ITEM 7. Management’s discussion and analysis of financial condition and results of operations
Overview
We design, make and sell semiconductors to electronics designers and manufacturers all over the world. For many years, we have run our business with three overarching ambitions in mind. First, we will act like owners who will own the company for decades. Second, we will adapt and succeed in a world that is ever changing. And third, we will be a company that we are personally proud to be a part of and that we would want as our neighbor. When we are successful in achieving these ambitions, our employees, customers, communities and shareholders all win.
Our business model is designed around the following four sustainable competitive advantages that we believe, in combination, put us in a unique class of companies:
•A strong foundation of manufacturing and technology. We invest in manufacturing technologies and do most of our manufacturing in-house. This strategic decision to directly control our manufacturing helps ensure a consistent supply of products for our customers and also allows us to invest in technology that differentiates the features of our products. We have focused on creating a competitive manufacturing cost advantage by investing in our advanced analog 300-millimeter capacity, which has about a 40% cost advantage per unpackaged chip over 200-millimeter. To strengthen this advantage, we are moving forward with our plan to build our new 300-millimeter wafer fabrication facility in Richardson, Texas, as 300-millimeter wafers will continue to support the majority of our Analog growth.
•Broad portfolio of differentiated analog and embedded processing products. Our customers need multiple chips for their systems. The breadth of our portfolio means we can meet more of these needs than our competitors can, which gives us access to more customers and the opportunity to sell more products and generate more revenue per customer system. We invest more than $1 billion each year to develop new products for our portfolio, which includes tens of thousands of products.
•Reach of market channels. Customers often begin their initial product selection process and design-in journey on our website, and the breadth of our portfolio attracts more customers to our website than any of our competitors’ websites. Our web presence and global sales and applications team are advantages that give us unique access and insight to about 100,000 customers designing TI semiconductors into their end products.
•Diversity and longevity of our products, markets and customer positions. Together, the attributes above result in diverse and long-lived positions that deliver high terminal value to our shareholders. Because of the breadth of our portfolio, we are not dependent on any single product, customer, technology or market. Some of our products generate revenue for decades, which strengthens the return on our investments.
Our strategic focus, and where we invest the majority of our resources, is on Analog and Embedded Processing, with a particular emphasis on designing and selling those products into the industrial and automotive markets. We believe these markets represent the best growth opportunities over the next decade or longer, due to increasing semiconductor content. Additionally, analog and embedded processing products sold into industrial and automotive markets provide long product life cycles, intrinsic diversity and less capital-intensive manufacturing, which we believe offer stability, profitability and strong cash generation.
This business model is the foundation of our capital management strategy, which is based on our belief that free cash flow growth, especially on a per-share basis, is important for maximizing shareholder value over the long term. We also believe that free cash flow will be valued only if it is productively invested in the business or returned to shareholders.
The combined effect of our ambitions, business model and sustainable competitive advantages is that we have continued to build a stronger company. Over time, we have gained market share in Analog and Embedded Processing and grown and returned all free cash flow to our owners.
Management’s discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. In the following discussion of our results of operations:
•Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels, and how management allocates resources and measures results. See Note 1 to the financial statements for more information regarding our segments.
•When we discuss our results:
◦Unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are evidenced by fluctuations in shipment volumes.
◦New products do not tend to have a significant impact on our revenue in any given period because we sell such a large number of products.
◦From time to time, our revenue and gross profit are affected by changes in demand for higher-priced or lower-priced products, which we refer to as changes in the “mix” of products shipped.
◦Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed. When factory loadings decrease, our fixed costs are spread over reduced output and, absent other circumstances, our profit margins decrease. Conversely, as factory loadings increase, our fixed costs are spread over increased output and, absent other circumstances, our profit margins increase. Increases and decreases in factory loadings tend to correspond to increases and decreases in demand.
•All dollar amounts in the tables are stated in millions of U.S. dollars.
Our results of operations discussed below provides details of our financial results for 2019 and 2018 and year-to-year comparisons between 2019 and 2018. Discussion of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in “Management’s discussion and analysis of financial condition and results of operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Results of operations
In 2019, we continued our focus on analog and embedded processing products and the industrial and automotive markets. Together, these products and markets represent highly diverse opportunities with thousands of applications and long-term growth potential. Gross margin of 63.7% reflected the quality of our product portfolio, as well as the efficiency of our manufacturing strategy, including the benefit of 300-millimeter Analog production.
Our focus on Analog and Embedded Processing allows us to generate strong cash flow from operations. Our cash flow from operations of $6.65 billion underscored the strength of our business model. Free cash flow was $5.80 billion and represented 40.3% of revenue, up from 38.4% a year ago. During 2019, we returned $5.97 billion to shareholders through a combination of stock repurchases and dividends. Our strategy is to return all free cash flow to shareholders. Our dividends represented 52% of free cash flow, underscoring their sustainability. For an explanation of free cash flow, see the Non-GAAP financial information section.
Details of financial results – 2019 compared with 2018
Revenue of $14.38 billion decreased $1.40 billion, or 9%, primarily due to lower revenue from Embedded Processing and Analog.
Gross profit of $9.16 billion was down $1.11 billion, or 11%, primarily due to lower revenue. As a percentage of revenue, gross profit decreased to 63.7% from 65.1%.
Operating expenses (R&D and SG&A) were $3.19 billion compared with $3.24 billion.
Acquisition charges of $288 million were non-cash. See Note 7 to the financial statements.
Restructuring charges/other was a credit of $36 million due to the sale of our manufacturing facility in Greenock, Scotland.
Operating profit was $5.72 billion, or 39.8% of revenue, compared with $6.71 billion, or 42.5% of revenue.
Other income and expense (OI&E) was $175 million of income compared with $98 million of income. See Note 12 to the financial statements.
Interest and debt expense of $170 million increased $45 million due to the issuance of additional long-term debt.
Our provision for income taxes was $711 million compared with $1.11 billion. The decrease was due to lower income before income taxes and a lower annual operating tax rate. Our annual operating tax rate, which does not include discrete tax items, was 16% compared with 20% in 2018. We use “annual operating tax rate” to describe the estimated annual effective tax rate, as explained further in the Non-GAAP financial information section.
Our effective tax rate, which includes discrete tax items, was 12% in 2019 compared with 17% in 2018. See Note 4 to the financial statements for a reconciliation of the U.S. statutory income tax rate to our effective tax rate.
Net income was $5.02 billion compared with $5.58 billion. EPS was $5.24 compared with $5.59.
Segment results – 2019 compared with 2018
Analog (includes Power, Signal Chain and High Volume product lines)
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2019
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2018
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Change
|
Revenue
|
$
|
10,223
|
|
|
$
|
10,801
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|
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(5)
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%
|
Operating profit
|
4,477
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|
|
5,109
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(12)
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%
|
Operating profit % of revenue
|
43.8
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%
|
|
47.3
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%
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|
|
Analog revenue decreased due to Power, High Volume and, to a lesser extent, Signal Chain. Operating profit decreased primarily due to lower revenue and associated gross profit.
Embedded Processing (includes Connected Microcontrollers and Processors product lines)
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2019
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|
2018
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Change
|
Revenue
|
$
|
2,943
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|
|
$
|
3,554
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|
(17)
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%
|
Operating profit
|
907
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|
|
1,205
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|
|
(25)
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%
|
Operating profit % of revenue
|
30.8
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%
|
|
33.9
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%
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|
|
Embedded Processing revenue decreased in both product lines, led by Processors. Operating profit decreased due to lower revenue and associated gross profit.
Other (includes DLP® products, calculators and custom ASIC products)
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2019
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|
2018
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Change
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Revenue
|
$
|
1,217
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|
|
$
|
1,429
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(15)
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%
|
Operating profit *
|
339
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|
|
399
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|
|
(15)
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%
|
Operating profit % of revenue
|
27.9
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%
|
|
27.9
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%
|
|
|
* Includes acquisition charges and restructuring charges/other
Other revenue decreased $212 million, and operating profit decreased $60 million.
Financial condition
At the end of 2019, total cash (cash and cash equivalents plus short-term investments) was $5.39 billion, an increase of $1.15 billion from the end of 2018.
Accounts receivable were $1.07 billion, a decrease of $133 million compared with the end of 2018. Days sales outstanding were 29 at the end of both 2019 and 2018.
Inventory was $2.00 billion, a decrease of $216 million from the end of 2018. Days of inventory at the end of 2019 were 144 compared with 152 at the end of 2018.
Liquidity and capital resources
Our primary source of liquidity is cash flow from operations. Additional sources of liquidity are cash and cash equivalents, short-term investments and a variable rate, revolving credit facility. Cash flows from operating activities for 2019 were $6.65 billion, a decrease of $540 million primarily due to lower net income.
Our revolving credit facility is with a consortium of investment-grade banks and allows us to borrow up to $2 billion until March 2024. This credit facility also serves as support for the issuance of commercial paper. As of December 31, 2019, our credit facility was undrawn, and we had no commercial paper outstanding.
Investing activities for 2019 used $1.92 billion compared with $78 million in 2018. Capital expenditures were $847 million compared with $1.13 billion in 2018 and were primarily for semiconductor manufacturing equipment in both periods. Short-term investments used cash of $1.14 billion in 2019 and provided cash proceeds of $1.07 billion in 2018.
Financing activities for 2019 used $4.73 billion compared with $6.33 billion in 2018. In 2019, we received net proceeds of $1.49 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $750 million. In 2018, we received net proceeds of $1.50 billion from the issuance of fixed-rate, long-term debt and retired maturing debt of $500 million. Dividends paid in 2019 were $3.01 billion compared with $2.56 billion in 2018, reflecting an increase in the dividend rate, partially offset by fewer shares outstanding. We used $2.96 billion to repurchase 27.4 million shares of our common stock compared with $5.10 billion used in 2018 to repurchase 49.5 million shares. Employee exercises of stock options provided cash proceeds of $539 million compared with $373 million in 2018.
We had $2.44 billion of cash and cash equivalents and $2.95 billion of short-term investments as of December 31, 2019. We believe we have the necessary financial resources and operating plans to fund our working capital needs, capital expenditures, dividend and debt-related payments, and other business requirements for at least the next 12 months.
Non-GAAP financial information
This MD&A includes references to free cash flow and ratios based on that measure. These are financial measures that were not prepared in accordance with generally accepted accounting principles in the United States (GAAP). Free cash flow was calculated by subtracting capital expenditures from the most directly comparable GAAP measure, cash flows from operating activities (also referred to as cash flow from operations).
We believe that free cash flow and the associated ratios provide insight into our liquidity, our cash-generating capability and the amount of cash potentially available to return to shareholders, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures.
Reconciliation to the most directly comparable GAAP measures is provided in the table below.
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For Years Ended December 31,
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2019
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2018
|
Cash flow from operations (GAAP)
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$
|
6,649
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|
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$
|
7,189
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Capital expenditures
|
(847)
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(1,131)
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Free cash flow (non-GAAP)
|
$
|
5,802
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|
|
$
|
6,058
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|
|
|
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Revenue
|
$
|
14,383
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|
|
$
|
15,784
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|
|
|
|
|
Cash flow from operations as a percentage of revenue (GAAP)
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46.2
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%
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|
45.5
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%
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Free cash flow as a percentage of revenue (non-GAAP)
|
40.3
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%
|
|
38.4
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%
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This MD&A also includes references to an annual operating tax rate, a non-GAAP term we use to describe the estimated annual effective tax rate, a GAAP measure that by definition does not include discrete tax items. We believe the term annual operating tax rate helps differentiate from the effective tax rate, which includes discrete tax items.
Long-term contractual obligations
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Payments Due by Period
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Contractual Obligations
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2020
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2021/2022
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2023/2024
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Thereafter
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Total
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Long-term debt (a)
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$
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669
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|
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$
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1,349
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|
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$
|
1,060
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|
|
$
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5,488
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|
|
$
|
8,566
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|
Purchase commitments (b)
|
|
452
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|
|
407
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|
|
97
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|
|
109
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|
|
1,065
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|
Transition tax on indefinitely reinvested earnings (c)
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|
—
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|
|
100
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|
|
237
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|
|
169
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|
|
506
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|
Operating leases (d)
|
|
75
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|
|
114
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|
|
66
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|
|
131
|
|
|
386
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|
Deferred compensation plans (e)
|
|
23
|
|
|
63
|
|
|
54
|
|
|
135
|
|
|
275
|
|
Total (f)
|
|
$
|
1,219
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|
|
$
|
2,033
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|
|
$
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1,514
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|
|
$
|
6,032
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$
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10,798
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(a)Principal and related interest payments for our long-term debt obligations, including amounts classified as the current portion of long-term debt.
(b)Includes payments for software licenses and contractual arrangements with suppliers when there is a fixed, non-cancellable payment schedule or when minimum payments are due with a reduced delivery schedule. Excludes cancellable arrangements. See Note 11 to the financial statements.
(c)Includes payments for the one-time transition tax on our indefinitely reinvested earnings related to the 2017 enactment of the U.S. Tax Cuts and Jobs Act. See Note 4 to the financial statements.
(d)Includes minimum payments for leased facilities and equipment and purchases of industrial gases under contracts accounted for as operating leases. See Note 10 to the financial statements.
(e)Estimated payments for certain liabilities that existed as of December 31, 2019.
(f)Excludes $303 million of uncertain tax liabilities under ASC 740, as well as any planned future funding contributions to retirement benefit plans. Amounts associated with uncertain tax liabilities have been excluded because of the difficulty in making reasonably reliable estimates of the timing of cash settlements with the respective taxing authorities. Regarding future funding of retirement benefit plans, we plan to contribute about $20 million in 2020, but funding projections beyond 2020 are not practical to estimate due to the rules affecting tax-deductible contributions and the impact from the plans’ asset performance, interest rates and potential U.S. and non-U.S. legislation.
Critical accounting policies
Our accounting policies are more fully described in Note 2 of the consolidated financial statements. As disclosed in Note 2, the preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. However, based on facts and circumstances inherent in developing estimates and assumptions, management believes it is unlikely that applying other estimates and assumptions would have a material impact on the financial statements. We consider the following accounting policies to be those that are most important to the portrayal of our financial condition and that require a higher degree of judgment.
Revenue recognition
Based on management’s assessment of the revenue recognition criteria, we generally recognize revenue from sales of our products to distributors upon shipment or delivery to the distributors. For our consignment arrangements with distributors, delivery occurs and revenue is recognized when the distributor pulls product from consignment inventory that we store at designated locations. Recognition is not contingent upon resale of the products to the distributors’ customers in either scenario.
Revenue is recognized net of allowances, which are management’s estimates of future credits to be granted to distributors under programs common in the semiconductor industry. These allowances are not material and generally include special pricing arrangements, product returns due to quality issues, and incentives designed to maximize growth opportunities.
Allowances are based on analysis of historical data and contractual terms and are recorded when revenue is recognized. We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner.
Income taxes
In determining net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax provisions and the resultant tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense.
In the ordinary course of global business, there may be many transactions and calculations where the ultimate tax outcome is uncertain. The calculation of tax liabilities involves dealing with uncertainties in the interpretation and application of complex tax laws, and significant judgment is necessary to (i) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (ii) measure the amount of tax benefit that qualifies for recognition. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different from what is reflected in the historical income tax provisions and accruals.
As part of our financial process, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to be ultimately recoverable. Our judgment regarding future recoverability of our deferred tax assets may change due to various factors, including changes in U.S. or international tax laws and changes in market conditions and their impact on our assessment of taxable income in future periods. These changes, if any, may require adjustments to the deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made.
Inventory valuation allowances
Inventory is valued net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. Statistical allowances are determined quarterly for raw materials and work-in-process based on historical disposals of inventory for salability and obsolescence reasons. For finished goods, quarterly statistical allowances are determined by comparing inventory levels of individual parts to historical shipments, current backlog and estimated future sales in order to identify inventory considered unlikely to be sold. A specific allowance for each material type will be carried if there is a significant event not captured by the statistical allowance, such as an end-of-life part or demand with imminent risk of cancellation. Allowances are also calculated quarterly for instances where inventoried costs for individual products are in excess of the net realizable value for those products. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and other factors.
Changes in accounting standards
See Note 2 to the financial statements for information regarding the status of new accounting and reporting standards.
Off-balance sheet arrangements
As of December 31, 2019, we had no significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Commitments and contingencies
See Note 11 to the financial statements for a discussion of our commitments and contingencies.
ITEM 8. Financial statements and supplementary data
List of financial statements
Income for each of the three years in the period ended December 31, 2019
Comprehensive income for each of the three years in the period ended December 31, 2019
Balance sheets as of December 31, 2019 and 2018
Cash flows for each of the three years in the period ended December 31, 2019
Stockholders’ equity for each of the three years in the period ended December 31, 2019
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.
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Consolidated Statements of Income
|
|
For Years Ended December 31,
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(Millions of dollars, except share and per-share amounts)
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2019
|
|
2018
|
|
2017
|
Revenue
|
|
$
|
14,383
|
|
|
$
|
15,784
|
|
|
$
|
14,961
|
|
Cost of revenue (COR)
|
|
5,219
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|
|
5,507
|
|
|
5,347
|
|
Gross profit
|
|
9,164
|
|
|
10,277
|
|
|
9,614
|
|
Research and development (R&D)
|
|
1,544
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|
|
1,559
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|
|
1,508
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|
Selling, general and administrative (SG&A)
|
|
1,645
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|
|
1,684
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|
|
1,694
|
|
Acquisition charges
|
|
288
|
|
|
318
|
|
|
318
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|
Restructuring charges/other
|
|
(36)
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|
|
3
|
|
|
11
|
|
Operating profit
|
|
5,723
|
|
|
6,713
|
|
|
6,083
|
|
Other income (expense), net (OI&E)
|
|
175
|
|
|
98
|
|
|
75
|
|
Interest and debt expense
|
|
170
|
|
|
125
|
|
|
78
|
|
Income before income taxes
|
|
5,728
|
|
|
6,686
|
|
|
6,080
|
|
Provision for income taxes
|
|
711
|
|
|
1,106
|
|
|
2,398
|
|
Net income
|
|
$
|
5,017
|
|
|
$
|
5,580
|
|
|
$
|
3,682
|
|
|
|
|
|
|
|
|
Earnings per common share (EPS):
|
|
|
|
|
|
|
Basic
|
|
$
|
5.33
|
|
|
$
|
5.71
|
|
|
$
|
3.68
|
|
Diluted
|
|
$
|
5.24
|
|
|
$
|
5.59
|
|
|
$
|
3.61
|
|
|
|
|
|
|
|
|
Average shares outstanding (millions):
|
|
|
|
|
|
|
Basic
|
|
936
|
|
|
970
|
|
|
991
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|
Diluted
|
|
952
|
|
|
990
|
|
|
1,012
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|
|
|
|
|
|
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|
A portion of net income is allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents. Diluted EPS is calculated using the following:
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|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,017
|
|
|
$
|
5,580
|
|
|
$
|
3,682
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|
Income allocated to RSUs
|
|
(31)
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|
|
(42)
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|
|
(33)
|
|
Income allocated to common stock for diluted EPS
|
|
$
|
4,986
|
|
|
$
|
5,538
|
|
|
$
|
3,649
|
|
See accompanying notes.
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|
|
Consolidated Statements of Comprehensive Income
|
|
For Years Ended December 31,
|
|
|
|
|
(Millions of dollars)
|
|
2019
|
|
2018
|
|
2017
|
Net income
|
|
$
|
5,017
|
|
|
$
|
5,580
|
|
|
$
|
3,682
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
Net actuarial losses of defined benefit plans:
|
|
|
|
|
|
|
Adjustments, net of tax effect of ($37), $35 and ($26)
|
|
88
|
|
|
(98)
|
|
|
92
|
|
Recognized within net income, net of tax effect of ($13), ($15) and ($27)
|
|
38
|
|
|
50
|
|
|
56
|
|
Prior service credit of defined benefit plans:
|
|
|
|
|
|
|
Adjustments, net of tax effect of $0, $1 and $1
|
|
—
|
|
|
(6)
|
|
|
(2)
|
|
Recognized within net income, net of tax effect of $0, $1 and $1
|
|
—
|
|
|
(3)
|
|
|
(5)
|
|
Derivative instruments:
|
|
|
|
|
|
|
Change in fair value, net of tax effect of $0, $1 and $0
|
|
—
|
|
|
(2)
|
|
|
—
|
|
Recognized within net income, net of tax effect of $0, $0 and $0
|
|
—
|
|
|
—
|
|
|
1
|
|
Other comprehensive income (loss), net of taxes
|
|
126
|
|
|
(59)
|
|
|
142
|
|
Total comprehensive income
|
|
$
|
5,143
|
|
|
$
|
5,521
|
|
|
$
|
3,824
|
|
See accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
December 31,
|
|
|
(Millions of dollars, except share amounts)
|
|
2019
|
|
2018
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,437
|
|
|
$
|
2,438
|
|
Short-term investments
|
|
2,950
|
|
|
1,795
|
|
Accounts receivable, net of allowances of ($8) and ($19)
|
|
1,074
|
|
|
1,207
|
|
Raw materials
|
|
176
|
|
|
181
|
|
Work in process
|
|
916
|
|
|
1,070
|
|
Finished goods
|
|
909
|
|
|
966
|
|
Inventories
|
|
2,001
|
|
|
2,217
|
|
Prepaid expenses and other current assets
|
|
299
|
|
|
440
|
|
Total current assets
|
|
8,761
|
|
|
8,097
|
|
Property, plant and equipment at cost
|
|
5,740
|
|
|
5,425
|
|
Accumulated depreciation
|
|
(2,437)
|
|
|
(2,242)
|
|
Property, plant and equipment
|
|
3,303
|
|
|
3,183
|
|
Long-term investments
|
|
300
|
|
|
251
|
|
Goodwill
|
|
4,362
|
|
|
4,362
|
|
Acquisition-related intangibles
|
|
340
|
|
|
628
|
|
Deferred tax assets
|
|
197
|
|
|
295
|
|
Capitalized software licenses
|
|
69
|
|
|
89
|
|
Overfunded retirement plans
|
|
218
|
|
|
92
|
|
Other long-term assets
|
|
468
|
|
|
140
|
|
Total assets
|
|
$
|
18,018
|
|
|
$
|
17,137
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
500
|
|
|
$
|
749
|
|
Accounts payable
|
|
388
|
|
|
478
|
|
Accrued compensation
|
|
714
|
|
|
724
|
|
Income taxes payable
|
|
46
|
|
|
103
|
|
Accrued expenses and other liabilities
|
|
475
|
|
|
420
|
|
Total current liabilities
|
|
2,123
|
|
|
2,474
|
|
Long-term debt
|
|
5,303
|
|
|
4,319
|
|
Underfunded retirement plans
|
|
93
|
|
|
118
|
|
Deferred tax liabilities
|
|
78
|
|
|
42
|
|
Other long-term liabilities
|
|
1,514
|
|
|
1,190
|
|
Total liabilities
|
|
9,111
|
|
|
8,143
|
|
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
|
|
2,110
|
|
|
1,950
|
|
Retained earnings
|
|
39,898
|
|
|
37,906
|
|
Treasury common stock at cost
|
|
|
|
|
Shares: 2019 – 808,784,381; 2018 – 795,665,646
|
|
(34,495)
|
|
|
(32,130)
|
|
Accumulated other comprehensive income (loss), net of taxes (AOCI)
|
|
(347)
|
|
|
(473)
|
|
Total stockholders’ equity
|
|
8,907
|
|
|
8,994
|
|
Total liabilities and stockholders’ equity
|
|
$
|
18,018
|
|
|
$
|
17,137
|
|
See accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows
|
|
For Years Ended December 31,
|
|
|
|
|
(Millions of dollars)
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
|
$
|
5,017
|
|
|
$
|
5,580
|
|
|
$
|
3,682
|
|
Adjustments to net income:
|
|
|
|
|
|
|
Depreciation
|
|
708
|
|
|
590
|
|
|
539
|
|
Amortization of acquisition-related intangibles
|
|
288
|
|
|
318
|
|
|
318
|
|
Amortization of capitalized software
|
|
54
|
|
|
46
|
|
|
47
|
|
Stock compensation
|
|
217
|
|
|
232
|
|
|
242
|
|
Gains on sales of assets
|
|
(23)
|
|
|
(3)
|
|
|
—
|
|
Deferred taxes
|
|
81
|
|
|
(105)
|
|
|
112
|
|
Increase (decrease) from changes in:
|
|
|
|
|
|
|
Accounts receivable
|
|
133
|
|
|
71
|
|
|
(7)
|
|
Inventories
|
|
216
|
|
|
(282)
|
|
|
(167)
|
|
Prepaid expenses and other current assets
|
|
265
|
|
|
669
|
|
|
76
|
|
Accounts payable and accrued expenses
|
|
(93)
|
|
|
(7)
|
|
|
51
|
|
Accrued compensation
|
|
(15)
|
|
|
(7)
|
|
|
(3)
|
|
Income taxes payable
|
|
(193)
|
|
|
158
|
|
|
468
|
|
Changes in funded status of retirement plans
|
|
29
|
|
|
36
|
|
|
21
|
|
Other
|
|
(35)
|
|
|
(107)
|
|
|
(16)
|
|
Cash flows from operating activities
|
|
6,649
|
|
|
7,189
|
|
|
5,363
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(847)
|
|
|
(1,131)
|
|
|
(695)
|
|
Proceeds from asset sales
|
|
30
|
|
|
9
|
|
|
40
|
|
Purchases of short-term investments
|
|
(3,444)
|
|
|
(5,641)
|
|
|
(4,555)
|
|
Proceeds from short-term investments
|
|
2,309
|
|
|
6,708
|
|
|
4,095
|
|
Other
|
|
32
|
|
|
(23)
|
|
|
(12)
|
|
Cash flows from investing activities
|
|
(1,920)
|
|
|
(78)
|
|
|
(1,127)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
1,491
|
|
|
1,500
|
|
|
1,099
|
|
Repayment of debt
|
|
(750)
|
|
|
(500)
|
|
|
(625)
|
|
Dividends paid
|
|
(3,008)
|
|
|
(2,555)
|
|
|
(2,104)
|
|
Stock repurchases
|
|
(2,960)
|
|
|
(5,100)
|
|
|
(2,556)
|
|
Proceeds from common stock transactions
|
|
539
|
|
|
373
|
|
|
483
|
|
Other
|
|
(42)
|
|
|
(47)
|
|
|
(31)
|
|
Cash flows from financing activities
|
|
(4,730)
|
|
|
(6,329)
|
|
|
(3,734)
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(1)
|
|
|
782
|
|
|
502
|
|
Cash and cash equivalents at beginning of period
|
|
2,438
|
|
|
1,656
|
|
|
1,154
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,437
|
|
|
$
|
2,438
|
|
|
$
|
1,656
|
|
See accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Stockholders’ Equity
|
|
Common
Stock
|
|
Paid-in
Capital
|
|
Retained
Earnings
|
|
Treasury
Common
Stock
|
|
AOCI
|
(Millions of dollars, except per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
1,741
|
|
|
$
|
1,674
|
|
|
$
|
33,107
|
|
|
$
|
(25,523)
|
|
|
$
|
(526)
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
3,682
|
|
|
—
|
|
|
—
|
|
Dividends declared and paid ($2.12 per share)
|
|
—
|
|
|
—
|
|
|
(2,104)
|
|
|
—
|
|
|
—
|
|
Common stock issued for stock-based awards
|
|
—
|
|
|
(138)
|
|
|
—
|
|
|
621
|
|
|
—
|
|
Stock repurchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,556)
|
|
|
—
|
|
Stock compensation
|
|
—
|
|
|
242
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
142
|
|
Dividend equivalents on RSUs
|
|
—
|
|
|
—
|
|
|
(17)
|
|
|
—
|
|
|
—
|
|
Other
|
|
—
|
|
|
(2)
|
|
|
(6)
|
|
|
—
|
|
|
—
|
|
Balance, December 31, 2017
|
|
1,741
|
|
|
1,776
|
|
|
34,662
|
|
|
(27,458)
|
|
|
(384)
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
5,580
|
|
|
—
|
|
|
—
|
|
Dividends declared and paid ($2.63 per share)
|
|
—
|
|
|
—
|
|
|
(2,555)
|
|
|
—
|
|
|
—
|
|
Common stock issued for stock-based awards
|
|
—
|
|
|
(55)
|
|
|
—
|
|
|
428
|
|
|
—
|
|
Stock repurchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,100)
|
|
|
—
|
|
Stock compensation
|
|
—
|
|
|
232
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(59)
|
|
Dividend equivalents on RSUs
|
|
—
|
|
|
—
|
|
|
(17)
|
|
|
—
|
|
|
—
|
|
Cumulative effect of accounting changes
|
|
—
|
|
|
—
|
|
|
236
|
|
|
—
|
|
|
(30)
|
|
Other
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, December 31, 2018
|
|
1,741
|
|
|
1,950
|
|
|
37,906
|
|
|
(32,130)
|
|
|
(473)
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
5,017
|
|
|
—
|
|
|
—
|
|
Dividends declared and paid ($3.21 per share)
|
|
—
|
|
|
—
|
|
|
(3,008)
|
|
|
—
|
|
|
—
|
|
Common stock issued for stock-based awards
|
|
—
|
|
|
(55)
|
|
|
—
|
|
|
594
|
|
|
—
|
|
Stock repurchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,960)
|
|
|
—
|
|
Stock compensation
|
|
—
|
|
|
217
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
126
|
|
Dividend equivalents on RSUs
|
|
—
|
|
|
—
|
|
|
(17)
|
|
|
—
|
|
|
—
|
|
Other
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Balance, December 31, 2019
|
|
$
|
1,741
|
|
|
$
|
2,110
|
|
|
$
|
39,898
|
|
|
$
|
(34,495)
|
|
|
$
|
(347)
|
|
See accompanying notes.
Notes to financial statements
1. Description of business, including segment and geographic area information
We design, make and sell semiconductors to electronics designers and manufacturers all over the world. We have two reportable segments, which are established along major categories of products as follows:
•Analog – consisting of the following product lines: Power, Signal Chain and High Volume.
•Embedded Processing – consisting of the following product lines: Connected Microcontrollers and Processors.
We report the results of our remaining business activities in Other. Other includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other includes DLP® products, calculators and custom ASIC products.
In Other, we also include items that are not used in evaluating the results of or in allocating resources to our segments. Examples of these items include acquisition charges (see Note 7); restructuring charges (see Note 12); and certain corporate-level items, such as litigation expenses, environmental costs, insurance settlements, and gains and losses from other activities, including asset dispositions. We allocate the remainder of our expenses associated with corporate activities to our operating segments based on specific methodologies, such as percentage of operating expenses or headcount.
Our centralized manufacturing and support organizations, such as facilities, procurement and logistics, provide support to our operating segments, including those in Other. Costs incurred by these organizations, including depreciation, are charged to the segments on a per-unit basis. Consequently, depreciation expense is not an independently identifiable component within the segments’ results and therefore is not provided.
With the exception of goodwill, we do not identify or allocate assets by operating segment, nor does the chief operating decision maker evaluate operating segments using discrete asset information. We have no material intersegment revenue. The accounting policies of the segments are consistent with those described below in the summary of significant accounting policies and practices.
Segment information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
Analog
|
$
|
10,223
|
|
|
$
|
10,801
|
|
|
$
|
9,900
|
|
Embedded Processing
|
2,943
|
|
|
3,554
|
|
|
3,498
|
|
Other
|
1,217
|
|
|
1,429
|
|
|
1,563
|
|
Total revenue
|
$
|
14,383
|
|
|
$
|
15,784
|
|
|
$
|
14,961
|
|
|
|
|
|
|
|
Operating profit:
|
|
|
|
|
|
Analog
|
$
|
4,477
|
|
|
$
|
5,109
|
|
|
$
|
4,468
|
|
Embedded Processing
|
907
|
|
|
1,205
|
|
|
1,143
|
|
Other
|
339
|
|
|
399
|
|
|
472
|
|
Total operating profit
|
$
|
5,723
|
|
|
$
|
6,713
|
|
|
$
|
6,083
|
|
Geographic area information
The following geographic area information includes revenue, based on product shipment destination, and property, plant and equipment, based on physical location. The geographic revenue information does not necessarily reflect end demand by geography because our products tend to be shipped to the locations where our customers manufacture their products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
United States
|
$
|
1,827
|
|
|
$
|
2,288
|
|
|
$
|
1,901
|
|
Asia (a)
|
8,650
|
|
|
9,240
|
|
|
8,824
|
|
Europe, Middle East and Africa
|
2,707
|
|
|
3,047
|
|
|
2,907
|
|
Japan
|
796
|
|
|
869
|
|
|
1,049
|
|
Rest of world
|
403
|
|
|
340
|
|
|
280
|
|
Total revenue
|
$
|
14,383
|
|
|
$
|
15,784
|
|
|
$
|
14,961
|
|
(a)Revenue from products shipped into China was $7.2 billion, $7.0 billion and $6.6 billion in 2019, 2018 and 2017, respectively, which includes shipments to customers that manufacture in China and then export end products to their customers around the world, as well as distributors that transship inventory through China to service other countries.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Property, plant and equipment:
|
|
|
|
United States
|
$
|
1,998
|
|
|
$
|
1,812
|
|
Asia (a)
|
1,046
|
|
|
1,116
|
|
Europe, Middle East and Africa
|
63
|
|
|
84
|
|
Japan
|
185
|
|
|
157
|
|
Rest of world
|
11
|
|
|
14
|
|
Total property, plant and equipment
|
$
|
3,303
|
|
|
$
|
3,183
|
|
(a)Property, plant and equipment at our two sites in the Philippines was $394 million and $437 million as of December 31, 2019 and 2018, respectively. Property, plant and equipment at our sites in China was $304 million and $313 million as of December 31, 2019 and 2018, respectively.
2. Basis of presentation and significant accounting policies and practices
Basis of presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The basis of these financial statements is comparable for all periods presented herein, except for the effects of adopting a new accounting standard in 2019 related to leases.
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 2019 presentation.
The preparation of financial statements requires the use of estimates from which final results may vary.
Significant accounting policies and practices
Revenue recognition
We generate revenue primarily from the sale of semiconductor products, either directly to a customer or to a distributor, or at the conclusion of a consignment process. We have a variety of types of contracts with our customers and distributors. In determining whether a contract exists, we evaluate the terms of the arrangement, the relationship with the customer or distributor and their ability to pay.
We recognize revenue from sales of our products, including sales to our distributors, when control is transferred. Control is considered transferred when title and risk of loss pass, when the customer becomes obligated to pay and, where required, when the customer has accepted the products. This transfer generally occurs at a point in time upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order. Payment for sales to customers and distributors is generally due on our standard commercial terms. For sales to distributors, payment is not contingent upon resale of the products.
Revenue from sales of our products that are subject to inventory consignment agreements is recognized at a point in time, when the customer or distributor pulls product from consignment inventory that we store at designated locations. Delivery and transfer of control occur at that point, when title and risk of loss transfers and the customer or distributor becomes obligated to pay for the products pulled from inventory. Until the products are pulled for use or sale by the customer or distributor, we retain control over the products’ disposition, including the right to pull back or relocate the products.
The revenue recognized is adjusted based on allowances, which are prepared on a portfolio basis using a most likely amount methodology based on analysis of historical data and contractual terms. These allowances, which are not material, generally include adjustments for pricing arrangements, product returns and incentives. The length of time between invoicing and payment is not significant under any of our payment terms. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component.
In addition, we record allowances for accounts receivable that we estimate may not be collected. We monitor collectability of accounts receivable primarily through review of accounts receivable aging. When collection is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, record a charge in the period such determination is made.
We recognize shipping fees, if any, received from customers in revenue. We include the related shipping and handling costs in cost of revenue. The majority of our customers pay these fees directly to third parties.
Advertising costs
We expense advertising and other promotional costs as incurred. This expense was $30 million, $34 million and $39 million in 2019, 2018 and 2017, respectively.
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 Consolidated Statements of Income on a net (excluded from revenue) basis.
Leases
We determine if an arrangement is a lease at inception. Leases are included in other long-term assets, accrued expenses and other liabilities, and other long-term liabilities on our Consolidated Balance Sheets.
Lease assets represent our right to use underlying assets for the lease term, and lease liabilities represent our obligations to make lease payments over the lease term. On the commencement date, leases are evaluated for classification, and assets and liabilities are recognized based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the information available at commencement in determining the present value of lease payments. Operating lease expense is generally recognized on a straight-line basis over the lease term. Our lease values include options to extend or not to terminate the lease when it is reasonably certain that we will exercise such options.
We have agreements with lease and non-lease components, which are accounted for as a single lease component. Leases with an initial lease term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Earnings per share (EPS)
We use the two-class method for calculating EPS because the restricted stock units (RSUs) we grant are participating securities containing non-forfeitable rights to receive dividend equivalents. Under the two-class method, a portion of net income is allocated to RSUs and excluded from the calculation of income allocated to common stock, as shown in the table below.
Computation and reconciliation of earnings per common share are as follows (shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
2017
|
|
|
|
|
|
Net Income
|
|
Shares
|
|
EPS
|
|
Net Income
|
|
Shares
|
|
EPS
|
|
Net Income
|
|
Shares
|
|
EPS
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
5,017
|
|
|
|
|
|
|
$
|
5,580
|
|
|
|
|
|
|
$
|
3,682
|
|
|
|
|
|
Income allocated to RSUs
|
(32)
|
|
|
|
|
|
|
(43)
|
|
|
|
|
|
|
(34)
|
|
|
|
|
|
Income allocated to common stock
|
$
|
4,985
|
|
|
936
|
|
|
$
|
5.33
|
|
|
$
|
5,537
|
|
|
970
|
|
|
$
|
5.71
|
|
|
$
|
3,648
|
|
|
991
|
|
|
$
|
3.68
|
|
Dilutive effect of stock compensation plans
|
|
|
16
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
5,017
|
|
|
|
|
|
|
$
|
5,580
|
|
|
|
|
|
|
$
|
3,682
|
|
|
|
|
|
Income allocated to RSUs
|
(31)
|
|
|
|
|
|
|
(42)
|
|
|
|
|
|
|
(33)
|
|
|
|
|
|
Income allocated to common stock
|
$
|
4,986
|
|
|
952
|
|
|
$
|
5.24
|
|
|
$
|
5,538
|
|
|
990
|
|
|
$
|
5.59
|
|
|
$
|
3,649
|
|
|
1,012
|
|
|
$
|
3.61
|
|
Potentially dilutive securities representing 6 million, 4 million and 6 million shares of common stock that were outstanding in 2019, 2018 and 2017 respectively, were excluded from the computation of diluted earnings per common share during these periods because their effect would have been anti-dilutive.
Investments
We present investments on our Consolidated Balance Sheets as cash equivalents, short-term investments or long-term investments, which are detailed below. See Note 6 for additional information.
•Cash equivalents and short-term investments – We consider investments in available-for-sale debt securities with maturities of 90 days or less from the date of our investment to be cash equivalents. We consider investments in available-for-sale debt securities with maturities beyond 90 days from the date of our investment as being available for use in current operations and include them 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.
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.
We review inventory quarterly for salability and obsolescence. A statistical allowance is provided for inventory considered unlikely to be sold. The statistical allowance is based on an analysis of historical disposal activity, historical customer shipments, as well as estimated future sales. A specific allowance for each material type will be carried if there is a significant event not captured by the statistical allowance. 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
Goodwill is reviewed for impairment annually or more frequently if certain impairment indicators arise. We perform our annual goodwill impairment test as of October 1 for our reporting units, which compares the fair value for each reporting unit to its associated carrying value, including goodwill. See Note 7 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 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 valued at historical 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.
Derivatives and hedging
We 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.
In connection with the issuance of long-term debt, we may 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 do not use derivatives for speculative or trading purposes.
Changes in accounting standards – adopted standards for current period
Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842)
We adopted ASU No. 2016-02, Leases (ASC 842) effective January 1, 2019, using the modified retrospective transition method applied to leases existing at, or entered into after, the adoption date. The reported results for 2019 reflect the application of the new accounting guidance, while the reported results for prior periods are not adjusted and continue to be reported in accordance with our historical accounting under ASC 840, Leases. In addition, we elected the package of practical expedients permitted under the transition guidance that allowed us to apply prior conclusions related to lease definition, classification and initial direct costs.
The adoption of the new standard resulted in the recognition of $229 million of lease liabilities with corresponding lease assets as of January 1, 2019. The standard did not materially impact our results of operations and had no impact on cash flows.
Other standards
The following standards were also adopted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASU
|
|
Description
|
|
Adopted Date
|
ASU No. 2017-12
|
|
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
|
|
January 1, 2019
|
ASU No. 2018-14
|
|
Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans
|
|
January 1, 2019
|
Changes in accounting standards – standards not yet adopted
ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This standard requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which requires waiting to recognize a loss until it is probable of being incurred. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a reduction to the amortized cost basis of the securities. We are adopting this standard effective January 1, 2020, applying the guidance on a modified retrospective basis. In preparation for adoption of the standard, we have updated certain policies and related processes, but this standard will not have a material impact on our financial position or results of operations.
Other standards
We are evaluating the impact of the following standards, but we do not expect them to have a material impact on our financial position or results of operations. We are adopting these standards as of their effective dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASU
|
|
Description
|
|
Effective Date
|
ASU No. 2018-13
|
|
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
|
|
January 1, 2020
|
ASU No. 2018-15
|
|
Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
|
|
January 1, 2020
|
3. Stock compensation
We have stock options outstanding to participants under long-term incentive plans. The option price per share may not be less than the fair market value of our common stock on the date of the grant. The options have a 10-year term, generally vest ratably over four years, and continue to vest after the option recipient retires.
We also have RSUs outstanding to participants under long-term incentive plans. Each RSU represents the right to receive one share of TI common stock, issued on the vesting date, which is generally four years after the date of grant. RSUs continue to vest after the recipient retires. Holders of RSUs receive an annual cash payment equivalent to the dividends paid on our common stock.
We have options and RSUs outstanding to non-employee directors under 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 director deferred compensation accounts.
We also have an employee stock purchase plan (ESPP) 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% of the fair market value on the exercise date.
Total stock compensation expense recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
COR
|
$
|
21
|
|
|
$
|
25
|
|
|
$
|
36
|
|
R&D
|
66
|
|
|
69
|
|
|
59
|
|
SG&A
|
130
|
|
|
138
|
|
|
147
|
|
Total
|
$
|
217
|
|
|
$
|
232
|
|
|
$
|
242
|
|
These amounts include expenses related to non-qualified stock options, RSUs and stock options offered under our ESPP and are net of estimated forfeitures.
We recognize compensation expense for non-qualified stock options and RSUs on a straight-line basis over the minimum service period required for vesting of the award, adjusting for estimated forfeitures based on historical activity. Awards issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis. Options issued under our ESPP are expensed over a three-month period.
Fair-value methods and assumptions
We account for all awards granted under our various stock compensation plans at fair value. We estimate the fair values for non-qualified stock options using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Weighted average grant date fair value, per share
|
$
|
22.08
|
|
|
$
|
23.20
|
|
|
$
|
16.49
|
|
Weighted average assumptions used:
|
|
|
|
|
|
Expected volatility
|
26
|
%
|
|
23
|
%
|
|
24
|
%
|
Expected lives (in years)
|
7.1
|
|
7.2
|
|
7.2
|
Risk-free interest rates
|
2.66
|
%
|
|
2.57
|
%
|
|
2.36
|
%
|
Expected dividend yields
|
2.95
|
%
|
|
2.25
|
%
|
|
2.52
|
%
|
We determine expected volatility on all options granted 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 10-year average. We believe the historical experience method is the best estimate of future exercise patterns currently available.
Risk-free interest rates are determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options.
Expected dividend yields are based on the annualized approved quarterly dividend rate 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 is determined based on the closing price of our common stock on the date of grant.
Our ESPP is a discount-purchase plan and consequently the Black-Scholes-Merton option-pricing model is not used to determine the fair value per share of these awards. The fair value per share under this plan equals the amount of the discount.
Long-term incentive and director compensation plans
Stock option and RSU transactions under our long-term incentive and director compensation plans are 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, 2018
|
39,905,454
|
|
|
$
|
56.10
|
|
|
7,305,543
|
|
|
$
|
66.72
|
|
Granted
|
4,559,093
|
|
|
104.51
|
|
|
1,142,974
|
|
|
106.58
|
|
Stock options exercised/RSUs vested
|
(11,529,174)
|
|
|
44.68
|
|
|
(2,370,762)
|
|
|
52.74
|
|
Forfeited and expired
|
(441,429)
|
|
|
83.89
|
|
|
(179,955)
|
|
|
81.57
|
|
Outstanding grants, December 31, 2019
|
32,493,944
|
|
|
66.57
|
|
|
5,897,800
|
|
|
79.62
|
|
The weighted average grant date fair values per share of RSUs granted in 2019, 2018 and 2017 were $106.58, $110.05 and $79.52, respectively. In 2019, 2018 and 2017, the total grant date fair values of shares vested from RSU grants were $125 million, $123 million and $149 million, respectively.
As of December 31, 2019, the number of shares remaining available for future issuance under these plans was 45,082,425.
Summarized information about stock options outstanding as of December 31, 2019, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
|
|
|
Options Exercisable
|
|
|
Exercise Price Range
|
|
|
Number Outstanding (Shares)
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Weighted Average Exercise Price per Share
|
|
Number Exercisable (Shares)
|
|
Weighted Average Exercise Price per Share
|
$
|
23.05 to 127.35
|
|
32,493,944
|
|
|
5.9
|
|
$
|
66.57
|
|
|
19,646,782
|
|
|
$
|
50.82
|
|
In 2019, 2018 and 2017, the aggregate intrinsic values (i.e., the difference in the closing market price on the date of exercise and the exercise price paid by the optionee) of options exercised were $819 million, $561 million and $632 million, respectively.
Summarized information as of December 31, 2019, 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)
|
32,001,396
|
|
|
19,646,782
|
|
Weighted average remaining contractual life (in years)
|
5.8
|
|
4.6
|
Weighted average exercise price per share
|
$
|
66.03
|
|
|
$
|
50.82
|
|
Intrinsic value (millions of dollars)
|
$
|
1,992
|
|
|
$
|
1,522
|
|
(a)Includes effects of expected forfeitures. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $2.01 billion.
As of December 31, 2019, total future compensation related to equity awards not yet recognized in our Consolidated Statements of Income was $226 million, consisting of $98 million related to unvested stock options and $128 million related to unvested RSUs. The $226 million is expected to be recognized as follows: $113 million in 2020, $72 million in 2021, $37 million in 2022 and $4 million in 2023.
Employee stock purchase plan
Options outstanding under the ESPP as of December 31, 2019, had an exercise price equal to 85% of the fair market value of TI common stock on the date of automatic exercise. The automatic exercise occurred on January 2, 2020, resulting in an exercise price of $110.14 per share. Of the total outstanding options, none were exercisable as of December 31, 2019.
ESPP transactions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Exercise Price
|
Outstanding grants, December 31, 2018
|
229,836
|
|
|
$
|
80.29
|
|
Granted
|
742,819
|
|
|
102.34
|
|
Exercised
|
(798,806)
|
|
|
94.30
|
|
Outstanding grants, December 31, 2019
|
173,849
|
|
|
110.14
|
|
The weighted average grant date fair values per share of options granted under the ESPP in 2019, 2018 and 2017 were $18.05, $15.43 and $12.99, respectively. The total intrinsic value of options exercised under these plans was $13 million in 2019, 2018 and 2017.
As of December 31, 2019, the number of shares remaining available for future issuance under this plan was 33,812,282.
Effect on shares outstanding and treasury shares
Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2019, $13.18 billion of stock repurchase authorizations remain, and no expiration date has been specified.
Our current practice is to issue shares of common stock from treasury shares upon exercise of stock options, distribution of director deferred compensation and vesting of RSUs. The following table reflects the changes in our treasury shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
RSUs
|
|
Treasury Shares
|
Balance, December 31, 2016
|
|
|
|
|
744,831,978
|
|
Repurchases
|
|
|
|
|
30,570,129
|
|
Shares used for:
|
|
|
|
|
|
Stock options/RSUs
|
(13,313,019)
|
|
|
(4,419,464)
|
|
|
|
Stock applied to taxes
|
—
|
|
|
1,058,100
|
|
|
|
ESPP
|
(1,065,757)
|
|
|
—
|
|
|
|
Director deferred stock units
|
—
|
|
|
—
|
|
|
(4,750)
|
|
Total issued
|
(14,378,776)
|
|
|
(3,361,364)
|
|
|
(17,740,140)
|
|
Balance, December 31, 2017
|
|
|
|
|
757,657,217
|
|
|
|
|
|
|
|
Repurchases
|
|
|
|
|
49,482,220
|
|
Shares used for:
|
|
|
|
|
|
Stock options/RSUs
|
(8,432,458)
|
|
|
(2,769,994)
|
|
|
|
Stock applied to taxes
|
—
|
|
|
553,720
|
|
|
|
ESPP
|
(819,878)
|
|
|
—
|
|
|
|
Director deferred stock units
|
—
|
|
|
—
|
|
|
(5,181)
|
|
Total issued
|
(9,252,336)
|
|
|
(2,216,274)
|
|
|
(11,468,610)
|
|
Balance, December 31, 2018
|
|
|
|
|
795,665,646
|
|
|
|
|
|
|
|
Repurchases
|
|
|
|
|
27,398,701
|
|
Shares used for:
|
|
|
|
|
|
Stock options/RSUs
|
(11,529,174)
|
|
|
(2,370,762)
|
|
|
|
Stock applied to taxes
|
—
|
|
|
490,347
|
|
|
|
ESPP
|
(798,806)
|
|
|
—
|
|
|
|
Director deferred stock units
|
—
|
|
|
—
|
|
|
(71,571)
|
|
Total issued
|
(12,327,980)
|
|
|
(1,880,415)
|
|
|
(14,208,395)
|
|
Balance, December 31, 2019
|
|
|
|
|
808,784,381
|
|
The effects on cash flows are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Proceeds from common stock transactions (a)
|
$
|
539
|
|
|
$
|
373
|
|
|
$
|
483
|
|
|
|
|
|
|
|
Tax benefit realized from stock compensation
|
$
|
224
|
|
|
$
|
179
|
|
|
$
|
341
|
|
Reduction to deferred tax asset
|
(49)
|
|
|
(43)
|
|
|
(91)
|
|
Excess tax benefit for stock compensation
|
$
|
175
|
|
|
$
|
136
|
|
|
$
|
250
|
|
(a)Net of taxes paid for employee shares withheld of $52 million, $60 million and $83 million in 2019, 2018 and 2017, respectively.
4. Income taxes
Income before income taxes is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S.
|
$
|
4,915
|
|
|
$
|
5,672
|
|
|
$
|
5,130
|
|
Non-U.S.
|
813
|
|
|
1,014
|
|
|
950
|
|
Total
|
$
|
5,728
|
|
|
$
|
6,686
|
|
|
$
|
6,080
|
|
Provision for income taxes is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
2017
|
|
|
|
|
|
Current
|
|
Deferred
|
|
Total
|
|
Current
|
|
Deferred
|
|
Total
|
|
Current
|
|
Deferred
|
|
Total
|
U.S. federal
|
$
|
483
|
|
|
$
|
25
|
|
|
$
|
508
|
|
|
$
|
979
|
|
|
$
|
(98)
|
|
|
$
|
881
|
|
|
$
|
2,101
|
|
|
$
|
51
|
|
|
$
|
2,152
|
|
Non-U.S.
|
135
|
|
|
56
|
|
|
191
|
|
|
225
|
|
|
(8)
|
|
|
217
|
|
|
173
|
|
|
61
|
|
|
234
|
|
U.S. state
|
12
|
|
|
—
|
|
|
12
|
|
|
7
|
|
|
1
|
|
|
8
|
|
|
12
|
|
|
—
|
|
|
12
|
|
Total
|
$
|
630
|
|
|
$
|
81
|
|
|
$
|
711
|
|
|
$
|
1,211
|
|
|
$
|
(105)
|
|
|
$
|
1,106
|
|
|
$
|
2,286
|
|
|
$
|
112
|
|
|
$
|
2,398
|
|
Principal reconciling items from the U.S. statutory income tax rate to the effective tax rate (provision for income taxes as a percentage of income before income taxes) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S. statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
U.S. tax benefit for foreign derived intangible income
|
(4.9)
|
|
|
(5.3)
|
|
|
—
|
|
U.S. excess tax benefit for stock compensation
|
(3.1)
|
|
|
(2.0)
|
|
|
(4.1)
|
|
U.S. R&D tax credit
|
(1.4)
|
|
|
(1.3)
|
|
|
(1.1)
|
|
Non-U.S. effective tax rates
|
0.3
|
|
|
0.1
|
|
|
(2.5)
|
|
U.S. Tax Act transitional non-cash expense
|
—
|
|
|
4.2
|
|
|
—
|
|
U.S. Tax Act enactment-date effects and measurement period adjustments
|
—
|
|
|
(0.7)
|
|
|
12.7
|
|
U.S. tax benefit for manufacturing
|
—
|
|
|
—
|
|
|
(1.6)
|
|
Other
|
0.5
|
|
|
0.5
|
|
|
1.0
|
|
Effective tax rate
|
12.4
|
%
|
|
16.5
|
%
|
|
39.4
|
%
|
The U.S. Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017. The Tax Act reduces the U.S. statutory income tax rate from 35% to 21% and requires companies to pay a one-time tax on indefinitely reinvested earnings of certain non-U.S. subsidiaries that were previously tax deferred. We applied the guidance in Staff Accounting Bulletin No. 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018. As of December 31, 2018, we completed our accounting for the enactment-date income tax effects of the Tax Act. We booked a provisional amount of $773 million in 2017 and reduced our provisional amount by $44 million in 2018, for a net of $729 million.
The earnings represented by non-cash operating assets, such as fixed assets and inventory, will continue to be permanently reinvested outside the United States. Provisions of the Tax Act, such as the one-time tax on indefinitely reinvested earnings and the global intangible low-taxed income (GILTI) tax for years beginning in 2018, eliminate any additional U.S. taxation resulting from repatriation of earnings of non-U.S. subsidiaries to the United States. Consequently, no U.S. tax provision has been made for the future remittance of these earnings. However, withholding or distribution taxes in certain non-U.S. jurisdictions will be incurred upon repatriation of available cash to the United States. A provision has been made for deferred taxes on these undistributed earnings to the extent that repatriation of the available cash to the United States is expected to result in a tax liability. As of December 31, 2019, we have no basis differences that would result in material unrecognized deferred tax liabilities.
We have made an allowable policy election to account for the effects of GILTI as a component of income tax expense in the period in which the tax is incurred.
The primary components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Deferred loss and tax credit carryforwards
|
$
|
213
|
|
|
$
|
247
|
|
Accrued expenses
|
113
|
|
|
129
|
|
Stock compensation
|
109
|
|
|
122
|
|
Inventories and related reserves
|
109
|
|
|
107
|
|
Retirement costs for defined benefit and retiree health care
|
49
|
|
|
80
|
|
Total deferred tax assets, before valuation allowance
|
593
|
|
|
685
|
|
Valuation allowance
|
(180)
|
|
|
(172)
|
|
Total deferred tax assets, after valuation allowance
|
413
|
|
|
513
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
(95)
|
|
|
(10)
|
|
Acquisition-related intangibles and fair-value adjustments
|
(82)
|
|
|
(142)
|
|
International earnings
|
(62)
|
|
|
(43)
|
|
Other
|
(55)
|
|
|
(65)
|
|
Total deferred tax liabilities
|
(294)
|
|
|
(260)
|
|
Net deferred tax asset
|
$
|
119
|
|
|
$
|
253
|
|
The deferred tax assets and liabilities based on tax jurisdictions are presented on our Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Deferred tax assets
|
$
|
197
|
|
|
$
|
295
|
|
Deferred tax liabilities
|
(78)
|
|
|
(42)
|
|
Net deferred tax asset
|
$
|
119
|
|
|
$
|
253
|
|
We make an ongoing assessment regarding the realization of U.S. and non-U.S. deferred tax assets. This assessment is based on our evaluation of relevant criteria, including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, taxable income in prior carryback years and expectations for future taxable income. Valuation allowances increased by $8 million, $7 million and $37 million in 2019, 2018 and 2017, respectively. These changes had no impact to net income in 2019 or 2018.
We have U.S. and non-U.S. tax loss carryforwards of approximately $6 million, none of which will expire before the year 2029.
Cash payments made for income taxes, net of refunds, were $570 million, $705 million and $1.80 billion in 2019, 2018 and 2017, respectively.
Uncertain tax positions
We operate in a number of tax jurisdictions, and our income tax returns are subject to examination by tax authorities in those jurisdictions who may challenge any item on these tax returns. Because the matters challenged by authorities are typically complex, their ultimate outcome is uncertain. Before any benefit can be recorded in our financial statements, we must determine that it is “more likely than not” that a tax position will be sustained by the appropriate tax authorities. We recognize accrued interest related to uncertain tax positions and penalties as components of OI&E.
The changes in the total amounts of uncertain tax positions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Balance, January 1
|
$
|
286
|
|
|
$
|
300
|
|
|
$
|
243
|
|
Additions based on tax positions related to the current year
|
3
|
|
|
3
|
|
|
17
|
|
Additions for tax positions of prior years
|
63
|
|
|
1
|
|
|
42
|
|
Reductions for tax positions of prior years
|
(41)
|
|
|
—
|
|
|
(1)
|
|
Settlements with tax authorities
|
(8)
|
|
|
(18)
|
|
|
(1)
|
|
Balance, December 31
|
$
|
303
|
|
|
$
|
286
|
|
|
$
|
300
|
|
|
|
|
|
|
|
Interest income (expense) recognized in the year ended December 31
|
$
|
9
|
|
|
$
|
(15)
|
|
|
$
|
(19)
|
|
|
|
|
|
|
|
Interest payable as of December 31
|
$
|
44
|
|
|
$
|
49
|
|
|
$
|
38
|
|
The liability for uncertain tax positions is a component of other long-term liabilities on our Consolidated Balance Sheets.
All of the $303 million and $286 million liabilities for uncertain tax positions as of December 31, 2019 and 2018, respectively, are comprised of positions that, if recognized, would lower the effective tax rate. If these liabilities are ultimately realized, $2 million and $30 million of existing deferred tax assets in 2019 and 2018, respectively, would also be realized. It is reasonably possible that the $303 million liability as of December 31, 2019, could decrease by up to $249 million in 2020 for the resolution of a tax depreciation-related position.
As of December 31, 2019, the statute of limitations remains open for U.S. federal tax returns for 2013 and following years. Audit activities related to our U.S. federal tax returns through 2012 have been completed except for certain pending tax treaty procedures for relief from double taxation. The procedures for relief from double taxation pertain to U.S. federal tax returns for the years 2007 through 2012. The audit of the U.S. federal tax returns for 2013 through 2015 is underway.
In non-U.S. jurisdictions, the years open to audit represent the years still open under the statute of limitations. With respect to major jurisdictions outside the United States, our subsidiaries are no longer subject to income tax audits for years before 2007.
5. Financial instruments and risk concentration
Financial instruments
We hold derivative financial instruments such as forward foreign currency exchange contracts, the fair value of which was not material as of December 31, 2019. Our forward foreign currency exchange contracts outstanding as of December 31, 2019, had a notional value of $458 million to hedge our non-U.S. dollar net balance sheet exposures, including $136 million to sell Japanese yen, $106 million to sell Indian rupees and $74 million to sell British pounds.
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. Our postretirement plan assets are carried at fair value or net asset value per share. 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. As of December 31, 2019, the carrying value of long-term debt, including the current portion, was $5.80 billion, and the estimated fair value was $6.29 billion. The estimated fair value is measured using broker-dealer quotes, which are Level 2 inputs. See Note 6 for a description of fair value and the definition of Level 2 inputs.
Risk concentration
We are subject to counterparty risks from financial institutions, customers and issuers of debt securities. Financial instruments that could subject us to concentrations of credit risk are primarily cash deposits, cash equivalents, short-term investments and accounts receivable. To manage our credit risk exposure, we place cash investments in investment-grade debt securities and limit the amount of credit exposure to any one issuer. We also limit counterparties on cash deposits and financial derivative contracts to financial institutions with investment-grade ratings.
Concentrations of credit risk with respect to accounts receivable are limited due to our large number of customers and their dispersion across different industries and geographic areas. We maintain allowances for expected returns, disputes, adjustments, incentives and collectability. These allowances are deducted from accounts receivable on our Consolidated Balance Sheets.
Accounts receivable allowances changed to reflect amounts charged (credited) to operating results by ($11) million, $11 million and ($9) million in 2019, 2018 and 2017, respectively.
Major customer
No end customer accounted for 10% or more of revenue in 2019, 2018 or 2017.
6. Valuation of debt and equity investments and certain liabilities
Debt and equity investments measured at fair value
Available-for-sale debt investments and trading securities are stated at fair value, which is generally based on market prices or broker quotes. See Fair-value considerations below. Unrealized gains and losses from available-for-sale debt securities are recorded as an increase or decrease, net of taxes, in AOCI on our Consolidated Balance Sheets. Other-than-temporary impairments on available-for-sale debt securities are recorded in OI&E in our Consolidated Statements of Income.
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.
Other equity investments
Our other investments include equity-method investments and non-marketable equity investments, which are not measured at fair value. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity-method investments are recognized in OI&E based on our ownership share of the investee’s financial results.
Non-marketable equity securities are measured at cost with adjustments for observable changes in price or impairments. Gains and losses on non-marketable equity investments are recognized in OI&E.
Details of our investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
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 debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,213
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
747
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate obligations
|
174
|
|
|
1,216
|
|
|
—
|
|
|
473
|
|
|
748
|
|
|
—
|
|
U.S. government agency and Treasury securities
|
604
|
|
|
1,734
|
|
|
—
|
|
|
988
|
|
|
1,047
|
|
|
—
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
—
|
|
|
—
|
|
|
272
|
|
|
—
|
|
|
—
|
|
|
226
|
|
Total
|
1,991
|
|
|
2,950
|
|
|
272
|
|
|
2,208
|
|
|
1,795
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other measurement basis:
|
|
|
|
|
|
|
|
|
|
|
|
Equity-method investments
|
—
|
|
|
—
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
21
|
|
Non-marketable equity investments
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Cash on hand
|
446
|
|
|
—
|
|
|
—
|
|
|
230
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
2,437
|
|
|
$
|
2,950
|
|
|
$
|
300
|
|
|
$
|
2,438
|
|
|
$
|
1,795
|
|
|
$
|
251
|
|
As of December 31, 2019 and 2018, unrealized gains and losses associated with our available-for-sale investments were not material. We did not recognize any credit losses related to available-for-sale investments in 2019, 2018 or 2017.
In 2019, 2018 and 2017, the proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $2.31 billion, $6.71 billion and $4.10 billion, respectively. Gross realized gains and losses from these sales were not material.
The following table presents the aggregate maturities of our available-for-sale debt investments as of December 31, 2019:
|
|
|
|
|
|
|
Fair Value
|
One year or less
|
$
|
4,921
|
|
One to two years
|
20
|
|
There were no other-than-temporary declines and impairments in the values of our debt investments in 2019, 2018 or 2017.
In 2019, 2018 and 2017, net gains and losses associated with our equity investments were $32 million, $5 million and $4 million, respectively. These amounts include realized gains of $29 million, $11 million and $6 million on equity investments sold during 2019, 2018 and 2017, respectively.
Fair-value considerations
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 described 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. 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. As of December 31, 2019 and 2018, we had no Level 3 assets or liabilities.
The following are our assets and liabilities that were accounted for at fair value on a recurring basis. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,213
|
|
|
$
|
—
|
|
|
$
|
1,213
|
|
|
$
|
747
|
|
|
$
|
—
|
|
|
$
|
747
|
|
Corporate obligations
|
—
|
|
|
1,390
|
|
|
1,390
|
|
|
—
|
|
|
1,221
|
|
|
1,221
|
|
U.S. government agency and Treasury securities
|
2,338
|
|
|
—
|
|
|
2,338
|
|
|
2,035
|
|
|
—
|
|
|
2,035
|
|
Mutual funds
|
272
|
|
|
—
|
|
|
272
|
|
|
226
|
|
|
—
|
|
|
226
|
|
Total assets
|
$
|
3,823
|
|
|
$
|
1,390
|
|
|
$
|
5,213
|
|
|
$
|
3,008
|
|
|
$
|
1,221
|
|
|
$
|
4,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
$
|
298
|
|
|
$
|
—
|
|
|
$
|
298
|
|
|
$
|
246
|
|
|
$
|
—
|
|
|
$
|
246
|
|
Total liabilities
|
$
|
298
|
|
|
$
|
—
|
|
|
$
|
298
|
|
|
$
|
246
|
|
|
$
|
—
|
|
|
$
|
246
|
|
7. Goodwill and acquisition-related intangibles
Goodwill by segment as of December 31, 2019 and 2018, is as follows:
|
|
|
|
|
|
|
Goodwill
|
Analog
|
$
|
4,158
|
|
Embedded Processing
|
172
|
|
Other
|
32
|
|
Total
|
$
|
4,362
|
|
We perform our annual goodwill impairment test as of October 1 and determine whether the fair value of each of our reporting units is in excess of its carrying value. Determination of fair value is based upon management estimates and judgment, using unobservable inputs in discounted cash flow models to calculate the fair value of each reporting unit. These unobservable inputs are considered Level 3 measurements, as described in Note 6. In 2019, 2018 and 2017, we determined no impairment was indicated.
The components of acquisition-related intangibles are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
Amortization Period (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Developed technology
|
7 – 10
|
|
$
|
2,000
|
|
|
$
|
1,660
|
|
|
$
|
340
|
|
|
$
|
2,125
|
|
|
$
|
1,573
|
|
|
$
|
552
|
|
Customer relationships
|
8
|
|
—
|
|
|
—
|
|
|
—
|
|
|
810
|
|
|
734
|
|
|
76
|
|
Total
|
|
|
$
|
2,000
|
|
|
$
|
1,660
|
|
|
$
|
340
|
|
|
$
|
2,935
|
|
|
$
|
2,307
|
|
|
$
|
628
|
|
Acquisition charges
Acquisition charges represent the ongoing amortization of intangible assets resulting from the acquisition of National Semiconductor Corporation. These amounts are included in Other for segment reporting purposes, consistent with how management measures the performance of its segments.
Amortization of acquisition-related intangibles was $288 million in 2019 and $318 million in 2018 and 2017. Fully amortized assets are written off against accumulated amortization. The remaining estimated amortization is $198 million in 2020 and $142 million in 2021.
8. Postretirement benefit plans
Plan descriptions
We have various employee retirement plans, including defined contribution, defined benefit and retiree health care benefit plans. For qualifying employees, we offer deferred compensation arrangements.
U.S. retirement plans
Our principal retirement plans in the United States are a defined contribution plan; an enhanced defined contribution plan; and qualified and non-qualified defined benefit pension plans. The defined benefit plans were closed to new participants in 1997, and then current participants were allowed to make a one-time election to continue accruing a benefit in the plans or to cease accruing a benefit and instead to participate in the enhanced defined contribution plan described below.
Both defined contribution plans offer an employer-matching savings option that allows employees to make pretax and post-tax contributions to various investment choices. Employees who elected to continue accruing a benefit in the qualified defined benefit pension plans may also participate in the defined contribution plan, where employer-matching contributions are provided for up to 2% of the employee’s annual eligible earnings. Employees who elected not to continue accruing a benefit in the defined benefit pension plans, and employees hired after November 1997 and through December 31, 2003, may participate in the enhanced defined contribution plan. This plan provides for a fixed employer contribution of 2% of the employee’s annual eligible earnings, plus an employer-matching contribution of up to 4% of the employee’s annual eligible earnings. Employees hired after December 31, 2003, do not receive the fixed employer contribution of 2% of the employee’s annual eligible earnings.
As of December 31, 2019 and 2018, as a result of employees’ elections, TI’s U.S. defined contribution plans held shares of TI common stock totaling 8 million shares and 9 million shares valued at $988 million and $821 million, respectively. Dividends paid on these shares in 2019 and 2018 were $26 million and $24 million, respectively. Effective April 1, 2016, the TI common stock fund was frozen to new contributions or transfers into the fund.
Our aggregate expense for the U.S. defined contribution plans was $61 million in 2019, 2018 and 2017.
The defined benefit pension plans include employees still accruing benefits, as well as employees and participants who no longer accrue service-related benefits, but instead, may participate in the enhanced defined contribution plan. Benefits under the qualified defined benefit pension plan are determined using a formula based on years of service and the highest five consecutive years of compensation. We intend to contribute amounts to this plan to meet the minimum funding requirements of applicable local laws and regulations, plus such additional amounts as we deem appropriate. The non-qualified defined benefit plans are unfunded and closed to new participants.
U.S. retiree health care benefit plan
U.S. employees who meet eligibility requirements are offered medical coverage during retirement. We make a contribution toward the cost of those retiree medical benefits for certain retirees and their dependents. The contribution rates are based upon various factors, the most important of which are an employee’s date of hire, date of retirement, years of service and eligibility for Medicare benefits. The balance of the cost is borne by the plan’s participants. Employees hired after January 1, 2001, are responsible for the full cost of their medical benefits during retirement.
Non-U.S. retirement plans
We provide retirement coverage for non-U.S. employees, as required by local laws or to the extent we deem appropriate, through a number of defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances.
As of December 31, 2019 and 2018, as a result of employees’ elections, TI’s non-U.S. defined contribution plans held TI common stock valued at $28 million and $23 million, respectively. Dividends paid on these shares of TI common stock in 2019 and 2018 were not material.
Effects on our Consolidated Statements of Income and Balance Sheets
Expense related to defined benefit and retiree health care benefit plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined Benefit
|
|
|
|
|
|
U.S. Retiree Health Care
|
|
|
|
|
|
Non-U.S. Defined Benefit
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
18
|
|
|
$
|
19
|
|
|
$
|
22
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
31
|
|
|
$
|
36
|
|
|
$
|
37
|
|
Interest cost
|
38
|
|
|
35
|
|
|
42
|
|
|
14
|
|
|
15
|
|
|
17
|
|
|
43
|
|
|
45
|
|
|
44
|
|
Expected return on plan assets
|
(41)
|
|
|
(42)
|
|
|
(41)
|
|
|
(14)
|
|
|
(15)
|
|
|
(17)
|
|
|
(86)
|
|
|
(67)
|
|
|
(62)
|
|
Amortization of prior service cost (credit)
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(3)
|
|
|
(4)
|
|
|
1
|
|
|
(1)
|
|
|
(2)
|
|
Recognized net actuarial loss
|
9
|
|
|
17
|
|
|
14
|
|
|
—
|
|
|
2
|
|
|
3
|
|
|
29
|
|
|
20
|
|
|
28
|
|
Net periodic benefit costs
|
24
|
|
|
29
|
|
|
37
|
|
|
2
|
|
|
4
|
|
|
4
|
|
|
18
|
|
|
33
|
|
|
45
|
|
Settlement losses
|
10
|
|
|
23
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
2
|
|
Total, including other postretirement losses
|
$
|
34
|
|
|
$
|
52
|
|
|
$
|
73
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
21
|
|
|
$
|
36
|
|
|
$
|
47
|
|
All defined benefit and retiree health care benefit plan expense components other than service cost are recognized in OI&E in our Consolidated Statements of Income. Service cost is recognized within operating profit.
For the U.S. qualified pension and retiree health care plans, the expected return on plan assets component of net periodic benefit cost is based upon a market-related value of assets. In accordance with U.S. GAAP, the market-related value of assets is the fair value adjusted by a smoothing technique whereby certain gains and losses are phased in over a period of three years.
Changes in the benefit obligations and plan assets for defined benefit and retiree health care benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined Benefit
|
|
|
|
U.S. Retiree Health Care
|
|
|
|
Non-U.S. Defined Benefit
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in plan benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year:
|
$
|
874
|
|
|
$
|
998
|
|
|
$
|
361
|
|
|
$
|
414
|
|
|
$
|
2,411
|
|
|
$
|
2,469
|
|
Service cost
|
18
|
|
|
19
|
|
|
3
|
|
|
5
|
|
|
31
|
|
|
36
|
|
Interest cost
|
38
|
|
|
35
|
|
|
14
|
|
|
15
|
|
|
43
|
|
|
45
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
13
|
|
|
11
|
|
|
7
|
|
|
7
|
|
Benefits paid
|
(11)
|
|
|
(10)
|
|
|
(41)
|
|
|
(41)
|
|
|
(103)
|
|
|
(87)
|
|
Settlements
|
(66)
|
|
|
(100)
|
|
|
—
|
|
|
—
|
|
|
(12)
|
|
|
(16)
|
|
Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
Actuarial loss (gain)
|
107
|
|
|
(68)
|
|
|
9
|
|
|
(43)
|
|
|
193
|
|
|
6
|
|
Plan amendments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Effects of exchange rate changes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
(56)
|
|
Benefit obligation at end of year
|
$
|
960
|
|
|
$
|
874
|
|
|
$
|
359
|
|
|
$
|
361
|
|
|
$
|
2,581
|
|
|
$
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year:
|
$
|
869
|
|
|
$
|
995
|
|
|
$
|
330
|
|
|
$
|
394
|
|
|
$
|
2,410
|
|
|
$
|
2,593
|
|
Actual return on plan assets
|
185
|
|
|
(56)
|
|
|
53
|
|
|
(12)
|
|
|
337
|
|
|
(52)
|
|
Employer contributions (qualified plans)
|
—
|
|
|
20
|
|
|
1
|
|
|
1
|
|
|
9
|
|
|
19
|
|
Employer contributions (non-qualified plans)
|
10
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
13
|
|
|
11
|
|
|
7
|
|
|
7
|
|
Benefits paid
|
(11)
|
|
|
(10)
|
|
|
(41)
|
|
|
(41)
|
|
|
(103)
|
|
|
(87)
|
|
Settlements
|
(66)
|
|
|
(100)
|
|
|
—
|
|
|
—
|
|
|
(12)
|
|
|
(16)
|
|
Effects of exchange rate changes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
(54)
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
(23)
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
$
|
987
|
|
|
$
|
869
|
|
|
$
|
356
|
|
|
$
|
330
|
|
|
$
|
2,661
|
|
|
$
|
2,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
$
|
27
|
|
|
$
|
(5)
|
|
|
$
|
(3)
|
|
|
$
|
(31)
|
|
|
$
|
80
|
|
|
$
|
(1)
|
|
The actuarial loss (gain) for all pension plans was primarily related to a change in the discount rate used to measure the benefit obligations of those plans in 2019 and 2018.
Amounts recognized on our Consolidated Balance Sheets as of December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined Benefit
|
|
U.S. Retiree Health Care
|
|
Non-U.S. Defined Benefit
|
|
Total
|
2019
|
|
|
|
|
|
|
|
Overfunded retirement plans
|
$
|
73
|
|
|
$
|
—
|
|
|
$
|
145
|
|
|
$
|
218
|
|
Accrued expenses and other liabilities & other long-term liabilities
|
(17)
|
|
|
—
|
|
|
(4)
|
|
|
(21)
|
|
Underfunded retirement plans
|
(29)
|
|
|
(3)
|
|
|
(61)
|
|
|
(93)
|
|
Funded status at end of 2019
|
$
|
27
|
|
|
$
|
(3)
|
|
|
$
|
80
|
|
|
$
|
104
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
Overfunded retirement plans
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
52
|
|
|
$
|
92
|
|
Accrued expenses and other liabilities & other long-term liabilities
|
(8)
|
|
|
—
|
|
|
(3)
|
|
|
(11)
|
|
Underfunded retirement plans
|
(37)
|
|
|
(31)
|
|
|
(50)
|
|
|
(118)
|
|
Funded status at end of 2018
|
$
|
(5)
|
|
|
$
|
(31)
|
|
|
$
|
(1)
|
|
|
$
|
(37)
|
|
Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute about $20 million to our retirement benefit plans in 2020.
Accumulated benefit obligations, which are generally less than the projected benefit obligations as they exclude the impact of future salary increases, were $878 million and $793 million as of December 31, 2019 and 2018, respectively, for the U.S. defined benefit plans, and $2.46 billion and $2.29 billion as of December 31, 2019 and 2018, respectively, for the non-U.S. defined benefit plans.
The change in AOCI is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined Benefit
|
|
U.S. Retiree Health Care
|
|
|
|
Non-U.S. Defined Benefit
|
|
|
|
Total
|
|
|
|
Net Actuarial Loss
|
|
Net Actuarial Loss
|
|
Prior Service Credit
|
|
Net Actuarial Loss
|
|
Prior Service Credit
|
|
Net Actuarial Loss
|
|
Prior Service Credit
|
AOCI balance, net of taxes, December 31, 2018
|
$
|
135
|
|
|
$
|
21
|
|
|
$
|
(5)
|
|
|
$
|
317
|
|
|
$
|
3
|
|
|
$
|
473
|
|
|
$
|
(2)
|
|
Changes in AOCI by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
(36)
|
|
|
(31)
|
|
|
—
|
|
|
(58)
|
|
|
—
|
|
|
(125)
|
|
|
—
|
|
Recognized within net income
|
(19)
|
|
|
—
|
|
|
1
|
|
|
(32)
|
|
|
(1)
|
|
|
(51)
|
|
|
—
|
|
Tax effect
|
11
|
|
|
7
|
|
|
—
|
|
|
32
|
|
|
—
|
|
|
50
|
|
|
—
|
|
Total change to AOCI
|
(44)
|
|
|
(24)
|
|
|
1
|
|
|
(58)
|
|
|
(1)
|
|
|
(126)
|
|
|
—
|
|
AOCI balance, net of taxes, December 31, 2019
|
$
|
91
|
|
|
$
|
(3)
|
|
|
$
|
(4)
|
|
|
$
|
259
|
|
|
$
|
2
|
|
|
$
|
347
|
|
|
$
|
(2)
|
|
Information on plan assets
We report and measure the plan assets of our defined benefit pension and other postretirement plans at fair value. The tables below set forth the fair value of our plan assets using the same three-level hierarchy of fair-value inputs described in Note 6.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
|
|
Other (a)
|
|
Total
|
Assets of U.S. defined benefit plan:
|
|
|
|
|
|
|
|
|
|
Fixed income securities and cash equivalents
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
640
|
|
|
$
|
640
|
|
Equity securities
|
—
|
|
|
—
|
|
|
|
|
347
|
|
|
347
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
987
|
|
|
$
|
987
|
|
|
|
|
|
|
|
|
|
|
|
Assets of U.S. retiree health care plan:
|
|
|
|
|
|
|
|
|
|
Fixed income securities and cash equivalents
|
$
|
62
|
|
|
$
|
—
|
|
|
|
|
$
|
168
|
|
|
$
|
230
|
|
Equity securities
|
—
|
|
|
—
|
|
|
|
|
126
|
|
|
126
|
|
Total
|
$
|
62
|
|
|
$
|
—
|
|
|
|
|
$
|
294
|
|
|
$
|
356
|
|
|
|
|
|
|
|
|
|
|
|
Assets of non-U.S. defined benefit plans:
|
|
|
|
|
|
|
|
|
|
Fixed income securities and cash equivalents
|
$
|
59
|
|
|
$
|
126
|
|
|
|
|
$
|
1,762
|
|
|
$
|
1,947
|
|
Equity securities
|
41
|
|
|
2
|
|
|
|
|
671
|
|
|
714
|
|
Total
|
$
|
100
|
|
|
$
|
128
|
|
|
|
|
$
|
2,433
|
|
|
$
|
2,661
|
|
(a)Consists of bond index and equity index funds, measured at net asset value per share, as well as cash equivalents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
|
|
Other (a)
|
|
Total
|
Assets of U.S. defined benefit plan:
|
|
|
|
|
|
|
|
|
|
Fixed income securities and cash equivalents
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
563
|
|
|
$
|
563
|
|
Equity securities
|
—
|
|
|
—
|
|
|
|
|
306
|
|
|
306
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
869
|
|
|
$
|
869
|
|
|
|
|
|
|
|
|
|
|
|
Assets of U.S. retiree health care plan:
|
|
|
|
|
|
|
|
|
|
Fixed income securities and cash equivalents
|
$
|
59
|
|
|
$
|
—
|
|
|
|
|
$
|
155
|
|
|
$
|
214
|
|
Equity securities
|
—
|
|
|
—
|
|
|
|
|
116
|
|
|
116
|
|
Total
|
$
|
59
|
|
|
$
|
—
|
|
|
|
|
$
|
271
|
|
|
$
|
330
|
|
|
|
|
|
|
|
|
|
|
|
Assets of non-U.S. defined benefit plans:
|
|
|
|
|
|
|
|
|
|
Fixed income securities and cash equivalents
|
$
|
47
|
|
|
$
|
139
|
|
|
|
|
$
|
1,602
|
|
|
$
|
1,788
|
|
Equity securities
|
33
|
|
|
1
|
|
|
|
|
588
|
|
|
622
|
|
Total
|
$
|
80
|
|
|
$
|
140
|
|
|
|
|
$
|
2,190
|
|
|
$
|
2,410
|
|
(a)Consists of bond index and equity index funds, measured at net asset value per share, as well as cash equivalents.
The investments in our major benefit plans largely consist of low-cost, broad-market index funds to mitigate risks of concentration within market sectors. Our investment policy is designed to better match the interest rate sensitivity of the plan assets and liabilities. The appropriate mix of equity and bond investments is determined primarily through the use of detailed asset-liability modeling studies that look to balance the impact of changes in the discount rate against the need to provide asset growth to cover future service cost. Most of our plans around the world have a greater proportion of fixed income securities with return characteristics that are more closely aligned with changes in the liabilities caused by discount rate volatility.
Assumptions and investment policies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined Benefit
|
|
|
|
U.S. Retiree Health Care
|
|
|
|
Non-U.S. Defined Benefit
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted average assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.62%
|
|
|
4.37%
|
|
|
3.63%
|
|
|
4.30%
|
|
|
1.46%
|
|
|
1.85%
|
|
Long-term pay progression
|
3.30%
|
|
|
3.30%
|
|
|
n/a
|
|
n/a
|
|
3.06%
|
|
|
2.96%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.35%
|
|
|
3.77%
|
|
|
4.30%
|
|
|
3.63%
|
|
|
1.85%
|
|
|
1.84%
|
|
Long-term rate of return on plan assets
|
4.90%
|
|
|
4.80%
|
|
|
4.40%
|
|
|
4.10%
|
|
|
3.62%
|
|
|
2.58%
|
|
Long-term pay progression
|
3.30%
|
|
|
3.30%
|
|
|
n/a
|
|
n/a
|
|
3.03%
|
|
|
2.96%
|
|
We utilize a variety of methods to select an appropriate discount rate depending on the depth of the corporate bond market in the country in which the benefit plan operates. In the United States, we use a settlement approach whereby a portfolio of bonds is selected from the universe of actively traded high-quality U.S. corporate bonds. The selected portfolio is designed to provide cash flows sufficient to pay the plan’s expected benefit payments when due. The resulting discount rate reflects the rate of return of the selected portfolio of bonds. For our non-U.S. locations with a sufficient number of actively traded high-quality bonds, an analysis is performed in which the projected cash flows from the defined benefit plans are discounted against a yield curve constructed with an appropriate universe of high-quality corporate bonds available in each country. In this manner, a present value is developed. The discount rate selected is the single equivalent rate that produces the same present value. For countries that lack a sufficient corporate bond market, a government bond index adjusted for an appropriate risk premium is used to establish the discount rate.
Assumptions for the expected long-term rate of return on plan assets are based on future expectations for returns for each asset class and the effect of periodic target asset allocation rebalancing. We adjust the results for the payment of reasonable expenses of the plan from plan assets. We believe our assumptions are appropriate based on the investment mix and long-term nature of the plans’ investments. Assumptions used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries.
The target allocation ranges for the plans that hold a substantial majority of the defined benefit assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined Benefit
|
|
U.S. Retiree Health Care
|
|
Non-U.S. Defined Benefit
|
Fixed income securities and cash equivalents
|
65%
|
|
|
65%
|
|
|
60% – 100%
|
Equity securities
|
35%
|
|
|
35%
|
|
|
0% – 40%
|
We rebalance the plans’ investments when they are outside the target allocation ranges.
Weighted average asset allocations as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined Benefit
|
|
|
|
U.S. Retiree Health Care
|
|
|
|
Non-U.S. Defined Benefit
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Fixed income securities and cash equivalents
|
65%
|
|
|
65%
|
|
|
65%
|
|
|
65%
|
|
|
73%
|
|
|
74%
|
|
Equity securities
|
35%
|
|
|
35%
|
|
|
35%
|
|
|
35%
|
|
|
27%
|
|
|
26%
|
|
None of the plan assets related to the defined benefit pension plans and retiree health care benefit plan are directly invested in TI common stock.
The following assumed future benefit payments to plan participants in the next 10 years are used to measure our benefit obligations. Almost all of the payments, which may vary significantly from these assumptions, will be made from plan assets and not from company assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025 – 2029
|
U.S. Defined Benefit
|
$
|
99
|
|
|
$
|
118
|
|
|
$
|
85
|
|
|
$
|
90
|
|
|
$
|
87
|
|
|
$
|
441
|
|
U.S. Retiree Health Care
|
32
|
|
|
30
|
|
|
29
|
|
|
27
|
|
|
26
|
|
|
115
|
|
Non-U.S. Defined Benefit
|
95
|
|
|
96
|
|
|
99
|
|
|
100
|
|
|
104
|
|
|
542
|
|
Assumed health care cost trend rates for the U.S. retiree health care benefit plan as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Assumed health care cost trend rate for next year
|
7.00%
|
|
|
7.25%
|
|
Ultimate trend rate
|
5.00%
|
|
|
5.00%
|
|
Year in which ultimate trend rate is reached
|
2028
|
|
|
2028
|
|
Deferred compensation plans
We have deferred compensation plans that allow U.S. employees whose base salary and management responsibility exceed a certain level to defer receipt of a portion of their cash compensation. Payments under these plans are made based on the participant’s distribution election and plan balance. Participants can earn a return on their deferred compensation based on notional investments in the same investment funds that are offered in our defined contribution plans.
As of December 31, 2019, our liability to participants of the deferred compensation plans was $298 million and is recorded in other long-term liabilities on our Consolidated Balance Sheets. This amount reflects the accumulated participant deferrals and earnings thereon as of that date. As of December 31, 2019, we held $272 million in mutual funds related to these plans that are recorded in long-term investments on our Consolidated Balance Sheets, and serve as an economic hedge against changes in fair values of our other deferred compensation liabilities. We record changes in the fair value of the liability and the related investment in SG&A as discussed in Note 6.
9. 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 December 31, 2019, we had a variable-rate revolving credit facility from a consortium of investment-grade banks that allows us to borrow up to $2 billion until March 2024. The interest rate on borrowings under this credit facility, if drawn, is indexed to the applicable London Interbank Offered Rate (LIBOR). As of December 31, 2019, our credit facility was undrawn, and we had no commercial paper outstanding.
Long-term debt
We retired $750 million of maturing debt in August 2019.
In March 2019, we issued a principal amount of $750 million of fixed-rate, long-term debt due in 2039. We incurred $7 million of issuance and other related costs. The proceeds of the offering were $743 million, net of the original issuance discount, and were used for general corporate purposes.
In September 2019, we issued a principal amount of $750 million of fixed-rate, long-term debt due in 2029. We incurred $5 million of issuance and other related costs. The proceeds of the offering were $748 million, net of the original issuance discount, and were used for general corporate purposes.
We retired $500 million of maturing debt in May 2018.
In the second quarter of 2018, we issued an aggregate principal amount of $1.5 billion of fixed-rate, long-term debt due in 2048, comprised of the issuance of $1.3 billion in May 2018 and an additional $200 million in June 2018. We incurred $16 million of issuance and other related costs. The proceeds of the offering were $1.5 billion, net of the original issuance discount and premium, and were used for general corporate purposes.
We retired $250 million of maturing debt in March 2017 and another $375 million in June 2017.
In May 2017, we issued an aggregate principal amount of $600 million of fixed-rate, long-term debt. The offering consisted of the reissuance of $300 million of 2.75% notes due in 2021 at a premium and the issuance of $300 million of 2.625% notes due in 2024 at a discount. We incurred $3 million of issuance and other related costs. The proceeds of the offerings were $605 million, net of the original issuance discount and premium, and were used for the repayment of maturing debt and general corporate purposes.
In November 2017, we issued a principal amount of $500 million of fixed-rate, long-term debt due in 2027. We incurred $3 million of issuance and other related costs. The proceeds of the offering were $494 million, net of the original issuance discount, and were used for general corporate purposes.
Long-term debt outstanding is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Notes due 2019 at 1.65%
|
$
|
—
|
|
|
$
|
750
|
|
Notes due 2020 at 1.75%
|
500
|
|
|
500
|
|
Notes due 2021 at 2.75%
|
550
|
|
|
550
|
|
Notes due 2022 at 1.85%
|
500
|
|
|
500
|
|
Notes due 2023 at 2.25%
|
500
|
|
|
500
|
|
Notes due 2024 at 2.625%
|
300
|
|
|
300
|
|
Notes due 2027 at 2.90%
|
500
|
|
|
500
|
|
Notes due 2029 at 2.25%
|
750
|
|
|
—
|
|
Notes due 2039 at 3.875%
|
750
|
|
|
—
|
|
Notes due 2048 at 4.15%
|
1,500
|
|
|
1,500
|
|
Total debt
|
5,850
|
|
|
5,100
|
|
Net unamortized discounts, premiums and issuance costs
|
(47)
|
|
|
(32)
|
|
Total debt, including net unamortized discounts, premiums and issuance costs
|
5,803
|
|
|
5,068
|
|
Current portion of long-term debt
|
(500)
|
|
|
(749)
|
|
Long-term debt
|
$
|
5,303
|
|
|
$
|
4,319
|
|
Interest and debt expense was $170 million, $125 million and $78 million in 2019, 2018 and 2017, respectively. This was net of the amortized discounts, premiums and issuance costs. Cash payments for interest on long-term debt were $156 million, $114 million and $75 million in 2019, 2018 and 2017, respectively. Capitalized interest was not material.
10. Leases
We conduct certain operations in leased facilities and also lease a portion of our data processing and other equipment. In addition, certain long-term supply agreements to purchase industrial gases are accounted for as operating leases. Lease agreements frequently include renewal provisions and require us to pay real estate taxes, insurance and maintenance costs.
Our leases are included as a component of the following balance sheet lines:
|
|
|
|
|
|
|
December 31,
|
|
2019
|
Other long-term assets
|
$
|
337
|
|
|
|
Accrued expenses and other liabilities
|
$
|
73
|
|
Other long-term liabilities
|
259
|
|
Details of our operating leases are as follows:
|
|
|
|
|
|
|
For Year Ended
December 31,
|
|
2019
|
Lease cost related to lease liabilities
|
$
|
66
|
|
Variable lease cost
|
41
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows for lease cost
|
$
|
60
|
|
|
|
Lease assets obtained in exchange for new lease liabilities
|
$
|
167
|
|
|
|
Weighted average remaining lease term
|
8.2 years
|
Weighted average discount rate
|
3.37
|
%
|
As of December 31, 2019, we had committed to make the following minimum payments under our non-cancellable operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Total
|
Lease payments
|
$
|
75
|
|
|
$
|
63
|
|
|
$
|
51
|
|
|
$
|
38
|
|
|
$
|
28
|
|
|
$
|
131
|
|
|
$
|
386
|
|
Imputed lease interest
|
|
|
|
|
|
|
|
|
|
|
|
|
(54)
|
|
Total lease liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
332
|
|
As of December 31, 2018, we had committed to make the following minimum payments under our non-cancellable operating leases, as reported under ASC 840:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
Operating leases
|
$
|
56
|
|
|
$
|
46
|
|
|
$
|
36
|
|
|
$
|
29
|
|
|
$
|
18
|
|
|
$
|
39
|
|
|
$
|
224
|
|
11. Commitments and contingencies
Purchase commitments
Our purchase commitments include payments for software licenses and contractual arrangements with suppliers when there is a fixed, non-cancellable payment schedule or when minimum payments are due with a reduced delivery schedule.
As of December 31, 2019, we had committed to make the following minimum payments under our purchase commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Total
|
Purchase commitments
|
$
|
452
|
|
|
$
|
286
|
|
|
$
|
121
|
|
|
$
|
70
|
|
|
$
|
27
|
|
|
$
|
109
|
|
|
$
|
1,065
|
|
Indemnification guarantees
We routinely sell products with an intellectual property indemnification included in the terms of sale. Historically, we have had only minimal, infrequent losses associated with these indemnities. Consequently, we cannot reasonably estimate any future liabilities that may result.
Warranty costs/product liabilities
We accrue for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability. Historically, we have experienced a low rate of payments on product claims. Although we cannot predict the likelihood or amount of any future claims, we do not believe they will have a material adverse effect on our financial condition, results of operations or liquidity. Our stated warranties for semiconductor products obligate us to repair, replace or credit the purchase price of a covered product back to the buyer. Product claim consideration may exceed the price of our products.
General
We are subject to various legal and administrative proceedings. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity.
12. Supplemental financial information
Restructuring charges/other
Restructuring charges/other are included in Other for segment reporting purposes and are comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Restructuring charges (a)
|
$
|
(15)
|
|
|
$
|
6
|
|
|
$
|
11
|
|
Gains on sales of assets
|
(21)
|
|
|
(3)
|
|
|
—
|
|
Restructuring charges/other
|
$
|
(36)
|
|
|
$
|
3
|
|
|
$
|
11
|
|
(a)Includes severance and benefits, accelerated depreciation, changes in estimates or other exit costs.
Changes in accrued restructuring balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Balance, January 1
|
$
|
28
|
|
|
$
|
29
|
|
|
$
|
40
|
|
Restructuring charges
|
(15)
|
|
|
6
|
|
|
11
|
|
Non-cash items (a)
|
—
|
|
|
(3)
|
|
|
(1)
|
|
Payments
|
(13)
|
|
|
(4)
|
|
|
(21)
|
|
Balance, December 31
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
29
|
|
(a)Reflects charges for impacts of accelerated depreciation and changes in exchange rates.
The restructuring accrual balances are reported as a component of either accrued expenses and other liabilities or other long-term liabilities on our Consolidated Balance Sheets, depending on the expected timing of payment.
In April 2019, we sold our manufacturing facility in Greenock, Scotland.
In January 2020, we announced a multiyear plan to close our two remaining factories with 150-millimeter production, which are more than 50 years old and located in Sherman and Dallas, Texas. Production will be transitioned from these sites to our more advanced and cost-effective 300-millimeter wafer fabrication facilities in North Texas. We expect this transition to be completed in the next three to five years. Charges for these closures cannot be reasonably estimated until a later phase of the transition.
Other income (expense), net (OI&E)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Other income (a)
|
$
|
197
|
|
|
$
|
150
|
|
|
$
|
163
|
|
Other expense (b)
|
(22)
|
|
|
(52)
|
|
|
(88)
|
|
Total
|
$
|
175
|
|
|
$
|
98
|
|
|
$
|
75
|
|
(a)Other income includes interest, royalty and lease income, as well as investment gains and losses.
(b)Other expense includes a portion of pension and other retiree benefit costs. It also includes currency gains and losses, tax interest and miscellaneous items.
Property, plant and equipment at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable Lives (Years)
|
|
December 31,
|
|
|
|
|
|
2019
|
|
2018
|
Land
|
n/a
|
|
$
|
126
|
|
|
$
|
128
|
|
Buildings and improvements
|
5 – 40
|
|
2,504
|
|
|
2,497
|
|
Machinery and equipment
|
2 – 10
|
|
3,110
|
|
|
2,800
|
|
Total
|
|
|
$
|
5,740
|
|
|
$
|
5,425
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Long-term portion of transition tax on indefinitely reinvested earnings
|
$
|
506
|
|
|
$
|
506
|
|
Uncertain tax positions
|
303
|
|
|
286
|
|
Deferred compensation plans
|
298
|
|
|
246
|
|
Operating lease liabilities
|
259
|
|
|
—
|
|
Other
|
148
|
|
|
152
|
|
Total
|
$
|
1,514
|
|
|
$
|
1,190
|
|
Accumulated other comprehensive income (loss), net of taxes (AOCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Postretirement benefit plans:
|
|
|
|
Net actuarial loss
|
$
|
(347)
|
|
|
$
|
(473)
|
|
Prior service credit
|
2
|
|
|
2
|
|
Cash flow hedge derivative instruments
|
(2)
|
|
|
(2)
|
|
Total
|
$
|
(347)
|
|
|
$
|
(473)
|
|
Details on amounts reclassified out of accumulated other comprehensive income (loss), net of taxes, to net income
Our Consolidated Statements of Comprehensive Income include items that have been recognized within net income in 2019, 2018 and 2017. The table below details where these transactions are recorded in our Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
|
|
Impact to Related Statement of Income Lines
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Net actuarial losses of defined benefit plans:
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss and settlement losses (a)
|
|
$
|
51
|
|
|
$
|
65
|
|
|
$
|
83
|
|
|
Decrease to OI&E
|
Tax effect
|
|
(13)
|
|
|
(15)
|
|
|
(27)
|
|
|
Decrease to provision for income taxes
|
Recognized within net income, net of taxes
|
|
$
|
38
|
|
|
$
|
50
|
|
|
$
|
56
|
|
|
Decrease to net income
|
|
|
|
|
|
|
|
|
|
Prior service credit of defined benefit plans:
|
|
|
|
|
|
|
|
|
Amortization of prior service credit (a)
|
|
$
|
—
|
|
|
$
|
(4)
|
|
|
$
|
(6)
|
|
|
Increase to OI&E
|
Tax effect
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Increase to provision for income taxes
|
Recognized within net income, net of taxes
|
|
$
|
—
|
|
|
$
|
(3)
|
|
|
$
|
(5)
|
|
|
Increase to net income
|
|
|
|
|
|
|
|
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
Amortization of treasury-rate locks
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Increase to interest and debt expense
|
Tax effect
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Decrease to provision for income taxes
|
Recognized within net income, net of taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Decrease to net income
|
(a)Detailed in Note 8.
13. Quarterly financial data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarters
|
|
|
|
|
|
|
|
2018 Quarters
|
|
|
|
|
|
|
|
4th
|
|
3rd
|
|
2nd
|
|
1st
|
|
4th
|
|
3rd
|
|
2nd
|
|
1st
|
Revenue
|
$
|
3,350
|
|
|
$
|
3,771
|
|
|
$
|
3,668
|
|
|
$
|
3,594
|
|
|
$
|
3,717
|
|
|
$
|
4,261
|
|
|
$
|
4,017
|
|
|
$
|
3,789
|
|
Gross profit
|
2,097
|
|
|
2,446
|
|
|
2,360
|
|
|
2,261
|
|
|
2,407
|
|
|
2,804
|
|
|
2,619
|
|
|
2,447
|
|
Included in operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition charges
|
50
|
|
|
79
|
|
|
80
|
|
|
79
|
|
|
79
|
|
|
80
|
|
|
79
|
|
|
80
|
|
Restructuring charges/other
|
—
|
|
|
—
|
|
|
(36)
|
|
|
—
|
|
|
(2)
|
|
|
1
|
|
|
3
|
|
|
1
|
|
Operating profit
|
1,249
|
|
|
1,589
|
|
|
1,506
|
|
|
1,379
|
|
|
1,516
|
|
|
1,937
|
|
|
1,712
|
|
|
1,548
|
|
Net income
|
1,070
|
|
|
1,425
|
|
|
1,305
|
|
|
1,217
|
|
|
1,239
|
|
|
1,570
|
|
|
1,405
|
|
|
1,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
1.14
|
|
|
$
|
1.51
|
|
|
$
|
1.38
|
|
|
$
|
1.29
|
|
|
$
|
1.29
|
|
|
$
|
1.61
|
|
|
$
|
1.43
|
|
|
$
|
1.38
|
|
Diluted EPS
|
$
|
1.12
|
|
|
$
|
1.49
|
|
|
$
|
1.36
|
|
|
$
|
1.26
|
|
|
$
|
1.27
|
|
|
$
|
1.58
|
|
|
$
|
1.40
|
|
|
$
|
1.35
|
|
Report of independent registered public accounting firm
To the Shareholders and the Board of Directors of Texas Instruments Incorporated
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Texas Instruments Incorporated (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 20, 2020 expressed an unqualified opinion thereon.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Uncertain tax positions
|
|
|
|
|
|
Description of the matter
|
As discussed in Note 4 to the consolidated financial statements, the Company operates in the United States and multiple international tax jurisdictions, and its income tax returns are subject to examination by tax authorities in those jurisdictions who may challenge any tax position on these returns. Uncertainty in a tax position may arise because tax laws are subject to interpretation. The Company uses significant judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition. Auditing management’s estimate of the amount of tax benefit that qualifies for recognition involved auditor judgment because management’s estimate is complex, requires a high degree of judgment and is based on interpretations of tax laws and legal rulings.
|
|
|
How we addressed the matter in our audit
|
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting process for uncertain tax positions. For example, this included controls over the Company’s assessment of the technical merits of tax positions and management’s process to measure the benefit of those tax positions. Among other procedures performed, we involved our tax professionals to assess the technical merits of the Company’s tax positions. This included assessing the Company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. We also evaluated the appropriateness of the Company’s accounting for its tax positions taking into consideration relevant international and local income tax laws and legal rulings. We analyzed the Company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. We also evaluated the adequacy of the Company’s financial statement disclosures in Note 4 to the consolidated financial statements related to these tax matters.
|
We have served as the Company’s auditor since 1952.
Dallas, Texas
February 20, 2020