EX-13 2 ex13.htm EXHIBIT 13 ex13.htm

Exhibit 13
 
TEXAS INSTRUMENTS     | 2 |     2010 ANNUAL REPORT

 
 
For Years Ended
December 31,
 
Consolidated statements of income
 
2010
   
2009
   
2008
 
[Millions of dollars, except share and per-share amounts]
                 
                   
Revenue
  $ 13,966     $ 10,427     $ 12,501  
Cost of revenue
    6,474       5,428       6,256  
Gross profit
    7,492       4,999       6,245  
Research and development
    1,570       1,476       1,940  
Selling, general and administrative
    1,519       1,320       1,614  
Restructuring expense
    33       212       254  
Gain on divestiture
    (144 )            
Operating profit
    4,514       1,991       2,437  
Other income (expense) net
    37       26       44  
Income before income taxes
    4,551       2,017       2,481  
Provision for income taxes
    1,323       547       561  
Net income
  $ 3,228     $ 1,470     $ 1,920  
                         
Earnings per common share:
                       
Basic
  $ 2.66     $ 1.16     $ 1.46  
Diluted
  $ 2.62     $ 1.15     $ 1.44  
                         
Average shares outstanding (millions):
                       
Basic
    1,199       1,260       1,308  
Diluted
    1,213       1,269       1,321  
                         
Cash dividends declared per share of common stock
  $ 0.49     $ 0.45     $ 0.41  

See accompanying notes.

 
 

 

TEXAS INSTRUMENTS     | 3 |     2010 ANNUAL REPORT

   
For Years Ended
December 31,
 
Consolidated statements of comprehensive income
 
2010
   
2009
   
2008
 
[Millions of dollars]
                 
                   
Net income
  $ 3,228     $ 1,470     $ 1,920  
Other comprehensive income (loss):
                       
Available-for-sale investments:
                       
Unrealized gains (losses), net of tax benefit (expense) of ($3), ($9) and $20
    7       17       (38 )
Reclassification of recognized transactions, net of tax benefit (expense) of $0, ($3) and $0
          6        
Net actuarial gains (losses) of defined benefit plans:
                       
Adjustment, net of tax benefit (expense) of $61, ($38) and $282
    (154 )     91       (476 )
Reclassification of recognized transactions, net of tax benefit (expense) of ($36), ($27) and ($17)
    65       62       32  
Prior service cost of defined benefit plans:
                       
Adjustment, net of tax benefit (expense) of ($1), $1 and $1
    2       (1 )     14  
Reclassification of recognized transactions, net of tax benefit (expense) of $0, $3 and ($1)
          (6 )     2  
Total
    (80 )     169       (466 )
Total comprehensive income
  $ 3,148     $ 1,639     $ 1,454  

See accompanying notes.

 
 

 

TEXAS INSTRUMENTS     | 4 |     2010 ANNUAL REPORT

   
December 31,
 
Consolidated balance sheets
 
2010
   
2009
 
[Millions of dollars, except share amounts]
           
             
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 1,319     $ 1,182  
Short-term investments
    1,753       1,743  
Accounts receivable, net of allowances
    1,518       1,277  
Inventories
    1,520       1,202  
Deferred income taxes
    770       546  
Prepaid expenses and other current assets
    180       164  
Total current assets
    7,060       6,114  
Property, plant and equipment at cost
    6,907       6,705  
Less accumulated depreciation
    (3,227 )     (3,547 )
Property, plant and equipment, net
    3,680       3,158  
Long-term investments
    453       637  
Goodwill
    924       926  
Acquisition-related intangibles
    76       124  
Deferred income taxes
    927       926  
Capitalized software licenses, net
    205       119  
Overfunded retirement plans
    31       64  
Other assets
    45       51  
Total assets
  $ 13,401     $ 12,119  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 621     $ 503  
Accrued compensation
    629       386  
Income taxes payable
    109       128  
Accrued expenses and other liabilities
    622       570  
Total current liabilities
    1,981       1,587  
Underfunded retirement plans
    519       425  
Deferred income taxes
    86       67  
Deferred credits and other liabilities
    378       318  
Total liabilities
    2,964       2,397  
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: 2010 – 1,740,166,101; 2009 – 1,739,811,721
    1,740       1,740  
Paid-in capital
    1,114       1,086  
Retained earnings
    24,695       22,066  
Less treasury common stock at cost.
               
Shares: 2010 – 572,722,397; 2009 – 499,693,704
    (16,411 )     (14,549 )
Accumulated other comprehensive income (loss), net of taxes
    (701 )     (621 )
Total stockholders’ equity
    10,437       9,722  
Total liabilities and stockholders’ equity
  $ 13,401     $ 12,119  

See accompanying notes.

 
 

 

TEXAS INSTRUMENTS     | 5 |     2010 ANNUAL REPORT

   
For Years Ended
December 31,
 
Consolidated statements of cash flows
 
2010
   
2009
   
2008
 
[Millions of dollars]
                 
                   
Cash flows from operating activities:
                 
Net income
  $ 3,228     $ 1,470     $ 1,920  
Adjustments to net income:
                       
Depreciation
    865       877       1,022  
Stock-based compensation
    190       186       213  
Amortization of acquisition-related intangibles
    48       48       37  
Gain on divestiture
    (144 )            
Deferred income taxes
    (188 )     146       (182 )
Increase (decrease) from changes in:
                       
Accounts receivable
    (231 )     (364 )     865  
Inventories
    (304 )     177       43  
Prepaid expenses and other current assets
    (8 )     35       (125 )
Accounts payable and accrued expenses
    57       5       (325 )
Accrued compensation
    246       (38 )     (141 )
Income taxes payable
    49       73       38  
Other
    12       28       (35 )
Net cash provided by operating activities
    3,820       2,643       3,330  
                         
Cash flows from investing activities:
                       
Additions to property, plant and equipment
    (1,199 )     (753 )     (763 )
Proceeds from divestiture
    148              
Purchases of short-term investments
    (2,510 )     (2,273 )     (1,746 )
Sales, redemptions and maturities of short-term investments
    2,564       2,030       1,300  
Purchases of long-term investments
    (8 )     (9 )     (9 )
Redemptions and sales of long-term investments
    147       64       55  
Business acquisitions, net of cash acquired
    (199 )     (155 )     (19 )
Net cash used in investing activities
    (1,057 )     (1,096 )     (1,182 )
                         
Cash flows from financing activities:
                       
Dividends paid
    (592 )     (567 )     (537 )
Sales and other common stock transactions
    407       109       210  
Excess tax benefit from share-based payments
    13       1       19  
Stock repurchases
    (2,454 )     (954 )     (2,122 )
Net cash used in financing activities
    (2,626 )     (1,411 )     (2,430 )
                         
Net increase (decrease) in cash and cash equivalents
    137       136       (282 )
Cash and cash equivalents at beginning of year
    1,182       1,046       1,328  
Cash and cash equivalents at end of year
  $ 1,319     $ 1,182     $ 1,046  

See accompanying notes.

 
 

 

TEXAS INSTRUMENTS     | 6 |     2010 ANNUAL REPORT

Consolidated statements of stockholders’ equity
 
Common
Stock
   
Paid-in
Capital
   
Retained
Earnings
   
Treasury
Common
Stock
   
Accumulated Other
Comprehensive
Income (Loss)
 
[Millions of dollars, except per-share amounts]
                             
                               
Balance, December 31, 2007
  $ 1,740     $ 931     $ 19,788     $ (12,160 )   $ (324 )
                                         
2008
                                       
Net income
                1,920              
Dividends declared on common stock ($.41 per share)
                (537 )            
Common stock issued on exercise of stock options
          (153 )           360        
Stock repurchases
                      (2,014 )      
Stock-based compensation transactions
          213                    
Tax impact from exercise of options
          31                    
Other comprehensive income (loss), net of tax
                            (466 )
Other
                (3 )            
Balance, December 31, 2008
    1,740       1,022       21,168       (13,814 )     (790 )
                                         
2009
                                       
Net income
                1,470              
Dividends declared on common stock ($.45 per share)
                (567 )            
Common stock issued on exercise of stock options
          (120 )           226        
Stock repurchases
                      (961 )      
Stock-based compensation transactions
          186                    
Tax impact from exercise of options
          (2 )                  
Other comprehensive income (loss), net of tax
                            169  
Other
                (5 )            
Balance, December 31, 2009
    1,740       1,086       22,066       (14,549 )     (621 )
                                         
2010
                                       
Net income
                3,228              
Dividends declared on common stock ($.49 per share)
                (592 )            
Common stock issued on exercise of stock options
          (182 )           588        
Stock repurchases
                      (2,450 )      
Stock-based compensation transactions
          190                    
Tax impact from exercise of options
          21                    
Other comprehensive income (loss), net of tax
                            (80 )
Other
          (1 )     (7 )            
Balance, December 31, 2010
  $ 1,740     $ 1,114     $ 24,695     $ (16,411 )   $ (701 )

See accompanying notes.

 
 

 

TEXAS INSTRUMENTS     | 7 |     2010 ANNUAL REPORT
Notes to financial statements

1. Description of business and significant accounting policies and practices

Business: At Texas Instruments (TI), we design and make semiconductors that we sell to electronics designers and manufacturers all over the world. We have three reportable segments, which are established along major product categories as follows:

Analog – consists of high-volume analog & logic, high-performance analog and power management products;

Embedded Processing – consists of digital signal processors (DSPs) and microcontrollers used in catalog, communications infrastructure and automotive applications; and

Wireless – consists of connectivity products, OMAP™ applications processors and basebands for wireless applications, including handsets.

In addition, we report the results of our remaining business activities in Other. Other includes our smaller semiconductor operating segments that include product lines such as DLP® products (primarily used in projectors to create high-definition images) and custom semiconductors known as application-specific integrated circuits (ASICs), as well as our handheld graphing and scientific calculators. Other also includes royalties received for our patented technology that we license to other electronics companies and revenue from transitional supply agreements entered into in connection with acquisitions and divestitures. See Note 15 for additional information on our business segments.
 
Basis of presentation: The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The basis of these financial statements is comparable for all periods presented herein, except for the adoption of:

 
·
A new accounting standard on business combinations as of January 1, 2009, the impact of which was not significant, and
 
·
A new accounting standard on fair-value measurements for non-financial assets and liabilities as of January 1, 2009, which primarily resulted in additional disclosures regarding fair-value measurements.

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 the 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 2010 presentation.
The preparation of financial statements requires the use of estimates from which final results may vary.

Revenue recognition: We recognize revenue from direct sales of our products to our customers, including shipping fees, when title passes to the customer, which usually occurs upon shipment or delivery, depending upon the terms of the sales order; when persuasive evidence of an arrangement exists; and when collectability is reasonably assured. Revenue from sales of our products that are subject to inventory consignment agreements is recognized when the customer pulls product from consignment inventory that we store at designated locations. Estimates of product returns for quality reasons and of price allowances (based on historical experience, product shipment analysis and customer contractual arrangements) are recorded when revenue is recognized. Allowances include volume-based incentives and special pricing arrangements. In addition, we record allowances for accounts receivable that we estimate may not be collected.
We recognize revenue from direct sales of our products to our distributors, net of allowances, consistent with the principles discussed above. Title transfers to the distributors at delivery or when the products are pulled from consignment inventory and payment is due on our standard commercial terms; payment terms are not contingent upon resale of the products. We also grant discounts to some distributors for prompt payments. We calculate credit allowances based on historical data, current economic conditions and contractual terms. For instance, we sell to distributors at standard published prices, but we may grant them price adjustment credits in response to individual competitive opportunities they may have. To estimate allowances, we use statistical percentages of revenue, determined quarterly, based upon recent historical adjustment trends.
We also provide distributors an allowance to scrap certain slow-moving or obsolete products in their inventory, estimated as a negotiated fixed percentage of each distributor’s purchases from us. In addition, if we publish a new price for a product that is lower than that paid by distributors for the same product still remaining in each distributor’s on-hand inventory, we may credit them for the difference between those prices. The allowance for this type of credit is based on the identified product price difference applied to our estimate of each distributor’s on-hand inventory of that product. We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner.

 
 

 

TEXAS INSTRUMENTS     | 8 |     2010 ANNUAL REPORT

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

Advertising costs: We expense advertising and other promotional costs as incurred. This expense was $44 million in 2010, $42 million in 2009 and $123 million in 2008.

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

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

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

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

   
Net Income
   
2010
Shares
   
EPS
   
Net Income
   
2009
Shares
   
EPS
   
Net Income
   
2008
Shares
   
EPS
 
Basic EPS:
                                                     
Net income
  $ 3,228                 $ 1,470                 $ 1,920              
Less income allocated to RSUs
    (44 )                 (14 )                 (12 )            
Income allocated to common stock for basic EPS calculation
  $ 3,184       1,199     $ 2.66     $ 1,456       1,260     $ 1.16     $ 1,908       1,308     $ 1.46  
                                                                         
Adjustment for dilutive shares:
                                                                       
Stock-based compensation plans
            14                       9                       13          
                                                                         
Diluted EPS:
                                                                       
Net income
  $ 3,228                     $ 1,470                     $ 1,920                  
Less income allocated to RSUs
    (44 )                     (14 )                     (12 )                
Income allocated to common stock for diluted EPS calculation
  $ 3,184       1,213     $ 2.62     $ 1,456       1,269     $ 1.15     $ 1,908       1,321     $ 1.44  
 
Options to purchase 88 million, 135 million and 123 million shares of common stock that were outstanding during 2010, 2009 and 2008 were not included in the computation of diluted EPS because their exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

Investments: We present investments on our balance sheets as cash equivalents, short-term investments or long-term investments. Specific details are as follows:

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

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

 

TEXAS INSTRUMENTS     | 9 |     2010 ANNUAL REPORT

Classification of investments: Depending on our reasons for holding the investment and our ownership percentage, we classify investments in securities as available-for-sale, trading, equity-method or cost-method investments, which are more fully described in Note 7. We determine cost or amortized cost, as appropriate, on a specific identification basis.

Inventories: Inventories are stated at the lower of cost or estimated net realizable value. Cost is generally computed on a currently adjusted standard cost basis, which approximates costs on a first-in first-out basis. Standard costs are based on the normal utilization of installed factory capacity. Costs associated with underutilization of capacity are expensed as incurred. Inventory held at consignment locations is included in our finished goods inventory, as we retain full title and rights to the product.
We review inventory quarterly for salability and obsolescence. A specific allowance is provided for inventory considered unlikely to be sold. Remaining inventory includes a salability and obsolescence allowance based on an analysis of historical disposal activity. We write off inventory in the period in which disposal occurs.

Property, plant and equipment and other capitalized costs: Property, plant and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. We amortize acquisition-related intangibles on a straight-line basis over the estimated economic life of the assets. Capitalized software licenses generally are amortized on a straight-line basis over the term of the license. Fully depreciated or amortized assets are written off against accumulated depreciation or amortization.

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

Goodwill: Goodwill is not amortized but is reviewed for impairment annually, or more frequently if certain impairment indicators arise. We complete our annual goodwill impairment tests as of October 1 for our reporting units. The test compares the fair value for each reporting unit to its associated carrying value including goodwill.

Foreign currency: The functional currency for our non-U.S. subsidiaries is the U.S. dollar. Accounts recorded in currencies other than the U.S. dollar are remeasured into the functional currency. Current assets (except inventories), deferred income taxes, other assets, current liabilities and long-term liabilities are remeasured at exchange rates in effect at the end of each reporting period. Inventories, and property, plant and equipment and depreciation thereon, are remeasured at historic exchange rates. Revenue and expense accounts other than depreciation for each month are remeasured at the appropriate daily rate of exchange. Currency exchange gains and losses from remeasurement are credited or charged to Other income (expense) net (OI&E).
 
Derivatives and hedging: We use derivative financial instruments to manage exposure to foreign exchange risk. These instruments are primarily forward foreign currency exchange contracts that are used as economic hedges to reduce the earnings impact exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures or for specified non-U.S. dollar forecasted transactions. Gains and losses from changes in the fair value of these forward foreign currency exchange contracts are credited or charged to OI&E. We do not use derivatives for speculative or trading purposes. We do not apply hedge accounting to our foreign currency derivative instruments.

Changes in accounting standards:
In October 2009, the Financial Accounting Standards Board (FASB) concurrently issued the following Accounting Standards Updates (ASUs):

·
ASU No. 2009 – 14 - Software (Topic 985): Certain Revenue Arrangements That Include Software Elements. This standard removes tangible products from the scope of software revenue recognition guidance and also provides guidance on determining whether software deliverables in an arrangement that includes a tangible product, such as embedded software, are within the scope of the software revenue guidance.
·
ASU No. 2009 – 13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This standard modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services and support, to a customer at different times as part of a single revenue generating transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements.
 
 
 

 

TEXAS INSTRUMENTS     | 10 |     2010 ANNUAL REPORT

We will apply these standards on a prospective basis for revenue arrangements entered into or materially modified beginning January 1, 2011. We have evaluated the potential impact of these standards and have determined they will have no significant impact on our financial position or results of operations.
In January 2010, the FASB issued ASU No. 2010 – 06 - Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This standard amends the disclosure guidance with respect to fair value measurements for both interim and annual reporting periods. Specifically, this standard requires new disclosures for significant transfers of assets or liabilities between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for purchases, sales, issuance and settlements of Level 3 fair value items on a gross, rather than net basis; and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and Level 3 assets and liabilities. Except for the detailed disclosures of changes in Level 3 items, which will be effective for us as of January 1, 2011, the remaining new disclosure requirements were effective for us as of January 1, 2010. We have included these new disclosures, as applicable, in Note 7.
In April 2010, the FASB issued ASU No. 2010 – 17 - Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition. This standard provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for certain research and development transactions. Under this new standard, a company can recognize as revenue consideration that is contingent upon achievement of a milestone in the period in which it is achieved, only if the milestone meets all criteria to be considered substantive. This standard will be effective for us on a prospective basis as of January 1, 2011. We have evaluated the potential impact of this standard and have determined it will have no significant impact on our financial position or results of operations.

2. Restructuring activities

Costs incurred with restructuring activities generally consist of voluntary and involuntary severance-related expenses, asset impairments and other costs to exit activities. We recognize voluntary termination benefits when the employee accepts the offered benefit arrangement. We recognize involuntary severance-related expenses depending on whether the termination benefits are provided under an ongoing benefit arrangement or under a one-time benefit arrangement. We recognize involuntary severance-related expenses associated with an ongoing benefit arrangement once they are probable and the amounts are estimable. We recognize involuntary severance-related expenses associated with a one-time benefit arrangement once the benefits have been communicated to employees.
Restructuring activities have also resulted in asset impairments, which are included in restructuring expense and are recorded as an adjustment to the basis of the asset, not as a liability relating to a restructuring charge. When we commit to a plan to abandon a long-lived asset before the end of its previously estimated useful life, we accelerate the recognition of depreciation to reflect the use of the asset over its shortened useful life. When an asset is held to be sold, we write down the carrying value to its net realizable value and cease depreciation.
In October 2008, we announced actions to reduce expenses in our Wireless segment, especially our baseband operation. In January 2009, we announced actions that included broad-based employment reductions to align our spending with weakened demand. Combined, these actions eliminated about 3,900 jobs; they were completed in 2009.

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

   
Severance
and Benefits
   
Impairments
and Other
Charges
   
Total
 
Accrual at December 31, 2008
  $ 186     $ 5     $ 191  
Restructuring expense
    201       11       212  
Non-cash charges
    (26 )*     1       (25 )
Payments
    (277 )     (7 )     (284 )
Remaining accrual at December 31, 2009
    84       10       94  
                         
Restructuring expense
    33             33  
Non-cash charges
    (33 )*           (33 )
Payments
    (62 )     (2 )     (64 )
Remaining accrual at December 31, 2010
  $ 22     $ 8     $ 30  

* Reflects charges for postretirement benefit plan settlement, curtailment and special termination benefits.
 
 
 

 

TEXAS INSTRUMENTS     | 11 |     2010 ANNUAL REPORT

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

Restructuring expense recognized by segment from the actions described above is as follows:

   
2010
   
2009
   
2008
 
Analog
  $ 13     $ 84     $ 58  
Embedded Processing
    6       43       24  
Wireless
    10       62       132  
Other
    4       23       40  
Total restructuring expense
  $ 33     $ 212     $ 254  

3. Stock-based compensation
 
We account for all awards granted under our various stock-based employee compensation plans at fair value. The stock-based compensation expense recognized for the years ended December 31, 2010, 2009 and 2008 were as follows:

   
2010
   
2009
   
2008
 
Stock-based compensation expense recognized:
                 
Cost of revenue
  $ 36     $ 35     $ 41  
Research and development
    53       54       62  
Selling, general and administrative
    101       97       110  
Total
  $ 190     $ 186     $ 213  

These amounts include expense related to non-qualified stock options, RSUs and to stock options offered under our employee stock purchase plan.
We issue awards of non-qualified stock options generally with graded vesting provisions (e.g., 25 percent per year for four years). We recognize the related compensation cost on a straight-line basis over the minimum service period required for vesting of the award. For awards to employees who are retirement eligible or nearing retirement eligibility, we recognize compensation cost on a straight-line basis over the longer of the service period required to be performed by the employee in order to earn the award, or a six-month period.
We also issue RSUs, which generally vest four years after the date of grant. We recognize the related compensation costs on a straight-line basis over the vesting period.

Fair value methods and assumptions
We estimate the fair values for non-qualified stock options under the long-term incentive plans and director plans using the Black-Scholes option-pricing model with the following weighted average assumptions:

 
2010
 
2009
 
2008
 
Weighted average grant date fair value, per share
  $ 6.61     $ 5.43     $ 8.86  
Weighted average assumptions used:
                       
Expected volatility
    32 %     48 %     31 %
Expected lives
6.4 yrs  
5.9 yrs  
5.7 yrs  
Risk-free interest rates
    2.83 %     2.63 %     3.01 %
Expected dividend yields
    2.08 %     2.94 %     1.34 %

We determine expected volatility on all options granted after July 1, 2005, using available implied volatility rates rather than an analysis of historical volatility. We believe that market-based measures of implied volatility are currently the best available indicators of the expected volatility used in these estimates.
We determine expected lives of options based on the historical option exercise experience of our optionees using a rolling 10-year average. We believe the historical experience method is the best estimate of future exercise patterns currently available.
Risk-free interest rates are determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options.
 
 
 

 

TEXAS INSTRUMENTS     | 12 |     2010 ANNUAL REPORT

Expected dividend yields are based on the approved annual dividend rate in effect and the current market price of our common stock at the time of grant. No assumption for a future dividend rate change is included unless there is an approved plan to change the dividend in the near term.
The fair value per share of RSUs that we grant is determined based on the closing price of our common stock on the date of grant.
Our employee stock purchase plan is a discount-purchase plan and consequently the Black-Scholes option-pricing model is not used to determine the fair value per share of these awards. The fair value per share under this plan equals the amount of the discount.

Long-term incentive and director compensation plans
We have stock options outstanding to participants under various long-term incentive plans. We also have assumed stock options that were granted by companies that we later acquired. Unless the options are acquisition-related replacement options, the option price per share may not be less than 100 percent of the fair market value of our common stock on the date of the grant. Substantially all the options have a 10-year term and vest ratably over four years. Our options generally continue to vest after the option recipient retires.
We also have RSUs outstanding under the long-term incentive plans. Each RSU represents the right to receive one share of TI common stock on the vesting date, which is generally four years after the date of grant. Upon vesting, the shares are issued without payment by the grantee. RSUs generally do not continue to vest after the recipient’s retirement date.
We have options and RSUs outstanding to non-employee directors under various director compensation plans. The plans generally provide for annual grants of stock options, a one-time grant of RSUs to each new non-employee director and the issuance of TI common stock upon the distribution of stock units credited to deferred compensation accounts established for such directors.
 
Stock option and RSU transactions under our long-term incentive and director compensation plans during 2010 were as follows:

   
Stock Options
   
Restricted Stock Units
 
   
Shares
   
Weighted
Average Exercise
Price per Share
   
Shares
   
Weighted
Average Grant-Date
Fair Value per Share
 
Outstanding grants, December 31, 2009
    174,713,222     $ 30.53       14,409,002     $ 23.86  
Granted
    16,208,193       23.11       6,441,488       23.47  
Vested RSUs
                (1,629,862 )     31.16  
Expired and forfeited
    (23,806,275 )     50.04       (653,263 )     24.61  
Exercised
    (16,980,127 )     21.16              
Outstanding grants, December 31, 2010
    150,135,013     $ 27.70       18,567,365     $ 23.06  

The weighted average grant-date fair value of RSUs granted during the years 2010, 2009 and 2008 was $23.47, $15.78 and $29.09 per share. For the years ended December 31, 2010, 2009 and 2008, the total fair value of shares vested from RSU grants was $51 million, $28 million and $20 million.

Summarized information about stock options outstanding at December 31, 2010, is as follows:

     
Stock Options Outstanding
         
Options Exercisable
 
Range of
Exercise
Prices
   
Number
Outstanding
(Shares)
   
Weighted Average
Remaining Contractual
Life (Years)
   
Weighted Average
Exercise Price per
Share
   
Number
Exercisable
(Shares)
   
Weighted Average
Exercise Price per
Share
 
$ .26 to 10.00       21,963       2.0     $ 6.16       21,963     $ 6.16  
10.01 to 20.00
      31,755,186       4.7       15.69       20,740,148       16.07  
20.01 to 30.00
      58,361,582       5.4       25.18       36,751,851       25.43  
30.01 to 40.00
      48,019,676       3.0       33.05       47,779,210       33.05  
40.01 to 50.38
      11,976,606       0.1       50.31       11,976,606       50.31  
$ .26 to 50.38       150,135,013       4.1     $ 27.70       117,269,778     $ 29.42  

During the years ended December 31, 2010, 2009 and 2008, the aggregate intrinsic value (i.e., the difference in the closing market price and the exercise price paid by the optionee) of options exercised was $140 million, $21 million and $110 million.
 
 
 

 

TEXAS INSTRUMENTS     | 13 |     2010 ANNUAL REPORT

Summarized information as of December 31, 2010, about outstanding stock options that are vested and expected to vest, as well as stock options that are currently exercisable, is as follows:

   
Outstanding Stock Options (Fully Vested and Expected
to Vest) (a)
   
Options
Exercisable
 
Number of outstanding (shares)
    147,952,889       117,269,778  
Weighted average remaining contractual life
 
4.1 yrs
   
2.9 yrs
 
Weighted average exercise price per share
  $ 28.10     $ 29.42  
Intrinsic value (millions of dollars)
  $ 944     $ 607  

(a)
Includes effects of expected forfeitures. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $968 million.
 
As of December 31, 2010, the total future compensation cost related to unvested stock options and RSUs not yet recognized in the statements of income was $133 million and $196 million. Of that total, $146 million, $107 million, $67 million and $9 million will be recognized in 2011, 2012, 2013 and 2014.

Employee stock purchase plan
We have an employee stock purchase plan under which options are offered to all eligible employees in amounts based on a percentage of the employee’s compensation. Under the plan, the option price per share is 85 percent of the fair market value on the exercise date, and options have a three-month term.
Options outstanding under the plan at December 31, 2010, had an exercise price of $27.83 per share (85 percent of the fair market value of TI common stock on the date of automatic exercise). Of the total outstanding options, none were exercisable at year-end 2010.

Employee stock purchase plan transactions during 2010 were as follows:

   
Employee Stock
Purchase Plan
(Shares)
   
Exercise Price
 
Outstanding grants, December 31, 2009
    579,681     $ 22.11  
Granted
    2,347,717       22.56  
Exercised
    (2,439,527 )     21.40  
Outstanding grants, December 31, 2010
    487,871     $ 27.83  

The weighted average grant-date fair value of options granted under the employee stock purchase plans during the years 2010, 2009 and 2008 was $3.97, $3.13 and $3.37 per share. During the years ended December 31, 2010, 2009 and 2008, the total intrinsic value of options exercised under these plans was $9 million, $10 million and $11 million.

Effect on shares outstanding and treasury shares
Our practice is to issue shares of common stock upon exercise of stock options generally from treasury shares and, on a limited basis, from previously unissued shares. We settled stock option plan exercises using treasury shares of 19,077,274 in 2010; 6,695,583 in 2009 and 11,217,809 in 2008; and previously unissued common shares of 342,380 in 2010; 93,648 in 2009 and 85,472 in 2008.
Upon vesting of RSUs, we issued treasury shares of 1,392,790 in 2010; 977,728 in 2009 and 544,404 in 2008. No previously unissued common shares were issued upon vesting of RSUs in these time periods.

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

   
As of December 31, 2010
Shares
 
Long-term Incentive
and Director
Compensation Plans
 
Employee Stock
Purchase Plan
 
Total
Reserved for issuance (a)
    249,171,482       30,075,811       279,247,293  
Shares to be issued upon exercise of outstanding options and RSUs
    (168,821,893 )     (487,871 )     (169,309,764 )
Available for future grants
    80,349,589       29,587,940       109,937,529  

(a)
Includes 119,515 shares credited to directors’ deferred compensation accounts that may settle in shares of TI common stock. These shares are not included as grants outstanding at December 31, 2010.
 
 
 

 

TEXAS INSTRUMENTS     | 14 |     2010 ANNUAL REPORT

Effect on cash flows
Cash received from the exercise of options was $407 million in 2010, $109 million in 2009 and $210 million in 2008. The related net tax impact realized was $21 million, ($2) million and $31 million (which includes excess tax benefits realized of $13 million, $1 million and $19 million) in 2010, 2009 and 2008.
 
4. Profit sharing plans

Profit sharing benefits are generally formulaic and determined by one or more subsidiary or company-wide financial metrics. We pay profit sharing benefits primarily under the company-wide TI Employee Profit Sharing Plan. This plan provides for profit sharing to be paid based solely on TI’s operating margin for the full calendar year. Under this plan, TI must achieve a minimum threshold of 10 percent operating margin before any profit sharing is paid. At 10 percent operating margin, profit sharing will be 2 percent of eligible payroll. The maximum amount of profit sharing available under the plan is 20 percent of eligible payroll, which is paid only if TI’s operating margin is at or above 35 percent for a full calendar year.
We recognized $279 million, $102 million and $121 million of profit sharing expense under the TI Employee Profit Sharing Plan in 2010, 2009 and 2008.

5. Income taxes

Income before income taxes
U.S.
Non-U.S.
Total
2010
  $ 3,769     $ 782     $ 4,551  
2009
    1,375       642       2,017  
2008
    1,749       732       2,481  
       
 
Provision (benefit) for income taxes
 
U.S. Federal
   
Non-U.S.
   
U.S. State
   
Total
 
2010:
                       
Current
  $ 1,347     $ 146     $ 18     $ 1,511  
Deferred
    (128 )     (62 )     2       (188 )
Total
  $ 1,219     $ 84     $ 20     $ 1,323  
                                 
2009:
                               
Current
  $ 334     $ 63     $ 4     $ 401  
Deferred
    117       30       (1 )     146  
Total
  $ 451     $ 93     $ 3     $ 547  
                                 
2008:
                               
Current
  $ 646     $ 89     $ 8     $ 743  
Deferred
    (214 )     43       (11 )     (182 )
Total
  $ 432     $ 132     $ (3 )   $ 561  

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

   
2010
   
2009
   
2008
 
Computed tax at statutory rate
  $ 1,593     $ 706     $ 868  
Effect of non-U.S. rates
    (182 )     (101 )     (197 )
Research and development tax credits
    (54 )     (28 )     (75 )
U.S. tax benefits for manufacturing
    (63 )     (21 )     (18 )
Other
    29       (9 )     (17 )
Total provision for income taxes
  $ 1,323     $ 547     $ 561  
 
 
 

 

TEXAS INSTRUMENTS     | 15 |     2010 ANNUAL REPORT

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

   
December 31,
 
   
2010
   
2009
 
Deferred income tax assets:
           
Inventories and related reserves
  $ 525     $ 347  
Postretirement benefit costs recognized in AOCI
    404       380  
Stock-based compensation
    357       339  
Accrued expenses
    251       219  
Deferred loss and tax credit carryforwards
    220       201  
Intangibles
    62       71  
Investments
    43       49  
Other
    103       98  
      1,965       1,704  
Less valuation allowance
    (3 )     (2 )
      1,962       1,702  
Deferred income tax liabilities:
               
Accrued retirement costs (defined benefit and retiree health care)
    (190 )     (176 )
Property, plant and equipment
    (83 )     (53 )
Other
    (78 )     (68 )
      (351 )     (297 )
Net deferred income tax asset
  $ 1,611     $ 1,405  

As of December 31, 2010 and 2009, net deferred income tax assets of $1.61 billion and $1.41 billion were presented in the balance sheets, based on tax jurisdiction, as deferred income tax assets of $1.70 billion and $1.47 billion and deferred income tax liabilities of $86 million and $67 million. The increase in net deferred income tax assets from December 31, 2009, to December 31, 2010, exceeds the $188 million deferred tax provision due to the recording of deferred tax assets associated with postretirement benefit costs recognized in Accumulated other comprehensive income (AOCI). We make an ongoing assessment regarding the realization of U.S. and non-U.S. deferred tax assets. While these assets are not assured of realization, our assessment is that a valuation allowance is not required for the remaining balance of the deferred tax assets. This assessment is based on our evaluation of relevant criteria including the existence of (a) deferred tax liabilities that can be used to absorb deferred tax assets, (b) taxable income in prior carryback years and (c) expectations for future taxable income.
We have U.S. and non-U.S. tax loss carryforwards of approximately $257 million, of which $134 million expire through the year 2024.
Provision has been made for deferred taxes on undistributed earnings of non-U.S. subsidiaries to the extent that dividend payments from these subsidiaries are expected to result in additional tax liability. The remaining undistributed earnings (approximately $3.44 billion at December 31, 2010) have been indefinitely reinvested; therefore, no provision has been made for taxes due upon remittance of these earnings. It is not practicable to determine the amount of unrecognized deferred tax liability on these unremitted earnings.
Cash payments made for income taxes (net of refunds) were $1.47 billion, $331 million and $772 million for the years ended December 31, 2010, 2009 and 2008.

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

 
 

 

TEXAS INSTRUMENTS     | 16 |     2010 ANNUAL REPORT

The following table summarizes the changes in the total amounts of uncertain tax positions for 2010 and 2009:

   
2010
   
2009
 
Balance, January 1
  $ 56     $ 148  
Additions based on tax positions related to the current year
    12       10  
Additions for tax positions of prior years
    50       6  
Reductions for tax positions of prior years
    (12 )     (18 )
Settlements with tax authorities
    (3 )     (90 )
Balance, December 31
  $ 103     $ 56  
Interest expense recognized in the year ended December 31
  $ 2     $  
Accrued interest receivable as of December 31
  $ 5     $ 9  

The liability for uncertain tax positions is a component of Deferred credits and other liabilities, and accrued interest receivable is a component of Other assets on our balance sheets.
Within the $103 million liability for uncertain tax positions as of December 31, 2010, are uncertain tax positions totaling $136 million that, if recognized, would impact the effective tax rate. If these tax liabilities are ultimately realized, $101 million of deferred tax assets would also be realized, primarily related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation.
As of December 31, 2010, the statute of limitations remains open for U.S. federal tax returns for 1999 and following years. Our returns for the years 2000 through 2006 are the subject of tax treaty procedures for relief from double taxation.
In foreign jurisdictions, the years open to audit represent the years still subject to the statute of limitations. Years still open to audit by foreign tax authorities in major jurisdictions include Germany (2005 onward), France (2008 onward), Japan (2003 onward) and Taiwan (2005 onward).
We are unable to estimate the range of any reasonably possible increase or decrease in uncertain tax positions that may occur within the next 12 months resulting from the eventual outcome of the years currently under audit or appeal. However, we do not anticipate any such outcome will result in a material change to our financial condition or results of operations.

6. Financial instruments and risk concentration

Financial instruments: We hold derivative financial instruments such as forward foreign currency exchange contracts, forward purchase contracts and investment warrants, the fair value of which is not material at December 31, 2010. Our forward foreign currency exchange contracts outstanding at December 31, 2010, had a notional value of $439 million to hedge our non-U.S. dollar net balance sheet exposures (including $236 million to sell Japanese yen, $69 million to sell euros and $33 million to sell British pound sterling).
Cash equivalents, short-term investments, certain long-term investments, postretirement plan assets, contingent consideration and deferred compensation liabilities are carried at fair value, which is described in Note 7. The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to their short maturity.

Risk concentration: Financial instruments that could subject us to concentrations of credit risk are primarily cash, cash equivalents, short-term investments and accounts receivable. In order to manage our credit risk exposure, we place cash investments in investment-grade debt securities and limit the amount of credit exposure to any one issuer. We also limit counterparties on forward foreign currency exchange contracts to investment-grade-rated financial institutions.
Concentrations of credit risk with respect to accounts receivable are limited due to our large number of customers and their dispersion across different industries and geographic areas. We maintain an allowance for losses based on the expected collectability of accounts receivable. These allowances are deducted from accounts receivable on our balance sheets.
 
Details of these allowances are as follows:

Accounts receivable allowances
 
Balance at
Beginning of Year
   
Additions Charged
(Credited) to
Operating Results
   
Recoveries and
Write-offs, Net
   
Balance at
End of Year
 
2010
  $ 23     $ (4 )   $ (1 )   $ 18  
2009
  $ 30     $ 1     $ (8 )   $ 23  
2008
  $ 26     $ 7     $ (3 )   $ 30  
 
 
 

 

TEXAS INSTRUMENTS     | 17 |     2010 ANNUAL REPORT

7. Valuation of debt and equity investments and certain liabilities

Debt and equity investments
We classify our investments as available-for-sale, trading, equity method or cost method. Most of our investments are classified as available-for-sale.
Available-for-sale securities consist primarily of money market funds and debt securities. Available-for-sale securities are stated at fair value, which is generally based on market prices, broker quotes or, when necessary, financial models (see fair value discussion below). We record other-than-temporary losses (impairments) on these securities in OI&E in our statements of income, and all other unrealized gains and losses as an increase or decrease, net of taxes, in AOCI on our balance sheet.
Trading securities are stated at fair value based on market prices. Our trading securities consist exclusively of mutual funds that hold a variety of debt and equity investments intended to generate returns that offset changes in certain deferred compensation liabilities. We record changes in the fair value of our trading securities and the related deferred compensation liabilities in selling, general and administrative (SG&A) expense in our statements of income.
Our other investments are not measured at fair value but are accounted for using either the equity method or cost method. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains or losses from equity method investments are reflected in OI&E based on our ownership share of the investee’s financial results. Gains and losses on cost method investments are recorded in OI&E when realized or when an impairment of the investment’s value is warranted based on our assessment of the recoverability of each investment.
 
Details of our investments and related unrealized gains and losses included in AOCI are as follows:

   
December 31, 2010
   
December 31, 2009
 
   
Cash and Cash
Equivalents
   
Short-term
Investments
   
Long-term
Investments
   
Cash and Cash
Equivalents
   
Short-term
Investments
   
Long-term
Investments
 
Measured at fair value:
                                   
Available-for-sale securities
                                   
Money market funds
  $ 167     $     $     $ 563     $     $  
Corporate obligations
    44       649             100       438        
U.S. Government agency and Treasury securities
    855       1,081             360       1,305        
Auction-rate securities
          23       257                   458  
                                                 
Trading securities
                                               
Mutual funds
                139                   123  
Total
    1,066       1,753       396       1,023       1,743       581  
                                                 
Other measurement basis:
                                               
Equity method investments
                36                   33  
Cost method investments
                21                   23  
Cash on hand
    253                   159              
Total
  $ 1,319     $ 1,753     $ 453     $ 1,182     $ 1,743     $ 637  
                                                 
Amounts included in AOCI from available-for-sale securities:
                                               
Unrealized gains (pre-tax)
  $     $ 1     $     $     $ 1     $  
Unrealized losses (pre-tax)
  $     $ 1     $ 22     $     $     $ 32  

As of December 31, 2010, about 60 percent of our investments in the corporate obligations shown above were insured by either the Federal Deposit Insurance Corporation (FDIC) or the United Kingdom government.
In the year ending December 31, 2010, $188 million of auction-rate securities were redeemed and we received notification in the fourth quarter of 2010 that an additional $23 million of auction-rate securities would be redeemed during 2011. These securities were subsequently redeemed in January of 2011 and were reclassified from long-term to short-term investments on the balance sheet as of December 31, 2010.
As of December 31, 2010 and 2009, unrealized losses included in AOCI were associated with auction-rate securities, and as of December 31, 2010, we have determined that these unrealized losses are not other-than-temporarily impaired. We expect to recover the entire cost basis of these securities. We do not intend to sell these investments, nor do we expect to be required to sell these investments before a recovery of the cost basis. For the year ended December 31, 2010, we did not recognize in earnings any credit losses related to these investments.
 
 
 

 

TEXAS INSTRUMENTS     | 18 |     2010 ANNUAL REPORT

Proceeds from sales, redemptions and maturities of short-term available-for-sale securities, excluding cash equivalents, were $2.56 billion, $2.03 billion and $1.30 billion in 2010, 2009 and 2008. Gross realized gains and losses from these sales were not significant.
 
The following table presents the aggregate maturities of investments in debt securities classified as available-for-sale at December 31, 2010:

Due
 
Fair Value
 
One year or less
  $ 2,156  
One to three years
    663  
Greater than three years (auction-rate securities)
    257  

Gross realized gains and losses from sales of long-term investments were not significant for 2010, 2009 or 2008. Other-than-temporary declines and impairments in the values of these investments recognized in OI&E were $1 million, $14 million and $10 million in 2010, 2009 and 2008.

Fair value considerations
As noted above, we measure and report our financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The three-level hierarchy discussed below indicates the extent and level of judgment used to estimate fair-value measurements.
 
Level 1 –
Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date.
 
Level 2 –
Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. Our Level 2 assets consist of corporate obligations, some U.S. government agency securities and auction-rate securities that have been called for redemption. We utilize a third-party data service to provide Level 2 valuations, verifying these valuations for reasonableness relative to unadjusted quotes obtained from brokers or dealers based on observable prices for similar assets in active markets.
 
Level 3 –
Uses inputs that are unobservable, supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models that utilize management estimates of market participant assumptions.
We own auction-rate securities that are primarily classified as Level 3 assets. Auction-rate securities are debt instruments with variable interest rates that historically would periodically reset through an auction process. These auctions have not functioned since 2008. There is no active secondary market for these securities, although limited observable transactions do occasionally occur. As a result, we use a discounted cash flow (DCF) model to determine the estimated fair value of these investments as of each quarter end. The assumptions used in preparing the DCF model include estimates for the amount and timing of future interest and principal payments and the rate of return required by investors to own these securities in the current environment. In making these assumptions we consider relevant factors including: the formula for each security that defines the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the guarantees by the U.S. Department of Education of the underlying student loans and additional credit enhancements provided through other means; and, publicly available pricing data for student loan asset-backed securities that are not subject to auctions. Our estimate of the rate of return required by investors to own these securities also considers the reduced liquidity for auction-rate securities.
To date, we have collected all interest on all of our auction-rate securities when due and expect to continue to do so in the future. The principal associated with failed auctions will not be accessible until successful auctions resume, a buyer is found outside of the auction process, or issuers use a different form of financing to replace these securities. Meanwhile, issuers continue to repay principal over time from cash flows prior to final maturity, or make final payments when they come due according to contractual maturities ranging from 24 to 37 years. All of our auction-rate securities are backed by pools of student loans substantially guaranteed by the U.S. Department of Education and we continue to believe that the credit quality of these securities is high based on this guarantee. As of December 31, 2010, all of these securities were rated AAA or Aaa by at least one of the major rating agencies. Although most of these securities are dual rated AAA/Aaa, one ($25 million par value) is rated AAA/B3 and one ($12 million par value) is rated AAA/Baa1. While our ability to liquidate auction-rate investments is likely to be limited for some period of time, we do not believe this will materially impact our ability to fund our working capital needs, capital expenditures, dividend payments or other business requirements.

 
 

 

TEXAS INSTRUMENTS     | 19 |     2010 ANNUAL REPORT

The following are our assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2010 and 2009. These tables do not include cash on hand, assets held by our postretirement plans, or assets and liabilities that are measured at historical cost or any basis other than fair value.

   
Fair Value
December 31, 2010
   
Level 1
    Level 2    
Level 3
 
Assets
                       
Money market funds
  $ 167     $ 167     $     $  
Corporate obligations
    693             693        
U.S. Government agency and Treasury securities
    1,936       1,120       816        
Auction-rate securities
    280             23       257  
Mutual funds
    139       139              
Total assets
  $ 3,215     $ 1,426     $ 1,532     $ 257  
   
Liabilities (a)
                               
Contingent consideration
  $ 8     $     $     $ 8  
Deferred compensation
    159       159              
Total liabilities
  $ 167     $ 159     $     $ 8  
   
 
   
Fair Value
December 31, 2009
   
Level 1
   
Level 2
   
Level 3
 
Assets
                       
Money market funds
  $ 563     $ 563     $     $  
Corporate obligations
    538             538        
U.S. Government agency and Treasury securities
    1,665       911       754        
Auction-rate securities
    458                   458  
Mutual funds
    123       123              
Total assets
  $ 3,347     $ 1,597     $ 1,292     $ 458  
                                 
Liabilities (a)
                               
Contingent consideration
  $ 18     $     $     $ 18  
Deferred compensation
    154       154              
Total liabilities
  $ 172     $ 154     $     $ 18  

(a)
The liabilities above are a component of Accrued expenses and other liabilities or Deferred credits and other liabilities on our balance sheets, depending on the expected timing of payment.
 
The following table summarizes the change in the fair values for Level 3 assets and liabilities for the years ended December 31, 2010 and 2009. The transfer of auction-rate securities into Level 2 was the result of these securities being called for redemption and all were subsequently redeemed.

   
Level 3
 
   
Auction-rate
Securities
   
Contingent
Consideration
 
Balance, December 31, 2008
  $ 482     $  
New contingent consideration
          10  
Change in fair value of contingent consideration – included in operating profit
          8  
Reduction in unrealized loss – included in AOCI
    21        
Redemptions
    (45 )      
Balance, December 31, 2009
    458       18  
                 
Change in fair value of contingent consideration – included in operating profit
          (10 )
Reduction in unrealized loss – included in AOCI
    10        
Redemptions
    (188 )      
Transfers into Level 2
    (23 )      
Balance, December 31, 2010
  $ 257     $ 8  
 
 
 

 

TEXAS INSTRUMENTS     | 20 |     2010 ANNUAL REPORT

8. Acquisitions and divestitures

Acquisitions
On October 14, 2010, we announced the acquisition of TI’s first semiconductor manufacturing site in China, located in the Chengdu High-tech Zone, which included a fully equipped and operational 200-millimeter wafer fabrication facility (fab), as well as a non-operating fab which is held for future capacity expansion. Additionally, we offered employment to the majority of existing employees at the Chengdu site. We are providing transitional supply services through the middle of 2011, while also installing our analog production processes. This acquisition, which was recorded as a business combination, used net cash of $140 million. An additional $35 million will be paid to the seller in October 2011, subject to adjustments for any claims we may have in relation to representations, warranties or other obligations of the seller. We recorded $158 million of property, plant and equipment, $5 million of inventory, $4 million of other assets and $8 million of expenses, which were charged to cost of revenue. Operating results for the transitional supply services are included in our Other segment. Additionally, we incurred acquisition-related costs of $2 million, which were recorded in SG&A expense.
On August 31, 2010, we completed the acquisition of two wafer fabrication facilities and equipment in Aizu-Wakamatsu, Japan, for net cash of $130 million. The terms of the acquisition included an operational 200-millimeter fab as well as a non-operating fab capable of either 200- or 300-millimeter production that is being held for future capacity expansion. Additionally, we offered employment to the existing employees at the Aizu site. We are providing transitional supply services through June 2012, while also installing our analog production processes.
The acquisition of the two Aizu wafer fabs and related 200-millimeter equipment was recorded as a business combination for net cash of $59 million. We recorded $42 million of property, plant and equipment, $9 million of inventory and $8 million of expenses, which were charged to cost of revenue. Operating results for the transitional supply services are included in our Other segment. In connection with the Aizu acquisition, we also settled a contractual arrangement with a third party for our benefit for net cash of $12 million, which was recorded as a charge in cost of revenue in our Other segment. Additionally, we incurred acquisition-related costs of $1 million, which were recorded in SG&A expense.
The Aizu acquisition also included 300-millimeter production tools, which we recorded as a capital purchase for net cash of $58 million. Of this amount, $36 million was for tools to be used primarily in our 300-millimeter analog fab in Richardson, Texas, and the remaining $22 million is held for sale.
In the second quarter of 2009, we acquired Luminary Micro for net cash of $51 million and other consideration of $7 million. These operations were integrated into our Embedded Processing segment.
In the first quarter of 2009, we acquired CICLON Semiconductor Device Corporation for net cash of $104 million and other consideration of $7 million. These operations were integrated into our Analog segment.
The results of operations for these acquisitions have been included in our financial statements from their respective acquisition dates. Pro forma financial information would not be materially different from amounts reported.

Divestiture
On November 15, 2010, we divested a product line previously included in our Other segment for $148 million, and recognized a gain in operating profit of $144 million.

9. Goodwill and other acquisition-related intangibles

The following table summarizes the changes in goodwill by segment for the years ended December 31, 2010 and 2009:

   
Analog
   
Embedded
Processing
   
Wireless
   
Other
   
Total
 
Goodwill, December 31, 2008
  $ 567     $ 157