
 

 
823

 

Stock repurchases
 

 

 

 
(1,800
)
 

Stock-based compensation
 

 
263

 

 

 

Tax impact from exercise of options
 

 
56

 

 

 

Other comprehensive income (loss), net of taxes
 

 

 

 

 
77

Dividend equivalents paid on restricted stock units
 

 

 
(13
)
 

 

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
)

See accompanying notes.


32


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: Processor, Microcontrollers 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, custom application-specific integrated circuits, calculators, royalties, and products from our former Wireless segment, which was eliminated effective January 1, 2013.
We also include in Other items that are not used in evaluating the results of or in allocating resources to our segments. These include acquisition-related charges (see Note 3); restructuring charges (see Note 4); 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. There was no significant 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,
 
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
 
Analog
 
$
8,104

 
$
7,194

 
$
6,998

Embedded Processing
 
2,740

 
2,450

 
2,257

Other
 
2,201

 
2,561

 
3,570

Total revenue
 
$
13,045

 
$
12,205

 
$
12,825

Operating profit:
 
 

 
 

 
 

Analog
 
$
2,786

 
$
1,859

 
$
1,650

Embedded Processing
 
384

 
185

 
158

Other
 
777

 
788

 
165

Total operating profit
 
$
3,947

 
$
2,832

 
$
1,973



33


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:
 
 
For Years Ended December 31,
 
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
 
United States
 
$
1,625

 
$
1,666

 
$
1,596

Asia (a)
 
7,915

 
7,370

 
7,808

Europe
 
2,293

 
1,926

 
1,861

Japan
 
1,032

 
1,072

 
1,357

Rest of world
 
180

 
171

 
203

Total revenue
 
$
13,045

 
$
12,205

 
$
12,825


(a) Revenue from products shipped into China, including Hong Kong, was $5.7 billion in 2014, $5.2 billion in 2013 and $5.4 billion in 2012.
 
 
December 31,
 
 
2014
 
2013
 
2012
Property, plant and equipment, net:
 
 
 
 
 
 
United States
 
$
1,436

 
$
1,765

 
$
1,931

Asia
 
1,096

 
1,277

 
1,547

Europe
 
162

 
196

 
241

Japan
 
124

 
144

 
174

Rest of world
 
22

 
17

 
19

Total property, plant and equipment, net
 
$
2,840

 
$
3,399

 
$
3,912


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 2014 presentation. The preparation of financial statements requires the use of estimates from which final results may vary.

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. In 2014, about 60 percent of our revenue was generated from sales of our products to distributors.


34


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. About 60 percent of our distributor revenue is generated from sales of consigned inventory. The allowances we record against this revenue are not material.

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 payment to be probable. </