Item 8. Financial Statements and Supplementary Data.

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List of Financial Statements (Item 15(a))

Income for each of the three years in the period ended December 31, 2016
Comprehensive income for each of the three years in the period ended December 31, 2016
Balance sheets at December 31, 2016 and 2015
Cash flows for each of the three years in the period ended December 31, 2016
Stockholders’ equity for each of the three years in the period ended December 31, 2016

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.

Consolidated Statements of Income		For Years Ended December 31,
(Millions of dollars, except share and per-share amounts)		2016					2015					2014
Revenue		$		13,370			$		13,000			$		13,045
Cost of revenue (COR)				5,130					5,440					5,618
Gross profit				8,240					7,560					7,427
Research and development (R&D)				1,370					1,280					1,358
Selling, general and administrative (SG&A)				1,767					1,748					1,843
Acquisition charges				319					329					330
Restructuring charges/other				(15	)				(71	)				(51	)
Operating profit				4,799					4,274					3,947
Other income (expense), net (OI&E)				211					32					21
Interest and debt expense				80					90					94
Income before income taxes				4,930					4,216					3,874
Provision for income taxes				1,335					1,230					1,053
Net income		$		3,595			$		2,986			$		2,821
Earnings per common share (EPS):
Basic		$		3.54			$		2.86			$		2.61
Diluted		$		3.48			$		2.82			$		2.57
Average shares outstanding (millions):
Basic				1,003					1,030					1,065
Diluted				1,021					1,043					1,080
Cash dividends declared per common share		$		1.64			$		1.40			$		1.24
As a result of accounting rule ASC 260, which requires a portion of Net income to be allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents, diluted EPS is calculated using the following:
Net income		$		3,595			$		2,986			$		2,821
Income allocated to RSUs				(44	)				(42	)				(43	)
Income allocated to common stock for diluted EPS		$		3,551			$		2,944			$		2,778
See accompanying notes.

Consolidated Statements of Comprehensive Income		For Years Ended December 31,
(Millions of dollars)		2016					2015					2014
Net income		$		3,595			$		2,986			$		2,821
Other comprehensive income (loss)
Net actuarial gains (losses) of defined benefit plans:
Adjustment, net of tax benefit (expense) of $6, $36 and $25				(43	)				(74	)				(46	)
Recognized within Net income, net of tax benefit (expense) of ($25), ($25) and ($21)				51					53					42
Prior service (cost) credit of defined benefit plans:
Adjustment, net of tax benefit (expense) of $0, ($11) and $0				—					20					(1	)
Recognized within Net income, net of tax benefit (expense) of $2, $0 and $0				(3	)				—					—
Derivative instruments:
Recognized within Net income, net of tax benefit (expense) of $0, ($1) and ($1)				1					1					1
Other comprehensive income (loss), net of taxes				6					—					(4	)
Total comprehensive income		$		3,601			$		2,986			$		2,817
See accompanying notes.

Consolidated Balance Sheets		December 31,
(Millions of dollars, except share amounts)		2016					2015
Assets
Current assets:
Cash and cash equivalents		$		1,154			$		1,000
Short-term investments				2,336					2,218
Accounts receivable, net of allowances of ($17) and ($7)				1,267					1,165
Raw materials				102					109
Work in process				954					846
Finished goods				734					736
Inventories				1,790					1,691
Prepaid expenses and other current assets				910					1,000
Total current assets				7,457					7,074
Property, plant and equipment at cost				4,923					5,465
Accumulated depreciation				(2,411	)				(2,869	)
Property, plant and equipment, net				2,512					2,596
Long-term investments				235					221
Goodwill, net				4,362					4,362
Acquisition-related intangibles, net				1,264					1,583
Deferred income taxes				374					201
Capitalized software licenses, net				52					46
Overfunded retirement plans				96					85
Other assets				79					62
Total assets		$		16,431			$		16,230
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt		$		631			$		1,000
Accounts payable				396					386
Accrued compensation				710					664
Income taxes payable				83					95
Accrued expenses and other liabilities				444					410
Total current liabilities				2,264					2,555
Long-term debt				2,978					3,120
Underfunded retirement plans				129					196
Deferred income taxes				33					37
Deferred credits and other liabilities				554					376
Total liabilities				5,958					6,284
Stockholders’ equity:
Preferred stock, $25 par value. Authorized – 10,000,000 shares
Participating cumulative preferred. None issued.				—					—
Common stock, $1 par value. Authorized – 2,400,000,000 shares
Shares issued – 1,740,815,939				1,741					1,741
Paid-in capital				1,674					1,629
Retained earnings				33,107					31,176
Treasury common stock at cost
Shares: 2016 – 744,831,978; 2015 – 729,547,527				(25,523	)				(24,068	)
Accumulated other comprehensive income (loss), net of taxes (AOCI)				(526	)				(532	)
Total stockholders’ equity				10,473					9,946
Total liabilities and stockholders’ equity		$		16,431			$		16,230
See accompanying notes.

Consolidated Statements of Cash Flows		For Years Ended December 31,
(Millions of dollars)		2016					2015					2014
Cash flows from operating activities
Net income		$		3,595			$		2,986			$		2,821
Adjustments to Net income:
Depreciation				605					766					850
Amortization of acquisition-related intangibles				319					319					321
Amortization of capitalized software				31					48					59
Stock compensation				252					286					277
Gains on sales of assets				(40	)				(85	)				(73	)
Deferred income taxes				(202	)				(55	)				(61	)
Increase (decrease) from changes in:
Accounts receivable				(108	)				77					(49	)
Inventories				(99	)				93					(53	)
Prepaid expenses and other current assets				(81	)				94					65
Accounts payable and accrued expenses				72					(142	)				(132	)
Accrued compensation				36					7					89
Income taxes payable				333					11					(81	)
Changes in funded status of retirement plans				(73	)				(23	)				(58	)
Other				(26	)				15					79
Cash flows from operating activities				4,614					4,397					4,054
Cash flows from investing activities
Capital expenditures				(531	)				(551	)				(385	)
Proceeds from asset sales				—					110					142
Purchases of short-term investments				(3,503	)				(2,767	)				(3,107	)
Proceeds from short-term investments				3,390					2,892					2,966
Other				(6	)				14					7
Cash flows from investing activities				(650	)				(302	)				(377	)
Cash flows from financing activities
Proceeds from issuance of long-term debt				499					498					498
Repayment of debt				(1,000	)				(1,000	)				(1,000	)
Dividends paid				(1,646	)				(1,444	)				(1,323	)
Stock repurchases				(2,132	)				(2,741	)				(2,831	)
Proceeds from common stock transactions				472					396					554
Other				(3	)				(3	)				(3	)
Cash flows from financing activities				(3,810	)				(4,294	)				(4,105	)
Net change in Cash and cash equivalents				154					(199	)				(428	)
Cash and cash equivalents at beginning of period				1,000					1,199					1,627
Cash and cash equivalents at end of period		$		1,154			$		1,000			$		1,199
See accompanying notes.

																	Treasury
		Common					Paid-in					Retained					Common
Consolidated Statements of Stockholders' Equity		Stock					Capital					Earnings					Stock					AOCI
(Millions of dollars, except per-share amounts)
Balance, December 31, 2013		$		1,741			$		1,211			$		28,173			$		(19,790	)		$		(528	)
2014
Net income				—					—					2,821					—					—
Dividends declared and paid ($1.24 per share)				—					—					(1,323	)				—					—
Common stock issued for stock-based awards				—					(226	)				—					781					—
Stock repurchases				—					—					—					(2,831	)				—
Stock compensation				—					277					—					—					—
Excess tax benefit for stock compensation				—					110					—					—					—
Other comprehensive income (loss), net of taxes				—					—					—					—					(4	)
Dividend equivalents paid on restricted stock units				—					—					(18	)				—					—
Other				—					(4	)				—					—					—
Balance, December 31, 2014				1,741					1,368					29,653					(21,840	)				(532	)
2015
Net income				—					—					2,986					—					—
Dividends declared and paid ($1.40 per share)				—					—					(1,444	)				—					—
Common stock issued for stock-based awards				—					(116	)				—					513					—
Stock repurchases				—					—					—					(2,741	)				—
Stock compensation				—					286					—					—					—
Excess tax benefit for stock compensation				—					90					—					—					—
Other comprehensive income (loss), net of taxes				—					—					—					—					—
Dividend equivalents paid on restricted stock units				—					—					(19	)				—					—
Other				—					1					—					—					—
Balance, December 31, 2015				1,741					1,629					31,176					(24,068	)				(532	)
2016
Net income				—					—					3,595					—					—
Dividends declared and paid ($1.64 per share)				—					—					(1,646	)				—					—
Common stock issued for stock-based awards				—					(204	)				—					677					—
Stock repurchases				—					—					—					(2,132	)				—
Stock compensation				—					252					—					—					—
Other comprehensive income (loss), net of taxes				—					—					—					—					6
Dividend equivalents paid on restricted stock units				—					—					(18	)				—					—
Other				—					(3	)				—					—					—
Balance, December 31, 2016		$		1,741			$		1,674			$		33,107			$		(25,523	)		$		(526	)
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. For 2016, we have two reportable segments, which are established along major categories of products as follows:

	•	Analog – consisting of the following product lines: High Volume Analog & Logic, Power Management, High Performance Analog and Silicon Valley Analog.

	•	Embedded Processing – consisting of the following product lines: Processors, Microcontrollers and Connectivity.

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, custom ASICs and royalties received from agreements involving license rights to our patent portfolio.

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 13); restructuring charges (see Note 3); 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. The assets and liabilities associated with these organizations are included in Other.

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 the same as those described below in the summary of significant accounting policies and practices.

Segment information

	For Years Ended December 31,
	2016					2015					2014
Revenue:
Analog	$		8,536			$		8,339			$		8,104
Embedded Processing			3,023					2,787					2,740
Other			1,811					1,874					2,201
Total revenue	$		13,370			$		13,000			$		13,045
Operating profit:
Analog	$		3,380			$		3,048			$		2,786
Embedded Processing			801					596					384
Other			618					630					777
Total operating profit	$		4,799			$		4,274			$		3,947

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 revenue information is not necessarily indicative of the geographic area in which the end applications containing our products are ultimately consumed because our products tend to be shipped to the locations where our customers manufacture their products. Specifically, many of our products are shipped to our customers in China who may include these parts in the manufacture of their own end products, which they may in turn export to their customers around the world.

	For Years Ended December 31,
	2016					2015					2014
Revenue:
United States	$		1,682			$		1,612			$		1,625
Asia (a)			8,024					7,910					7,915
Europe, Middle East and Africa			2,393					2,163					2,294
Japan			1,040					1,127					1,032
Rest of world			231					188					179
Total revenue	$		13,370			$		13,000			$		13,045

(a)	Revenue from products shipped into China, including Hong Kong, was $6.0 billion in 2016, $5.8 billion in 2015 and $5.7 billion in 2014.

	December 31,
	2016					2015					2014
Property, plant and equipment, net:
United States	$		1,372			$		1,370			$		1,436
Asia (a)			908					958					1,096
Europe, Middle East and Africa			98					130					162
Japan			115					122					124
Rest of world			19					16					22
Total property, plant and equipment, net	$		2,512			$		2,596			$		2,840

(a)	Property, plant and equipment, net, at our two sites in the Philippines was $412 million, $471 million and $546 million as of December 31, 2016, 2015 and 2014, respectively.

Major customer

No end customer accounted for 10 percent or more of revenue in 2016 or 2014. In 2015, Apple Inc. accounted for approximately 11 percent of revenue, recognized primarily in our Analog segment.

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 adoption of a new accounting standard in the fourth quarter of 2016 related to stock compensation, which includes certain provisions applied prospectively. See Changes in accounting standards for further information.

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 2016 presentation, retrospectively applying certain provisions of the new accounting standard related to stock compensation.

The preparation of financial statements requires the use of estimates from which final results may vary.

Significant accounting policies and practices

Revenue recognition

We recognize revenue from sales of our products, including sales to our distributors, when title and risk of loss pass, which usually occurs upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order; when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. For sales to distributors, payment is due on our standard commercial terms and is not contingent upon resale of the products.

Revenue from sales of our products that are subject to inventory consignment agreements, including consignment arrangements with distributors, is recognized in accordance with the principles discussed above. Delivery occurs when the customer or distributor pulls product from consignment inventory that we store at designated locations.

We recognize revenue net of allowances, which are management’s estimates of future credits to be granted to customers or distributors under programs common in the semiconductor industry. These allowances, which are not material, generally include volume-based incentives, product returns due to quality issues, incentives designed to maximize growth opportunities and special pricing arrangements. Allowances are based on analysis of historical data, current economic conditions 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.

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 the accounts receivable aging. When collection is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made.

We recognize in revenue shipping fees, if any, received from customers. We include shipping and handling costs in COR. 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 $44 million in 2016, $46 million in 2015 and $45 million in 2014.

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.

Earnings per share (EPS)

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

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

	For Years Ended December 31,
	2016														2015														2014
	Net														Net														Net
	Income				Shares					EPS					Income				Shares					EPS					Income				Shares					EPS
Basic EPS:
Net income	$		3,595												$		2,986												$		2,821
Income allocated to RSUs			(45	)													(43	)													(44	)
Income allocated to common stock for basic EPS calculation	$		3,550				1,003			$		3.54			$		2,943				1,030			$		2.86			$		2,777				1,065			$		2.61
Adjustment for dilutive shares:
Stock compensation plans							18														13														15
Diluted EPS:
Net income	$		3,595												$		2,986												$		2,821
Income allocated to RSUs			(44	)													(42	)													(43	)
Income allocated to common stock for diluted EPS calculation	$		3,551				1,021			$		3.48			$		2,944				1,043			$		2.82			$		2,778				1,080			$		2.57

No potentially dilutive securities were excluded from the computation of diluted earnings per common share during 2016. Potentially dilutive securities representing 12 million and 11 million shares of common stock that were outstanding in 2015 and 2014, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive.

Investments

We present investments on our Consolidated Balance Sheets as cash equivalents, short-term investments or long-term investments. Specific details are as follows:

	•	Cash equivalents and short-term investments: We consider investments in debt securities with maturities of 90 days or less from the date of our investment to be cash equivalents. We consider investments in debt securities with maturities beyond 90 days from the date of our investment as being available for use in current operations and include 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.

	•	Classification of investments: Depending on our reasons for holding the investment and our ownership percentage, we classify our investments as either available for sale, trading, equity method or cost method, which are more fully described in Note 8. We determine cost or amortized cost, as appropriate, on a specific identification basis.

Inventories

Inventories are stated at the lower of cost or estimated net realizable value. Cost is generally computed on a currently adjusted standard cost basis, which approximates cost on a first-in first-out basis. Standard cost is based on the normal utilization of installed factory capacity. Cost associated with underutilization of capacity is expensed as incurred. Inventory held at consignment locations is included in our finished goods inventory. Consigned inventory was $334 million and $275 million as of December 31, 2016 and 2015, respectively.

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 and indefinite-lived intangibles

Goodwill is not amortized but is reviewed for impairment annually or more frequently if certain impairment indicators arise. We perform our annual goodwill impairment 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 9 for additional information.

Foreign currency

The functional currency for our non-U.S. subsidiaries is the U.S. dollar. Accounts recorded in currencies other than the U.S. dollar are remeasured into the functional currency. Current assets (except inventories), deferred income taxes, other assets, current liabilities and long-term liabilities are remeasured at exchange rates in effect at the end of each reporting period. Property, plant and equipment with associated depreciation and inventories are 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. See Note 13 for additional information.

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 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

In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This standard removes the requirement to categorize within the fair value hierarchy certain investments for which fair value is not readily available but measured using the net asset value per share. This standard was effective beginning January 1, 2016, and prior period amounts have been retrospectively adjusted for consistency in presentation. Our adoption of this standard only affects our presentation of fair values of postretirement plan assets in Note 10 and does not impact our financial position and results of operations.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard provides for several changes to the accounting for stock compensation, including a requirement that certain income-tax effects of awards be recognized in Net income in the period in which the awards are settled or vested, rather than recognized as Paid-in capital in the equity section of the balance sheet. The standard also changes the presentation of excess tax benefits and statutory tax withholdings in the statement of cash flows. This standard is effective for interim and annual periods beginning January 1, 2017; however, early adoption is permitted. We elected to adopt this standard in the fourth quarter of 2016, which requires us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the adoption. Each of the provisions within this standard has its own specified transition method; some have been applied prospectively and others have been applied on a retrospective basis.

The primary effects of early adoption on our financial statements are as follows:

	•	Income statement effects: Prospective basis – Net excess tax benefits and deficiencies will now be included in Provision for income taxes, rather than in Paid-in capital. The new standard requires this to be adopted on a prospective basis, with an initial adjustment to interim periods in the year of adoption. We recorded adjustments within Provision for income taxes, rather than in Paid-in capital, for excess tax benefits of $43 million, $40 million and $50 million for the first, second and third quarters of 2016, respectively. Excess tax benefits for the fourth quarter of 2016 were $17 million, for a total of $150 million recognized for all of 2016. See Note 6 for more information on income taxes. This standard also affects the average shares outstanding used in the diluted EPS calculation. The effects of these adjustments are shown in the table below. Results for prior annual periods were not affected.

	•	Cash flow effects: Retrospective basis – Excess tax benefits are now included in Cash flows from operating activities rather than Cash flows from financing activities in our Consolidated Statements of Cash Flows. We elected to apply this change in presentation retrospectively, and thus, prior periods have been adjusted. Taxes paid for employee shares withheld upon the vesting of RSUs are now included in Cash flows from financing activities in our Consolidated Statements of Cash Flows. This change is required to be applied retrospectively, and thus, prior periods have been adjusted.

Under this standard, entities are permitted to make an accounting policy election to either estimate forfeitures on stock compensation awards, as previously required, or to recognize forfeitures as they occur. We elected not to change our policy on accounting for forfeitures and will continue to estimate forfeitures expected to occur in determining the amount of compensation cost to be recognized in each period.

The effects of our adoption of the new standard on our unaudited quarterly results for 2016 are as follows:

	Quarter
	1st										2nd										3rd
	Reported					Recast					Reported					Recast					Reported					Recast
Income statement data:
Provision for income taxes	$		282			$		239			$		323			$		283			$		413			$		363
Net income			668					711					779					819					968					1,018
Average diluted shares outstanding, in millions			1,018					1,022					1,016					1,020					1,017					1,023
Basic EPS	$		0.65			$		0.70			$		0.77			$		0.81			$		0.95			$		1.00
Diluted EPS	$		0.65			$		0.69			$		0.76			$		0.79			$		0.94			$		0.98
Cash flow data:
Cash flows from operating activities	$		547			$		653			$		1,069			$		1,109			$		1,413			$		1,465
Cash flows from financing activities			(839	)				(945	)				(1,180	)				(1,220	)				(676	)				(728	)

Certain annual cash flow information has also been adjusted to reflect select aspects of the new standard that are applied retrospectively. The impact to our previously reported annual results is as follows:

	For Years Ended December 31,
	2015										2014
	Reported					Recast					Reported					Recast
Cash flows from operating activities	$		4,268			$		4,397			$		3,892			$		4,054
Cash flows from financing activities			(4,165	)				(4,294	)				(3,943	)				(4,105	)

Standards not yet adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. It is effective for annual and interim reporting periods beginning after December 15, 2017. This standard permits early adoption, but not before December 15, 2016, and permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the potential impact of this standard on our financial position and results of operations, as well as our selected transition method. Based on our preliminary assessment, we believe the new standard will not have a material impact on our financial position and results of operations, as we do not expect to change the manner or timing of recognizing revenue on a majority of our revenue transactions. We recognize revenue on sales to customers and distributors upon satisfaction of our performance obligations when the goods are shipped. For consignment sales, we recognize revenue when the goods are pulled from consignment inventory.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Under this standard, all equity investments except those accounted for under the equity method are required to be measured at fair value. Equity investments that do not have a readily determinable fair value may, as a practical expedient, be measured at cost, adjusted for changes in observable prices minus impairment. This standard is effective for our interim and annual periods beginning January 1, 2018. We do not expect this standard to have a material impact on our financial position and results of operations, as nearly all of our equity investments are already recorded at fair value or under the equity method.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires all leases that have a term of over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard will be effective for our interim and annual periods beginning January 1, 2019, and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently evaluating the timing of adoption and the potential impact of this standard on our financial position, but we do not expect it to have a material impact on our results of operations.

In June 2016, the FASB issued 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 having been incurred. There are other provisions within the standard that affect how impairments of other financial assets may be recorded and presented, and that expand disclosures. This standard will be effective for our interim and annual periods beginning after December 15, 2019, and permits earlier application but not before December 15, 2018. The standard will be applied using a modified retrospective approach. We are currently evaluating the potential impact of this standard, but we do not expect it to have a material impact on our financial position and results of operations.

3. Restructuring charges/other

Restructuring charges/other is comprised of the following components:

	For Years Ended December 31,
	2016					2015					2014
Restructuring charges (a)	$		25			$		14			$		20
Gains on sales of assets			(40	)				(83	)				(75	)
Other			—					(2	)				4
Restructuring charges/other	$		(15	)		$		(71	)		$		(51	)

(a)	Includes severance and benefits, accelerated depreciation, changes in estimates or other exit costs.

Restructuring charges/other are recognized in Other for segment reporting purposes.

Restructuring charges

In the fourth quarter of 2016, we recognized $18 million of restructuring charges for severance and benefit costs related to the reorganization of product lines that we announced in January 2017. As of December 31, 2016, no payments have been made.

We announced in January 2016 our intentions to phase out through the end of 2018 a manufacturing facility in Greenock, Scotland. We are moving production from this facility to more cost-effective 200-millimeter TI manufacturing facilities in Germany, Japan and Maine. Total restructuring charges, primarily severance and related benefit costs associated with the expected reduction of about 350 jobs, are estimated to be about $40 million. We recognized charges of $7 million in 2016 and $17 million in 2015. These charges were comprised of severance and benefits costs, as well as accelerated depreciation. The remaining charges are expected to be recognized through the end of 2018.

The 2014 restructuring charges were related to prior actions in Embedded Processing and Japan. These actions have been completed.

Changes in accrued restructuring balances

	2016					2015					2014
Balance, January 1	$		32			$		57			$		161
Restructuring charges			25					14					20
Non-cash items (a)			(6	)				—					—
Payments			(11	)				(39	)				(124	)
Balance, December 31	$		40			$		32			$		57

(a)	Reflects charges for impacts of accelerated depreciation and changes in exchange rates.

Gains on sales of assets

In 2016, we recognized a gain of $40 million on the sale of intellectual property.

We recognized $83 million of gains on sales of assets in 2015. This included $48 million associated with the sale of a site in Plano, Texas, and $34 million associated with the sale of a manufacturing facility in Houston, Texas.

We recognized $75 million of gains on sales of assets in 2014. This consisted of $30 million associated with the sale of a site in Nice, France; $28 million associated with the sales of real estate in Santa Clara, California; and $17 million of asset sales associated primarily with factory closures in Houston, Texas, and Hiji, Japan.

4. Stock compensation

We have stock options outstanding to participants under long-term incentive plans. We also have assumed stock options that were granted by companies that we later acquired. Unless the options are acquisition-related replacement options, the option price per share may not be less than the fair market value of our common stock on the date of the grant. The options have a 10-year term and generally vest ratably over four years. Our options continue to vest after the option recipient retires.

We also have RSUs outstanding under long-term incentive plans. Each RSU represents the right to receive one share of TI common stock on the vesting date, which is generally four years after the date of grant. Upon vesting, the shares are issued without payment by the grantee. Our 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 deferred compensation accounts established for such directors.

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

Total stock compensation expense recognized is as follows:

	For Years Ended December 31,
	2016					2015					2014
COR	$		40			$		47			$		48
R&D			60					60					62
SG&A			152					169					156
Acquisition charges			—					10					11
Total	$		252			$		286			$		277

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

We issue awards of non-qualified stock options with graded vesting provisions (e.g., 25 percent per year for four years). We recognize the related compensation expense on a straight-line basis over the minimum service period required for vesting of the award, adjusting for expected forfeiture activity. Awards issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis.

Our RSUs generally vest four years after the date of grant. We recognize the related compensation expense on a straight-line basis over the vesting period, adjusting for expected forfeiture activity. RSUs issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis.

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,
	2016					2015					2014
Weighted average grant date fair value, per share	$		10.03			$		9.49			$		8.13
Weighted average assumptions used:
Expected volatility			25	%				22	%				22	%
Expected lives (in years)			7.3					7.3					7.3
Risk-free interest rates			1.72	%				1.64	%				2.45	%
Expected dividend yields			2.87	%				2.52	%				2.72	%

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 employee stock purchase plan 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
					Weighted Average									Weighted Average
					Exercise Price									Grant Date Fair
	Shares				per Share					Shares				Value per Share
Outstanding grants, December 31, 2015		56,773,983			$		37.45				16,055,542			$		38.51
Granted		10,974,304					53.02				2,337,976					53.98
Vested RSUs		—					—				(5,639,666	)				31.64
Forfeited and expired		(965,893	)				48.12				(421,473	)				42.63
Exercised		(14,516,606	)				32.51				—					—
Outstanding grants, December 31, 2016		52,265,788					41.89				12,332,379					44.44

The weighted average grant date fair values per share of RSUs granted in 2016, 2015 and 2014 were $53.98, $53.22 and $44.71, respectively. In 2016, 2015 and 2014, the total grant date fair values of shares vested from RSU grants were $178 million, $114 million and $133 million, respectively.

Summarized information about stock options outstanding as of December 31, 2016, is as follows:

			Stock Options Outstanding													Options Exercisable
			Number				Weighted Average				Weighted Average					Number				Weighted Average
Exercise Price			Outstanding				Remaining Contractual				Exercise Price					Exercisable				Exercise Price
Range			(Shares)				Life (Years)				per Share					(Shares)				per Share
$	14.47 to 20.00			1,996,801				2.1			$		14.96				1,996,801			$		14.96
	20.01 to 30.00			5,130,177				2.6					24.59				5,130,177					24.59
	30.01 to 40.00			14,126,454				5.3					33.06				11,328,597					33.12
	40.01 to 50.00			9,854,196				7.1					44.10				3,544,639					44.10
	50.01 to 60.00			21,103,396				8.6					53.44				2,017,172					53.96
	60.01 to 71.27			54,764				9.7					71.00				—					—
	14.47 to 71.27			52,265,788				6.6					41.89				24,017,386					33.16

In 2016, 2015 and 2014, 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 $424 million, $290 million and $367 million, respectively.

Summarized information as of December 31, 2016, 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					Options
	Expected to Vest) (a)					Exercisable
Number of outstanding (shares)			50,994,139					24,017,386
Weighted average remaining contractual life (in years)			6.5					4.9
Weighted average exercise price per share	$		41.63			$		33.16
Intrinsic value (millions of dollars)	$		1,598			$		956

(a)	Includes effects of expected forfeitures of approximately 1 million shares. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $1,624 million.

As of December 31, 2016, the total future compensation cost related to equity awards not yet recognized in our Consolidated Statements of Income was $250 million, consisting of $111 million related to unvested stock options and $139 million related to unvested RSUs. The $250 million is expected to be recognized as follows: $129 million in 2017, $80 million in 2018, $37 million in 2019 and $4 million in 2020.

Director deferred compensation

Directors who retire or resign from the board may receive stock distributions for compensation they elected to defer. Director deferred stock activity is as follows:

	Director Deferred Stock
	(Shares)
Outstanding, December 31, 2015		142,913
New shares deferred		14,319
Issued		(13,587	)
Outstanding, December 31, 2016		143,645

Employee stock purchase plan

Options outstanding under the employee stock purchase plan as of December 31, 2016, had an exercise price equal to 85 percent of the fair market value of TI common stock on the date of automatic exercise. The automatic exercise occurred on January 3, 2017, resulting in an exercise price of $62.55 per share. Of the total outstanding options, none were exercisable as of December 31, 2016.

Employee stock purchase plan transactions are as follows:

	Employee Stock
	Purchase Plan
	(Shares)				Exercise Price
Outstanding grants, December 31, 2015		372,566			$		46.19
Granted		1,273,036					55.51
Exercised		(1,362,202	)				51.50
Outstanding grants, December 31, 2016		283,400					62.55

The weighted average grant date fair values per share of options granted under the employee stock purchase plans in 2016, 2015 and 2014 were $9.79, $7.89 and $7.34, respectively. In 2016, 2015 and 2014, the total intrinsic value of options exercised under these plans was $12 million per year.

Effect on shares outstanding and treasury shares

Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2016, $5.80 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, 2013										658,012,970
Repurchases										61,665,209
Shares used for:
Stock options/RSUs		(19,503,382	)			(5,609,627	)
Stock applied to exercises or taxes		6,618				1,408,701
ESPP		(1,784,184	)			—
Director deferred stock		—				—				(7,178	)
Total issued		(21,280,948	)			(4,200,926	)			(25,481,874	)
Balance, December 31, 2014										694,189,127
Repurchases										51,384,339
Shares used for:
Stock options/RSUs		(11,953,455	)			(3,386,415	)
Stock applied to exercises or taxes		8,562				845,164
ESPP		(1,532,264	)			—
Director deferred stock		—				—				(7,531	)
Total issued		(13,477,157	)			(2,541,251	)			(16,018,408	)
Balance, December 31, 2015										729,547,527
Repurchases										35,480,036
Shares used for:
Stock options/RSUs		(14,516,606	)			(5,639,666	)
Stock applied to exercises or taxes		—				1,336,476
ESPP		(1,362,202	)			—
Director deferred stock		—				—				(13,587	)
Total issued		(15,878,808	)			(4,303,190	)			(20,181,998	)
Balance, December 31, 2016										744,831,978

Shares available for future grants and reserved for issuance are as follows:

		December 31, 2016
		Long-Term				Director				Employee Stock
Shares		Incentive Plans				Compensation Plans (a)				Purchase Plan				Total
Reserved for issuance			123,296,771				2,341,272				36,670,572				162,308,615
Shares to be issued upon exercise of outstanding options and RSUs			(63,715,186	)			(1,026,626	)			(283,400	)			(65,025,212	)
Available for future grants			59,581,585				1,314,646				36,387,172				97,283,403

(a)	Includes 143,645 shares credited to directors’ deferred stock accounts that settle in shares of TI common stock. These shares are not included as grants outstanding as of December 31, 2016.

The effects on cash flows are as follows:

	For Years Ended December 31,
	2016					2015					2014
Proceeds from common stock transactions (a)	$		472			$		396			$		554
Tax benefit realized from stock compensation	$		255			$		171			$		218
Reduction to deferred income tax asset			(105	)				(81	)				(108	)
Excess tax benefit for stock compensation	$		150			$		90			$		110

(a)	Net of taxes paid for employee shares withheld of $70 million in 2016, $46 million in 2015 and $62 million in 2014.

5. Profit sharing plans

Profit sharing benefits are generally formulaic and determined by one or more subsidiary or company-wide financial metrics. We pay profit sharing benefits primarily under the company-wide TI Employee Profit Sharing Plan. This plan provides for profit sharing to be paid based solely on TI’s operating margin for the full calendar year. Under this plan, TI must achieve a minimum threshold of 10 percent operating margin before any profit sharing is paid. At 10 percent operating margin, profit sharing will be 2 percent of eligible payroll. The maximum amount of profit sharing available under the plan is 20 percent of eligible payroll, which is paid only if TI’s operating margin is at or above 35 percent for a full calendar year.

We recognized $346 million, $309 million and $269 million of profit sharing expense under the TI Employee Profit Sharing Plan in 2016, 2015 and 2014, respectively.

6. Income taxes

Income before Income Taxes

	For Years Ended December 31,
	2016					2015					2014
U.S.	$		3,953			$		3,218			$		2,684
Non-U.S.			977					998					1,190
Total	$		4,930			$		4,216			$		3,874

Provision (Benefit) for Income Taxes

	For Years Ended December 31,
	2016															2015															2014
	Current					Deferred					Total					Current					Deferred					Total					Current					Deferred					Total
U.S. federal	$		1,289			$		(122	)		$		1,167			$		1,110			$		(72	)		$		1,038			$		911			$		(73	)		$		838
Non-U.S.			238					(80	)				158					168					14					182					194					11					205
U.S. state			10					—					10					7					3					10					9					1					10
Total	$		1,537			$		(202	)		$		1,335			$		1,285			$		(55	)		$		1,230			$		1,114			$		(61	)		$		1,053

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,
	2016					2015					2014
U.S. statutory income tax rate			35.0%				35.0%					35.0%
Non-U.S. effective tax rates			(3.7	)				(4.0	)				(5.5	)
U.S. excess tax benefit for stock compensation (a)			(3.0	)			—					—
U.S. tax benefit for manufacturing			(1.5	)				(1.6	)				(1.3	)
U.S. R&D tax credit			(1.2	)				(1.3	)				(1.5	)
U.S. non-deductible expenses			0.3					0.3					0.2
Impact of changes to uncertain tax positions			0.6					0.2					0.1
Other			0.6					0.6					0.2
Effective tax rate			27.1	%				29.2	%				27.2	%

(a)	This is related to the adoption of ASU 2016-09 as discussed in Note 2.

Our effective tax rate benefits from lower rates (compared with the U.S. statutory income tax rate) applicable to our operations in many of the jurisdictions in which we operate, and from U.S. tax benefits. These lower non-U.S. tax rates are generally statutory in nature, without expiration and available to companies that operate in those taxing jurisdictions. Also included in the non-U.S. effective tax rates reconciling item above are benefits from tax holidays of $30 million, $50 million and $44 million in 2016, 2015 and 2014, respectively. The tax benefits relate to our operations in Malaysia and the Philippines, and expire in 2018 and 2017, respectively. The terms of the Malaysia tax holiday are currently under governmental review as required for the end of the first five years of the holiday period.

The primary components of deferred income tax assets and liabilities are as follows:

	December 31,
	2016					2015
Deferred income tax assets:
Stock compensation	$		220			$		244
Accrued expenses			219					215
Deferred loss and tax credit carryforwards			214					226
Inventories and related reserves			145					147
Retirement costs for defined benefit and retiree health care			82					87
Other			81					101
Total deferred income tax assets, before valuation allowance			961					1,020
Valuation allowance			(128	)				(186	)
Total deferred income tax assets, after valuation allowance			833					834
Deferred income tax liabilities:
Acquisition-related intangibles and fair-value adjustments			(460	)				(565	)
International earnings			(32	)				(105	)
Total deferred income tax liabilities			(492	)				(670	)
Net deferred income tax asset	$		341			$		164

The deferred income tax assets and liabilities based on tax jurisdictions are presented on our Consolidated Balance Sheets as follows:

	December 31,
	2016					2015
Deferred income tax assets	$		374			$		201
Deferred income tax liabilities			(33	)				(37	)
Net deferred income tax asset	$		341			$		164

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. Changes in valuation allowance balances in 2016 and 2015 of $58 million and $9 million, respectively, impacted Net income by $63 million and $0 million, respectively.

We have U.S. and non-U.S. tax loss carryforwards of approximately $12 million, none of which will expire before the year 2026.

A provision has been made for deferred taxes on undistributed earnings of non-U.S. subsidiaries to the extent that dividend payments from these subsidiaries are expected to result in additional tax liability. The remaining undistributed earnings of approximately $9.03 billion as of December 31, 2016, have been indefinitely reinvested outside of the United States; therefore, no U.S. tax provision has been made for taxes due upon remittance of these earnings. The indefinitely reinvested earnings of our non-U.S. subsidiaries are primarily invested in working capital and property, plant and equipment. Determination of the amount of unrecognized deferred income tax liability is not practical because of the complexities associated with its hypothetical calculation.

Cash payments made for income taxes, net of refunds, were $1.15 billion, $1.17 billion and $1.10 billion in 2016, 2015 and 2014, 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:

	2016					2015					2014
Balance, January 1	$		84			$		108			$		91
Additions based on tax positions related to the current year			4					11					10
Additions for tax positions of prior years			189					3					52
Reductions for tax positions of prior years			(2	)				(21	)				(9	)
Settlements with tax authorities			(32	)				(17	)				(36	)
Balance, December 31	$		243			$		84			$		108
Interest income (expense) recognized in the year ended December 31	$		4			$		8			$		6
Interest receivable (payable) as of December 31	$		13			$		9			$		—

The liability for uncertain tax positions is a component of Deferred credits and other liabilities on our Consolidated Balance Sheets.

All of the $243 million liability for uncertain tax positions as of December 31, 2016, is comprised of positions that, if recognized, would benefit the effective tax rate. If these tax liabilities are ultimately realized, $12 million of existing deferred tax assets would also be realized, related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation.

All of the $84 million liability for uncertain tax positions as of December 31, 2015, is comprised of positions that, if recognized, would benefit the effective tax rate. If these tax liabilities are ultimately realized, $12 million of existing deferred tax assets would also be realized, related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation.

As of December 31, 2016, the statute of limitations remains open for U.S. federal tax returns for 2010 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 2006 through 2011.

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.

7. 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, 2016. Our forward foreign currency exchange contracts outstanding as of December 31, 2016, had a notional value of $494 million to hedge our non-U.S. dollar net balance sheet exposures, including $158 million to sell Japanese yen and $123 million to sell euros.

Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our postretirement plan assets and deferred compensation liabilities, are carried at fair value. 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 8 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.

Details of these accounts receivable allowances are as follows:

	2016					2015					2014
Balance, January 1	$		7			$		12			$		22
Additions charged (credited) to operating results			10					(5	)				(9	)
Recoveries and write-offs, net			—					—					(1	)
Balance, December 31	$		17			$		7			$		12

8. Valuation of debt and equity investments and certain liabilities

Debt and equity investments

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

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

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

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

Details of our investments are as follows:

	December 31, 2016															December 31, 2015
	Cash and Cash					Short-Term					Long-Term					Cash and Cash					Short-Term					Long-Term
	Equivalents					Investments					Investments					Equivalents					Investments					Investments
Measured at fair value:
Available-for-sale securities:
Money market funds	$		346			$		—			$		—			$		395			$		—			$		—
Corporate obligations			107					544					—					132					285					—
U.S. government agency and Treasury securities			490					1,792					—					245					1,933					—
Trading securities:
Mutual funds			—					—					201					—					—					187
Total			943					2,336					201					772					2,218					187
Other measurement basis:
Equity-method investments			—					—					25					—					—					25
Cost-method investments			—					—					9					—					—					9
Cash on hand			211					—					—					228					—					—
Total	$		1,154			$		2,336			$		235			$		1,000			$		2,218			$		221

As of December 31, 2016 and 2015, 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 2016, 2015 and 2014.

In 2016, 2015 and 2014, the proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $3.39 billion, $2.89 billion and $2.97 billion, respectively. Gross realized gains and losses from these sales were not material.

The following table presents the aggregate maturities of investments in debt securities classified as available for sale as of December 31, 2016:

Due		Fair Value
One year or less		$		3,254
One to two years				25

Other-than-temporary declines and impairments in the values of these investments recognized in OI&E were not material in 2016, 2015 and 2014.

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

	•	Level 1 – Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date.

	•	Level 2 – Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. 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, 2016 and 2015, we had no Level 3 assets or liabilities, other than certain assets held by our postretirement plans.

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, 2016															December 31, 2015
	Level 1					Level 2					Total					Level 1					Level 2					Total
Assets:
Money market funds	$		346			$		—			$		346			$		395			$		—			$		395
Corporate obligations			—					651					651					—					417					417
U.S. government agency and Treasury securities			2,042					240					2,282					1,828					350					2,178
Mutual funds			201					—					201					187					—					187
Total assets	$		2,589			$		891			$		3,480			$		2,410			$		767			$		3,177
Liabilities:
Deferred compensation	$		218			$		—			$		218			$		198			$		—			$		198
Total liabilities	$		218			$		—			$		218			$		198			$		—			$		198

9. Goodwill and acquisition-related intangibles

Goodwill, net, by segment as of December 31, 2016 and 2015, 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 8. In 2016, 2015 and 2014, we determined no impairment was indicated.

The components of Acquisition-related intangibles, net, are as follows:

	Amortization		December 31, 2016															December 31, 2015
Acquisition-Related	Period		Gross Carrying					Accumulated										Gross Carrying					Accumulated
Intangibles	(Years)		Amount					Amortization					Net					Amount					Amortization					Net
Developed technology	7 - 10		$		2,130			$		1,144			$		986			$		2,131			$		928			$		1,203
Customer relationships	8				810					532					278					810					431					379
Other intangibles	5				—					—					—					3					2					1
Total			$		2,940			$		1,676			$		1,264			$		2,944			$		1,361			$		1,583

Amortization of acquisition-related intangibles was $319 million, $319 million and $321 million in 2016, 2015 and 2014, respectively, primarily related to developed technology. Fully amortized assets are written off against accumulated amortization. Future estimated amortization of acquisition-related intangibles is as follows:

	Amortization of Acquisition-Related Intangibles
2017	$		318
2018			318
2019			288
2020			198
2021			142
Thereafter			—

10. 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 U.S. 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 pre-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 percent 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 percent of the employee’s annual eligible earnings, plus an employer-matching contribution of up to 4 percent of the employee’s annual eligible earnings. Employees hired after December 31, 2003, do not receive the fixed employer contribution of 2 percent of the employee’s annual eligible earnings.

As of December 31, 2016 and 2015, as a result of employees’ elections, TI’s U.S. defined contribution plans held shares of TI common stock totaling 11 million shares and 13 million shares valued at $796 million and $704 million, respectively. Dividends paid on these shares in 2016 and 2015 were $20 million and $19 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 $60 million in 2016, 2015 and 2014.

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 upon 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, 2016 and 2015, as a result of employees’ elections, TI’s non-U.S. defined contribution plans held TI common stock valued at $20 million and $17 million, respectively. Dividends paid on these shares of TI common stock in 2016 and 2015 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
	2016					2015					2014					2016					2015					2014					2016					2015					2014
Service cost	$		22			$		22			$		21			$		5			$		5			$		4			$		34			$		35			$		39
Interest cost			42					43					45					20					20					22					52					53					68
Expected return on plan assets			(41	)				(48	)				(42	)				(20	)				(22	)				(20	)				(68	)				(76	)				(80	)
Amortization of prior service cost (credit)			—					—					—					(3	)				2					4					(2	)				(2	)				(2	)
Recognized net actuarial loss			21					19					26					7					8					7					25					24					24
Net periodic benefit costs			44					36					50					9					13					17					41					34					49
Settlement losses			21					25					5					—					—					—					2					2					1
Curtailment gain			—					—					—					—					—					—					—					—					(2	)
Total, including other postretirement losses (gains)	$		65			$		61			$		55			$		9			$		13			$		17			$		43			$		36			$		48

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.										U.S.										Non-U.S.
	Defined Benefit										Retiree Health Care										Defined Benefit
	2016					2015					2016					2015					2016					2015
Change in plan benefit obligation
Benefit obligation at beginning of year:	$		1,033			$		1,076			$		463			$		513			$		2,231			$		2,316
Service cost			22					22					5					5					34					35
Interest cost			42					43					20					20					52					53
Participant contributions			—					—					10					19					6					6
Benefits paid			(9	)				(8	)				(38	)				(46	)				(77	)				(73	)
Medicare subsidy			—					—					1					3					—					—
Actuarial loss (gain)			27					(6	)				(27	)				(21	)				259					14
Settlements			(85	)				(94	)				—					—					(8	)				(18	)
Plan amendments			—					—					—					(30	)				—					—
Effects of exchange rate changes			—					—					—					—					(136	)				(102	)
Benefit obligation at end of year (BO)	$		1,030			$		1,033			$		434			$		463			$		2,361			$		2,231
Change in plan assets
Fair value of plan assets at beginning of year:	$		1,019			$		1,082			$		441			$		497			$		2,134			$		2,213
Actual return on plan assets			79					(24	)				20					—					227					25
Employer contributions (funding of qualified plans)			15					52					1					1					160					72
Employer contributions (payments for non-qualified plans)			15					11					—					—					—					—
Participant contributions			—					—					10					19					6					6
Benefits paid			(9	)				(8	)				(38	)				(46	)				(77	)				(73	)
Settlements			(85	)				(94	)				—					—					(8	)				(18	)
Effects of exchange rate changes			—					—					—					—					(133	)				(91	)
Other			—					—					—					(30	)				—					—
Fair value of plan assets at end of year (FVPA)	$		1,034			$		1,019			$		434			$		441			$		2,309			$		2,134
Funded status (FVPA – BO) at end of year	$		4			$		(14	)		$		—			$		(22	)		$		(52	)		$		(97	)

Amounts recognized on our Consolidated Balance Sheets as of December 31, are as follows:

	U.S. Defined					U.S. Retiree					Non-U.S.
	Benefit					Health Care					Defined Benefit					Total
2016
Overfunded retirement plans	$		66			$		3			$		27			$		96
Accrued expenses and other liabilities & Deferred credits and other liabilities			(9	)				—					(6	)				(15	)
Underfunded retirement plans			(53	)				(3	)				(73	)				(129	)
Funded status (FVPA – BO) at end of 2016	$		4			$		—			$		(52	)		$		(48	)
2015
Overfunded retirement plans	$		51			$		—			$		34			$		85
Accrued expenses and other liabilities & Deferred credits and other liabilities			(16	)				—					(6	)				(22	)
Underfunded retirement plans			(49	)				(22	)				(125	)				(196	)
Funded status (FVPA – BO) at end of 2015	$		(14	)		$		(22	)		$		(97	)		$		(133	)

Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute about $100 million to our retirement benefit plans in 2017. The amounts shown for underfunded U.S. defined benefit plans were for non-qualified pension plans, which we do not fund because contributions to them are not tax deductible.

Accumulated benefit obligations, which are generally less than the projected benefit obligations as they exclude the impact of future salary increases, were $926 million and $948 million as of December 31, 2016 and 2015, respectively, for the U.S. defined benefit plans, and $2.22 billion and $2.09 billion as of December 31, 2016 and 2015, respectively, for the non-U.S. defined benefit plans.

The change in AOCI is as follows:

	U.S. Defined					U.S. Retiree										Non-U.S.
	Benefit					Health Care										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, 2015	$		167			$		80			$		(13	)		$		303			$		(7	)		$		550			$		(20	)
Changes in AOCI by category:
Adjustments			(10	)				(27	)				—					86					—					49					—
Recognized within Net income			(42	)				(7	)				3					(27	)				2					(76	)				5
Tax effect			18					12					(1	)				(11	)				(1	)				19					(2	)
Total change to AOCI			(34	)				(22	)				2					48					1					(8	)				3
AOCI balance, net of taxes, December 31, 2016	$		133			$		58			$		(11	)		$		351			$		(6	)		$		542			$		(17	)

The estimated amounts of net actuarial loss and unrecognized prior service credit included in AOCI as of December 31, 2016, that are expected to be amortized into net periodic benefit cost over the next fiscal year are: $15 million and none for the U.S. defined benefit plans; $4 million and ($4) million for the U.S. retiree health care benefit plan; and $27 million and ($2) million for the non-U.S. defined benefit plans.

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 8. With the adoption of ASU 2015-07, certain assets are no longer subject to disclosure by level of fair value but have been included in the tables below to permit reconciliation to the total plan assets. See Note 2 for more information.

	December 31, 2016
	Level 1					Level 2					Level 3					Other (a)					Total
Assets of U.S. defined benefit plan:
Fixed income securities and cash equivalents	$		—			$		—			$		—			$		685			$		685
Equity securities			—					—					—					349					349
Total	$		—			$		—			$		—			$		1,034			$		1,034
Assets of U.S. retiree health care plan:
Fixed income securities and cash equivalents	$		180			$		3			$		—			$		44			$		227
Equity securities			—					—					—					207					207
Total	$		180			$		3			$		—			$		251			$		434
Assets of non-U.S. defined benefit plans:
Fixed income securities and cash equivalents	$		19			$		127			$		—			$		1,508			$		1,654
Equity securities			5					18					—					629					652
Other			—					—					3					—					3
Total	$		24			$		145			$		3			$		2,137			$		2,309

(a)Consists of bond index and equity index funds, measured at net asset value per share.

	December 31, 2015
	Level 1					Level 2					Level 3					Other (a)					Total
Assets of U.S. defined benefit plan:
Fixed income securities and cash equivalents	$		—			$		249			$		—			$		415			$		664
Equity securities			—					—					—					355					355
Total	$		—			$		249			$		—			$		770			$		1,019
Assets of U.S. retiree health care plan:
Fixed income securities and cash equivalents	$		178			$		5			$		—			$		37			$		220
Equity securities			—					—					—					221					221
Total	$		178			$		5			$		—			$		258			$		441
Assets of non-U.S. defined benefit plans:
Fixed income securities and cash equivalents	$		4			$		109			$		—			$		1,385			$		1,498
Equity securities			6					18					—					608					632
Other			—					—					4					—					4
Total	$		10			$		127			$		4			$		1,993			$		2,134

(a)Consists of bond index and equity index funds, measured at net asset value per share.

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. For the U.S. plans, we utilize an option collar strategy to reduce the volatility of returns on investments in U.S. equity funds.

The only Level 3 asset in our worldwide benefit plans for the periods presented is a diversified property fund in a non-U.S. pension plan. These investments are valued using inputs from the fund managers and internal models. Changes to the fair value of this fund since December 31, 2014, have not been material, and are due to redemptions.

Assumptions and investment policies

	U.S.								U.S. Retiree								Non-U.S.
	Defined Benefit								Health Care								Defined Benefit
	2016				2015				2016				2015				2016				2015
Weighted average assumptions used to determine benefit obligations:
Discount rate		4.29%				4.62%				4.08%				4.40%				1.76%				2.41%
Long-term pay progression		3.30%				3.30%			n/a				n/a					3.11%				3.21%
Weighted average assumptions used to determine net periodic benefit cost:
Discount rate		4.40%				4.33%				4.40%				4.15%				2.41%				2.34%
Long-term rate of return on plan assets		4.60%				5.10%				4.40%				4.70%				3.18%				3.55%
Long-term pay progression		3.30%				3.30%			n/a				n/a					3.21%				3.27%

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				U.S. Retiree		Non-U.S.
Asset Category		Benefit				Health Care		Defined Benefit
Fixed income securities and cash equivalents			65%			50% - 65%		60% - 100%
Equity securities			35%			35% - 50%		0% - 40%

We rebalance the plans’ investments when they are not within the target allocation ranges.

Weighted average asset allocations as of December 31 are as follows:

		U.S. Defined								U.S. Retiree								Non-U.S. Defined
		Benefit								Health Care								Benefit
Asset Category		2016				2015				2016				2015				2016				2015
Fixed income securities and cash equivalents			66%				65%				52%				50%				72%				70%
Equity securities			34%				35%				48%				50%				28%				30%

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. As of December 31, 2016, we do not expect to return any of the defined benefit pension plans’ assets to TI in the next 12 months.

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.

		U.S. Defined					U.S. Retiree					Non-U.S.
		Benefit					Health Care					Defined Benefit
2017		$		128			$		32			$		82
2018				120					32					84
2019				86					33					87
2020				91					33					89
2021				101					32					91
2022 - 2026				450					151					489

Assumed health care cost trend rates for the U.S. retiree health care benefit plan as of December 31 are as follows:

		2016				2015
Assumed health care cost trend rate for next year			6.75%				7.00%
Ultimate trend rate			5.00%				5.00%
Year in which ultimate trend rate is reached			2024				2024

A one percentage point increase or decrease in health care cost trend rates over all future periods would have increased or decreased the accumulated postretirement benefit obligation for the U.S. retiree health care benefit plan as of December 31, 2016, by $2 million. The service cost and interest cost components of 2016 plan expense would have increased or decreased by less than $1 million.

Deferred compensation arrangements

We have a deferred compensation plan that allows 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 this plan 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, 2016, our liability to participants of the deferred compensation plans was $218 million and is recorded in Deferred credits and other liabilities on our Consolidated Balance Sheets. This amount reflects the accumulated participant deferrals and earnings thereon as of that date. As of December 31, 2016, we held $201 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 8.

11. 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, 2016, 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 2021. 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, 2016, our credit facility was undrawn and we had no commercial paper outstanding.

Long-term debt

In May 2016, we issued a principal amount of $500 million of fixed-rate, long-term debt due in 2022. We incurred $3 million of issuance and other related costs, which are amortized to Interest and debt expense over the term of the debt. The proceeds of the offering were $499 million, net of the original issuance discount, and were used toward the repayment of a portion of $1.0 billion of maturing debt retired in May 2016.

In May 2015, we issued a principal amount of $500 million of fixed-rate, long-term debt due in 2020. We incurred $3 million of issuance and other related costs, which are amortized to Interest and debt expense over the term of the debt. The proceeds of the offering were $498 million, net of the original issuance discount, and were used toward the repayment of a portion of the debt that matured in August 2015. We retired $250 million of maturing debt in April 2015 and another $750 million in August 2015.

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

Long-term debt outstanding is as follows:

	December 31,
	2016					2015
Notes due 2016 at 2.375%	$		—			$		1,000
Notes due 2017 at 0.875%			250					250
Notes due 2017 at 6.60% (assumed with National acquisition)			375					375
Notes due 2018 at 1.00%			500					500
Notes due 2019 at 1.65%			750					750
Notes due 2020 at 1.75%			500					500
Notes due 2021 at 2.75%			250					250
Notes due 2022 at 1.85%			500					—
Notes due 2023 at 2.25%			500					500
Total debt			3,625					4,125
Net unamortized discounts, premiums and debt issuance costs			(16	)				(5	)
Total debt, including net unamortized discounts, premiums and debt issuance costs			3,609					4,120
Current portion of long-term debt			(631	)				(1,000	)
Long-term debt	$		2,978			$		3,120

Interest and debt expense was $80 million in 2016, $90 million in 2015 and $94 million in 2014. This was net of the amortization of the debt discounts, premiums and debt issuance costs. Cash payments for interest on long-term debt were $88 million in 2016, $99 million in 2015 and $102 million in 2014. Capitalized interest was not material.

12. Commitments and contingencies

Purchase commitments

Some of our purchase commitments, including software licenses, require minimum payments.

Operating 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 purchase and renewal provisions and require us to pay taxes, insurance and maintenance costs. Rental and lease expense incurred was $86 million, $98 million and $113 million in 2016, 2015 and 2014, respectively.

As of December 31, 2016, we had committed to make the following minimum payments under our purchase commitments and non-cancellable operating leases:

		Purchase					Operating
		Commitments					Leases
2017		$		132			$		67
2018				92					47
2019				81					28
2020				24					24
2021				2					17
Thereafter				5					57

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.

13. Supplemental financial information

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. See Note 9 for additional information.

Other Income (Expense), Net (OI&E)

	For Years Ended December 31,
	2016					2015					2014
Income from settlements related to intellectual property infringement	$		188			$		—			$		—
Lease income			14					14					14
Interest income			11					6					7
Investment gains (losses)			5					3					5
Currency exchange gains (losses)			2					5					(4	)
Tax interest income (expense)			(3	)				8					6
Other			(6	)				(4	)				(7	)
Total	$		211			$		32			$		21

Prepaid Expenses and Other Current Assets

	December 31,
	2016					2015
Prepaid taxes on intercompany inventory profits, net	$		566			$		801
Other prepaid expenses and current assets			344					199
Total	$		910			$		1,000

Property, Plant and Equipment at Cost

	Depreciable		December 31,
	Lives (Years)		2016					2015
Land	n/a		$		127			$		127
Buildings and improvements	5 - 40				2,753					2,789
Machinery and equipment	2 - 10				2,043					2,549
Total			$		4,923			$		5,465

Accumulated Other Comprehensive Income (Loss), Net of Taxes (AOCI)

	December 31,
	2016					2015
Postretirement benefit plans:
Net actuarial loss	$		(542	)		$		(550	)
Prior service credit			17					20
Cash flow hedge derivative			(1	)				(2	)
Total	$		(526	)		$		(532	)

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 2016, 2015 and 2014. The table below details where these transactions are recorded in our Consolidated Statements of Income.

		For Years Ended															Impact to
		December 31,															Related Statement
Details about AOCI Components		2016					2015					2014					of Income Line
Net actuarial gains (losses) of defined benefit plans:
Recognized net actuarial loss and Settlement losses (a)		$		76			$		78			$		63			Increase to Pension expense (b)
Tax effect				(25	)				(25	)				(21	)		Decrease to Provision for income taxes
Recognized within Net income, net of taxes		$		51			$		53			$		42			Decrease to Net income
Prior service (cost) credit of defined benefit plans:
Amortization of prior service cost (credit) and Curtailment gain (a)		$		(5	)		$		—			$		—			Decrease to Pension expense (b)
Tax effect				2					—					—			Increase to Provision for income taxes
Recognized within Net income, net of taxes		$		(3	)		$		—			$		—			Increase to Net income
Derivative instruments:
Amortization of treasury-rate locks		$		1			$		2			$		2			Increase to Interest and debt expense
Tax effect				—					(1	)				(1	)		Decrease to Provision for income taxes
Recognized within Net income, net of taxes		$		1			$		1			$		1			Decrease to Net income

(a)	Detailed in Note 10.

(b)	Pension expense is included in COR, R&D, SG&A and Restructuring charges/other.

14. Quarterly financial data (unaudited)

As a result of our early adoption of ASU 2016-09, we have recast Net income and EPS for the first three quarters of 2016 to conform to the new presentation. See Note 2 for additional information, including the effects of the change on previously reported quarterly data.

		2016 Quarters																				2015 Quarters
		4th					3rd					2nd					1st					4th					3rd					2nd					1st
Revenue		$		3,414			$		3,675			$		3,273			$		3,008			$		3,189			$		3,429			$		3,232			$		3,150
Gross profit				2,133					2,280					2,003					1,824					1,866					1,997					1,881					1,816
Included in Operating profit:
Acquisition charges				80					80					79					80					81					83					82					83
Restructuring charges/other				(20	)				1					2					2					(68	)				—					(1	)				(2	)
Operating profit				1,319					1,395					1,117					968					1,142					1,164					1,010					958
Net income				1,047					1,018					819					711					836					798					696					656
Basic EPS		$		1.04			$		1.00			$		0.81			$		0.70			$		0.81			$		0.77			$		0.66			$		0.62
Diluted EPS		$		1.02			$		0.98			$		0.79			$		0.69			$		0.80			$		0.76			$		0.65			$		0.61

Report of independent registered public accounting firm

The Board of Directors and Stockholders

Texas Instruments Incorporated

We have audited the accompanying consolidated balance sheets of Texas Instruments Incorporated and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Texas Instruments Incorporated and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for stock compensation in 2016.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, 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 23, 2017, expressed an unqualified opinion thereon.

Dallas, Texas

February 23, 2017