1. Description of business and significant accounting policies and practices.  Texas Instruments (TI) makes, markets and sells high-technology components; about 80,000 customers all over the world buy our products.

 

Basis of Presentation - The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (US GAAP) and except for new accounting standards on business combinations, fair value measurements and earnings per share, on the same basis as the audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2008.  The consolidated statements of income, statements of comprehensive income and statements of cash flows for the periods ended June 30, 2009 and 2008, and the balance sheet as of June 30, 2009, are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown.  The consolidated balance sheet as of December 31, 2008, presented herein is derived from the audited consolidated balance sheet presented in our annual report on Form 10-K at that date.  Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period presentation.  Certain information and note disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission.  Because the consolidated interim financial statements do not include all of the information and notes required by US GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2008.  The results for the six-month period are not necessarily indicative of a full year’s results.

 

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 share and per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated.

 

Acquisitions – In the second quarter of 2009, we expanded our microcontroller portfolio by acquiring Luminary Micro for net cash of $51 million and other consideration of $7 million.  We recognized $15 million of goodwill, which is not expected to be deductible for tax purposes, $41 million of intangible assets, and $2 million of other net assets and liabilities.  We are still in the process of finalizing valuations of certain acquired assets and liabilities, so these provisional measurements are subject to change.  The former Luminary Micro operations were integrated into our Embedded Processing segment.  

 

In the first quarter of 2009, we acquired CICLON Semiconductor Device Corporation (CICLON), a designer of high-frequency, high-efficiency power management semiconductors for net cash of $104 million and other consideration of $7 million.  This acquisition expands our ability to help customers improve energy efficiency in end-equipment designs, such as high-power computing and server systems.  We recognized $70 million of goodwill, which is not expected to be deductible for tax purposes, $40 million of intangible assets, and $1 million of other net assets and liabilities.  The former CICLON operations were integrated into our Analog segment.  

 

The results of operations of these acquisitions have been included in our financial statements from their respective acquisition dates and were not significant for either the three or six month periods of 2009.  Pro forma information for the comparable periods of 2008 to reflect these acquisitions would not be materially different from amounts reported.

 

Use of Derivatives and Hedging - We use derivative financial instruments to manage exposure to foreign exchange risk.  We do not apply hedge accounting to our foreign currency derivative instruments.  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 other income (expense) net (OI&E).  We do not use derivative financial instruments for speculative or trading purposes.

 

Fair Values of Financial Instruments – The fair values of our derivative financial instruments were not significant at June 30, 2009.  Our investments in cash equivalents, short-term investments and certain long-term investments are carried at fair value and are disclosed in Note 6.  The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments.

 

Changes in Accounting Standards – In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.  This FSP provides additional guidance and disclosure requirements regarding the recognition and measurement of contingent assets acquired and contingent liabilities assumed in a business combination where the fair value of the contingent assets and liabilities cannot be determined as of the acquisition date.  This FSP was effective for us for acquisitions occurring after January 1, 2009.  The adoption of this FSP has not had a significant impact on our financial condition or results of operations, and its future impact will be dependent upon the specific terms of future business combinations.

 

In April 2009, the FASB issued the following three FSPs:

 

·          FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides additional guidance to companies for determining fair values of financial instruments for which there is no active market or quoted prices may represent distressed transactions.  The guidance includes a reaffirmation of the need to use judgment in certain circumstances.

 

·          FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, requires companies to provide additional fair value information for certain financial instruments in interim financial statements, similar to what is currently required to be disclosed on an annual basis.

 

·          FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments, amends the existing guidance regarding impairments for investments in debt securities.  Specifically, it changes how companies determine if an impairment is considered to be other-than-temporary and the related accounting.  This standard also requires increased disclosures.

 

These FSPs apply to both interim and annual periods and were effective for us beginning April 1, 2009.  The adoption of these standards did not have an impact on our financial condition or results of operations.

 

In May 2009, the FASB issued SFAS No. 165, Subsequent Events.  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, and specifically requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.  SFAS 165 is effective for us beginning with the quarter ending June 30, 2009 and will be applied prospectively.

 

In June 2009, the FASB concurrently issued SFAS No. 166,  Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140,  and SFAS No. 167, Amendments to FASB Interpretation No. 46(R), that

change the way entities account for securitizations and other transfers of financial instruments.  In addition to increased disclosure, these standards eliminate the concept of qualifying special purpose entities and change the test for consolidation of variable interest entities.  These standards will be effective for us as of January 1, 2010.  We have evaluated these standards and believe they will have no impact on our financial condition or results of operations.

 

In June 2009, the FASB also issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (a replacement of FASB Statement No. 162).  This standard establishes the FASB Accounting Standards Codification™ (Codification) as the single source of authoritative US GAAP.  The Codification does not create any new GAAP standards but incorporates existing accounting and reporting standards into a new topical structure.  The Codification will be effective for us July 1, 2009, and beginning with the third quarter interim report, a new referencing system will be used to identify authoritative accounting standards, replacing the existing references to SFAS, EITF, FSP, etc.  Existing standards will be designated by their Accounting Standards Codification (ASC) topical reference and new standards will be designated as Accounting Standards Updates, with a year and assigned sequence number. 

2. Restructuring activities.  In October 2008, we announced actions that, when complete, will reduce annualized expenses by more than $200 million in our Wireless segment, especially our baseband operation.  Additionally, in January 2009 we announced actions that included employment reductions to align our spending with weakened demand.  Combined, these actions, when complete, will eliminate about 3,900 jobs and will reduce our annualized costs by more than $700 million.  The total restructuring charges for these actions are expected to be about $460 million and will continue through the fourth quarter of 2009.

 

We recognized $230 million in restructuring charges related to these actions in the fourth quarter of 2008.   Additionally, we recognized $105 million in the first quarter of 2009 and $85 million in the second quarter of 2009 as detailed below.   

 

The table below reflects the changes in accrued restructuring balances related to the 2008 and 2009 actions:

 

 

* Reflects charges and credits for post-employment benefit plan settlement, curtailment and special termination benefits.

 

Restructuring charges recognized by segment in the periods of 2009 are as follows:

 

3. Stock-based compensation.  We have several stock-based employee compensation plans, which are more fully described in Note 3 in our 2008 annual report on Form 10-K.

 

The amounts of stock-based compensation expense recognized in the periods presented are as follows:

 

	For Three Months Ended June 30,		For Six Months Ended June 30,
	2009	2008	2009	2008
COR ...................................................................................................................	$8	$11	$18	$21
R&D ..................................................................................................................	14	15	28	32
SG&A ................................................................................................................	25	28	51	55
Total ..................................................................................................................	$47	$54	$97	$108

 

These amounts include expense related to non-qualified stock options, restricted stock units (RSUs) and stock options offered under our employee stock purchase plan.

4. Income taxes.  Federal income taxes have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate.  As of June 30, 2009, the estimated annual effective tax rate for 2009 is about 27 percent, which differs from the 35 percent statutory corporate tax rate primarily due to the effects of non-U.S. tax rates.  Included in the tax provision for the first six months of 2009 were $5 million in discrete tax benefits primarily related to earnings of non-U.S. subsidiaries.  The tax provision in the year-ago period included discrete tax benefits of $79 million, which were primarily due to our decision to indefinitely reinvest the accumulated earnings of a non-U.S. subsidiary.

 

During the second quarter of 2009 a $90 million payment was made in respect of U.S. tax return audits for the years 2003 through 2006 for all settled audit adjustments on which the adjustment amount had been agreed with the IRS.  The audit adjustments had been previously reflected in our FIN 48 liability and the payment had no income statement impact.  Other U.S. tax audit issues for these years remain unresolved and subject to issue resolution processes.  A $20 million tax interest payment was also made in the second quarter of 2009 for the interest liability already accrued on the same agreed U.S. tax audit adjustments

5. Earnings per share (EPS).  In 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, and it became effective for us beginning January 1, 2009.  Under this standard, unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our RSUs, are considered participating securities for purposes of calculating EPS.  Under the two-class method required by EITF 03-6-1, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock, as shown in the table below.  This FSP requires retrospective application for periods prior to the effective date and as a result, all prior period earnings per share data presented herein have been adjusted to conform to these provisions.  The adoption of this FSP resulted in a decrease of $.01 per share to the previously reported basic EPS for the three months and six months ended June 30, 2008, and no change to the previously reported diluted EPS.

 

Computation and reconciliation of earnings per common share are as follows:

 

 

 

Options to purchase 139 million and 87 million shares of common stock that were outstanding during the second quarters of 2009 and 2008, and 140 million and 87 million shares outstanding during the six months of 2009 and 2008, were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.