Description of business and significant accounting policies and practices

9 Months Ended

Sep. 30, 2012

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Description of business and significant accounting policies and practices

Description of business and significant accounting policies and practices

At Texas Instruments (TI), we design and make semiconductors that we sell to electronics designers and manufacturers all over the world.

Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP) and on the same basis as the audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2011.  The consolidated statements of income, statements of comprehensive income and statements of cash flows for the periods ended September 30, 2012 and 2011, and the balance sheet as of September 30, 2012, are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown.  Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period presentation.  Certain information and note disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission.  Because the consolidated interim financial statements do not include all of the information and notes required by U.S. GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2011.  The results for the three- and nine-month periods are not necessarily indicative of a full year’s results.

The consolidated financial statements include the accounts of all subsidiaries.  All intercompany balances and transactions have been eliminated in consolidation.  All dollar amounts in the financial statements and tables in these notes, except per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated.

Acquisition

On September 23, 2011, we completed the acquisition of National Semiconductor Corporation (National). We accounted for this transaction under Accounting Standards Codification (ASC) 805 - Business Combinations, and the consolidated financial statements include the balances and results of operations of National from the date of acquisition. National’s operating results are included in the Analog segment. See Note 2 for further information.

Earnings per share (EPS)

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

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

	For Three Months Ended September 30, 2012						For Three Months Ended September 30, 2011
	Net Income			Shares	EPS		Net Income			Shares	EPS
Basic EPS:
Net income	$	784					$	601
Less income allocated to RSUs	(15		)				(10		)
Income allocated to common stock for basic EPS calculation	$	769		1,130	$	.68	$	591		1,144	$	.52
Adjustment for dilutive shares:
Stock-based compensation plans				11						13
Diluted EPS:
Net income	$	784					$	601
Less income allocated to RSUs	(14		)				(10		)
Income allocated to common stock for diluted EPS calculation	$	770		1,141	$	.67	$	591		1,157	$	.51

	For Nine Months Ended September 30, 2012						For Nine Months Ended September 30, 2011
	Net Income			Shares	EPS		Net Income			Shares	EPS
Basic EPS:
Net income	$	1,495					$	1,938
Less income allocated to RSUs	(27		)				(30		)
Income allocated to common stock for basic EPS calculation	$	1,468		1,138	$	1.29	$	1,908		1,156	$	1.65
Adjustment for dilutive shares:
Stock-based compensation plans				15						21
Diluted EPS:
Net income	$	1,495					$	1,938
Less income allocated to RSUs	(27		)				(29		)
Income allocated to common stock for diluted EPS calculation	$	1,468		1,153	$	1.27	$	1,909		1,177	$	1.62

Potentially dilutive securities representing 65 million and 55 million shares of common stock that were outstanding during the third quarters of 2012 and 2011, respectively, and 65 million and 56 million shares outstanding during the first nine months of 2012 and 2011, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive.

Derivatives and hedging

We have an interest rate swap, entered into in connection with the issuance of variable-rate long-term debt in May 2011, which is designated as a hedge of the variability of cash flows related to interest payments. See Note 9 for additional information. Gains and losses from changes in the fair value of the interest rate swap are credited or charged to Accumulated other comprehensive income (loss), net of taxes (AOCI).

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

We do not use derivatives for speculative or trading purposes.

Fair values of financial instruments

The fair values of our derivative financial instruments were not significant at September 30, 2012.  Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our deferred compensation liabilities, are carried at fair value and are discussed in Note 6.  The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. The carrying value of our long-term debt approximates the fair value as measured using broker-dealer quotes, which are level 2 inputs. See Note 6 for the definition of level 2 inputs.