TXN - 12.31.2012 - 8-K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 8-K

CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): May 3, 2013
TEXAS INSTRUMENTS INCORPORATED
(Exact name of Registrant as specified in its charter)

DELAWARE
 
001-03761
 
75-0289970
(State or other jurisdiction of incorporation)
 
(Commission file number)
 
(I.R.S. employer identification no.)

12500 TI BOULEVARD
P.O. BOX 660199
DALLAS, TEXAS 75266-0199
(Address of principal executive offices)
 
Registrant's telephone number, including area code: (214) 479-3773

Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))







 









ITEM 8.01. Other Events
As previously announced, Texas Instruments Incorporated (“TI,” “we” or “our”) has restructured its Wireless business to focus investments on embedded markets with greater potential for sustainable growth instead of the smartphone and consumer tablet markets. Consistent with this restructuring, effective January 1, 2013, the Wireless segment was eliminated and our embedded wireless products are now included in our Embedded Processing segment. The remaining Wireless products are now included in Other. We also reclassified certain products, primarily radio frequency identification (RFID) products, from Other to Embedded Processing. Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, reflects these changes.
We are filing this Current Report on Form 8-K to recast the description of business, certain notes to the financial statements and management's discussion and analysis for the periods presented in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”), to reflect the change in reportable segments. Only the following notes to the financial statements have been recast from their previous presentation:
Note 1 - Description of business and significant accounting policies and practices
Note 3 - Restructuring charges/other
Note 10 - Goodwill and acquisition-related intangibles
Note 16 - Segment and geographic area data
Exhibits 99.1 and 99.2 to this Report contain the recast information. The information presented in Exhibits 99.1 and 99.2 does not reflect events occurring after the filing of the 2012 Form 10-K. For information concerning significant developments and other changes to our business since the filing of the 2012 Form 10-K, please review our subsequent SEC filings.

ITEM 9.01. Exhibits

Designation
of Exhibit
in this Report
  
Description of Exhibit
23
  
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
99.1
  
Description of business from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012, recast to reflect changes in segment reporting
99.2
  
Financial Statements and Supplementary Data and Management's Discussion and Analysis of Financial Condition and Results of Operations from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012, recast to reflect changes in segment reporting
101.ins
  
Instance Document
101.sch
 
XBRL Taxonomy Schema
101.cal
 
XBRL Taxonomy Calculation Linkbase
101.lab
 
XBRL Taxonomy Labels Linkbase
101.pre
 
XBRL Taxonomy Presentation Linkbase
101.Def
 
XBRL Taxonomy Definitions Documents






SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
TEXAS INSTRUMENTS INCORPORATED
 
 
By:
/s/ Kevin P. March
 
Kevin P. March
Senior Vice President and
Chief Financial Officer

Date: May 3, 2013

TXN - 12.31.2012 - Exhibit 23


Exhibit 23
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We consent to the incorporation by reference in the following registration statements, and in the related prospectuses thereto, of our report dated February 22, 2013 (except for Notes 1, 3, 10 and 16, as to which the date is May 3, 2013), with respect to the consolidated financial statements of Texas Instruments Incorporated, included in this Current Report (Form 8-K) dated May 3, 2013: Registration Statements (Forms S-8) No. 333-158933, No. 333-158934, No. 33-42172, No. 33-54615, No. 33-61154, No. 333-07127 (as amended), No. 333-41913, No. 333-41919, No. 333-31321 (as amended), No. 333-31323, No. 333-48389, No. 333-44662, No. 333-107759, No. 333-107760, No. 333-107761, No. 333-127021, and No. 333-177235; Registration Statements (Form S-3) No. 333-165045 and No. 333-186803; and Registration Statements (Forms S-4) No. 333-89433 (as amended), No. 333-87199, No. 333-80157 (as amended), and No. 333-41030 (as amended).


 
 
 
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
 
Dallas, Texas
May 3, 2013

 
 



TXN - 12.31.2012 - Exhibit 99.1


Exhibit 99.1
ITEM 1. Business.
Company Overview
At TI, 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 more than 35 countries. We have three segments: Analog, Embedded Processing and 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.
We were the world's fourth largest semiconductor company in 2012 as measured by revenue, according to preliminary estimates from an external source.
Financial information with respect to our segments and our operations outside the United States is contained in the note to the financial statements captioned “Segment and geographic area data” and is incorporated herein by reference.
Product Information
Semiconductors are electronic components that serve as the building blocks inside modern electronic systems and equipment. Semiconductors come in two basic forms: individual transistors and integrated circuits (generally known as “chips”) that combine multiple transistors on a single piece of material to form a complete electronic circuit. Our products, more than 100,000 orderable parts, are integrated circuits 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, to a lesser extent, custom semiconductor products. Catalog products are designed for use by many customers and/or many applications and are sold through both distribution and direct channels. The majority of our catalog products are proprietary, but some are commodity products. The life cycles of catalog products generally span multiple years, with some products continuing to sell for decades after their initial release. Custom products are designed for a specific customer for a specific application, are sold only to that customer and are typically sold directly to the customer. The life cycles of custom products are generally determined by end-equipment upgrade cycles and can be as short as 12 to 24 months.
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. Additional information regarding each segment's products follows.
Analog
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 digital signal processors (DSPs). Analog semiconductors are also used to manage power in every electronic device, whether plugged into a wall or running off a battery. We estimate that we sell our Analog products to more than 100,000 customers. These sales generated about 55 percent of our revenue in 2012. According to external sources, the worldwide market for analog semiconductors was about $39 billion in 2012. Our Analog segment's revenue in 2012 was about $7.0 billion, or about 18 percent of this fragmented market, the leading position. We believe that we are well positioned to increase our market share over time.
Our Analog segment includes the following major product lines: High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA).

HVAL products: These include both high-volume analog and logic products. High-volume analog includes integrated analog products for specific applications, including custom products. End markets for high-volume analog products include communications, automotive, computing and many consumer electronics products. Logic includes some commodity products marketed to many different customers for many different applications.
Power products: These include both catalog and application-specific products that help customers manage power in any type of electronic system. We design and manufacture power management semiconductors for both portable devices

1



(battery-powered devices, such as handheld consumer electronics, laptop computers and cordless power tools) and line-powered systems (products that require an external electrical source, such as computers, digital TVs, wireless basestations and high-voltage industrial equipment).
HPA products: These include catalog analog products, such as amplifiers, data converters and interface semiconductors, that we market to many different customers who use them in manufacturing a wide range of products sold in many end markets, including the industrial, communications, computing and consumer electronics markets. HPA products generally have long life cycles, often more than 10 years.
SVA products: These consist of products that we acquired through our purchase of National Semiconductor Corporation (National) in 2011. These include power management, data converter, interface and operational amplifier catalog analog products, nearly all of which are complementary to our other Analog products. This portfolio of thousands of products is marketed to many different customers who use them in manufacturing a wide range of products sold in many end markets. SVA products generally have long life cycles, often more than 10 years.
Embedded Processing
Embedded Processing products are the “brains” of many electronic devices. Compared with general purpose microprocessors that perform many different tasks, 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 wireless basestation communications infrastructure equipment. Our Embedded Processing products are used in many end markets, particularly industrial, automotive and communications infrastructure.
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 about 18 percent of our revenue in 2012. According to external sources, the worldwide market for embedded processors was about $17 billion in 2012. Our Embedded Processing segment's revenue in 2012 was about $2.3 billion. This was the number two position and represented about 13 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: Processors, Microcontrollers and Connectivity.
Processor products: These include DSPs and applications processors. DSPs perform mathematical computations almost instantaneously to process or improve digital data. Applications processors like our embedded OMAPTM and SitaraTM products run an industry-standard operating system and perform multiple complex tasks, often communicating with other systems.
Microcontroller products: Microcontrollers are 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. Microcontroller products also include radio frequency identification (RFID) products, which are frequently used in automotive applications and sold along with our microcontroller products.
Connectivity products: Connectivity products enable electronic devices to seamlessly connect and transfer data, and the requirements for speed, data capability, distance and power 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, GPS and Near Field Communications. 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 includes revenue from our smaller product lines, such as DLP® (primarily used in projectors to create high-definition images), custom semiconductors known as application-specific integrated circuits (ASICs) and calculators. It includes

2



royalties received for our patented technology that we license to other electronics companies and revenue from transitional supply agreements related to acquisitions and divestitures. We also include revenue, about $1.2 billion in 2012, from our baseband products and from our OMAP applications processors and connectivity products sold into smartphone and consumer tablet applications, all of which are product lines that we have previously announced we are exiting. We expect this revenue to substantially cease by the end of 2013. Other generated about $3.6 billion in 2012.
We also include in Other restructuring charges and certain acquisition-related charges that are not used in evaluating results of and allocating resources to our Analog and Embedded Processing segments. These acquisition-related charges include certain fair-value adjustments, restructuring charges, transaction expenses, acquisition-related retention bonuses and amortization of intangible assets. Other also includes certain corporate-level items, such as litigation and environmental costs, insurance proceeds, and assets and liabilities associated with our centralized operations, such as our worldwide manufacturing, facilities and procurement operations.

3




Applications for Our Products
The table below lists the major end markets that used our products in 2012 and the approximate percentage of our 2012 product revenue that the market represented. The chart also lists the most frequent applications and our products used within these key markets.
End Market
Applications
TI Products
Communications
(31% of product
revenue)
Phones and infrastructure equipment
Mobile connectivity solutions (including wireless LAN, global positioning systems, Bluetooth®, NFC)
Video conferencing
Analog, Embedded Processing, Other
Computing
(25% of product
revenue)
Printers
Hard disk drives
Monitors and projectors
Notebooks, netbooks, desktop computers and servers
    Tablets
Analog, Embedded Processing, Other
Industrial
(17% of product
revenue)
Digital power controls:
Switch mode power supplies
Uninterruptible power supplies
Motor controls:
Heating/ventilation/air conditioning
Industrial control motor drives
Power tools
Copiers
Security:
Biometrics (fingerprint identification and authentication) Intelligent sensing (smoke and glass-breakage detection) Video analytics (surveillance)
Smart metering
Test and measurement
Point of service/portable data terminals
Medical diagnostic and monitoring equipment
LED lighting
Factory automation
Analog, Embedded Processing, Other
Consumer Electronics
(13% of product
revenue)
Digital cameras
Gaming
Home and portable audio/visual equipment
Home appliances
Personal navigation devices
eBook readers
Pico projectors
Analog, Embedded Processing, Other
Automotive
(11% of product
revenue)
Safety systems
Driver information/entertainment
Power train
Body systems
Analog, Embedded Processing, Other
Education
(3% of product
revenue)
Handheld graphing and scientific calculators and peripheral hardware
Educational software
Other
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” is an important concept that 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

4



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.
Seasonality
Our revenue and operating results are subject to some seasonal variation. Our semiconductor sales generally are seasonally weaker in the first and fourth quarters and stronger in the second and third quarters, as manufacturers prepare for the major holiday selling seasons. 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
We face significant global competition from numerous 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, 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. Our primary Analog competitors include Analog Devices, Inc.; Fairchild Semiconductor Corporation; Freescale Semiconductor, Inc.; Infineon Technologies AG; Intersil Corporation; Linear Technology Corporation; Maxim Integrated Products, Inc.; NXP Semiconductors N.V.; QUALCOMM Incorporated; Richtek Technology Corporation; and STMicroelectronics NV.
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 and power characteristics. Primary competitors of our Embedded Processing segment include Atmel Corporation; Broadcom Corp.; Freescale Semiconductor, Inc.; Infineon Technologies AG; Microchip Technology, Inc.; NVIDIA Corporation; NXP Semiconductors N.V.; QUALCOMM Incorporated; Renesas Electronics Corporation; and STMicroelectronics NV.
Manufacturing
Semiconductor manufacturing begins with a sequence of photo-lithographic and chemical processing steps that fabricate a number of semiconductor devices on a thin silicon wafer. Each device on the wafer is tested, the wafer is cut into individual units and each unit is assembled into a package that then is usually retested. 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 CMOS logic products, such as our OMAP 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. Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed. In general, these fixed costs do not decline with reductions in customer demand or utilization of capacity, potentially hurting our profit margins. Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over increased output, potentially benefiting our profit margins.
We expect to maintain sufficient internal wafer fabrication capacity to meet the vast majority of our production needs. To supplement our internal wafer fabrication capacity and maximize our responsiveness to customer demand and return on capital, our wafer manufacturing strategy utilizes the capacity of outside suppliers, commonly known as foundries, and subcontractors. In 2012, we sourced about 20 percent of our total wafers and about 75 percent of our advanced CMOS logic needs from external foundries.
In 2011, we initiated closure of an older wafer fabrication facility in Hiji, Japan, and another in Houston, Texas. We expect to complete these plant closures in 2013.

5




Inventory

Our inventory practices differ by product, but we generally maintain inventory levels that are consistent with our expectations of customer demand. Because of the longer product life cycles of catalog products and their inherently lower risk of obsolescence, we generally carry more inventory of those products than custom products. Additionally, we sometimes maintain catalog-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 some 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
Our products are sold to original equipment manufacturers (OEMs), original design manufacturers (ODMs), contract manufacturers and distributors. (An OEM designs and sells products under its own brand that it manufactures in-house or has manufactured by others. An ODM designs and manufactures products for other companies, which then sell those products under their own brand.) In 2012, no single customer accounted for 10 percent or more of our revenue.
Sales and Distribution
We market and sell our semiconductor products through a direct sales force, distributors and authorized third-party sales representatives. We have sales or marketing offices in 34 countries worldwide and have expanded our sales networks in the emerging markets of China, India and Eastern Europe over the last few years. Distributors located around the world account for about 50 percent of our revenue. 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 distributor-owned and TI-consigned inventory. Over time, we expect this mix will shift more toward consignment. We sell our calculator products primarily through retailers and instructional dealers.
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 firm purchase orders with a customer-requested delivery date within a specified length of time. As customer requirements and industry conditions change, orders may be, under certain circumstances, 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. Accordingly, our backlog at any particular date may not be indicative of revenue for any future period. Our backlog of orders was $1.17 billion at December 31, 2012, and $1.39 billion at December 31, 2011.
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

6



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 also participate in the same initiatives. Participation in these initiatives may require us to license our patents to other companies.
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 OMAPTM and DLP®.
Research and Development
Our R&D expense was $1.88 billion in 2012, compared with $1.72 billion in 2011 and $1.57 billion in 2010. Our primary areas of R&D investment are Analog and Embedded Processing products.
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 external industry consortia, and we collaborate with our foundry suppliers on semiconductor manufacturing technology.
From time to time we may terminate R&D projects before completion or decide not to manufacture and sell a developed product. 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 following completion.
Executive Officers of the Registrant
The following is an alphabetical list of the names and ages of the executive officers of the company and the positions or offices with the company presently held by each person named:
Name
Age
Position
Niels Anderskouv
43
Senior Vice President
Stephen A. Anderson
51
Senior Vice President
Brian T. Crutcher
40
Senior Vice President
R. Gregory Delagi
50
Senior Vice President
David K. Heacock
52
Senior Vice President
Joseph F. Hubach
55
Senior Vice President, Secretary and General Counsel
Sami Kiriaki
52
Senior Vice President
Melendy E. Lovett
54
Senior Vice President (President, Education Technology)
Kevin P. March
55
Senior Vice President and Chief Financial Officer
Robert K. Novak
47
Senior Vice President
Kevin J. Ritchie
56
Senior Vice President
John J. Szczsponik, Jr.
52
Senior Vice President
Richard K. Templeton
54
Director; Chairman of the Board; President and Chief Executive Officer
Teresa L. West
52
Senior Vice President
Darla H. Whitaker
47
Senior Vice President
The term of office of the above-listed officers is from the date of their election until their successor shall have been elected and qualified. All executive officers of the company have been employees of the company for more than five years. Mses. Lovett, West and Whitaker and Messrs. Delagi, Heacock, Hubach, March, Ritchie and Templeton have served as executive officers of the company for more than five years. Messrs. Anderson and Novak became executive officers of the company in 2008. Mr. Szczsponik became an executive officer of the company in 2009. Messrs. Crutcher and Kiriaki became executive officers of the company in 2010. Mr. Anderskouv became an executive officer of the company in 2012.

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Employees
At December 31, 2012, we had 34,151 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 Financial 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.


8
TXN - 12.31.2012 - Exhibit 99.2

Exhibit 99.2
TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

INDEX TO EXHIBIT
 
Page Reference
Index
1
Consolidated financial statements
 
Income for each of the three years in the period ended December 31, 2012
2
Comprehensive income for each of the three years in the period ended December 31, 2012
3
Balance sheets at December 31, 2012 and 2011
4
Cash flows for each of the three years in the period ended December 31, 2012
5
Stockholders' equity for each of the three years in the period ended December 31, 2012
6
Notes to financial statements
7
Report of independent registered public accounting firm
38
Management's discussion and analysis of financial condition and results of operations
39

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. 

1




 
 
For Years Ended
December 31,
Consolidated statements of income
 
2012
 
2011
 
2010
[Millions of dollars, except share and per-share amounts]
 
 
 
 
 
 
Revenue
 
$
12,825

 
$
13,735

 
$
13,966

Cost of revenue (COR)
 
6,457

 
6,963

 
6,474

Gross profit
 
6,368

 
6,772

 
7,492

Research and development (R&D)
 
1,877

 
1,715

 
1,570

Selling, general and administrative (SG&A)
 
1,804

 
1,638

 
1,519

Acquisition charges
 
450

 
315

 

Restructuring charges/other
 
264

 
112

 
(111
)
Operating profit
 
1,973

 
2,992

 
4,514

Other income (expense) net (OI&E)
 
47

 
5

 
37

Interest and debt expense
 
85

 
42

 

Income before income taxes
 
1,935

 
2,955

 
4,551

Provision for income taxes
 
176

 
719

 
1,323

Net income
 
$
1,759

 
$
2,236

 
$
3,228

 
 
 
 
 
 
 
Earnings per common share:
 
 

 
 

 
 

Basic
 
$
1.53

 
$
1.91

 
$
2.66

Diluted
 
$
1.51

 
$
1.88

 
$
2.62

 
 
 
 
 
 
 
Average shares outstanding (millions):
 
 

 
 

 
 

Basic
 
1,132

 
1,151

 
1,199

Diluted
 
1,146

 
1,171

 
1,213

 
 
 
 
 
 
 
Cash dividends declared per share of common stock
 
$
0.72

 
$
0.56

 
$
0.49


See accompanying notes.

2


 
 
For Years Ended
December 31,
Consolidated statements of comprehensive income
 
2012
 
2011
 
2010
[Millions of dollars]
 
 
 
 
 
 
Net income
 
$
1,759

 
$
2,236

 
$
3,228

Other comprehensive income (loss):
 
 

 
 

 
 

Available-for-sale investments:
 
 

 
 

 
 

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

 
(2
)
 
7

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

 
12

 

Net actuarial gains (losses) of defined benefit plans:
 
 
 
 

 
 

Adjustment, net of tax benefit (expense) of $29, $65 and $61
 
(81
)
 
(124
)
 
(154
)
Reclassification of recognized transactions, net of tax benefit (expense) of ($104), ($28) and ($36)
 
160

 
48

 
65

Prior service cost of defined benefit plans:
 
 

 
 

 
 

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

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

 
2

 

Change in fair value of derivative instrument, net of tax benefit (expense) of $1, $1 and $0
 
(3
)
 
(2
)
 

Other comprehensive income (loss), net of taxes
 
77

 
(75
)
 
(80
)
Total comprehensive income
 
$
1,836

 
$
2,161

 
$
3,148


See accompanying notes.

3


 
 
December 31,
Consolidated balance sheets
 
2012
 
2011
[Millions of dollars, except share amounts]
 
 
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,416

 
$
992

Short-term investments
 
2,549

 
1,943

Accounts receivable, net of allowances of ($31) and ($19)
 
1,230

 
1,545

Raw materials
 
116

 
115

Work in process
 
935

 
1,004

Finished goods
 
706

 
669

Inventories
 
1,757

 
1,788

Deferred income taxes
 
1,044

 
1,174

Prepaid expenses and other current assets
 
234

 
386

Total current assets
 
8,230

 
7,828

Property, plant and equipment at cost
 
6,891

 
7,133

Less accumulated depreciation
 
(2,979
)
 
(2,705
)
Property, plant and equipment, net
 
3,912

 
4,428

Long-term investments
 
215

 
265

Goodwill
 
4,362

 
4,452

Acquisition-related intangibles, net
 
2,558

 
2,900

Deferred income taxes
 
280

 
321

Capitalized software licenses, net
 
142

 
206

Overfunded retirement plans
 
68

 
40

Other assets
 
254

 
57

Total assets
 
$
20,021

 
$
20,497

 
 
 
 
 
Liabilities and stockholders’ equity
 
 

 
 

Current liabilities:
 
 

 
 

Commercial paper borrowings
 
$

 
$
999

Current portion of long-term debt
 
1,500

 
382

Accounts payable
 
444

 
625

Accrued compensation
 
524

 
597

Income taxes payable
 
79

 
101

Deferred income taxes
 
2

 

Accrued expenses and other liabilities
 
881

 
795

Total current liabilities
 
3,430

 
3,499

Long-term debt
 
4,186

 
4,211

Underfunded retirement plans
 
269

 
701

Deferred income taxes
 
572

 
607

Deferred credits and other liabilities
 
603

 
527

Total liabilities
 
9,060

 
9,545

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: 2012 – 1,740,815,939; 2011 – 1,740,630,391
 
1,741

 
1,741

Paid-in capital
 
1,176

 
1,194

Retained earnings
 
27,205

 
26,278

Less treasury common stock at cost.
       Shares: 2012 – 632,636,970; 2011 – 601,131,631
 
(18,462
)
 
(17,485
)
Accumulated other comprehensive income (loss), net of taxes
 
(699
)
 
(776
)
Total stockholders’ equity
 
10,961

 
10,952

Total liabilities and stockholders’ equity
 
$
20,021

 
$
20,497

See accompanying notes.

4


 
 
For Years Ended
December 31,
Consolidated statements of cash flows
 
2012
 
2011
 
2010
[Millions of dollars]
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
1,759

 
$
2,236

 
$
3,228

Adjustments to net income:
 
 

 
 

 
 

Depreciation
 
957

 
904

 
865

Amortization of acquisition-related intangibles
 
342

 
111

 
48

Stock-based compensation
 
263

 
269

 
190

Gain on sales of assets and divestiture
 

 
(5
)
 
(144
)
Deferred income taxes
 
65

 
(119
)
 
(188
)
Gain on transfer of Japan substitutional pension
 
(144
)
 

 

Increase (decrease) from changes in:
 
 

 
 

 
 

Accounts receivable
 
311

 
112

 
(231
)
Inventories
 
5

 
(17
)
 
(304
)
Prepaid expenses and other current assets
 
227

 
(29
)
 
(8
)
Accounts payable and accrued expenses
 
99

 
2

 
57

Accrued compensation
 
(82
)
 
(77
)
 
246

Income taxes payable
 
(229
)
 
(85
)
 
(19
)
Changes in funded status of retirement plans
 
(198
)
 
(7
)
 
26

Other
 
39

 
(39
)
 
54

Cash flows from operating activities
 
3,414

 
3,256

 
3,820

 
 
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

 
 

Additions to property, plant and equipment
 
(495
)
 
(816
)
 
(1,199
)
Proceeds from insurance recovery, asset sales and divestiture
 

 
16

 
148

Purchases of short-term investments
 
(2,802
)
 
(3,653
)
 
(2,510
)
Proceeds from short-term investments
 
2,198

 
3,555

 
2,564

Purchases of long-term investments
 
(1
)
 
(6
)
 
(8
)
Proceeds from long-term investments
 
61

 
157

 
147

Business acquisitions, net of cash acquired
 

 
(5,425
)
 
(199
)
Cash flows from investing activities
 
(1,039
)
 
(6,172
)
 
(1,057
)
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

 
 

Proceeds from issuance of long-term debt and commercial paper borrowings
 
1,492

 
4,697

 

Repayment of debt and commercial paper borrowings
 
(1,375
)
 
(200
)
 

Dividends paid
 
(819
)
 
(644
)
 
(592
)
Stock repurchases
 
(1,800
)
 
(1,973
)
 
(2,454
)
Proceeds from common stock transactions
 
523

 
690

 
407

Excess tax benefit from share-based payments
 
38

 
31

 
13

Other
 
(10
)
 
(12
)
 

Cash flows from financing activities
 
(1,951
)
 
2,589

 
(2,626
)
 
 
 
 
 
 
 
Net change in cash and cash equivalents
 
424

 
(327
)
 
137

Cash and cash equivalents at beginning of year
 
992

 
1,319

 
1,182

Cash and cash equivalents at end of year
 
$
1,416

 
$
992

 
$
1,319

 
 
 
 
 
 
 

See accompanying notes.

5


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, 2009
 
$
1,740

 
$
1,086

 
$
22,066

 
$
(14,549
)
 
$
(621
)
 
 
 
 
 
 
 
 
 
 
 
2010
 
 

 
 

 
 

 
 

 
 

Net income
 

 

 
3,228

 

 

Dividends declared and paid ($.49 per share)
 

 

 
(592
)
 

 

Common stock issued for stock-based awards
 

 
(182
)
 

 
588

 

Stock repurchases
 

 

 

 
(2,450
)
 

Stock-based compensation
 

 
190

 

 

 

Tax impact from exercise of options
 

 
21

 

 

 

Other comprehensive income (loss), net of taxes
 

 

 

 

 
(80
)
Other
 

 
(1
)
 
(7
)
 

 

Balance, December 31, 2010
 
1,740

 
1,114

 
24,695

 
(16,411
)
 
(701
)
 
 
 
 
 
 
 
 
 
 
 
2011
 
 

 
 

 
 

 
 

 
 

Net income
 

 

 
2,236

 

 

Dividends declared and paid ($.56 per share)
 

 

 
(644
)
 

 

Common stock issued for stock-based awards
 
1

 
(252
)
 

 
898

 

Stock repurchases
 

 

 

 
(1,973
)
 

Stock-based compensation
 

 
269

 

 

 

Tax impact from exercise of options
 

 
45

 

 

 

Other comprehensive income (loss), net of taxes
 

 

 

 

 
(75
)
Other
 

 
18

 
(9
)
 
1

 

Balance, December 31, 2011
 
1,741

 
1,194

 
26,278

 
(17,485
)
 
(776
)
 
 
 
 
 
 
 
 
 
 
 
2012
 
 

 
 

 
 

 
 

 
 

Net income
 

 

 
1,759

 

 

  Dividends declared and paid ($.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

Other
 

 

 
(13
)
 

 

Balance, December 31, 2012
 
$
1,741

 
$
1,176

 
$
27,205

 
$
(18,462
)
 
$
(699
)

See accompanying notes.


6


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 two reportable segments, which are established along major categories of products as follows:

Analog – consists of the following major product lines: High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA). SVA consists of products that we acquired through our purchase of National Semiconductor Corporation (National) in 2011.
Embedded Processing – consists of the following major product lines: Processors, Microcontrollers and Connectivity.

We report the results of our remaining business activities in Other. As previously announced, we restructured our Wireless business to focus our OMAP™ applications processors and connectivity products (formerly Wireless products) on embedded applications with long life cycles. Consistent with this restructuring, effective January 1, 2013, the Wireless segment was eliminated. Financial results for embedded OMAP applications processors and embedded connectivity products, both of which have many of the same characteristics as the products in our Embedded Processing segment, are now reported in that segment. Financial results for baseband products and Wireless products for the smartphone and consumer tablet markets, both of which are product lines that we have announced we are exiting, are included in Other. We also reclassified certain product lines, primarily radio frequency identification (RFID) products, from Other to Embedded Processing. See Note 16 for additional information on our business segments.

Basis of presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The basis of these financial statements is comparable for all periods presented herein.

The consolidated financial statements include the accounts of all subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in these notes, except per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated. We have reclassified certain amounts in the prior periods’ financial statements to conform to the 2012 presentation. The preparation of financial statements requires the use of estimates from which final results may vary.

On September 23, 2011, we completed the acquisition of National. We accounted for this transaction under Accounting Standards Codification (ASC) 805 - Business Combinations, and the consolidated financial statements include the balances and results of operations of National from the date of acquisition. See Note 2 for more detailed information.

Revenue recognition
We recognize revenue from direct sales of our products to our customers, including shipping fees, when title and risk of loss pass to the customer, which usually occurs upon shipment or delivery, depending upon the terms of the sales order; when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. Revenue from sales of our products that are subject to inventory consignment agreements is recognized consistent with the principles discussed above, but delivery occurs 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 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 allowances for certain growth-based incentives.

We 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

7


difference applied to our estimate of each distributor’s on-hand inventory of that product. We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner.

We determine the amount and timing of royalty revenue based on our contractual agreements with intellectual property licensees. We recognize royalty revenue when earned under the terms of the agreements and when we consider realization of payment to be probable. Where royalties are based on a percentage of licensee sales of royalty-bearing products, we recognize royalty revenue by applying this percentage to our estimate of applicable licensee sales. We base this estimate on historical experience and an analysis of each licensee’s sales results. Where royalties are based on fixed payment amounts, we recognize royalty revenue ratably over the term of the royalty agreement. Where warranted, revenue from licensees may be recognized on a cash basis.

We include shipping and handling costs in COR.

Advertising costs
We expense advertising and other promotional costs as incurred. This expense was $46 million in 2012, $43 million in 2011 and $44 million in 2010.

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 or all of the deferred tax assets will not be realized.

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

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

Computation and reconciliation of earnings per common share are as follows (shares in millions):
 
 
2012
 
2011
 
2010
 
 
Net Income
 
Shares
 
EPS
 
Net Income
 
Shares
 
EPS
 
Net Income
 
Shares
 
EPS
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,759

 
 
 
 
 
$
2,236

 
 
 
 
 
$
3,228

 
 
 
 
Less income allocated to RSUs
 
(31
)
 
 
 
 
 
(35
)
 
 
 
 
 
(44
)
 
 
 
 
Income allocated to common stock for basic EPS calculation
 
$
1,728

 
1,132

 
$
1.53

 
$
2,201

 
1,151

 
$
1.91

 
$
3,184

 
1,199

 
$
2.66

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustment for dilutive shares:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock-based compensation plans
 
 

 
14

 
 

 
 

 
20

 
 

 
 

 
14

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 
$
1,759

 
 

 
 

 
$
2,236

 
 

 
 

 
$
3,228

 
 

 
 

Less income allocated to RSUs
 
(31
)
 
 

 
 

 
(34
)
 
 

 
 

 
(44
)
 
 

 
 

Income allocated to common stock for diluted EPS calculation
 
$
1,728

 
1,146

 
$
1.51

 
$
2,202

 
1,171

 
$
1.88

 
$
3,184

 
1,213

 
$
2.62

 

8


Potentially dilutive securities representing 52 million, 24 million and 66 million shares of common stock that were outstanding during 2012, 2011 and 2010, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been 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 maturities of 90 days or less from the date of our investment to be cash equivalents. We consider investments in debt securities with maturities beyond 90 days from the date of our investment as being available for use in current operations and include these investments in short-term investments. The primary objectives of our cash equivalent and short-term investment activities are to preserve capital and maintain liquidity while generating appropriate returns.
Long-term investments: Long-term investments consist of mutual funds, venture capital funds and non-marketable equity securities. Prior to the fourth quarter of 2012, this also included auction-rate securities.
Classification of investments: Depending on our reasons for holding the investment and our ownership percentage, we classify investments in securities as available for sale, trading, or equity- or cost-method investments, which are more fully described in Note 9. We determine cost or amortized cost, as appropriate, on a specific identification basis.

Inventories
Inventories are stated at the lower of cost or estimated net realizable value. Cost is generally computed on a currently adjusted standard cost basis, which approximates cost on a first-in first-out basis. Standard cost is based on the normal utilization of installed factory capacity. Cost associated with underutilization of capacity is expensed as incurred. Inventory held at consignment locations is included in our finished goods inventory. Consigned inventory was $169 million and $129 million as of December 31, 2012 and 2011, respectively.

We review inventory quarterly for salability and obsolescence. A specific allowance is provided for inventory considered unlikely to be sold. Remaining inventory includes a salability and obsolescence allowance based on an analysis of historical disposal activity. We write off inventory in the period in which disposal occurs.

Property, plant and equipment; acquisition-related intangibles and other capitalized costs
Property, plant and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Our cost basis includes certain assets acquired in business combinations that were initially recorded at fair value as of the date of acquisition. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. We amortize acquisition-related intangibles on a straight-line basis over the estimated economic life of the assets. Capitalized software licenses generally are amortized on a straight-line basis over the term of the license. Fully depreciated or amortized assets are written off against accumulated depreciation or amortization.

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

Goodwill and indefinite-lived intangibles
Goodwill is not amortized but is reviewed for impairment annually or more frequently if certain impairment indicators arise. We perform 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. See Note 10 for additional information.

Foreign currency
The functional currency for our non-U.S. subsidiaries is the U.S. dollar. Accounts recorded in currencies other than the U.S. dollar are remeasured into the functional currency. Current assets (except inventories), deferred income taxes, other assets, current liabilities and long-term liabilities are remeasured at exchange rates in effect at the end of each reporting period. Property, plant and equipment with associated depreciation and inventories are remeasured at historic exchange rates. Revenue and expense accounts other than depreciation for each month are remeasured at the appropriate daily rate of exchange. Currency exchange gains and losses from remeasurement are credited or charged to OI&E.


9


Derivatives and hedging
In connection with the issuance of variable-rate long-term debt in May 2011, as more fully described in Note 12, we entered into an interest rate swap designated as a hedge of the variability of cash flows related to interest payments. Gains and losses from changes in the fair value of the interest rate swap are credited or charged to Accumulated other comprehensive income (loss), net of taxes (AOCI).

We also use derivative financial instruments to manage exposure to foreign exchange risk. These instruments are primarily forward foreign currency exchange contracts that are used as economic hedges to reduce the earnings impact exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. Gains and losses from changes in the fair value of these forward foreign currency exchange contracts are credited or charged to OI&E. We do not apply hedge accounting to our foreign currency derivative instruments.

We do not use derivatives for speculative or trading purposes.

Changes in accounting standards
As of December 31, 2012, the Financial Accounting Standards Board had issued several accounting standards that we have not yet been required to adopt. None of these standards would have a material effect on our financial condition, results of operations or financial disclosures.

2. Acquisition-related charges
National acquisition
On September 23, 2011, we completed the acquisition of National by acquiring all issued and outstanding common shares in exchange for total consideration of $6.56 billion. We recognized $3.528 billion of goodwill, which was applied to the Analog segment. None of the goodwill related to the National acquisition was deductible for tax purposes.

We incurred various costs as a result of the acquisition of National that are included in Other consistent with how management measures the performance of its segments. These total acquisition-related charges are as follows:
 
 
For Years Ended
December 31,
 
 
2012
 
2011
Distributor contract termination
 
$
21

 
$

Inventory related
 

 
96

Property, plant and equipment related
 

 
15

As recorded in COR
 
21

 
111

Amortization of intangible assets
 
325

 
87

Retention bonuses
 
57

 
46

Stock-based compensation
 
17

 
50

Severance and other benefits:
 
 
 
 
Employment reductions announced at closing
 
16

 
29

Change of control
 

 
41

Transaction and other costs
 
35

 
62

As recorded in Acquisition charges
 
450

 
315

Total acquisition-related charges
 
$
471

 
$
426


In 2011, we discontinued using one of National’s distributors. We acquired the distributor’s inventory at fair value, resulting in an incremental charge of $21 million to COR upon sale of the inventory in 2012.

At acquisition, we recognized costs associated with the adjustments to write up the value of acquired inventory and property, plant and equipment to fair value. These costs are in addition to the normal expensing of the acquired assets based on their carrying or book value prior to the acquisition. The total fair-value write-up of $96 million for the acquired inventory was expensed as that inventory was sold. The total fair-value write-up for the acquired property, plant and equipment was $436 million. In the fourth quarter of 2011, depreciation was $15 million. It continues at a declining rate and is no longer separately disclosed as an acquisition-related charge.


10


The amount of recognized amortization of acquired intangible assets resulting from the National acquisition is based on estimated useful lives varying between two and ten years. See Note 10 for additional information.

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

Stock-based compensation was recognized for the accelerated vesting of equity awards upon the termination of employees, with additional compensation being recognized over the applicable vesting period for the remaining grantees.

Severance and other benefits costs were for former National employees who were terminated after the closing date. These costs totaled $70 million for the year ended December 31, 2011, with $41 million in charges related to change of control provisions under existing employment agreements and $29 million in charges for announced employment reductions affecting about 350 jobs. All of these jobs were eliminated by the end of 2012 as a result of redundancies and cost efficiency measures, with approximately $16 million of additional expense recognized in 2012. Of the $86 million in cumulative charges recognized through December 31, 2012, $65 million was paid in 2012 and $14 million was paid in 2011.

Transaction and other costs include various expenses incurred in connection with the National acquisition. In 2011, we also incurred bridge financing costs.

In conformance with Accounting Standards Codification (ASC) 805 – Business Combinations, the following unaudited summaries of pro forma combined results of operation for the years ended December 31, 2011 and 2010, give effect to the acquisition as if it had been completed on January 1, 2010. These pro forma summaries do not reflect any operating efficiencies, cost savings or revenue enhancements that may be achieved by the combined companies. In addition, certain non-recurring expenses, such as restructuring charges and retention bonuses, are not reflected in the pro forma summaries. These pro forma summaries are presented for informational purposes only and are not indicative of what the actual results of operations would have been had the acquisition taken place as of that date, nor are they indicative of future consolidated results of operations.
 
 
For Years Ended
December 31,
 
 
2011
 
2010
 
 
(Unaudited)
Revenue
 
$
14,805

 
$
15,529

Net income
 
2,438

 
3,218

Earnings per common share – diluted
 
$
2.05

 
$
2.61


Other acquisitions
In October 2010, we acquired our first semiconductor manufacturing site in China, located in the Chengdu High-tech Zone. This acquisition, which was recorded as a business combination, used net cash of $140 million. As contractually agreed, we made an additional payment of $35 million to the seller in October 2011.

In August 2010, we completed the acquisition of two wafer fabs and equipment in Aizu-Wakamatsu, Japan, for net cash of $130 million. The acquisition of the fabs and related 200-millimeter equipment was recorded as a business combination for net cash of $59 million. 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 COR in Other. Additionally, we incurred acquisition-related costs of $1 million, which were recorded in SG&A. This acquisition also included 300-millimeter production tools, which we recorded as a capital purchase for net cash of $58 million.
  
The results of operations for these acquisitions have been included in our financial statements from their respective acquisition dates. Operating results for transitional supply agreements are included in Other. Pro forma financial information for these acquisitions would not be materially different from amounts reported.


11


3. Restructuring charges/other
Restructuring charges/other is comprised of the following components:
 
For Years Ended
December 31,
 
2012
 
2011
 
2010
Restructuring charges by action:
 
 
 
 
 
Restructuring charges
$
261

 
$

 
$

Goodwill impairment
90

 

 

2012 Wireless action
351

 

 

2011 action
49

 
112

 

2008/2009 actions

 

 
33

 
 
 
 
 
 
Other:
 
 
 
 
 
Gain on transfer of Japan substitutional pension
(144
)
 

 

Gain on divested product line

 

 
(144
)
Other
8

 

 

Restructuring charges/other
$
264

 
$
112

 
$
(111
)

Restructuring charges/other recognized by segment are as follows:
 
 
For Years Ended
December 31,
 
 
2012
 
2011
 
2010
Analog
 
$

 
$

 
$
13

Embedded Processing
 

 

 
8

Other
 
264

 
112

 
(132
)
Total
 
$
264

 
$
112

 
$
(111
)

Restructuring charges
Restructuring charges may consist of voluntary or involuntary severance-related charges, asset-related charges and other costs to exit activities. We recognize voluntary termination benefits when the employee accepts the offered benefit arrangement. We recognize involuntary severance-related charges depending on whether the termination benefits are provided under an ongoing benefit arrangement or under a one-time benefit arrangement. If the former, we recognize the charges once they are probable and the amounts are estimable. If the latter, we recognize the charges once the benefits have been communicated to employees.

Restructuring activities associated with assets are recorded as an adjustment to the basis of the asset, not as a liability. When we commit to a plan to abandon a long-lived asset before the end of its previously estimated useful life, we accelerate the recognition of depreciation to reflect the use of the asset over its shortened useful life. When an asset is held to be sold, we write down the carrying value to its net realizable value and cease depreciation. Restructuring actions may be viewed as an impairment indicator requiring testing of the recoverability of intangible assets, including goodwill.

2012 Wireless action
In November 2012, we announced an action concerning our Wireless business that, when complete, is expected to reduce annualized expenses by about $450 million and will focus our investments on embedded markets with greater potential for sustainable growth. About 1,700 jobs worldwide are expected to be eliminated. The total restructuring charges related to this action will be about $360 million, of which about $245 million will be for severance and related benefits. We recognized $351 million of these costs in the fourth quarter of 2012 in Other consisting of: $245 million for severance and benefit costs and other non-cash items of $3 million of accelerated depreciation of the affected facilities' assets, $13 million for other exit costs and $90 million for the non-tax deductible impairment of goodwill. See Note 10 for additional information on the goodwill impairment charge. We estimate that this action will be substantially complete by the end of 2013. As of December 31, 2012, $4 million has been paid to terminated employees for severance and benefits related to this action.

2011 action
Beginning in the fourth quarter of 2011, we recognized restructuring charges associated with the announced plans to close two older semiconductor manufacturing facilities in Hiji, Japan, and Houston, Texas, in 2013. Each facility employed about 500

12


people. The total charge for these closures is estimated at $215 million, of which $161 million has been recognized through December 31, 2012, consisting of: $113 million for severance and benefit costs, $23 million of accelerated depreciation of the facilities’ assets and $25 million for other exit costs. Of the estimated $215 million total cost, about $135 million will be for severance and related benefits, about $30 million will be for accelerated depreciation of facility assets and about $50 million will be for other exit costs. In 2012, $11 million was paid to terminated employees for severance and benefits related to this action.

The restructuring action related to the acquisition of National is discussed in Note 2 and is reflected in Acquisition charges in our Consolidated statements of income.

2008/2009 actions
In October 2008, we announced actions to reduce expenses in our Wireless business, 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:
 
 
2012 Action
 
2011 Action
 
2008/2009 Actions
 
 
 
 
Severance
and Benefits
 
Other
Charges
 
Severance
and Benefits
 
Other
Charges
 
Severance
and Benefits
 
Other
Charges
 
Total
Accrual at December 31, 2009
 
$

 
$

 
$

 
$

 
$
84

 
$
10

 
$
94

Restructuring charges
 

 

 

 

 
33

 

 
33

Non-cash items (a)
 

 

 

 

 
(33
)
 

 
(33
)
Payments
 

 

 

 

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

 

 

 

 
22

 
8

 
30

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring charges
 

 

 
107

 
5

 

 

 
112

Non-cash items (a)
 

 

 
(11
)
 
(5
)
 

 

 
(16
)
Payments
 

 

 

 

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

 

 
96

 

 
13

 
7

 
116

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring charges
 
245

 
106

 
6

 
43

 

 

 
400

Non-cash items (a)
 

 
(106
)
 
3

 
(18
)
 

 

 
(121
)
Payments
 
(4
)
 

 
(11
)
 
(22
)
 
(8
)
 
(1
)
 
(46
)
Remaining accrual at December 31, 2012
 
$
241

 
$

 
$
94

 
$
3

 
$
5

 
$
6

 
$
349

(a) Reflects charges for goodwill impairment, stock-based compensation, impacts of postretirement benefit plans and accelerated depreciation.

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

Other
Gain on transfer of Japan substitutional pension
During the third quarter of 2012, we transferred the obligations and assets of the substitutional portion of our Japan pension program from the pension trust to the government of Japan, resulting in a net gain of $144 million. See Note 11 for additional details.

Gain on divested product line
In November 2010, we divested a product line previously included in Other for $148 million and recognized a gain in operating profit of $144 million.


13


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

In 2011, we incurred cumulative gross operating losses of $101 million related to the earthquake and associated events in Japan. These losses related to property damage, the underutilization expense we incurred from having our manufacturing assets only partially loaded and costs associated with recovery teams assembled from across the world. Gross operating losses do not comprehend any lost revenue.

These losses have been offset by $36 million in cumulative insurance proceeds related to property damage claims ($23 million received in 2011 and $13 million for 2012). Almost all of these costs and proceeds are included in COR in our Consolidated statements of income and are recorded in Other.

In addition, we recognized $172 million in cumulative insurance proceeds through December 31, 2012, ($135 million received in 2012 and $37 million received in 2011) related to business interruption claims. These proceeds are recorded as revenue in our Consolidated statements of income and in Other.

In the third quarter of 2012, we completed discussions with our insurers and their advisors, settling all associated claims against our policies. All claims related to these events have been settled and the proceeds received.

5. Stock-based compensation
We have stock options outstanding to participants under various long-term incentive plans. We also have assumed stock options that were granted by companies that we later acquired. Unless the options are acquisition-related replacement options, the option price per share may not be less than 100 percent of the fair market value of our common stock on the date of the grant. Substantially all the options have a ten-year term and vest ratably over four years. Our options generally continue to vest after the option recipient retires.

We also have 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. Holders of most RSUs receive an annual cash payment equal to the dividends paid on our common stock.

We have options and RSUs outstanding to non-employee directors under various director compensation plans. The plans generally provide for annual grants of stock options and RSUs, a one-time grant of RSUs to each new non-employee director and the issuance of TI common stock upon the distribution of stock units credited to deferred compensation accounts established for such directors.

We also have an employee stock purchase plan under which options are offered to all eligible employees in amounts based on a percentage of the employee’s compensation, subject to a cap. Under the plan, the option price per share is 85 percent of the fair market value on the exercise date, and options have a three-month term.

Total stock-based compensation expense recognized was as follows:
 
 
For Years Ended
 December 31,
 
 
2012
 
2011
 
2010
Stock-based compensation expense recognized in:
 
 
 
 
 
 
Cost of revenue (COR)
 
$
48

 
$
40

 
$
36

Research and development (R&D)
 
71

 
58

 
53

Selling, general and administrative (SG&A)
 
127

 
121

 
101

Acquisition charges
 
17

 
50

 

Total
 
$
263

 
$
269

 
$
190


These amounts include expense related to non-qualified stock options, RSUs and stock options offered under our employee stock purchase plan and are net of expected forfeitures.

14



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

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

Fair-value methods and assumptions
We account for all awards granted under our various stock-based compensation plans at fair value. We estimate the fair values for non-qualified stock options under long-term incentive and director compensation plans using the Black-Scholes option-pricing model with the following weighted average assumptions.
 
 
2012
 
2011
 
2010
Weighted average grant date fair value, per share
 
$
8.31

 
$
10.37

 
$
6.61

Weighted average assumptions used:
 
 
 
 

 
 

Expected volatility
 
30
%
 
30
%
 
32
%
Expected lives (in years)
 
7.1

 
6.9

 
6.4

Risk-free interest rates
 
1.40
%
 
2.61
%
 
2.83
%
Expected dividend yields
 
2.10
%
 
1.51
%
 
2.08
%

We determine expected volatility on all options granted after July 1, 2005, using available implied volatility rates. We believe that market-based measures of implied volatility are currently the best available indicators of the expected volatility used in these estimates.

We determine expected lives of options based on the historical option exercise experience of our optionees using a rolling ten-year average. We believe the historical experience method is the best estimate of future exercise patterns currently available.

Risk-free interest rates are determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options.

Expected dividend yields are based on the approved annual dividend rate in effect and the current market price of our 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.


15


Long-term incentive and director compensation plans
Stock option and RSU transactions under our long-term incentive and director compensation plans during 2012 were as follows:
 
 
Stock Options
 
RSUs
 
 
Shares
 
Weighted Average
Exercise Price
per Share
 
Shares
 
Weighted Average
Grant Date Fair
Value per Share
Outstanding grants, December 31, 2011
 
113,273,394

 
$
25.79

 
23,358,846

 
$
25.09

Granted
 
13,508,034

 
32.35

 
5,617,150

 
31.60

Vested RSUs
 

 

 
(4,182,928
)
 
28.66

Expired and forfeited
 
(4,732,514
)
 
29.78

 
(1,417,834
)
 
26.76

Exercised
 
(22,409,816
)
 
20.32

 

 

Outstanding grants, December 31, 2012
 
99,639,098

 
$
27.73

 
23,375,234

 
$
25.91


The weighted average grant date fair value of RSUs granted during the years 2012, 2011 and 2010 was $31.60, $33.20 and $23.47 per share, respectively. For the years ended December 31, 2012, 2011 and 2010, the total fair value of shares vested from RSU grants was $120 million, $155 million and $51 million, respectively.

Summarized information about stock options outstanding at December 31, 2012, is as follows:
 
 
 
Stock Options Outstanding
 
Options Exercisable
Range of
Exercise
Price
 
Number
Outstanding
(Shares)
 
Weighted Average
Remaining Contractual
Life (Years)
 
Weighted Average
Exercise Price per
Share
 
Number
Exercisable
(Shares)
 
Weighted Average
Exercise Price per
Share
$
9.56 to 10.00
 
4,882

 
0.8
 
$
9.56

 
4,882

 
$
9.56

 
10.01 to 20.00
 
13,179,570

 
4.5
 
15.32

 
9,619,657

 
15.43

 
20.01 to 30.00
 
34,637,310

 
4.8
 
24.86

 
27,154,258

 
25.33

 
30.01 to 38.40
 
51,817,336

 
4.9
 
32.81

 
31,755,628

 
32.59

$
9.56 to 38.40
 
99,639,098

 
4.8
 
$
27.73

 
68,534,425

 
$
27.30


During the years ended December 31, 2012, 2011 and 2010, 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 $244 million, $231 million and $140 million, respectively.

Summarized information as of December 31, 2012, 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)
 
96,121,395

 
68,534,425

Weighted average remaining contractual life (in years)
 
4.7

 
3.3

Weighted average exercise price per share
 
$
28.75

 
$
27.30

Intrinsic value (millions of dollars)
 
$
398

 
$
300

(a) Includes effects of expected forfeitures of approximately 4 million shares. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $414 million.

As of December 31, 2012, the total future compensation cost related to equity awards not yet recognized in the Consolidated statements of income was $460 million, consisting of $143 million related to unvested stock options and $317 million related to RSUs. The $460 million will be recognized as follows: $205 million in 2013, $153 million in 2014, $94 million in 2015 and $8 million in 2016.

Employee stock purchase plan
Options outstanding under the employee stock purchase plan at December 31, 2012, had an exercise price of $27.47 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 2012.

16



Employee stock purchase plan transactions during 2012 were as follows:
 
 
Employee Stock
Purchase Plan
(Shares)
 
Exercise Price
Outstanding grants, December 31, 2011
 
580,095

 
$
25.29

Granted
 
2,931,354

 
25.64

Exercised
 
(2,829,498
)
 
25.12

Outstanding grants, December 31, 2012
 
681,951

 
$
27.47


The weighted average grant date fair value of options granted under the employee stock purchase plans during the years 2012, 2011 and 2010 was $4.52, $4.59 and $3.97 per share, respectively. During the years ended December 31, 2012, 2011 and 2010, the total intrinsic value of options exercised under these plans was $13 million, $10 million and $9 million, respectively.

Effect on shares outstanding and treasury shares
Our practice is to issue shares of common stock upon exercise of stock options generally from treasury shares and, on a limited basis, from previously unissued shares. We settled stock option plan exercises using treasury shares of 25,064,951 in 2012; 27,308,311 in 2011 and 19,077,274 in 2010; and previously unissued common shares of 180,955 in 2012; 390,438 in 2011 and 342,380 in 2010.

Upon vesting of RSUs, we issued treasury shares of 3,187,490 in 2012; 3,748,623 in 2011 and 1,392,790 in 2010, and previously unissued common shares of 4,593 in 2012; 73,852 in 2011, with none in 2010.

Shares available for future grant and reserved for issuance are summarized below:
 
 
As of December 31, 2012
Shares
 
Long-term Incentive
and Director
Compensation Plans
 
Employee Stock
Purchase Plan
 
Total
Reserved for issuance (a)
 
197,554,600

 
25,137,819

 
222,692,419

Shares to be issued upon exercise of outstanding options and RSUs
 
(123,143,365
)
 
(681,951
)
 
(123,825,316
)
Available for future grants
 
74,411,235

 
24,455,868

 
98,867,103

(a) Includes 129,033 shares credited to directors’ deferred compensation accounts that settle in shares of TI common stock. These shares are not included as grants outstanding at December 31, 2012.

Effect on cash flows
Cash received from the exercise of options was $523 million in 2012, $690 million in 2011 and $407 million in 2010. The related net tax impact realized was $56 million, $45 million and $21 million (which includes excess tax benefits realized of $38 million, $31 million and $13 million) in 2012, 2011 and 2010, respectively.
 
6. Profit sharing plans
Profit sharing benefits are generally formulaic and determined by one or more subsidiary or company-wide financial metrics. We pay profit sharing benefits primarily under the company-wide TI Employee Profit Sharing Plan. This plan provides for profit sharing to be paid based solely on TI’s operating margin for the full calendar year. Under this plan, TI must achieve a minimum threshold of 10 percent operating margin before any profit sharing is paid. At 10 percent operating margin, profit sharing will be 2 percent of eligible payroll. The maximum amount of profit sharing available under the plan is 20 percent of eligible payroll, which is paid only if TI’s operating margin is at or above 35 percent for a full calendar year.

We recognized $96 million, $143 million and $279 million of profit sharing expense under the TI Employee Profit Sharing Plan in 2012, 2011 and 2010, respectively.


17


7. Income taxes
Income before income taxes
 
 
U.S.
 
Non-U.S.
 
Total
2012
 
$
319

 
$
1,616

 
$
1,935

2011
 
1,791

 
1,164

 
2,955

2010
 
3,769

 
782

 
4,551

 
Provision (benefit) for income taxes
 
 
U.S. Federal
 
Non-U.S.
 
U.S. State
 
Total
2012:
 
 
 
 
 
 
 
 
Current
 
$
(43
)
 
$
156

 
$
(2
)
 
$
111

Deferred
 

 
65

 

 
65

Total
 
$
(43
)
 
$
221

 
$
(2
)
 
$
176

 
 
 
 
 
 
 
 
 
2011:
 
 

 
 

 
 

 
 

Current
 
$
692

 
$
138

 
$
8

 
$
838

Deferred
 
(154
)
 
24

 
11

 
(119
)
Total
 
$
538

 
$
162

 
$
19

 
$
719

 
 
 
 
 
 
 
 
 
2010:
 
 

 
 

 
 

 
 

Current
 
$
1,401

 
$
92

 
$
18

 
$
1,511

Deferred
 
(188
)
 
(2
)
 
2

 
(188
)
Total
 
$
1,213

 
$
90

 
$
20

 
$
1,323


Principal reconciling i