Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 3, 2017)
  • 10-Q (May 3, 2017)
  • 10-Q (Aug 4, 2016)
  • 10-Q (May 4, 2016)
  • 10-Q (Nov 5, 2015)
  • 10-Q (Aug 4, 2015)

 
8-K

 
Other

Texas Instruments 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
TXN-2014.9.30 - 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________________________________________________________________________________
FORM 10-Q 
 _______________________________________________________________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________  
 Commission File Number 001-03761
 _______________________________________________________________________________________________________________
 TEXAS INSTRUMENTS INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
 _______________________________________________________________________________________________________________
 
Delaware
75-0289970
(State of Incorporation)
(I.R.S. Employer Identification No.)

12500 TI Boulevard, P.O. Box 660199, Dallas, Texas
75266-0199
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code 214-479-3773
 _______________________________________________________________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                    Yes x   No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).            Yes x   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨  No x

1,056,299,947
Number of shares of Registrant's common stock outstanding as of
September 30, 2014
 


TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION
 
ITEM 1. Financial Statements.
 
Consolidated Statements of Income
[Millions of dollars, except share and per-share amounts]

 
For Three Months Ended
September 30,
 
For Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
3,501

 
$
3,244

 
$
9,776

 
$
9,177

Cost of revenue (COR)
1,457

 
1,465

 
4,244

 
4,453

Gross profit
2,044

 
1,779

 
5,532

 
4,724

Research and development (R&D)
332

 
368

 
1,047

 
1,176

Selling, general and administrative (SG&A)
463

 
465

 
1,414

 
1,397

Acquisition charges
83

 
86

 
248

 
257

Restructuring charges/other
(9
)
 
16

 
(24
)
 
(251
)
Operating profit
1,175

 
844

 
2,847

 
2,145

Other income (expense), net (OI&E)
3

 
(4
)
 
12

 
(2
)
Interest and debt expense
23

 
24

 
72

 
71

Income before income taxes
1,155

 
816

 
2,787

 
2,072

Provision for income taxes
329

 
187

 
791

 
421

Net income
$
826

 
$
629

 
$
1,996

 
$
1,651

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 
 
 
Basic
$
.77

 
$
.56

 
$
1.84

 
$
1.47

Diluted
$
.76

 
$
.56

 
$
1.81

 
$
1.45

 
 
 
 
 
 
 
 
Average shares outstanding (millions):
 

 
 

 
 
 
 
Basic
1,060

 
1,096

 
1,070

 
1,102

Diluted
1,074

 
1,111

 
1,085

 
1,117

 
 
 
 
 
 
 
 
Cash dividends declared per share of common stock
$
.30

 
$
.28

 
$
.90

 
$
.77


See accompanying notes.

2

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income
[Millions of dollars]

 
For Three Months Ended
September 30,
 
For Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
826

 
$
629

 
$
1,996

 
$
1,651

Other comprehensive income (loss), net of taxes
 
 
 
 
 
 
 
Net actuarial gains (losses) of defined benefit plans:
 
 
 
 
 
 
 
Adjustment
28

 
6

 
21

 
86

Recognized within Net income
17

 
13

 
38

 
46

Prior service cost of defined benefit plans:
 
 
 
 
 
 
 
Adjustment

 

 

 
(2
)
Recognized within Net income
(1
)
 
(1
)
 

 
(3
)
Derivative instruments:
 
 
 
 
 
 
 
Change in fair value

 

 

 
(1
)
Recognized within Net income

 

 
1

 
1

Other comprehensive income (loss)
44

 
18

 
60

 
127

Total comprehensive income
$
870

 
$
647

 
$
2,056

 
$
1,778


See accompanying notes.

3

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

Consolidated Balance Sheets
[Millions of dollars, except share amounts]

 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,306

 
$
1,627

Short-term investments
1,880

 
2,202

Accounts receivable, net of allowances of ($15) and ($22)
1,477

 
1,203

Raw materials
97

 
102

Work in process
905

 
919

Finished goods
749

 
710

Inventories
1,751

 
1,731

Deferred income taxes
378

 
393

Prepaid expenses and other current assets
964

 
863

Total current assets
7,756

 
8,019

Property, plant and equipment at cost
6,393

 
6,556

Accumulated depreciation
(3,463
)
 
(3,157
)
Property, plant and equipment, net
2,930

 
3,399

Long-term investments
219

 
216

Goodwill, net
4,362

 
4,362

Acquisition-related intangibles, net
1,982

 
2,223

Deferred income taxes
177

 
207

Capitalized software licenses, net
93

 
118

Overfunded retirement plans
135

 
130

Other assets
246

 
264

Total assets
$
17,900

 
$
18,938

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
1,002

 
$
1,000

Accounts payable
393

 
422

Accrued compensation
613

 
554

Income taxes payable
106

 
119

Deferred income taxes
2

 
1

Accrued expenses and other liabilities
527

 
651

Total current liabilities
2,643

 
2,747

Long-term debt
3,643

 
4,158

Underfunded retirement plans
222

 
216

Deferred income taxes
450

 
548

Deferred credits and other liabilities
471

 
462

Total liabilities
7,429

 
8,131

 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $25 par value.  Authorized – 10,000,000 shares.   Participating cumulative preferred.  None issued.

 

Common stock, $1 par value.  Authorized – 2,400,000,000 shares.   Shares issued – 1,740,815,939
1,741

 
1,741

Paid-in capital
1,314

 
1,211

Retained earnings
29,189

 
28,173

Treasury common stock at cost.  Shares:  September 30, 2014 – 684,515,992; December 31, 2013 – 658,012,970
(21,305
)
 
(19,790
)
Accumulated other comprehensive income (loss), net of taxes (AOCI)
(468
)
 
(528
)
Total stockholders’ equity
10,471

 
10,807

Total liabilities and stockholders’ equity
$
17,900

 
$
18,938

See accompanying notes.

4

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

Consolidated Statements of Cash Flows
[Millions of dollars]
 
 
For Nine Months Ended
September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
1,996

 
$
1,651

Adjustments to Net income:


 


Depreciation
639

 
666

Amortization of acquisition-related intangibles
241

 
253

Amortization of capitalized software
45

 
65

Stock-based compensation
217

 
221

Gains on sales of assets
(44
)
 
(6
)
Deferred income taxes
(84
)
 
(2
)
Increase (decrease) from changes in:


 


Accounts receivable
(272
)
 
(302
)
Inventories
(20
)
 
31

Prepaid expenses and other current assets
81

 
(61
)
Accounts payable and accrued expenses
(224
)
 
(297
)
Accrued compensation
51

 
37

Income taxes payable
(90
)
 
(29
)
Changes in funded status of retirement plans
73

 
82

Other
11

 
(124
)
Cash flows from operating activities
2,620

 
2,185

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(260
)
 
(305
)
Proceeds from asset sales
46

 
21

Purchases of short-term investments
(2,170
)
 
(3,177
)
Proceeds from short-term investments
2,491

 
3,564

Other
7

 
17

Cash flows from investing activities
114

 
120

 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of long-term debt
498

 
986

Repayment of debt
(1,000
)
 
(1,500
)
Dividends paid
(967
)
 
(849
)
Stock repurchases
(2,133
)
 
(2,134
)
Proceeds from common stock transactions
476

 
1,146

Excess tax benefit from share-based payments
75

 
72

Other
(4
)
 
(7
)
Cash flows from financing activities
(3,055
)
 
(2,286
)
 
 
 
 
Net change in Cash and cash equivalents
(321
)
 
19

Cash and cash equivalents at beginning of period
1,627

 
1,416

Cash and cash equivalents at end of period
$
1,306

 
$
1,435


See accompanying notes.

5

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
1.
Description of business and significant accounting policies and practices

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 primarily 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. See Note 11 for the results of our business segments.

Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) and on the same basis as the audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2013. The Consolidated Statements of Income, Comprehensive Income and Cash Flows for the periods ended September 30, 2014, and 2013, and the Consolidated Balance Sheet as of September 30, 2014, 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. 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 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, 2013. The results for the three-month and nine-month periods 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 these notes, except per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated.

Earnings per share (EPS)

Unvested share-based payment awards that contain non-forfeitable 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. 


6

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

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

 
For Three Months Ended
September 30, 2014
 
For Three Months Ended
September 30, 2013
 
Net Income
 
Shares
 
EPS
 
Net Income
 
Shares
 
EPS
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
826

 
 
 
 
 
$
629

 
 
 
 
Income allocated to RSUs
(13
)
 
 
 
 
 
(11
)
 
 
 
 
Income allocated to common stock for basic EPS calculation
$
813

 
1,060

 
$
.77

 
$
618

 
1,096

 
$
.56

 
 
 
 
 
 
 
 
 
 
 
 
Adjustment for dilutive shares:
 

 
 

 
 

 
 

 
 

 
 
Stock-based compensation plans
 

 
14

 
 

 
 

 
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS:
 

 
 

 
 

 
 

 
 

 
 
Net income
$
826

 
 

 
 

 
$
629

 
 

 
 
Income allocated to RSUs
(13
)
 
 

 
 

 
(11
)
 
 

 
 
Income allocated to common stock for diluted EPS calculation
$
813

 
1,074

 
$
.76

 
$
618

 
1,111

 
$
.56

 
For Nine Months Ended
September 30, 2014
 
For Nine Months Ended
September 30, 2013
 
Net
Income
 
Shares
 
EPS
 
Net
Income
 
Shares
 
EPS
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
1,996

 
 
 
 
 
$
1,651

 
 
 
 
Income allocated to RSUs
(31
)
 
 
 
 
 
(29
)
 
 
 
 
Income allocated to common stock for basic EPS calculation
$
1,965

 
1,070

 
$
1.84

 
$
1,622

 
1,102

 
$
1.47

 
 
 
 
 
 
 
 
 
 
 
 
Adjustment for dilutive shares:
 

 
 

 
 

 
 

 
 

 
 
Stock-based compensation plans
 

 
15

 
 

 
 

 
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS:
 

 
 

 
 

 
 

 
 

 
 
Net income
$
1,996

 
 

 
 

 
$
1,651

 
 

 
 
Income allocated to RSUs
(31
)
 
 

 
 

 
(28
)
 
 

 
 
Income allocated to common stock for diluted EPS calculation
$
1,965

 
1,085

 
$
1.81

 
$
1,623

 
1,117

 
$
1.45


Potentially dilutive securities representing 11 million shares of common stock that were outstanding during both the third quarter and first nine months of 2014 were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive. There were no potentially dilutive securities excluded from the computation of diluted earnings per common share during the third quarter and the first nine months of 2013.


7

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

Derivatives and hedging

In association with the issuance of certain long-term debt, we use financial derivatives such as treasury rate lock agreements that are recognized in AOCI and amortized over the life of the related debt. The results of these derivative transactions have not been material.

We also use derivative financial instruments to manage exposure to foreign exchange risk. These instruments are primarily forward foreign currency exchange contracts, which are used as economic hedges to reduce the earnings impact that 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.

Fair values of financial instruments

The fair values of our derivative financial instruments were not significant at September 30, 2014. Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our deferred compensation liabilities, are carried at fair value and are discussed in Note 5. The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. The carrying value of our long-term debt approximates its fair value as measured using broker-dealer quotes, which are based on Level 2 inputs. See Note 5 for the definition of Level 2 inputs.

Changes in Accounting Standards

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This standard raises the threshold for a disposal to qualify as a discontinued operation. Under the new guidance, only a disposal representing a strategic shift in operations that has or will have a major effect on an entity's operations and financial results, such as a disposal of a major geographic area or a major line of business, should be presented as discontinued operations. In addition, the new standard requires additional disclosures of both discontinued operations and certain other disposals that do not meet the revised definition of a discontinued operation. This standard is effective for annual and interim reporting periods beginning as of January 1, 2015. In the event that a future disposition meets the revised criteria, we expect that this standard will have an impact on the presentation of our financial statements and we will note the appropriate disclosures at that time.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. This standard is effective for annual and interim reporting periods beginning as of January 1, 2017. We are currently evaluating the potential impact of this standard on our financial position and results of operations.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual and interim reporting periods ending after December 15, 2016.  We are currently evaluating this new standard and expect it to have no impact on our financial position and results of operations.

8

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

2.
Acquisition charges

We incurred various costs as a result of the 2011 acquisition of National that are included in Other for segment reporting purposes, consistent with how management measures the performance of our segments. These acquisition charges are as follows:

 
For Three Months Ended
September 30,
 
For Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Amortization of intangible assets
$
80

 
$
81

 
$
239

 
$
244

Stock-based compensation
3

 
3

 
9

 
8

Retention bonuses

 
2

 

 
5

Acquisition charges
$
83

 
$
86

 
$
248

 
$
257

  
Amortization of intangible assets resulting from the National acquisition is based on estimated useful lives. See Note 6 for additional information. Stock-based compensation reflects awards to former National employees and is recognized over the applicable vesting period for the remaining grantees. Retention bonuses reflect amounts paid to former National employees who fulfilled agreed-upon service period obligations and were recognized ratably over the required service period.


9

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

3.
Restructuring charges/other

Restructuring charges/other is comprised of the following components, all of which are recognized in Other for segment reporting purposes:

 
For Three Months Ended
September 30,
 
For Nine Months Ended
September 30,
 
 
 
2014
 
2013
 
2014
 
2013
 
Cumulative Since January 1, 2011
Restructuring charges by action:
 
 
 
 
 
 
 
 
 
2013 actions
 
 
 
 
 
 
 
 
 
Severance and benefits cost (a)
$
(3
)
 
$

 
$
18

 
$

 
$
67

Other exit costs

 

 
7

 

 
7

 
(3
)
 

 
25

 

 
74

2012 Wireless action
 
 
 
 
 
 
 
 
 
Severance and benefits cost (a)

 

 
(6
)
 
30

 
269

Accelerated depreciation

 

 

 
6

 
9

Other exit costs

 

 

 
2

 
105

 

 

 
(6
)
 
38

 
383

Prior actions
 
 
 
 
 
 
 
 
 
Severance and benefits cost

 
2

 

 
3

 
119

Accelerated depreciation

 

 
1

 
5

 
29

Other exit costs (a)

 
14

 
(1
)
 
18

 
52

 

 
16

 

 
26

 
200

Total restructuring charges
(3
)
 
16

 
19

 
64

 
$
657

 
 
 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
 
 
Gains on sales of assets
(8
)
 

 
(47
)
 

 
 
Gain on technology transfer

 

 

 
(315
)
 
 
Other
2

 

 
4

 

 
 
Restructuring charges/other
$
(9
)
 
$
16

 
$
(24
)
 
$
(251
)
 
 

(a) Includes changes in estimates for the three and nine months ended September 30, 2014.

2013 actions

In January 2014, we announced cost-saving actions in Embedded Processing and in Japan to reduce expenses and focus our investments on markets with greater potential for sustainable growth and strong long-term returns. We expect the actions to be completed by mid-2015. Cost reductions include the elimination of about 1,100 jobs worldwide. Through September 30, 2014, we have recognized $74 million in cumulative restructuring charges, with no further material charges expected. As of September 30, 2014, $36 million has been paid to terminated employees for severance and benefits.

2012 Wireless action

In 2012, we announced a restructuring of our Wireless business to reduce expenses and focus our investments on markets with greater potential for sustainable growth and strong long-term returns. This action is now complete. We recognized $383 million in cumulative restructuring charges, including a $90 million impairment of goodwill. As of September 30, 2014, $241 million has been paid to terminated employees for severance and benefits.

Prior actions

In 2012, we announced closure of two older semiconductor manufacturing facilities in Houston, Texas, and Hiji, Japan. We recognized $200 million in cumulative restructuring charges related to these closures, completing both by the end of 2013. As of September 30, 2014, $102 million has been paid to terminated employees for severance and benefits.

10

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES


As of September 30, 2014, and December 31, 2013, we carried immaterial liabilities related to actions commenced in 2008 and 2009.

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

 
2013 Actions
 
2012 Wireless Action
 
Prior Actions
 
 
 
Severance and Benefits
 
Other Charges
 
Severance and Benefits
 
Severance and Benefits
 
Other Charges
 
Total
Remaining accrual at December 31, 2013
$
49

 
$

 
$
95

 
$
10

 
$
7

 
$
161

Restructuring charges
18

 
7

 
(6
)
 

 

 
19

Payments
(36
)
 

 
(61
)
 
(6
)
 
(7
)
 
(110
)
Remaining accrual at September 30, 2014
$
31

 
$
7

 
$
28

 
$
4

 
$

 
$
70


The accrual balances above are primarily 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

Gains on sales of assets

During the first quarter of 2014, we completed the sale of our site in Nice, France. The planned shut-down of this site was part of our 2012 Wireless restructuring action. As a result of the sale, we recognized a gain of $30 million in the first quarter of 2014. We also recognized gains of $17 million on a year-to-date basis tied to the sales of other assets associated primarily with our Houston and Hiji manufacturing facilities, with $8 million recognized in the third quarter of 2014.

Gain on technology transfer

During the second quarter of 2013, we recognized a gain of $315 million on a transfer of wireless connectivity technology to a customer.

4.
Income taxes

Federal income taxes for the interim periods presented have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate. The rate is based on current tax law and for 2014 does not assume reinstatement of the federal research tax credit, which expired at the end of 2013. As of September 30, 2014, the estimated annual effective tax rate for 2014 is about 28 percent, which differs from the 35 percent statutory corporate tax rate due to lower statutory tax rates applicable to our operations in many of the jurisdictions in which we operate and from U.S. tax benefits. The first-quarter 2013 tax provision included a $65 million discrete tax benefit from the reinstatement of the federal research tax credit retroactive to the beginning of 2012.

5.
Valuation of debt and equity investments and certain liabilities

Debt and equity investments

We classify our investments as available for sale, trading, equity method or cost method. Most of our investments are classified as available for sale.

Available-for-sale and trading securities are stated at fair value, which is generally based on market prices, broker quotes or, when necessary, financial models. See fair-value discussion below. Unrealized gains and losses on available-for-sale securities are recorded as an increase or decrease, net of taxes, in AOCI on our Consolidated Balance Sheets. We record other-than-temporary impairments on available-for-sale securities in OI&E in our Consolidated Statements of Income.


11

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

We classify certain mutual funds as trading securities. These mutual funds hold a variety of debt and equity investments intended to generate returns that offset changes in certain deferred compensation liabilities. We record changes in the fair value of these mutual funds and the related deferred compensation liabilities in SG&A.

Our other investments are not measured at fair value but are accounted for using either the equity method or cost method. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity-method investments are reflected in OI&E based on our ownership share of the investee’s financial results. Gains and losses on cost-method investments are recorded in OI&E when realized or when an impairment of the investment’s value is warranted based on our assessment of the recoverability of each investment.

Details of our investments are as follows:
 
 
September 30, 2014
 
December 31, 2013
 
Cash and Cash
Equivalents
 
Short-term Investments
 
Long-term Investments
 
Cash and Cash
Equivalents
 
Short-term Investments
 
Long-term Investments
Measured at fair value:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
364

 
$

 
$

 
$
500

 
$

 
$

Corporate obligations
90

 
345

 

 
123

 
217

 

U.S. Government agency and Treasury securities
625

 
1,535

 

 
787

 
1,985

 

Trading securities
 

 
 

 
 

 
 

 
 

 
 

Mutual funds

 

 
180

 

 

 
179

Total
1,079

 
1,880

 
180

 
1,410

 
2,202

 
179

 
 
 
 
 
 
 
 
 
 
 
 
Other measurement basis:
 

 
 

 
 

 
 

 
 

 
 

Equity-method investments

 

 
27

 

 

 
24

Cost-method investments

 

 
12

 

 

 
13

Cash on hand
227

 

 

 
217

 

 

Total
$
1,306

 
$
1,880

 
$
219

 
$
1,627

 
$
2,202

 
$
216

 

At September 30, 2014, and December 31, 2013, we had no significant unrealized gains or losses associated with our available-for-sale investments. We did not recognize any credit losses related to available-for-sale investments for the nine months ended September 30, 2014, and 2013.

For the nine months ended September 30, 2014, and 2013, the proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $2.49 billion and $3.56 billion, respectively. Gross realized gains and losses from these sales were not significant.

The following table presents the aggregate maturities of investments in debt securities classified as available for sale at September 30, 2014:

Due
 
Fair Value
One year or less
 
$
2,759

One to two years
 
200

 
Gross realized gains and losses from sales of long-term investments were not significant for the nine months ended September 30, 2014, and 2013. Other-than-temporary declines and impairments in the values of these investments recognized in OI&E were also not significant for the nine months ended September 30, 2014, and 2013.

Fair-value considerations


12

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

We measure and report certain financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The three-level hierarchy discussed below indicates the extent and level of judgment used to estimate fair-value measurements.

    Level 1 — Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date.
    Level 2 — Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. Our Level 2 assets consist of corporate obligations and some U.S. government agency and Treasury securities. We utilize a third-party data service to provide Level 2 valuations. We verify these valuations for reasonableness relative to unadjusted quotes obtained from brokers or dealers based on observable prices for similar assets in active markets.
    Level 3 — Uses inputs that are unobservable, supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models that utilize management estimates of market participant assumptions.

The following are our assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014, and December 31, 2013. For these periods, we had no Level 3 assets or liabilities. These tables do not include cash on hand, assets held by our postretirement plans, or assets and liabilities that are measured at historical cost or any basis other than fair value.

 
Fair Value
 
 
 
 
 
September 30, 2014
 
Level 1
 
Level 2
Assets:
 
 
 

 
 

Money market funds
$
364

 
$
364

 
$

Corporate obligations
435

 

 
435

U.S. Government agency and Treasury securities
2,160

 
1,595

 
565

Mutual funds
180

 
180

 

Total assets
$
3,139

 
$
2,139

 
$
1,000

 
 
 
 
 
 
Liabilities:
 

 
 

 
 

Deferred compensation
$
196

 
$
196

 
$

Total liabilities
$
196

 
$
196

 
$


 
Fair Value
 
 
 
 
 
December 31, 2013
 
Level 1
 
Level 2
Assets:
 
 
 

 
 

Money market funds
$
500

 
$
500

 
$

Corporate obligations
340

 

 
340

U.S. Government agency and Treasury securities
2,772

 
2,107

 
665

Mutual funds
179

 
179

 

Total assets
$
3,791

 
$
2,786

 
$
1,005

 
 
 
 
 
 
Liabilities:
 

 
 

 
 

Deferred compensation
$
197

 
$
197

 
$

Total liabilities
$
197

 
$
197

 
$

 
 

13

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

6.
Goodwill and acquisition-related intangibles

Goodwill was $4.36 billion net of accumulated impairment of $90 million as of September 30, 2014, and December 31, 2013. There was no impairment of goodwill during the nine months ended September 30, 2014 and 2013.

Components of acquisition-related intangible assets are as follows:

 
 
 
 
September 30, 2014
 
December 31, 2013
Acquisition-related Intangibles
 
Amortization Period (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Developed technology
 
5 - 10
 
$
2,128

 
$
659

 
$
1,469

 
$
2,157

 
$
526

 
$
1,631

Customer relationships
 
8
 
810

 
305

 
505

 
821

 
239

 
582

Other intangibles
 
5
 
3

 
2

 
1

 
5

 
3

 
2

In-process R&D
 
(a)
 
7

 
n/a

 
7

 
8

 
n/a

 
8

Total
 
 
 
$
2,948

 
$
966

 
$
1,982

 
$
2,991

 
$
768

 
$
2,223


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

Amortization of acquisition-related intangibles was $80 million and $83 million for the three months ended and $241 million and $253 million for the nine months ended September 30, 2014, and 2013, respectively, primarily related to developed technology. Fully amortized assets are written off against accumulated amortization.


14

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

7.
Postretirement benefit plans

Components of net periodic employee benefit cost are as follows:

 
U.S.
Defined Benefit
 
U.S.
Retiree Health Care
 
Non-U.S.
Defined Benefit
For Three Months Ended September 30,
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
6

 
$
6

 
$
1

 
$
1

 
$
9

 
$
9

Interest cost
11

 
12

 
6

 
5

 
17

 
15

Expected return on plan assets
(10
)
 
(11
)
 
(5
)
 
(6
)
 
(21
)
 
(17
)
Amortization of prior service cost (credit)

 

 
1

 
1

 

 
(1
)
Recognized net actuarial loss
6

 
5

 
1

 
3

 
6

 
7

Net periodic benefit costs
13

 
12

 
4

 
4

 
11

 
13

 
 
 
 
 
 
 
 
 
 
 
 
Settlement losses (a)
11

 
5

 

 

 
1

 
4

Curtailment gain

 

 

 

 
(2
)
 
(2
)
Total, including other postretirement (gains) losses
$
24

 
$
17

 
$
4

 
$
4

 
$
10

 
$
15

    
 
U.S.
Defined Benefit
 
U.S.
Retiree Health Care
 
Non-U.S.
Defined Benefit
For Nine Months Ended September 30,
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
16

 
$
20

 
$
3

 
$
4

 
$
29

 
$
29

Interest cost
33

 
33

 
17

 
15

 
52

 
46

Expected return on plan assets
(31
)
 
(36
)
 
(15
)
 
(18
)
 
(62
)
 
(50
)
Amortization of prior service cost (credit)

 

 
3

 
3

 
(1
)
 
(3
)
Recognized net actuarial loss
19

 
16

 
5

 
9

 
19

 
24

Net periodic benefit costs
37

 
33

 
13

 
13

 
37

 
46

 
 
 
 
 
 
 
 
 
 
 
 
Settlement losses (a)
14

 
18

 

 

 
1

 
4

Curtailment gain

 

 

 

 
(2
)
 
(5
)
Total, including other postretirement (gains) losses
$
51

 
$
51

 
$
13

 
$
13

 
$
36

 
$
45


(a) Includes non-restructuring and restructuring-related settlement losses.

In the first nine months of 2014, as a result of increased retirement activities, we remeasured our U.S. and Japan defined benefit plans. These remeasurements resulted in a net actuarial gain on a pre-tax basis of $12 million in Other comprehensive income. A gain of $17 million related to Japan was partially offset by a loss of $5 million related to the U.S. plans. For the nine months ended September 30, 2014, we also recognized settlement losses of $15 million related to our U.S. and Japan defined benefit plans, with a $2 million curtailment gain also related to Japan.

In the first nine months of 2013, as a result of increased retirement activities, we remeasured our U.S. and Japan defined benefit plans. These remeasurements resulted in a net actuarial gain on a pre-tax basis of $79 million in Other comprehensive income. Of this gain, $24 million related to the U.S. plans and $55 million was for Japan. For the nine months ended September 30, 2013, we also recognized settlement losses of $22 million on our U.S. and Japan defined benefit plans, with a $5 million curtailment gain also related to Japan.

The effects of these remeasurements and the effects of foreign currency exchange rate fluctuations are reflected in AOCI and in our Overfunded retirement plans and Underfunded retirement plans on our Consolidated Balance Sheets.

15

TEXAS INSTRUMENTS INCORPORATED AND SUBSIDIARIES

8.
Debt and lines of credit

Short-term borrowings

We maintain a line of credit to support commercial paper borrowings, if any, and to provide additional liquidity through bank loans. As of September 30, 2014, we had a variable-rate revolving credit facility from a consortium of investment-grade banks that allows us to borrow up to $2 billion through March 2019. The interest rate on borrowings under this credit facility, if drawn, is indexed to the applicable London Interbank Offered Rate (LIBOR). As of September 30, 2014, our credit facility was undrawn and we had no commercial paper outstanding.

Long-term debt

In March 2014, we issued an aggregate principal amount of $500 million of fixed-rate long-term debt, with $250 million due in 2017 and $250 million due in 2021. The proceeds of the offering were $498 million, net of the original issuance discount and were used toward the repayment of the $1.0 billion of debt that matured in May 2014. We incurred $3 million of issuance and other related costs, which are being amortized to Interest and debt expense over the term of the debt.

In May 2013, we issued an aggregate principal amount of $1.0 billion of fixed-rate long-term debt, with $500 million due in 2018 and $500 million due in 2023. We incurred $6 million of issuance and other related costs, which are being amortized to Interest and debt expense over the term of the debt. The proceeds of the offering were $986 million, net of the original issuance discount, and were used toward the repayment of $1.5 billion of maturing debt, including floating-rate notes. In connection with this repayment, we settled a floating-to-fixed interest rate swap associated with the maturing debt.

Long-term debt outstanding as of September 30, 2014, and December 31, 2013, is as follows:  

 
September 30,
2014
 
December 31,
2013
Notes due 2014 at 1.375%
$

 
$
1,000

Notes due 2015 at 3.95% (assumed with National acquisition)
250

 
250

Notes due 2015 at 0.45%
750

 
750

Notes due 2016 at 2.375%
1,000

 
1,000

Notes due 2017 at 6.60% (assumed with National acquisition)
375

 
375

Notes due 2017 at 0.875%
250

 

Notes due 2018 at 1.00%
500

 
500