Item 8. Financial Statements and Supplementary Data.

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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, 2017

Comprehensive income for each of the three years in the period ended December 31, 2017

Balance sheets at December 31, 2017 and 2016

Cash flows for each of the three years in the period ended December 31, 2017

Stockholders’ equity for each of the three years in the period ended December 31, 2017

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)	2017			2016			2015
Revenue	$	14,961		$	13,370		$	13,000
Cost of revenue (COR)		5,347			5,113			5,425
Gross profit		9,614			8,257			7,575
Research and development (R&D)		1,508			1,356			1,267
Selling, general and administrative (SG&A)		1,694			1,742			1,728
Acquisition charges		318			319			329
Restructuring charges/other		11			(15	)		(71	)
Operating profit		6,083			4,855			4,322
Other income (expense), net (OI&E)		75			155			(16	)
Interest and debt expense		78			80			90
Income before income taxes		6,080			4,930			4,216
Provision for income taxes		2,398			1,335			1,230
Net income	$	3,682		$	3,595		$	2,986

Earnings per common share (EPS):
Basic	$	3.68		$	3.54		$	2.86
Diluted	$	3.61		$	3.48		$	2.82

Average shares outstanding (millions):
Basic		991			1,003			1,030
Diluted		1,012			1,021			1,043

Cash dividends declared per common share	$	2.12		$	1.64		$	1.40

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	$	3,682		$	3,595		$	2,986
Income allocated to RSUs		(33	)		(44	)		(42	)
Income allocated to common stock for diluted EPS	$	3,649		$	3,551		$	2,944

See accompanying notes.

Consolidated Statements of Comprehensive Income	For Years Ended December 31,
(Millions of dollars)	2017			2016			2015
Net income	$	3,682		$	3,595		$	2,986
Other comprehensive income (loss)
Net actuarial losses of defined benefit plans:
Adjustment, net of tax effect of ($26), $6 and $36		92			(43	)		(74	)
Recognized within Net income, net of tax effect of ($27), ($25) and ($25)		56			51			53
Prior service credit of defined benefit plans:
Adjustment, net of tax effect of $1, $0 and ($11)		(2	)		—			20
Recognized within Net income, net of tax effect of $1, $2 and $0		(5	)		(3	)		—
Derivative instruments:
Recognized within Net income, net of tax effect of $0, $0 and ($1)		1			1			1
Other comprehensive income (loss), net of taxes		142			6			—
Total comprehensive income	$	3,824		$	3,601		$	2,986

See accompanying notes.

Consolidated Balance Sheets	December 31,
(Millions of dollars, except share amounts)	2017			2016
Assets
Current assets:
Cash and cash equivalents	$	1,656		$	1,154
Short-term investments		2,813			2,336
Accounts receivable, net of allowances of ($8) and ($17)		1,278			1,267
Raw materials		126			102
Work in process		1,089			954
Finished goods		742			734
Inventories		1,957			1,790
Prepaid expenses and other current assets		1,030			910
Total current assets		8,734			7,457
Property, plant and equipment at cost		4,789			4,923
Accumulated depreciation		(2,125	)		(2,411	)
Property, plant and equipment		2,664			2,512
Long-term investments		268			235
Goodwill		4,362			4,362
Acquisition-related intangibles		946			1,264
Deferred tax assets		264			374
Capitalized software licenses		110			52
Overfunded retirement plans		208			96
Other long-term assets		86			79
Total assets	$	17,642		$	16,431

Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	500		$	631
Accounts payable		466			396
Accrued compensation		722			710
Income taxes payable		128			83
Accrued expenses and other liabilities		442			444
Total current liabilities		2,258			2,264
Long-term debt		3,577			2,978
Underfunded retirement plans		89			129
Deferred tax liabilities		78			33
Other long-term liabilities		1,303			554
Total liabilities		7,305			5,958
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		1,776			1,674
Retained earnings		34,662			33,107
Treasury common stock at cost
Shares: 2017 – 757,657,217; 2016 – 744,831,978		(27,458	)		(25,523	)
Accumulated other comprehensive income (loss), net of taxes (AOCI)		(384	)		(526	)
Total stockholders’ equity		10,337			10,473
Total liabilities and stockholders’ equity	$	17,642		$	16,431

See accompanying notes.

Consolidated Statements of Cash Flows	For Years Ended December 31,
(Millions of dollars)	2017			2016			2015
Cash flows from operating activities
Net income	$	3,682		$	3,595		$	2,986
Adjustments to Net income:
Depreciation		539			605			766
Amortization of acquisition-related intangibles		318			319			319
Amortization of capitalized software		47			31			48
Stock compensation		242			252			286
Gains on sales of assets		—			(40	)		(85	)
Deferred taxes		112			(202	)		(55	)
Increase (decrease) from changes in:
Accounts receivable		(7	)		(108	)		77
Inventories		(167	)		(99	)		93
Prepaid expenses and other current assets		76			(81	)		94
Accounts payable and accrued expenses		51			72			(142	)
Accrued compensation		(3	)		36			7
Income taxes payable		468			333			11
Changes in funded status of retirement plans		21			(73	)		(23	)
Other		(16	)		(26	)		15
Cash flows from operating activities		5,363			4,614			4,397

Cash flows from investing activities
Capital expenditures		(695	)		(531	)		(551	)
Proceeds from asset sales		40			—			110
Purchases of short-term investments		(4,555	)		(3,503	)		(2,767	)
Proceeds from short-term investments		4,095			3,390			2,892
Other		(12	)		(6	)		14
Cash flows from investing activities		(1,127	)		(650	)		(302	)

Cash flows from financing activities
Proceeds from issuance of long-term debt		1,099			499			498
Repayment of debt		(625	)		(1,000	)		(1,000	)
Dividends paid		(2,104	)		(1,646	)		(1,444	)
Stock repurchases		(2,556	)		(2,132	)		(2,741	)
Proceeds from common stock transactions		483			472			396
Other		(31	)		(3	)		(3	)
Cash flows from financing activities		(3,734	)		(3,810	)		(4,294	)

Net change in Cash and cash equivalents		502			154			(199	)
Cash and cash equivalents at beginning of period		1,154			1,000			1,199
Cash and cash equivalents at end of period	$	1,656		$	1,154		$	1,000

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, 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	)

2017
Net income		—		—			3,682			—			—
Dividends declared and paid ($2.12 per share)		—		—			(2,104	)		—			—
Common stock issued for stock-based awards		—		(138	)		—			621			—
Stock repurchases		—		—			—			(2,556	)		—
Stock compensation		—		242			—			—			—
Other comprehensive income (loss), net of taxes		—		—			—			—			142
Dividend equivalents paid on restricted stock units		—		—			(17	)		—			—
Other		—		(2	)		(6	)		—			—
Balance, December 31, 2017	$	1,741	$	1,776		$	34,662		$	(27,458	)	$	(384	)

See accompanying notes.

Notes to financial statements

Description of business, including segment and geographic area information

We design, make and sell semiconductors to electronics designers and manufacturers all over the world. Beginning January 2017, we reorganized the product lines within our reportable segments – Analog and Embedded Processing – to align our business structure with the way our customers select and buy products. These changes had no effect on either our previously reported consolidated financial statements or our reportable segment amounts. Our two reportable segments are established along major categories of products as follows:

	•	Analog – consisting of the following product lines: Power, Signal Chain and High Volume.

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

We report the results of our remaining business activities in Other. Other includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other includes DLP® products, calculators and custom ASIC products. As of January 1, 2017, we no longer recognize royalties as revenue; instead, they are now recorded as OI&E. Prior period amounts were not material.

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.

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,
	2017		2016		2015
Revenue:
Analog	$	9,900	$	8,536	$	8,339
Embedded Processing		3,498		3,023		2,787
Other		1,563		1,811		1,874
Total revenue	$	14,961	$	13,370	$	13,000
Operating profit:
Analog	$	4,468	$	3,416	$	3,077
Embedded Processing		1,143		817		611
Other		472		622		634
Total operating profit	$	6,083	$	4,855	$	4,322

Operating profit in the prior periods has been recast as a result of our early adoption of a new accounting standard related to pension and other retiree benefit costs. See Note 2 for additional information.

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,
	2017		2016		2015
Revenue:
United States	$	1,901	$	1,682	$	1,612
Asia (a)		8,824		8,024		7,910
Europe, Middle East and Africa		2,907		2,393		2,163
Japan		1,049		1,040		1,127
Rest of world		280		231		188
Total revenue	$	14,961	$	13,370	$	13,000

(a)	Revenue from products shipped into China, including Hong Kong, was $6.6 billion in 2017, $6.0 billion in 2016 and $5.8 billion in 2015.

	December 31,
	2017		2016		2015
Property, plant and equipment:
United States	$	1,469	$	1,372	$	1,370
Asia (a)		964		908		958
Europe, Middle East and Africa		97		98		130
Japan		118		115		122
Rest of world		16		19		16
Total property, plant and equipment	$	2,664	$	2,512	$	2,596

(a)	Property, plant and equipment at our two sites in the Philippines was $437 million, $412 million and $471 million as of December 31, 2017, 2016 and 2015, respectively.

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 2016 related to stock compensation, which included certain provisions applied prospectively.

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 2017 presentation, retrospectively applying the new accounting standard related to pension and other retiree benefit costs. See Changes in accounting standards – adopted standards for current period for further information.

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 special pricing arrangements, product returns due to quality issues and incentives designed to maximize growth opportunities. Allowances are based on analysis of historical data and contractual terms and are recorded when revenue is recognized. We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner.

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 $39 million in 2017, $44 million in 2016 and $46 million in 2015.

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,
	2017							2016							2015
	Net							Net							Net
	Income			Shares		EPS		Income			Shares		EPS		Income			Shares		EPS
Basic EPS:
Net income	$	3,682						$	3,595						$	2,986
Income allocated to RSUs		(34	)						(45	)						(43	)
Income allocated to common stock for basic EPS calculation	$	3,648			991	$	3.68	$	3,550			1,003	$	3.54	$	2,943			1,030	$	2.86

Adjustment for dilutive shares:
Stock compensation plans					21							18							13

Diluted EPS:
Net income	$	3,682						$	3,595						$	2,986
Income allocated to RSUs		(33	)						(44	)						(42	)
Income allocated to common stock for diluted EPS calculation	$	3,649			1,012	$	3.61	$	3,551			1,021	$	3.48	$	2,944			1,043	$	2.82

Potentially dilutive securities representing 6 million and 12 million shares of common stock that were outstanding in 2017 and 2015, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive. No potentially dilutive securities were excluded from the computation of diluted earnings per common share during 2016.

Investments

We present investments on our Consolidated Balance Sheets as cash equivalents, short-term investments or long-term investments, which are detailed 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 $303 million and $334 million as of December 31, 2017 and 2016, 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 taxes, other assets, current liabilities and long-term liabilities are remeasured at exchange rates in effect at the end of each reporting period. Property, plant and equipment with associated depreciation and inventories are valued at historical exchange rates. Revenue and expense accounts other than depreciation for each month are remeasured at the appropriate daily rate of exchange. Currency exchange gains and losses from remeasurement are credited or charged to OI&E.

Derivatives and hedging

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

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

We do not use derivatives for speculative or trading purposes.

Changes in accounting standards – adopted standards for current period

Accounting Standards Update (ASU) No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory

This standard requires current and deferred taxes resulting from the intra-entity transfer of any assets other than inventory to be recognized for financial reporting purposes when the transfer occurs rather than postpone recognition until the asset has been sold to an outside party, as currently allowed. This standard is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings and is effective for interim and annual periods beginning January 1, 2018. We elected to adopt this standard in the first quarter of 2017. The effect on our financial position and results of operations was not material.

ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

This standard amends the income statement presentation of the components of net periodic benefit cost for defined benefit pension and other postretirement plans. This standard requires us to: (1) disaggregate the current service cost component from the other components of net periodic benefit cost (the “other components”) and present it in the same line items on the statement of income as other current compensation costs for related employees and (2) present the other components outside of operating profit (i.e., in OI&E). This standard is required to be applied retrospectively and is effective for interim and annual periods beginning January 1, 2018. We elected to adopt this standard as of January 1, 2017. Adoption of this standard did not impact Revenue, Net income, Earnings per common share or Cash flows from operating activities. The following components on the Consolidated Statements of Income were affected:

	For The Years Ended December 31,
	2016				2015
	Reported		Recast		Reported		Recast
COR	$	5,130	$	5,113	$	5,440	$	5,425
Gross profit		8,240		8,257		7,560		7,575
R&D		1,370		1,356		1,280		1,267
SG&A		1,767		1,742		1,748		1,728
Operating profit:
Analog		3,380		3,416		3,048		3,077
Embedded Processing		801		817		596		611
Other		618		622		630		634
Total operating profit		4,799		4,855		4,274		4,322
OI&E		211		155		32		(16	)

Changes in accounting standards – standards not yet adopted

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, which we are currently evaluating. It is effective for interim and annual reporting periods beginning January 1, 2018. This standard permits early adoption and the use of either the retrospective or cumulative-effect transition method.

We plan on adopting this standard using the cumulative-effect (i.e., modified retrospective) transition method, which will result in an adjustment to retained earnings for the cumulative effect of applying this guidance to contracts in process as of January 1, 2018. Under this approach, we will not restate the prior financial statements presented.

Based on our current assessment, we do not expect the new standard to have a material impact on our financial position and results of operations, as it is not expected to materially change the manner or timing in which we recognize revenue. 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.

Beginning January 1, 2017, we no longer recognize in revenue royalty income from licensing our patent portfolios; however, we are still required to apply the recognition, measurement and disclosure provisions of this new standard to our royalty income. We believe the most significant impact of the new standard will be to accelerate the timing of recognizing royalty income in OI&E, although the effect of such change on the results of operations and financial position recognized in any individual reporting period is not expected to be material. This change will have no effect on the recognition and timing of cash flows over any affected periods.

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. We do not plan to adopt this standard early. We are currently evaluating 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.

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 January 1, 2020, and permits earlier application but not before periods beginning January 1, 2019. 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.

Other standards

We do not expect the following standards to have a material impact on our financial position and results of operations. We plan to adopt these standards as of their effective dates.

ASU	Description	Effective Date
ASU No. 2016-01	Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities	January 1, 2018
ASU No. 2017-01	Business Combinations (Topic 805): Clarifying the Definition of a Business	January 1, 2018
ASU No. 2017-05	Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets	January 1, 2018
ASU No. 2017-12	Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities	January 1, 2019

Restructuring charges/other

Restructuring charges/other is comprised of the following components:

	For Years Ended December 31,
	2017		2016			2015
Restructuring charges (a)	$	11	$	25		$	14
Gains on sales of assets		—		(40	)		(83	)
Other		—		—			(2	)
Restructuring charges/other	$	11	$	(15	)	$	(71	)

(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

Beginning January 2017, we reorganized the product lines within our two reportable segments. We recognized a related $18 million of restructuring charges for severance and benefit costs in 2016 and an additional $3 million in 2017. Any further charges are not expected to be material. As of December 31, 2017, $16 million has been paid to terminated employees for severance and benefits.

We announced in January 2016 our intention to phase out 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 $8 million in 2017, $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 2019.

Changes in accrued restructuring balances

	2017			2016			2015
Balance, January 1	$	40		$	32		$	57
Restructuring charges		11			25			14
Non-cash items (a)		(1	)		(6	)		—
Payments		(21	)		(11	)		(39	)
Balance, December 31	$	29		$	40		$	32

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

The restructuring accrual balances are primarily reported as a component of either Accrued expenses and other liabilities or Other long-term liabilities on our Consolidated Balance Sheets, depending on the expected timing of payment.

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.

Stock compensation

We have stock options outstanding to participants under long-term incentive plans. The option price per share may not be less than the fair market value of our common stock on the date of the grant. The options have a 10-year term 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.

Total stock compensation expense recognized is as follows:

	For Years Ended December 31,
	2017		2016		2015
COR	$	36	$	40	$	47
R&D		59		60		60
SG&A		147		152		169
Acquisition charges		—		—		10
Total	$	242	$	252	$	286

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 estimated forfeitures.

We recognize compensation expense for non-qualified stock options and RSUs on a straight-line basis over the minimum service period required for vesting of the award, adjusting for estimated forfeitures based on historical activity. Awards issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis. Options issued under our employee stock purchase plan are expensed over a three-month period.

Fair-value methods and assumptions

We account for all awards granted under our various stock compensation plans at fair value. We estimate the fair values for non-qualified stock options using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:

	For Years Ended December 31,
	2017			2016			2015
Weighted average grant date fair value, per share	$	16.49		$	10.03		$	9.49
Weighted average assumptions used:
Expected volatility		24	%		25	%		22	%
Expected lives (in years)		7.2			7.3			7.3
Risk-free interest rates		2.36	%		1.72	%		1.64	%
Expected dividend yields		2.52	%		2.87	%		2.52	%

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

We determine expected lives of options based on the historical option exercise experience of our optionees using a rolling 10-year average. We believe the historical experience method is the best estimate of future exercise patterns currently available.

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

Expected dividend yields are based on the annualized approved quarterly dividend rate and the current market price of our common stock at the time of grant. No assumption for a future dividend rate change is included unless there is an approved plan to change the dividend in the near term.

The fair value per share of RSUs is determined based on the closing price of our common stock on the date of grant.

Our 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, 2016		52,265,788		$	41.89		12,332,379		$	44.44
Granted		6,474,732			79.28		1,604,469			79.52
Stock options exercised/RSUs vested		(13,313,019	)		37.13		(4,419,464	)		33.65
Forfeited and expired		(672,908	)		57.12		(291,741	)		54.34
Outstanding grants, December 31, 2017		44,754,593			48.49		9,225,643			55.40

The weighted average grant date fair values per share of RSUs granted in 2017, 2016 and 2015 were $79.52, $53.98 and $53.22, respectively. In 2017, 2016 and 2015, the total grant date fair values of shares vested from RSU grants were $149 million, $178 million and $114 million, respectively.

As of December 31, 2017, the number of shares remaining available for future issuance under these plans was 53,595,374.

Summarized information about stock options outstanding as of December 31, 2017, 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		1,230,810		1.1	$	14.97		1,230,810	$	14.97
	20.01 to 30.00		2,559,613		1.9		23.86		2,559,613		23.86
	30.01 to 40.00		9,441,380		4.3		33.02		9,441,380		33.02
	40.01 to 50.00		7,466,229		6.1		44.10		4,403,409		44.10
	50.01 to 60.00		17,689,385		7.6		53.42		4,472,432		53.61
	60.01 to 70.00		—		—		—		—		—
	70.01 to 80.00		6,347,174		9.1		79.19		6,470		71.03
	80.01 to 97.29		20,002		9.7		88.81		—		—
	14.47 to 97.29		44,754,593		6.4		48.49		22,114,114		37.34

In 2017, 2016 and 2015, 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 $632 million, $424 million and $290 million, respectively.

Summarized information as of December 31, 2017, 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)		43,804,402		22,114,114
Weighted average remaining contractual life (in years)		6.3		4.8
Weighted average exercise price per share	$	48.12	$	37.34
Intrinsic value (millions of dollars)	$	2,467	$	1,484

(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 $2,504 million.

As of December 31, 2017, the total future compensation cost related to equity awards not yet recognized in our Consolidated Statements of Income was $237 million, consisting of $108 million related to unvested stock options and $129 million related to unvested RSUs. The $237 million is expected to be recognized as follows: $123 million in 2018, $73 million in 2019, $37 million in 2020 and $4 million in 2021.

Employee stock purchase plan

Options outstanding under the employee stock purchase plan as of December 31, 2017, 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 2, 2018, resulting in an exercise price of $89.74 per share. Of the total outstanding options, none were exercisable as of December 31, 2017.

Employee stock purchase plan transactions are as follows:

	Employee Stock
	Purchase Plan
	(Shares)			Exercise Price
Outstanding grants, December 31, 2016		283,400		$	62.55
Granted		984,536			55.19
Exercised		(1,065,757	)		67.62
Outstanding grants, December 31, 2017		202,179			89.74

The weighted average grant date fair values per share of options granted under the employee stock purchase plans in 2017, 2016 and 2015 were $12.99, $9.79 and $7.89, respectively. In 2017, 2016 and 2015, the total intrinsic value of options exercised under these plans was $13 million, $12 million and $12 million, respectively.

As of December 31, 2017, the number of shares remaining available for future issuance under this plan was 35,402,636.

Effect on shares outstanding and treasury shares

Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2017, $9.24 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:


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 units	—		—		(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 units	—		—		(13,587	)
Total issued	(15,878,808	)	(4,303,190	)	(20,181,998	)
Balance, December 31, 2016					744,831,978

Repurchases					30,570,129
Shares used for:
Stock options/RSUs	(13,313,019	)	(4,419,464	)
Stock applied to exercises or taxes	—		1,058,100
ESPP	(1,065,757	)	—
Director deferred stock units	—		—		(4,750	)
Total issued	(14,378,776	)	(3,361,364	)	(17,740,140	)
Balance, December 31, 2017					757,657,217

The effects on cash flows are as follows:

	For Years Ended December 31,
	2017			2016			2015
Proceeds from common stock transactions (a)	$	483		$	472		$	396

Tax benefit realized from stock compensation	$	341		$	255		$	171
Reduction to deferred tax asset		(91	)		(105	)		(81	)
Excess tax benefit for stock compensation	$	250		$	150		$	90

(a)	Net of taxes paid for employee shares withheld of $83 million in 2017, $70 million in 2016 and $46 million in 2015.

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 $355 million, $346 million and $309 million of profit sharing expense under the TI Employee Profit Sharing Plan in 2017, 2016 and 2015, respectively.

Income taxes

Income before income taxes is comprised of the following components:

	For Years Ended December 31,
	2017		2016		2015
U.S.	$	5,130	$	3,953	$	3,218
Non-U.S.		950		977		998
Total	$	6,080	$	4,930	$	4,216

Provision for income taxes is comprised of the following components:

	For Years Ended December 31,
	2017						2016							2015
	Current		Deferred		Total		Current		Deferred			Total		Current		Deferred			Total
U.S. federal	$	2,101	$	51	$	2,152	$	1,289	$	(122	)	$	1,167	$	1,110	$	(72	)	$	1,038
Non-U.S.		173		61		234		238		(80	)		158		168		14			182
U.S. state		12		—		12		10		—			10		7		3			10
Total	$	2,286	$	112	$	2,398	$	1,537	$	(202	)	$	1,335	$	1,285	$	(55	)	$	1,230

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,
	2017			2016			2015
U.S. statutory income tax rate		35.0	%		35.0	%		35.0	%
U.S. Tax Act		12.7			—			—
U.S. excess tax benefit for stock compensation		(4.1	)		(3.0	)		—
Non-U.S. effective tax rates		(2.5	)		(3.7	)		(4.0	)
U.S. tax benefit for manufacturing		(1.6	)		(1.5	)		(1.6	)
U.S. R&D tax credit		(1.1	)		(1.2	)		(1.3	)
Impact of changes to uncertain tax positions		0.7			0.6			0.2
U.S. non-deductible expenses		0.2			0.3			0.3
Other		0.1			0.6			0.6
Effective tax rate		39.4	%		27.1	%		29.2	%

The U.S. Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017. The Tax Act reduces the U.S. statutory income tax rate from 35 percent to 21 percent and requires companies to pay a tax on indefinitely reinvested earnings of certain non-U.S. subsidiaries that were previously tax deferred. We have not completed our accounting for the tax effects of enactment of the Tax Act. We have made reasonable estimates of the tax on indefinitely reinvested earnings and the effects on our existing deferred tax balances. This resulted in additional tax expense in 2017 of $773 million, an increase of 12.7 percentage points to our effective tax rate. The combined effects of the tax on indefinitely reinvested earnings and the revaluation of our deferred tax balances are included as a component of income tax expense from continuing operations.

Details on provisional amounts are as follows:

	•	Indefinitely reinvested earnings – The tax on indefinitely reinvested earnings is based on our non-U.S. post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes, and resulted in an increase in income tax expense of $714 million. We have not yet completed our calculation of the total post-1986 E&P for these non-U.S. subsidiaries. Further, the tax on indefinitely reinvested earnings is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 non-U.S. E&P previously deferred from U.S. income taxes and finalize the amounts held in cash or other specified assets.

	•	Deferred tax assets and liabilities – We remeasured deferred tax assets and liabilities based on the U.S. statutory income tax rate of 21 percent. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was $59 million.

The Tax Act also included the global intangible low-taxed income (GILTI) tax for years beginning in 2018. We will account for the effects of GILTI as a component of income tax expense in the future period in which the tax arises.

The earnings represented by non-cash operating assets, such as fixed assets and certain inventory, will continue to be permanently reinvested outside the United States. The tax on indefinitely reinvested earnings eliminates any additional U.S. taxation of these earnings upon repatriation to the United States. Consequently, no U.S. tax provision has been made for the future remittance of these earnings. However, withholding taxes in certain non-U.S. jurisdictions will be incurred upon repatriation of available cash to the United States. A provision has been made for deferred taxes on these undistributed earnings to the extent that dividend payments from these subsidiaries are expected to result in a withholding tax liability. As of December 31, 2017, we have no basis differences that would result in material unrecognized deferred tax liabilities.

Our effective tax rate is affected by U.S. tax benefits and tax rates applicable to our operations in many of the jurisdictions in which we operate, most of which were lower than the U.S. statutory income tax rate prior to enactment of the Tax Act. These non-U.S. tax rates are generally statutory in nature and without expiration.

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

	December 31,
	2017			2016
Deferred tax assets:
Deferred loss and tax credit carryforwards	$	256		$	214
Accrued expenses		119			219
Stock compensation		107			220
Inventories and related reserves		93			145
Retirement costs for defined benefit and retiree health care		38			82
Other		9			81
Total deferred tax assets, before valuation allowance		622			961
Valuation allowance		(165	)		(128	)
Total deferred tax assets, after valuation allowance		457			833
Deferred tax liabilities:
Acquisition-related intangibles and fair-value adjustments		(207	)		(460	)
International earnings		(64	)		(32	)
Total deferred tax liabilities		(271	)		(492	)
Net deferred tax asset	$	186		$	341

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

	December 31,
	2017			2016
Deferred tax assets	$	264		$	374
Deferred tax liabilities		(78	)		(33	)
Net deferred tax asset	$	186		$	341

We make an ongoing assessment regarding the realization of U.S. and non-U.S. deferred tax assets. This assessment is based on our evaluation of relevant criteria, including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, taxable income in prior carryback years and expectations for future taxable income. Valuation allowances increased by $37 million in 2017 and decreased by $58 million in 2016. These changes had no impact to Net income in 2017 and had a $63 million benefit to Net income in 2016.

We have U.S. and non-U.S. tax loss carryforwards of approximately $6 million, none of which will expire before the year 2027.

Cash payments made for income taxes, net of refunds, were $1.80 billion, $1.15 billion and $1.17 billion in 2017, 2016 and 2015, 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:

	2017			2016			2015
Balance, January 1	$	243		$	84		$	108
Additions based on tax positions related to the current year		17			4			11
Additions for tax positions of prior years		42			189			3
Reductions for tax positions of prior years		(1	)		(2	)		(21	)
Settlements with tax authorities		(1	)		(32	)		(17	)
Balance, December 31	$	300		$	243		$	84

Interest income (expense) recognized in the year ended December 31	$	(19	)	$	4		$	8

Interest receivable (payable) as of December 31	$	(38	)	$	13		$	9

The liability for uncertain tax positions is a component of Other long-term liabilities on our Consolidated Balance Sheets.

All of the $300 million and the $243 million liabilities for uncertain tax positions as of December 31, 2017 and 2016, respectively, are comprised of positions that, if recognized, would lower the effective tax rate. If these liabilities are ultimately realized, $13 million and $12 million of existing deferred tax assets in 2017 and 2016, respectively, would also be realized. These deferred tax assets are related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation.

As of December 31, 2017, 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. The audit of the U.S. federal tax returns for 2013 through 2015 is underway.

In non-U.S. jurisdictions, the years open to audit represent the years still open under the statute of limitations. With respect to major jurisdictions outside the United States, our subsidiaries are no longer subject to income tax audits for years before 2007.

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, 2017. Our forward foreign currency exchange contracts outstanding as of December 31, 2017, had a notional value of $365 million to hedge our non-U.S. dollar net balance sheet exposures, including $140 million to sell Japanese yen, $59 million to sell British pound sterling and $49 million to sell euros.

Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our deferred compensation liabilities, are carried at fair value. Our postretirement plan assets are carried at fair value or net asset value per share. The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. 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:

	2017			2016		2015
Balance, January 1	$	17		$	7	$	12
Amounts charged (credited) to operating results		(9	)		10		(5	)
Recoveries and write-offs, net		—			—		—
Balance, December 31	$	8		$	17	$	7

Major customer

No end customer accounted for 10 percent or more of revenue in 2017 or 2016. In 2015, Apple Inc. accounted for approximately 11 percent of revenue, recognized primarily in our Analog segment.

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 Fair-value considerations 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, 2017						December 31, 2016
	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	$	525	$	—	$	—	$	346	$	—	$	—
Corporate obligations		172		698		—		107		544		—
U.S. government agency and Treasury securities		700		2,115		—		490		1,792		—
Trading securities:
Mutual funds		—		—		236		—		—		201
Total		1,397		2,813		236		943		2,336		201

Other measurement basis:
Equity-method investments		—		—		26		—		—		25
Cost-method investments		—		—		6		—		—		9
Cash on hand		259		—		—		211		—		—
Total	$	1,656	$	2,813	$	268	$	1,154	$	2,336	$	235

As of December 31, 2017 and 2016, 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 2017, 2016 and 2015. All of our debt securities classified as available for sale as of December 31, 2017, have maturities within one year.

In 2017, 2016 and 2015, the proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $4.10 billion, $3.39 billion and $2.89 billion, respectively. Gross realized gains and losses from these sales were not material.

Other-than-temporary declines and impairments in the values of our debt and equity investments, which were recognized in OI&E, were not material in 2017, 2016 and 2015.

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, 2017 and 2016, 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, 2017						December 31, 2016
	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Money market funds	$	525	$	—	$	525	$	346	$	—	$	346
Corporate obligations		—		870		870		—		651		651
U.S. government agency and Treasury securities		2,765		50		2,815		2,042		240		2,282
Mutual funds		236		—		236		201		—		201
Total assets	$	3,526	$	920	$	4,446	$	2,589	$	891	$	3,480

Liabilities:
Deferred compensation	$	255	$	—	$	255	$	218	$	—	$	218
Total liabilities	$	255	$	—	$	255	$	218	$	—	$	218

Goodwill and acquisition-related intangibles

Goodwill by segment as of December 31, 2017 and 2016, 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 2017, 2016 and 2015, we determined no impairment was indicated.

The components of Acquisition-related intangibles are as follows:

	Amortization	December 31, 2017						December 31, 2016
	Period	Gross Carrying		Accumulated				Gross Carrying		Accumulated
	(Years)	Amount		Amortization		Net		Amount		Amortization		Net
Developed technology	7 - 10	$	2,130	$	1,361	$	769	$	2,130	$	1,144	$	986
Customer relationships	8		810		633		177		810		532		278
Total		$	2,940	$	1,994	$	946	$	2,940	$	1,676	$	1,264

Amortization of acquisition-related intangibles was $318 million, $319 million and $319 million in 2017, 2016 and 2015, respectively. Fully amortized assets are written off against accumulated amortization. Remaining estimated amortization of acquisition-related intangibles is as follows:

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

Postretirement benefit plans

Plan descriptions

We have various employee retirement plans, including defined contribution, defined benefit and retiree health care benefit plans. For qualifying employees, we offer deferred compensation arrangements.

U.S. retirement plans

Our principal retirement plans in the United States are a defined contribution plan; an enhanced defined contribution plan; and qualified and non-qualified defined benefit pension plans. The defined benefit plans were closed to new participants in 1997, and then current participants were allowed to make a one-time election to continue accruing a benefit in the plans, or to cease accruing a benefit and instead to participate in the enhanced defined contribution plan described below.

Both defined contribution plans offer an employer-matching savings option that allows employees to make 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, 2017 and 2016, as a result of employees’ elections, TI’s U.S. defined contribution plans held shares of TI common stock totaling 10 million shares and 11 million shares valued at $1.00 billion and $796 million, respectively. Dividends paid on these shares in 2017 and 2016 were $22 million and $20 million, respectively. Effective April 1, 2016, the TI common stock fund was frozen to new contributions or transfers into the fund.

Our aggregate expense for the U.S. defined contribution plans was $61 million in 2017 and $60 million in 2016 and 2015.

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, 2017 and 2016, as a result of employees’ elections, TI’s non-U.S. defined contribution plans held TI common stock valued at $27 million and $20 million, respectively. Dividends paid on these shares of TI common stock in 2017 and 2016 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
	2017			2016			2015			2017			2016			2015			2017			2016			2015
Service cost	$	22		$	22		$	22		$	5		$	5		$	5		$	37		$	34		$	35
Interest cost		42			42			43			17			20			20			44			52			53
Expected return on plan assets		(41	)		(41	)		(48	)		(17	)		(20	)		(22	)		(62	)		(68	)		(76	)
Amortization of prior service cost (credit)		—			—			—			(4	)		(3	)		2			(2	)		(2	)		(2	)
Recognized net actuarial loss		14			21			19			3			7			8			28			25			24
Net periodic benefit costs		37			44			36			4			9			13			45			41			34
Settlement losses		36			21			25			—			—			—			2			2			2
Total, including other postretirement losses	$	73		$	65		$	61		$	4		$	9		$	13		$	47		$	43		$	36

With our early adoption of ASU 2017-07, all defined benefit and retiree health care benefit plan expense components other than service cost are recognized in OI&E in our Consolidated Statements of Income. Service cost is recognized within Operating profit. See Note 2 for additional information.

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
	2017			2016			2017			2016			2017			2016
Change in plan benefit obligation
Benefit obligation at beginning of year:	$	1,030		$	1,033		$	434		$	463		$	2,361		$	2,231
Service cost		22			22			5			5			37			34
Interest cost		42			42			17			20			44			52
Participant contributions		—			—			9			10			6			6
Benefits paid		(9	)		(9	)		(39	)		(38	)		(90	)		(77	)
Medicare subsidy		—			—			—			1			—			—
Actuarial loss (gain)		109			27			(15	)		(27	)		(52	)		259
Settlements		(196	)		(85	)		—			—			(13	)		(8	)
Plan amendments		—			—			3			—			—			—
Effects of exchange rate changes		—			—			—			—			176			(136	)
Benefit obligation at end of year (BO)	$	998		$	1,030		$	414		$	434		$	2,469		$	2,361

Change in plan assets
Fair value of plan assets at beginning of year:	$	1,034		$	1,019		$	434		$	441		$	2,309		$	2,134
Actual return on plan assets		123			79			44			20			148			227
Employer contributions (qualified plans)		25			15			1			1			56			160
Employer contributions (non-qualified plans)		18			15			—			—			—			—
Participant contributions		—			—			9			10			6			6
Benefits paid		(9	)		(9	)		(39	)		(38	)		(90	)		(77	)
Settlements		(196	)		(85	)		—			—			(13	)		(8	)
Effects of exchange rate changes		—			—			—			—			177			(133	)
Other		—			—			(55	)		—			—			—
Fair value of plan assets at end of year (FVPA)	$	995		$	1,034		$	394		$	434		$	2,593		$	2,309

Funded status (FVPA – BO) at end of year	$	(3	)	$	4		$	(20	)	$	—		$	124		$	(52	)

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
2017
Overfunded retirement plans	$	58		$	—		$	150		$	208
Accrued expenses and other liabilities & Other long-term liabilities		(13	)		—			(5	)		(18	)
Underfunded retirement plans		(48	)		(20	)		(21	)		(89	)
Funded status (FVPA – BO) at end of 2017	$	(3	)	$	(20	)	$	124		$	101

2016
Overfunded retirement plans	$	66		$	3		$	27		$	96
Accrued expenses and other liabilities & Other long-term liabilities		(9	)		—			(6	)		(15	)
Underfunded retirement plans		(53	)		(3	)		(73	)		(129	)
Funded status (FVPA – BO) at end of 2016	$	4		$	—		$	(52	)	$	(48	)

Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute about $50 million to our retirement benefit plans in 2018. 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 $899 million and $926 million as of December 31, 2017 and 2016, respectively, for the U.S. defined benefit plans, and $2.33 billion and $2.22 billion as of December 31, 2017 and 2016, 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, 2016	$	133		$	58		$	(11	)	$	351		$	(6	)	$	542		$	(17	)
Changes in AOCI by category:
Adjustments		28			(41	)		3			(105	)		—			(118	)		3
Recognized within Net income		(51	)		(3	)		4			(29	)		2			(83	)		6
Tax effect		8			15			(2	)		30			—			53			(2	)
Total change to AOCI		(15	)		(29	)		5			(104	)		2			(148	)		7
AOCI balance, net of taxes, December 31, 2017	$	118		$	29		$	(6	)	$	247		$	(4	)	$	394		$	(10	)

The estimated amounts of net actuarial loss and unrecognized prior service credit included in AOCI as of December 31, 2017, that are expected to be amortized into net periodic benefit cost over the next fiscal year are: $17 million and none for the U.S. defined benefit plans; $2 million and ($3) million for the U.S. retiree health care benefit plan; and $20 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.

	December 31, 2017
	Level 1		Level 2		Level 3		Other (a)		Total
Assets of U.S. defined benefit plan:
Fixed income securities and cash equivalents	$	—	$	—	$	—	$	654	$	654
Equity securities		—		—		—		341		341
Total	$	—	$	—	$	—	$	995	$	995

Assets of U.S. retiree health care plan:
Fixed income securities and cash equivalents	$	132	$	2	$	—	$	111	$	245
Equity securities		—		—		—		149		149
Total	$	132	$	2	$	—	$	260	$	394

Assets of non-U.S. defined benefit plans:
Fixed income securities and cash equivalents	$	16	$	183	$	—	$	1,646	$	1,845
Equity securities		7		23		—		717		747
Other		—		—		1		—		1
Total	$	23	$	206	$	1	$	2,363	$	2,593

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

	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.

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, 2015, 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
	2017	2016	2017	2016	2017	2016
Weighted average assumptions used to determine benefit obligations:
Discount rate	3.75%	4.29%	3.63%	4.08%	1.84%	1.76%
Long-term pay progression	3.30%	3.30%	n/a	n/a	2.96%	3.11%

Weighted average assumptions used to determine net periodic benefit cost:
Discount rate	4.21%	4.40%	4.08%	4.40%	1.76%	2.41%
Long-term rate of return on plan assets	4.30%	4.60%	4.10%	4.40%	2.60%	3.18%
Long-term pay progression	3.30%	3.30%	n/a	n/a	3.11%	3.21%

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.
	Benefit	Health Care	Defined Benefit
Fixed income securities and cash equivalents	65%	55% - 65%	60% - 100%
Equity securities	35%	35% - 45%	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
	2017	2016	2017	2016	2017	2016
Fixed income securities and cash equivalents	66%	66%	62%	52%	71%	72%
Equity securities	34%	34%	38%	48%	29%	28%

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, 2017, 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
2018	$	140	$	30	$	86
2019		111		31		87
2020		83		31		89
2021		90		30		90
2022		87		30		94
2023 – 2027		410		139		495

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


Assumed health care cost trend rate for next year	7.50	%	6.75	%
Ultimate trend rate	5.00	%	5.00	%
Year in which ultimate trend rate is reached	2028		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, 2017, by $1 million. The service cost and interest cost components of 2017 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, 2017, our liability to participants of the deferred compensation plans was $255 million and is recorded in Other long-term liabilities on our Consolidated Balance Sheets. This amount reflects the accumulated participant deferrals and earnings thereon as of that date. As of December 31, 2017, we held $236 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.

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, 2017, 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 2022. 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, 2017, our credit facility was undrawn and we had no commercial paper outstanding.

Long-term debt

We retired $250 million of maturing debt in March 2017 and another $375 million in June 2017.

In May 2017, we issued an aggregate principal amount of $600 million of fixed-rate, long-term debt. The offering consisted of the reissuance of $300 million of 2.75% notes due in 2021 at a premium and the issuance of $300 million of 2.625% notes due in 2024 at a discount. We incurred $3 million of issuance and other related costs. The proceeds of the offerings were $605 million, net of the original issuance discount and premium, and were used for the repayment of maturing debt and general corporate purposes.

In November 2017, we issued a principal amount of $500 million of fixed-rate, long-term debt due in 2027. We incurred $3 million of issuance and other related costs. The proceeds of the offering were $494 million, net of the original issuance discount, and were used for general corporate purposes.

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. 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. 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.

Long-term debt outstanding is as follows:

	December 31,
	2017			2016
Notes due 2017 at 0.875%	$	—		$	250
Notes due 2017 at 6.60% (assumed with National acquisition)		—			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%		550			250
Notes due 2022 at 1.85%		500			500
Notes due 2023 at 2.25%		500			500
Notes due 2024 at 2.625%		300			—
Notes due 2027 at 2.90%		500			—
Total debt		4,100			3,625
Net unamortized discounts, premiums and debt issuance costs		(23	)		(16	)
Total debt, including net unamortized discounts, premiums and debt issuance costs		4,077			3,609
Current portion of long-term debt		(500	)		(631	)
Long-term debt	$	3,577		$	2,978

Interest and debt expense was $78 million in 2017, $80 million in 2016 and $90 million in 2015. This was net of the amortization of the debt discounts, premiums and debt issuance costs. Cash payments for interest on long-term debt were $75 million in 2017, $88 million in 2016 and $99 million in 2015. Capitalized interest was not material.

Commitments and contingencies

Purchase commitments

Some of our purchase commitments include payments for software licenses and contractual agreements with suppliers where there is a fixed, non-cancellable payment schedule or minimum payments due with a reduced delivery schedule.

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 $81 million, $86 million and $98 million in 2017, 2016 and 2015, respectively.

As of December 31, 2017, we had committed to make the following minimum payments under our purchase commitments and non-cancellable operating leases:


	Purchase		Operating
	Commitments		Leases
2018	$	391	$	68
2019		367		45
2020		234		49
2021		37		29
2022		30		24
Thereafter		35		56

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.

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,
	2017			2016			2015
Royalty income (a)	$	119		$	—		$	—
Income from settlements related to intellectual property infringement		—			188			—
Pension and other retiree benefit costs (b)		(61	)		(56	)		(48	)
Other (c)		17			23			32
Total	$	75		$	155		$	(16	)

(a)	As of January 1, 2017, royalties are recorded in OI&E. See Note 1 for additional information.

(b)	Reflects the adoption of ASU 2017-07. See Note 2 for additional information.

(c)	Other includes interest and lease income, investment and currency gains and losses, and tax interest income and expense.

Prepaid expenses and other current assets

	December 31,
	2017		2016
Prepaid taxes on intercompany inventory profits, net	$	768	$	566
Other		262		344
Total	$	1,030	$	910

Property, plant and equipment at cost

	Depreciable	December 31,
	Lives (Years)	2017		2016
Land	n/a	$	127	$	127
Buildings and improvements	5 - 40		2,467		2,753
Machinery and equipment	2 - 10		2,195		2,043
Total		$	4,789	$	4,923

Other long-term liabilities

	December 31,
	2017		2016
Long-term portion of tax on indefinitely reinvested earnings	$	635	$	—
Other		668		554
Total	$	1,303	$	554

Accumulated other comprehensive income (loss), net of taxes (AOCI)

	December 31,
	2017			2016
Postretirement benefit plans:
Net actuarial loss	$	(394	)	$	(542	)
Prior service credit		10			17
Cash flow hedge derivative instruments		—			(1	)
Total	$	(384	)	$	(526	)

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 2017, 2016 and 2015. The table below details where these transactions are recorded in our Consolidated Statements of Income.

	For Years Ended									Impact to
	December 31,									Related Statement
	2017			2016			2015			of Income Line
Net actuarial losses of defined benefit plans:
Recognized net actuarial loss and Settlement losses (a)	$	83		$	76		$	78		Decrease to OI&E
Tax effect		(27	)		(25	)		(25	)	Decrease to Provision for income taxes
Recognized within Net income, net of taxes	$	56		$	51		$	53		Decrease to Net income

Prior service credit of defined benefit plans:
Amortization of prior service cost (credit) (a)	$	(6	)	$	(5	)	$	—		Increase to OI&E
Tax effect		1			2			—		Increase to Provision for income taxes
Recognized within Net income, net of taxes	$	(5	)	$	(3	)	$	—		Increase to Net income

Derivative instruments:
Amortization of treasury-rate locks	$	1		$	1		$	2		Increase to Interest and debt expense
Tax effect		—			—			(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.

Quarterly financial data (unaudited)

As a result of our early adoption of ASU 2017-07, we have recast Gross profit and Operating profit for 2016 to conform to the new presentation. See Note 2 for additional information.

	2017 Quarters								2016 Quarters
	4th		3rd		2nd		1st		4th			3rd		2nd		1st
Revenue	$	3,750	$	4,116	$	3,693	$	3,402	$	3,414		$	3,675	$	3,273	$	3,008
Gross profit		2,440		2,656		2,374		2,144		2,137			2,284		2,007		1,829
Included in Operating profit:
Acquisition charges		79		80		79		80		80			80		79		80
Restructuring charges/other		3		1		3		4		(20	)		1		2		2
Operating profit		1,563		1,788		1,480		1,252		1,332			1,408		1,131		984
Net income		344		1,285		1,056		997		1,047			1,018		819		711

Basic EPS	$	0.35	$	1.29	$	1.05	$	0.99	$	1.04		$	1.00	$	0.81	$	0.70
Diluted EPS	$	0.34	$	1.26	$	1.03	$	0.97	$	1.02		$	0.98	$	0.79	$	0.69

Report of independent registered public accounting firm

To the Shareholders and the Board of Directors of Texas Instruments Incorporated

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Texas Instruments Incorporated (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, 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 22, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 1952.

Dallas, Texas

February 22, 2018

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