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, 2018

Comprehensive income for each of the three years in the period ended December 31, 2018

Balance sheets as of December 31, 2018 and 2017

Cash flows for each of the three years in the period ended December 31, 2018

Stockholders’ equity for each of the three years in the period ended December 31, 2018

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)		2018					2017					2016
Revenue		$		15,784			$		14,961			$		13,370
Cost of revenue (COR)				5,507					5,347					5,113
Gross profit				10,277					9,614					8,257
Research and development (R&D)				1,559					1,508					1,356
Selling, general and administrative (SG&A)				1,684					1,694					1,742
Acquisition charges				318					318					319
Restructuring charges/other				3					11					(15	)
Operating profit				6,713					6,083					4,855
Other income (expense), net (OI&E)				98					75					155
Interest and debt expense				125					78					80
Income before income taxes				6,686					6,080					4,930
Provision for income taxes				1,106					2,398					1,335
Net income		$		5,580			$		3,682			$		3,595
Earnings per common share (EPS):
Basic		$		5.71			$		3.68			$		3.54
Diluted		$		5.59			$		3.61			$		3.48
Average shares outstanding (millions):
Basic				970					991					1,003
Diluted				990					1,012					1,021
A portion of net income is allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents. Diluted EPS is calculated using the following:
Net income		$		5,580			$		3,682			$		3,595
Income allocated to RSUs				(42	)				(33	)				(44	)
Income allocated to common stock for diluted EPS		$		5,538			$		3,649			$		3,551
See accompanying notes.

Consolidated Statements of Comprehensive Income		For Years Ended December 31,
(Millions of dollars)		2018					2017					2016
Net income		$		5,580			$		3,682			$		3,595
Other comprehensive income (loss)
Net actuarial losses of defined benefit plans:
Adjustment, net of tax effect of $35, ($26) and $6				(98	)				92					(43	)
Recognized within net income, net of tax effect of ($15), ($27) and ($25)				50					56					51
Prior service credit of defined benefit plans:
Adjustment, net of tax effect of $1, $1 and $0				(6	)				(2	)				—
Recognized within net income, net of tax effect of $1, $1 and $2				(3	)				(5	)				(3	)
Derivative instruments:
Change in fair value, net of tax effect of $1, $0 and $0				(2	)				—					—
Recognized within net income, net of tax effect of $0, $0 and $0				—					1					1
Other comprehensive income (loss), net of taxes				(59	)				142					6
Total comprehensive income		$		5,521			$		3,824			$		3,601
See accompanying notes.

Consolidated Balance Sheets		December 31,
(Millions of dollars, except share amounts)		2018					2017
Assets
Current assets:
Cash and cash equivalents		$		2,438			$		1,656
Short-term investments				1,795					2,813
Accounts receivable, net of allowances of ($19) and ($8)				1,207					1,278
Raw materials				181					126
Work in process				1,070					1,089
Finished goods				966					742
Inventories				2,217					1,957
Prepaid expenses and other current assets				440					1,030
Total current assets				8,097					8,734
Property, plant and equipment at cost				5,425					4,789
Accumulated depreciation				(2,242	)				(2,125	)
Property, plant and equipment				3,183					2,664
Long-term investments				251					268
Goodwill				4,362					4,362
Acquisition-related intangibles				628					946
Deferred tax assets				295					264
Capitalized software licenses				89					110
Overfunded retirement plans				92					208
Other long-term assets				140					86
Total assets		$		17,137			$		17,642
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt		$		749			$		500
Accounts payable				478					466
Accrued compensation				724					722
Income taxes payable				103					128
Accrued expenses and other liabilities				420					442
Total current liabilities				2,474					2,258
Long-term debt				4,319					3,577
Underfunded retirement plans				118					89
Deferred tax liabilities				42					78
Other long-term liabilities				1,190					1,303
Total liabilities				8,143					7,305
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				1,950					1,776
Retained earnings				37,906					34,662
Treasury common stock at cost
Shares: 2018 – 795,665,646; 2017 – 757,657,217				(32,130	)				(27,458	)
Accumulated other comprehensive income (loss), net of taxes (AOCI)				(473	)				(384	)
Total stockholders’ equity				8,994					10,337
Total liabilities and stockholders’ equity		$		17,137			$		17,642
See accompanying notes.

Consolidated Statements of Cash Flows		For Years Ended December 31,
(Millions of dollars)		2018					2017					2016
Cash flows from operating activities
Net income		$		5,580			$		3,682			$		3,595
Adjustments to net income:
Depreciation				590					539					605
Amortization of acquisition-related intangibles				318					318					319
Amortization of capitalized software				46					47					31
Stock compensation				232					242					252
Gains on sales of assets				(3	)				—					(40	)
Deferred taxes				(105	)				112					(202	)
Increase (decrease) from changes in:
Accounts receivable				71					(7	)				(108	)
Inventories				(282	)				(167	)				(99	)
Prepaid expenses and other current assets				669					76					(81	)
Accounts payable and accrued expenses				(7	)				51					72
Accrued compensation				(7	)				(3	)				36
Income taxes payable				158					468					333
Changes in funded status of retirement plans				36					21					(73	)
Other				(107	)				(16	)				(26	)
Cash flows from operating activities				7,189					5,363					4,614
Cash flows from investing activities
Capital expenditures				(1,131	)				(695	)				(531	)
Proceeds from asset sales				9					40					—
Purchases of short-term investments				(5,641	)				(4,555	)				(3,503	)
Proceeds from short-term investments				6,708					4,095					3,390
Other				(23	)				(12	)				(6	)
Cash flows from investing activities				(78	)				(1,127	)				(650	)
Cash flows from financing activities
Proceeds from issuance of long-term debt				1,500					1,099					499
Repayment of debt				(500	)				(625	)				(1,000	)
Dividends paid				(2,555	)				(2,104	)				(1,646	)
Stock repurchases				(5,100	)				(2,556	)				(2,132	)
Proceeds from common stock transactions				373					483					472
Other				(47	)				(31	)				(3	)
Cash flows from financing activities				(6,329	)				(3,734	)				(3,810	)
Net change in cash and cash equivalents				782					502					154
Cash and cash equivalents at beginning of period				1,656					1,154					1,000
Cash and cash equivalents at end of period		$		2,438			$		1,656			$		1,154
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, 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	)
2018
Net income				—					—					5,580					—					—
Dividends declared and paid ($2.63 per share)				—					—					(2,555	)				—					—
Common stock issued for stock-based awards				—					(55	)				—					428					—
Stock repurchases				—					—					—					(5,100	)				—
Stock compensation				—					232					—					—					—
Other comprehensive income (loss), net of taxes				—					—					—					—					(59	)
Dividend equivalents paid on restricted stock units				—					—					(17	)				—					—
Cumulative effect of accounting changes				—					—					236					—					(30	)
Other				—					(3	)				—					—					—
Balance, December 31, 2018		$		1,741			$		1,950			$		37,906			$		(32,130	)		$		(473	)
See accompanying notes.

Notes to financial statements

1. Description of business, including segment and geographic area information

We design, make and sell semiconductors to electronics designers and manufacturers all over the world. We have two reportable segments, which are established along major categories of products as follows:

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

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

We report the results of our remaining business activities in Other. Other includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other includes DLP® products, calculators and custom ASIC products.

In Other, we also include items that are not used in evaluating the results of or in allocating resources to our segments. Examples of these items include acquisition charges (see Note 8); restructuring charges (see Note 12); and certain corporate-level items, such as litigation expenses, environmental costs, insurance settlements, and gains and losses from other activities, including asset dispositions. We allocate the remainder of our expenses associated with corporate activities to our operating segments based on specific methodologies, such as percentage of operating expenses or headcount.

Our centralized manufacturing and support organizations, such as facilities, procurement and logistics, provide support to our operating segments, including those in Other. Costs incurred by these organizations, including depreciation, are charged to the segments on a per-unit basis. Consequently, depreciation expense is not an independently identifiable component within the segments’ results and, therefore, is not provided.

With the exception of goodwill, we do not identify or allocate assets by operating segment, nor does the chief operating decision maker evaluate operating segments using discrete asset information. We have no material intersegment revenue. The accounting policies of the segments are consistent with those described below in the summary of significant accounting policies and practices.

Segment information

	For Years Ended December 31,
	2018					2017					2016
Revenue:
Analog	$		10,801			$		9,900			$		8,536
Embedded Processing			3,554					3,498					3,023
Other			1,429					1,563					1,811
Total revenue	$		15,784			$		14,961			$		13,370
Operating profit:
Analog	$		5,109			$		4,468			$		3,416
Embedded Processing			1,205					1,143					817
Other			399					472					622
Total operating profit	$		6,713			$		6,083			$		4,855

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,
	2018					2017					2016
Revenue:
United States	$		2,288			$		1,901			$		1,682
Asia (a)			9,240					8,824					8,024
Europe, Middle East and Africa			3,047					2,907					2,393
Japan			869					1,049					1,040
Rest of world			340					280					231
Total revenue	$		15,784			$		14,961			$		13,370

(a)	Revenue from products shipped into China was $7.0 billion, $6.6 billion and $6.0 billion in 2018, 2017 and 2016, respectively.

		December 31,
	2018					2017
Property, plant and equipment:
United States	$		1,812			$		1,469
Asia (a)			1,116					964
Europe, Middle East and Africa			84					97
Japan			157					118
Rest of world			14					16
Total property, plant and equipment	$		3,183			$		2,664

(a)	Property, plant and equipment at our two sites in the Philippines was $437 million as of December 31, 2018 and 2017. Property, plant and equipment at our sites in China was $313 million and $236 million as of December 31, 2018 and 2017, respectively.

2. Basis of presentation and significant accounting policies and practices

Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The basis of these financial statements is comparable for all periods presented herein, except for the effects of adopting a new accounting standard in 2018 related to revenue recognition.

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 2018 presentation.

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

Significant accounting policies and practices

Revenue recognition

We generate revenue primarily from the sale of semiconductor products, either directly to a customer or to a distributor, or at the conclusion of a consignment process. We have a variety of types of contracts with our customers and distributors. In determining whether a contract exists, we evaluate the terms of the arrangement, the relationship with the customer or distributor and their ability to pay.

We recognize revenue from sales of our products, including sales to our distributors, when control is transferred. Control is considered transferred when title and risk of loss pass, when the customer becomes obligated to pay and, where required, when the customer has accepted the products. This transfer generally occurs at a point in time upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order. Payment for sales to customers and distributors is generally due on our standard commercial terms. For sales to distributors, payment is not contingent upon resale of the products.

Revenue from sales of our products that are subject to inventory consignment agreements is recognized at a point in time, when the customer or distributor pulls product from consignment inventory that we store at designated locations. Transfer of control occurs at that point, when title and risk of loss transfers and the customer or distributor becomes obligated to pay for the products pulled from inventory. Until the products are pulled for use or sale by the customer or distributor, we retain control over the products’ disposition, including the right to pull back or relocate the products.

The revenue recognized is adjusted based on allowances, which are prepared on a portfolio basis using a most likely amount methodology based on analysis of historical data and contractual terms. These allowances, which are not material, generally include adjustments for pricing arrangements, product returns and incentives. The length of time between invoicing and payment is not significant under any of our payment terms. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component.

In addition, we record allowances for accounts receivable that we estimate may not be collected. We monitor collectability of accounts receivable primarily through review of accounts receivable aging. When collection is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, record a charge in the period such determination is made.

We recognize shipping fees, if any, received from customers in revenue. We include the related shipping and handling costs in cost of revenue. The majority of our customers pay these fees directly to third parties.

Advertising costs

We expense advertising and other promotional costs as incurred. This expense was $34 million, $39 million and $44 million in 2018, 2017 and 2016, respectively.

Income taxes

We account for income taxes using an asset and liability approach. We record the amount of taxes payable or refundable for the current year and the deferred tax assets and liabilities for future tax consequences of events that have been recognized in the financial statements or tax returns. We record a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized.

Other assessed taxes

Some transactions require us to collect taxes such as sales, value-added and excise taxes from our customers. These transactions are presented in our Consolidated Statements of Income on a net (excluded from revenue) basis.

Earnings per share (EPS)

We use the two-class method for calculating EPS because the restricted stock units (RSUs) we grant are participating securities containing non-forfeitable rights to receive dividend equivalents. Under the two-class method, a portion of net income is allocated to RSUs and excluded from the calculation of income allocated to common stock, as shown in the table below.

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

	For Years Ended December 31,
	2018														2017														2016
	Net														Net														Net
	Income				Shares					EPS					Income					Shares				EPS					Income					Shares				EPS
Basic EPS:
Net income	$		5,580												$		3,682												$		3,595
Income allocated to RSUs			(43	)													(34	)													(45	)
Income allocated to common stock	$		5,537				970			$		5.71			$		3,648				991			$		3.68			$		3,550				1,003			$		3.54
Dilutive effect of stock compensation plans							20														21														18
Diluted EPS:
Net income	$		5,580												$		3,682												$		3,595
Income allocated to RSUs			(42	)													(33	)													(44	)
Income allocated to common stock	$		5,538				990			$		5.59			$		3,649				1,012			$		3.61			$		3,551				1,021			$		3.48

Potentially dilutive securities representing 4 million and 6 million shares of common stock that were outstanding in 2018 and 2017, respectively, were excluded from the computation of diluted earnings per common share during these periods because their effect would have been anti-dilutive. 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 below. See Note 7 for additional information.

	•	Cash equivalents and short-term investments – We consider investments in available-for-sale debt securities with maturities of 90 days or less from the date of our investment to be cash equivalents. We consider investments in available-for-sale debt securities with maturities beyond 90 days from the date of our investment as being available for use in current operations and include them in short-term investments. The primary objectives of our cash equivalent and short-term investment activities are to preserve capital and maintain liquidity while generating appropriate returns.

	•	Long-term investments – Long-term investments consist of mutual funds, venture capital funds and non-marketable equity securities.

Inventories

Inventories are stated at the lower of cost or estimated net realizable value. Cost is generally computed on a currently adjusted standard cost basis, which approximates cost on a first-in first-out basis. Standard cost is based on the normal utilization of installed factory capacity. Cost associated with underutilization of capacity is expensed as incurred. Inventory held at consignment locations is included in our finished goods inventory. Consigned inventory was $314 million and $303 million as of December 31, 2018 and 2017, 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

Goodwill is reviewed for impairment annually or more frequently if certain impairment indicators arise. We perform our annual goodwill impairment test as of October 1 for our reporting units, which compares the fair value for each reporting unit to its associated carrying value, including goodwill. See Note 8 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 Standard Update (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. We adopted Accounting Standards Codification Topic 606 (ASC 606) as of January 1, 2018, using the modified retrospective transition method applied only to contracts that were not completed as of the adoption date. The reported results for 2018 reflect the application of the new accounting guidance, while the reported results for prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under ASC 605, Revenue Recognition.

The most significant impact from adopting the standard relates to our accounting for royalty income on licenses of intellectual property; however, the effect of such change during any individual reporting period will not materially impact our results of operations and financial position. Although royalty income is recorded within OI&E, the new revenue guidance applies to these agreements by analogy, and therefore, such agreements have been evaluated for ASC 606 transition considerations. Under ASC 606, royalty income for our fixed-rate royalty agreements is bifurcated between two performance obligations: providing a right to use our initial patent portfolio and the right to access our future patents when those patents are developed. We have determined that the value of these agreements is allocated more heavily to the initial performance obligation. As a result, income from these agreements is recognized predominately at the time of contract execution rather than ratably over the life of the agreements, accelerating the timing of when we recognize royalty income in OI&E.

The timing of revenue recognition, billings and cash collections may result in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities). These items are included in other current and non-current assets and liabilities on the Consolidated Balance Sheets. Generally, we invoice customers for payment upon shipment or when goods are pulled from consignment inventory, which results in an unconditional right to consideration. The time frame between when the customer places an order for products and when it is shipped is less than 12 months.

Occasionally, as of the end of a reporting period, some performance obligations associated with contracts are unsatisfied or only partially satisfied. In accordance with the practical expedients available in the guidance, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Additionally, sales commissions are expensed when incurred because the amortization period would have been one year or less.

We recognized an increase to opening retained earnings of $206 million, net of taxes, as of January 1, 2018, due to the cumulative impact of adopting ASC 606. A contract asset of $283 million and deferred tax liabilities of $55 million were recorded as of January 1, 2018, related to the transition period adjustments.

ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This standard allows a reclassification of stranded tax effects as a result of the U.S. Tax Cuts and Jobs Act (the Tax Act) from AOCI to retained earnings. The provisions from this guidance are effective for interim and annual periods beginning after January 1, 2019. This standard should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effects of the Tax Act are recognized.

We elected to early adopt this standard during the fourth quarter of 2018 concurrent with the completion of our accounting for the tax effects of the enactment of the Tax Act, applying the guidance to the period of adoption. As a result, we reclassified stranded tax effects of $30 million from the 2018 opening balance of AOCI into retained earnings. See Note 5 for additional information related to our accounting for the effects of the Tax Act.

Other standards

The following standards were also adopted:

ASU		Description		Adopted 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. 2017-04		Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment		October 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

Changes in accounting standards – standards not yet adopted

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 finance lease. This standard is effective for interim and annual periods beginning January 1, 2019.

We are adopting this standard effective January 1, 2019, using the optional transition method, applying the guidance to leases existing at, or entered into after, the beginning of the period of adoption. We are also electing certain practical expedients permitted under the transition guidance. In preparation for adoption of the standard, we have implemented system functionality to enable the preparation of financial information. The most significant impact from adopting the standard will be the recognition of right-of-use assets and lease liabilities for operating leases on our Consolidated Balance Sheets, which will increase total assets by about 2 percent.

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, with early adoption permitted beginning January 1, 2019, and must be applied on a modified retrospective basis. We are 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 are evaluating the impact of the following standards, but we do not expect them 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. 2017-12		Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities		January 1, 2019
ASU No. 2018-13		Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement		January 1, 2020
ASU No. 2018-14		Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans		January 1, 2020
ASU No. 2018-15		Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract		January 1, 2020

3. Stock compensation

We have stock options outstanding to participants under long-term incentive plans. The option price per share may not be less than the fair market value of our common stock on the date of the grant. The options have a 10-year term, generally vest ratably over four years, and continue to vest after the option recipient retires.

We also have RSUs outstanding to participants under long-term incentive plans. Each RSU represents the right to receive one share of TI common stock 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. 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 (ESPP) under which options are offered to all eligible employees in amounts based on a percentage of the employee’s compensation, subject to a cap. Under the plan, the option price per share is 85 percent of the fair market value on the exercise date.

Total stock compensation expense recognized is as follows:

	For Years Ended December 31,
	2018					2017					2016
COR	$		25			$		36			$		40
R&D			69					59					60
SG&A			138					147					152
Total	$		232			$		242			$		252

These amounts include expenses related to non-qualified stock options, RSUs and stock options offered under our ESPP and are net of estimated forfeitures.

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

Fair-value methods and assumptions

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

	For Years Ended December 31,
	2018					2017					2016
Weighted average grant date fair value, per share	$		23.20			$		16.49			$		10.03
Weighted average assumptions used:
Expected volatility			23	%				24	%				25	%
Expected lives (in years)			7.2					7.2					7.3
Risk-free interest rates			2.57	%				2.36	%				1.72	%
Expected dividend yields			2.25	%				2.52	%				2.87	%

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

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

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

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

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

Our ESPP is a discount-purchase plan and consequently the Black-Scholes-Merton option-pricing model is not used to determine the fair value per share of these awards. The fair value per share under this plan equals the amount of the discount.

Long-term incentive and director compensation plans

Stock option and RSU transactions under our long-term incentive and director compensation plans are as follows:

	Stock Options									RSUs
					Weighted Average									Weighted Average
					Exercise Price									Grant Date Fair
	Shares				per Share					Shares				Value per Share
Outstanding grants, December 31, 2017		44,754,593			$		48.49				9,225,643			$		55.40
Granted		4,617,486					110.07				1,247,239					110.05
Stock options exercised/RSUs vested		(8,432,458	)				42.63				(2,769,994	)				44.50
Forfeited and expired		(1,034,167	)				77.30				(397,345	)				70.34
Outstanding grants, December 31, 2018		39,905,454					56.10				7,305,543					66.72

The weighted average grant date fair values per share of RSUs granted in 2018, 2017 and 2016 were $110.05, $79.52 and $53.98, respectively. In 2018, 2017 and 2016, the total grant date fair values of shares vested from RSU grants were $123 million, $149 million and $178 million, respectively.

As of December 31, 2018, the number of shares remaining available for future issuance under these plans was 50,167,414.

Summarized information about stock options outstanding as of December 31, 2018, 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			573,629				0.1			$		14.96				573,629			$		14.96
	20.01 to 40.00			9,508,056				2.9					31.21				9,508,056					31.21
	40.01 to 60.00			19,883,804				6.2					50.95				12,397,285					49.53
	60.01 to 80.00			5,612,386				8.1					79.21				1,143,118					79.20
	80.01 to 100.00			37,917				9.3					91.16				3,714					91.54
	100.01 to 113.30			4,289,662				9.1					110.15				—					—
	14.47 to 113.30			39,905,454				5.9					56.10				23,625,802					42.76

In 2018, 2017 and 2016, 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 $561 million, $632 million and $424 million, respectively.

Summarized information as of December 31, 2018, 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)			39,274,492					23,625,802
Weighted average remaining contractual life (in years)			5.9					4.7
Weighted average exercise price per share	$		55.60			$		42.76
Intrinsic value (millions of dollars)	$		1,591			$		1,222

(a)	Includes effects of expected forfeitures of approximately 1 million shares. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $1.60 billion.

As of December 31, 2018, total future compensation related to equity awards not yet recognized in our Consolidated Statements of Income was $224 million, consisting of $97 million related to unvested stock options and $127 million related to unvested RSUs. The $224 million is expected to be recognized as follows: $110 million in 2019, $72 million in 2020, $37 million in 2021 and $5 million in 2022.

Employee stock purchase plan

Options outstanding under the ESPP as of December 31, 2018, 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, 2019, resulting in an exercise price of $80.29 per share. Of the total outstanding options, none were exercisable as of December 31, 2018.

ESPP transactions are as follows:

	ESPP
	(Shares)				Exercise Price
Outstanding grants, December 31, 2017		202,179			$		89.74
Granted		847,535					87.48
Exercised		(819,878	)				90.06
Outstanding grants, December 31, 2018		229,836					80.29

The weighted average grant date fair values per share of options granted under the ESPP in 2018, 2017 and 2016 were $15.43, $12.99 and $9.79, respectively. In 2018, 2017 and 2016, the total intrinsic value of options exercised under these plans was $13 million, $13 million and $12 million, respectively.

As of December 31, 2018, the number of shares remaining available for future issuance under this plan was 34,555,101.

Effect on shares outstanding and treasury shares

Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2018, $16.14 billion of stock repurchase authorizations remain, and no expiration date has been specified.

Our current practice is to issue shares of common stock from treasury shares upon exercise of stock options, distribution of director deferred compensation and vesting of RSUs. The following table reflects the changes in our treasury shares:

	Stock Options				RSUs				Treasury Shares
Balance, December 31, 2015										729,547,527
Repurchases										35,480,036
Shares used for:
Stock options/RSUs		(14,516,606	)			(5,639,666	)
Stock applied to 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 taxes		—				1,058,100
ESPP		(1,065,757	)			—
Director deferred stock units		—				—				(4,750	)
Total issued		(14,378,776	)			(3,361,364	)			(17,740,140	)
Balance, December 31, 2017										757,657,217
Repurchases										49,482,220
Shares used for:
Stock options/RSUs		(8,432,458	)			(2,769,994	)
Stock applied to taxes		—				553,720
ESPP		(819,878	)			—
Director deferred stock units		—				—				(5,181	)
Total issued		(9,252,336	)			(2,216,274	)			(11,468,610	)
Balance, December 31, 2018										795,665,646

The effects on cash flows are as follows:

	For Years Ended December 31,
	2018					2017					2016
Proceeds from common stock transactions (a)	$		373			$		483			$		472
Tax benefit realized from stock compensation	$		179			$		341			$		255
Reduction to deferred tax asset			(43	)				(91	)				(105	)
Excess tax benefit for stock compensation	$		136			$		250			$		150

(a)	Net of taxes paid for employee shares withheld of $60 million, $83 million and $70 million in 2018, 2017 and 2016, respectively.

4. 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 $354 million, $355 million and $346 million of profit sharing expense under the TI Employee Profit Sharing Plan in 2018, 2017 and 2016, respectively.

5. Income taxes

Income before income taxes is comprised of the following components:

	For Years Ended December 31,
	2018					2017					2016
U.S.	$		5,672			$		5,130			$		3,953
Non-U.S.			1,014					950					977
Total	$		6,686			$		6,080			$		4,930

Provision for income taxes is comprised of the following components:

	For Years Ended December 31,
	2018															2017															2016
	Current					Deferred					Total					Current					Deferred					Total					Current					Deferred					Total
U.S. federal	$		979			$		(98	)		$		881			$		2,101			$		51			$		2,152			$		1,289			$		(122	)		$		1,167
Non-U.S.			225					(8	)				217					173					61					234					238					(80	)				158
U.S. state			7					1					8					12					—					12					10					—					10
Total	$		1,211			$		(105	)		$		1,106			$		2,286			$		112			$		2,398			$		1,537			$		(202	)		$		1,335

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,
	2018					2017					2016
U.S. statutory income tax rate			21.0	%				35.0	%				35.0	%
U.S. tax benefit for foreign derived intangible income			(5.3	)				—					—
U.S. Tax Act transitional non-cash expense			4.2					—					—
U.S. Tax Act enactment-date effects and measurement period adjustments			(0.7	)				12.7					—
U.S. tax on global intangible low-taxed income			0.4					—					—
U.S. tax benefit for manufacturing			—					(1.6	)				(1.5	)
U.S. excess tax benefit for stock compensation			(2.0	)				(4.1	)				(3.0	)
U.S. R&D tax credit			(1.3	)				(1.1	)				(1.2	)
U.S. non-deductible expenses			0.2					0.2					0.3
Non-U.S. effective tax rates			0.1					(2.5	)				(3.7	)
Impact of changes to uncertain tax positions			—					0.7					0.6
Other			(0.1	)				0.1					0.6
Effective tax rate			16.5	%				39.4	%				27.1	%

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 one-time tax on indefinitely reinvested earnings of certain non-U.S. subsidiaries that were previously tax deferred. We applied the guidance in Staff Accounting Bulletin No. 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018. As of December 31, 2017, we had not completed our accounting for the enactment-date income tax effects of the Tax Act for the following aspects: one-time tax on indefinitely reinvested earnings and the effects on our existing deferred tax balances. As of December 31, 2018, we completed our accounting for the enactment-date income tax effects of the Tax Act. We booked a provisional amount of $773 million in 2017 and reduced our provisional amount by $44 million in 2018, for a net of $729 million. The Tax Act also included the global intangible low-taxed income (GILTI) tax for years beginning in 2018. We account for the effects of GILTI as a component of income tax expense in the 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, 2018, 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,
	2018					2017
Deferred tax assets:
Deferred loss and tax credit carryforwards	$		247			$		256
Accrued expenses			129					119
Stock compensation			122					107
Inventories and related reserves			107					93
Retirement costs for defined benefit and retiree health care			80					38
Other			—					9
Total deferred tax assets, before valuation allowance			685					622
Valuation allowance			(172	)				(165	)
Total deferred tax assets, after valuation allowance			513					457
Deferred tax liabilities:
Acquisition-related intangibles and fair-value adjustments			(142	)				(207	)
International earnings			(43	)				(64	)
Other			(75	)				—
Total deferred tax liabilities			(260	)				(271	)
Net deferred tax asset	$		253			$		186

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

	December 31,
	2018					2017
Deferred tax assets	$		295			$		264
Deferred tax liabilities			(42	)				(78	)
Net deferred tax asset	$		253			$		186

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 $7 million and $37 million in 2018 and 2017, respectively. These changes had no impact to net income in 2018 or 2017.

We have U.S. and non-U.S. tax loss carryforwards of approximately $6 million, none of which will expire before the year 2028.

Cash payments made for income taxes, net of refunds, were $705 million, $1.80 billion and $1.15 billion in 2018, 2017 and 2016, 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:

	2018					2017					2016
Balance, January 1	$		300			$		243			$		84
Additions based on tax positions related to the current year			3					17					4
Additions for tax positions of prior years			1					42					189
Reductions for tax positions of prior years			—					(1	)				(2	)
Settlements with tax authorities			(18	)				(1	)				(32	)
Balance, December 31	$		286			$		300			$		243
Interest income (expense) recognized in the year ended December 31	$		(15	)		$		(19	)		$		4
Interest receivable (payable) as of December 31	$		(49	)		$		(38	)		$		13

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

All of the $286 million and $300 million liabilities for uncertain tax positions as of December 31, 2018 and 2017, respectively, are comprised of positions that, if recognized, would lower the effective tax rate. If these liabilities are ultimately realized, $30 million and $13 million of existing deferred tax assets in 2018 and 2017, respectively, would also be realized. It is reasonably possible that the $286 million liability as of December 31, 2018, could decrease by up to $223 million in 2019 for the resolution of a tax depreciation-related position.

As of December 31, 2018, the statute of limitations remains open for U.S. federal tax returns for 2013 and following years. Audit activities related to our U.S. federal tax returns through 2012 have been completed except for certain pending tax treaty procedures for relief from double taxation. The procedures for relief from double taxation pertain to U.S. federal tax returns for the years 2006 through 2012. The audit of the U.S. federal tax returns for 2013 through 2015 is underway.

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

6. 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, 2018. Our forward foreign currency exchange contracts outstanding as of December 31, 2018, had a notional value of $525 million to hedge our non-U.S. dollar net balance sheet exposures, including $160 million to sell Japanese yen, $99 million to sell euros and $94 million to sell Indian rupees.

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 7 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:

	2018					2017					2016
Balance, January 1	$		8			$		17			$		7
Amounts charged (credited) to operating results			11					(9	)				10
Recoveries and write-offs, net			—					—					—
Balance, December 31	$		19			$		8			$		17

Major customer

No end customer accounted for 10 percent or more of revenue in 2018, 2017 or 2016.

7. Valuation of debt and equity investments and certain liabilities

Debt and equity investments measured at fair value

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

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

Other equity investments

Our other investments include equity-method investments and non-marketable equity investments, which are not measured at fair value. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity-method investments are recognized in OI&E based on our ownership share of the investee’s financial results.

Non-marketable equity securities are measured at cost with adjustments for observable changes in price or impairments. Prior to our adoption of ASU 2016-01 in 2018, these securities were accounted for using the cost method of accounting, measured at cost less other-than-temporary impairment. Gains and losses on non-marketable equity investments are recognized in OI&E.

Details of our investments are as follows:

	December 31, 2018															December 31, 2017
	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 debt securities:
Money market funds	$		747			$		—			$		—			$		525			$		—			$		—
Corporate obligations			473					748					—					172					698					—
U.S. government agency and Treasury securities			988					1,047					—					700					2,115					—
Trading securities:
Mutual funds			—					—					226					—					—					236
Total			2,208					1,795					226					1,397					2,813					236
Other measurement basis:
Equity-method investments			—					—					21					—					—					26
Non-marketable equity investments			—					—					4					—					—					6
Cash on hand			230					—					—					259					—					—
Total	$		2,438			$		1,795			$		251			$		1,656			$		2,813			$		268

As of December 31, 2018 and 2017, 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 2018, 2017 or 2016.

In 2018, 2017 and 2016, the proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $6.71 billion, $4.10 billion and $3.39 billion, respectively. Gross realized gains and losses from these sales were not material.

The following table presents the aggregate maturities of our available-for-sale debt investments as of December 31, 2018:

		Fair Value
One year or less		$		3,838
One to two years				165

There were no other-than-temporary declines and impairments in the values of our debt investments in 2018, 2017 or 2016.

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, 2018 and 2017, 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, 2018															December 31, 2017
	Level 1					Level 2					Total					Level 1					Level 2					Total
Assets:
Money market funds	$		747			$		—			$		747			$		525			$		—			$		525
Corporate obligations			—					1,221					1,221					—					870					870
U.S. government agency and Treasury securities			2,035					—					2,035					2,765					50					2,815
Mutual funds			226					—					226					236					—					236
Total assets	$		3,008			$		1,221			$		4,229			$		3,526			$		920			$		4,446
Liabilities:
Deferred compensation	$		246			$		—			$		246			$		255			$		—			$		255
Total liabilities	$		246			$		—			$		246			$		255			$		—			$		255

8. Goodwill and acquisition-related intangibles

Goodwill by segment as of December 31, 2018 and 2017, 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 7. In 2018, 2017 and 2016, we determined no impairment was indicated.

The components of acquisition-related intangibles are as follows:

	Amortization		December 31, 2018															December 31, 2017
	Period		Gross Carrying					Accumulated										Gross Carrying					Accumulated
	(Years)		Amount					Amortization					Net					Amount					Amortization					Net
Developed technology	7 - 10		$		2,125			$		1,573			$		552			$		2,130			$		1,361			$		769
Customer relationships	8				810					734					76					810					633					177
Total			$		2,935			$		2,307			$		628			$		2,940			$		1,994			$		946

Acquisition charges

Acquisition charges represent the ongoing amortization of intangible assets resulting from the acquisition of National Semiconductor Corporation. These amounts are included in Other for segment reporting purposes, consistent with how management measures the performance of its segments.

Amortization of acquisition-related intangibles was $318 million, $318 million and $319 million in 2018, 2017 and 2016, respectively. Fully amortized assets are written off against accumulated amortization. Remaining estimated amortization is as follows:

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

9. 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 and post-tax contributions to various investment choices. Employees who elected to continue accruing a benefit in the qualified defined benefit pension plans may also participate in the defined contribution plan, where employer-matching contributions are provided for up to 2 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, 2018 and 2017, as a result of employees’ elections, TI’s U.S. defined contribution plans held shares of TI common stock totaling 9 million shares and 10 million shares valued at $821 million and $1.00 billion, respectively. Dividends paid on these shares in 2018 and 2017 were $24 million and $22 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 2018 and 2017 and $60 million in 2016.

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, 2018 and 2017, as a result of employees’ elections, TI’s non-U.S. defined contribution plans held TI common stock valued at $23 million and $27 million, respectively. Dividends paid on these shares of TI common stock in 2018 and 2017 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
	2018					2017					2016					2018					2017					2016					2018					2017					2016
Service cost	$		19			$		22			$		22			$		5			$		5			$		5			$		36			$		37			$		34
Interest cost			35					42					42					15					17					20					45					44					52
Expected return on plan assets			(42	)				(41	)				(41	)				(15	)				(17	)				(20	)				(67	)				(62	)				(68	)
Amortization of prior service credit			—					—					—					(3	)				(4	)				(3	)				(1	)				(2	)				(2	)
Recognized net actuarial loss			17					14					21					2					3					7					20					28					25
Net periodic benefit costs			29					37					44					4					4					9					33					45					41
Settlement losses			23					36					21					—					—					—					3					2					2
Total, including other postretirement losses	$		52			$		73			$		65			$		4			$		4			$		9			$		36			$		47			$		43

All defined benefit and retiree health care benefit plan expense components other than service cost are recognized in OI&E in our Consolidated Statements of Income. Service cost is recognized within operating profit.

For the U.S. qualified pension and retiree health care plans, the expected return on plan assets component of net periodic benefit cost is based upon a market-related value of assets. In accordance with U.S. GAAP, the market-related value of assets is the fair value adjusted by a smoothing technique whereby certain gains and losses are phased in over a period of three years.

Changes in the benefit obligations and plan assets for defined benefit and retiree health care benefit plans are as follows:

	U.S.										U.S.										Non-U.S.
	Defined Benefit										Retiree Health Care										Defined Benefit
	2018					2017					2018					2017					2018					2017
Change in plan benefit obligation
Benefit obligation at beginning of year:	$		998			$		1,030			$		414			$		434			$		2,469			$		2,361
Service cost			19					22					5					5					36					37
Interest cost			35					42					15					17					45					44
Participant contributions			—					—					11					9					7					6
Benefits paid			(10	)				(9	)				(41	)				(39	)				(87	)				(90	)
Settlements			(100	)				(196	)				—					—					(16	)				(13	)
Actuarial loss (gain)			(68	)				109					(43	)				(15	)				6					(52	)
Plan amendments			—					—					—					3					7					—
Effects of exchange rate changes			—					—					—					—					(56	)				176
Benefit obligation at end of year	$		874			$		998			$		361			$		414			$		2,411			$		2,469
Change in plan assets
Fair value of plan assets at beginning of year:	$		995			$		1,034			$		394			$		434			$		2,593			$		2,309
Actual return on plan assets			(56	)				123					(12	)				44					(52	)				148
Employer contributions (qualified plans)			20					25					1					1					19					56
Employer contributions (non-qualified plans)			20					18					—					—					—					—
Participant contributions			—					—					11					9					7					6
Benefits paid			(10	)				(9	)				(41	)				(39	)				(87	)				(90	)
Settlements			(100	)				(196	)				—					—					(16	)				(13	)
Effects of exchange rate changes			—					—					—					—					(54	)				177
Other			—					—					(23	)				(55	)				—					—
Fair value of plan assets at end of year	$		869			$		995			$		330			$		394			$		2,410			$		2,593
Funded status at end of year	$		(5	)		$		(3	)		$		(31	)		$		(20	)		$		(1	)		$		124

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
2018
Overfunded retirement plans	$		40			$		—			$		52			$		92
Accrued expenses and other liabilities & other long-term liabilities			(8	)				—					(3	)				(11	)
Underfunded retirement plans			(37	)				(31	)				(50	)				(118	)
Funded status at end of 2018	$		(5	)		$		(31	)		$		(1	)		$		(37	)
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 at end of 2017	$		(3	)		$		(20	)		$		124			$		101

Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute about $50 million to our retirement benefit plans in 2019. 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 $793 million and $899 million as of December 31, 2018 and 2017, respectively, for the U.S. defined benefit plans, and $2.29 billion and $2.33 billion as of December 31, 2018 and 2017, 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, 2017	$		118			$		29			$		(6	)		$		247			$		(4	)		$		394			$		(10	)
Changes in AOCI by category:
Adjustments			29					(16	)				—					120					7					133					7
Recognized within net income			(39	)				(2	)				3					(24	)				1					(65	)				4
Tax effect			2					4					(1	)				(26	)				(1	)				(20	)				(2	)
Cumulative effect of accounting changes (a)			25					6					(1	)				—					—					31					(1	)
Total change to AOCI			17					(8	)				1					70					7					79					8
AOCI balance, net of taxes, December 31, 2018	$		135			$		21			$		(5	)		$		317			$		3			$		473			$		(2	)

(a)Reflects the adoption of ASU 2018-02. See Note 2 for additional information.

The estimated amounts of net actuarial loss and unrecognized prior service cost (credit) included in AOCI as of December 31, 2018, that are expected to be amortized into net periodic benefit cost over the next fiscal year are: $10 million and none for the U.S. defined benefit plans; none and ($2) million for the U.S. retiree health care benefit plan; and $29 million and $1 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 7.

	December 31, 2018
	Level 1					Level 2					Level 3					Other (a)					Total
Assets of U.S. defined benefit plan:
Fixed income securities and cash equivalents	$		—			$		—			$		—			$		563			$		563
Equity securities			—					—					—					306					306
Total	$		—			$		—			$		—			$		869			$		869
Assets of U.S. retiree health care plan:
Fixed income securities and cash equivalents	$		59			$		—			$		—			$		155			$		214
Equity securities			—					—					—					116					116
Total	$		59			$		—			$		—			$		271			$		330
Assets of non-U.S. defined benefit plans:
Fixed income securities and cash equivalents	$		47			$		139			$		—			$		1,602			$		1,788
Equity securities			33					1					—					588					622
Total	$		80			$		140			$		—			$		2,190			$		2,410

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

	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, as well as cash equivalents.

The investments in our major benefit plans largely consist of low-cost, broad-market index funds to mitigate risks of concentration within market sectors. Our investment policy is designed to better match the interest rate sensitivity of the plan assets and liabilities. The appropriate mix of equity and bond investments is determined primarily through the use of detailed asset-liability modeling studies that look to balance the impact of changes in the discount rate against the need to provide asset growth to cover future service cost. Most of our plans around the world have a greater proportion of fixed income securities with return characteristics that are more closely aligned with changes in the liabilities caused by discount rate volatility. For the U.S. plans, we utilize an option collar strategy to reduce the volatility of returns on certain 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, 2016, 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
	2018				2017				2018				2017				2018				2017
Weighted average assumptions used to determine benefit obligations:
Discount rate	4.37%				3.75%				4.30%				3.63%				1.85%				1.84%
Long-term pay progression	3.30%				3.30%				n/a				n/a				2.96%				2.96%
Weighted average assumptions used to determine net periodic benefit cost:
Discount rate	3.77%				4.21%				3.63%				4.08%				1.84%				1.76%
Long-term rate of return on plan assets	4.80%				4.30%				4.10%				4.10%				2.58%				2.60%
Long-term pay progression	3.30%				3.30%				n/a				n/a				2.96%				3.11%

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
		2018			2017			2018			2017			2018			2017
Fixed income securities and cash equivalents		65%			66%			65%			62%			74%			71%
Equity securities		35%			34%			35%			38%			26%			29%

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, 2018, 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
2019		$		78			$		32			$		88
2020				105					31					90
2021				77					30					92
2022				79					29					95
2023				85					28					95
2024 – 2028				428					124					510

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

		2018				2017
Assumed health care cost trend rate for next year			7.25	%			7.50	%
Ultimate trend rate			5.00	%			5.00	%
Year in which ultimate trend rate is reached			2028				2028

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, 2018, by $1 million. The service cost and interest cost components of 2018 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, 2018, our liability to participants of the deferred compensation plans was $246 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, 2018, we held $226 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 7.

10. 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, 2018, 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 2023. 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, 2018, our credit facility was undrawn, and we had no commercial paper outstanding.

Long-term debt

We retired $500 million of maturing debt in May 2018.

In the second quarter of 2018, we issued an aggregate principal amount of $1.5 billion of fixed-rate, long-term debt due in 2048, comprised of the issuance of $1.3 billion in May 2018 and an additional $200 million in June 2018. We incurred $16 million of issuance and other related costs. The proceeds of the offering were $1.5 billion, net of the original issuance discount and premium, and were used for general corporate purposes.

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

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

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

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.

Long-term debt outstanding is as follows:

	December 31,
	2018					2017
Notes due 2018 at 1.00%	$		—			$		500
Notes due 2019 at 1.65%			750					750
Notes due 2020 at 1.75%			500					500
Notes due 2021 at 2.75%			550					550
Notes due 2022 at 1.85%			500					500
Notes due 2023 at 2.25%			500					500
Notes due 2024 at 2.625%			300					300
Notes due 2027 at 2.90%			500					500
Notes due 2048 at 4.15%			1,500					—
Total debt			5,100					4,100
Net unamortized discounts, premiums and issuance costs			(32	)				(23	)
Total debt, including net unamortized discounts, premiums and issuance costs			5,068					4,077
Current portion of long-term debt			(749	)				(500	)
Long-term debt	$		4,319			$		3,577

Interest and debt expense was $125 million, $78 million and $80 million in 2018, 2017 and 2016, respectively. This was net of the amortized discounts, premiums and issuance costs. Cash payments for interest on long-term debt were $114 million, $75 million and $88 million in 2018, 2017 and 2016, respectively. Capitalized interest was not material.

11. 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 $79 million, $81 million and $86 million in 2018, 2017 and 2016, respectively.

As of December 31, 2018, we had committed to make the following minimum payments under our purchase commitments and non-cancellable operating leases:

		Purchase					Operating
		Commitments					Leases
2019		$		389			$		56
2020				339					46
2021				130					36
2022				22					29
2023				15					18
Thereafter				15					39

Indemnification guarantees

We routinely sell products with an intellectual property indemnification included in the terms of sale. Historically, we have had only minimal, infrequent losses associated with these indemnities. Consequently, we cannot reasonably estimate any future liabilities that may result.

Warranty costs/product liabilities

We accrue for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability. Historically, we have experienced a low rate of payments on product claims. Although we cannot predict the likelihood or amount of any future claims, we do not believe they will have a material adverse effect on our financial condition, results of operations or liquidity. Our stated warranties for semiconductor products obligate us to repair, replace or credit the purchase price of a covered product back to the buyer. Product claim consideration may exceed the price of our products.

General

We are subject to various legal and administrative proceedings. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity.

12. Restructuring charges/other

Restructuring charges/other are included in Other for segment reporting purposes and are comprised of the following components:

	For Years Ended December 31,
	2018					2017					2016
Restructuring charges (a)	$		6			$		11			$		25
Gains on sales of assets			(3	)				—					(40	)
Restructuring charges/other	$		3			$		11			$		(15	)

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

Changes in accrued restructuring balances

	2018					2017					2016
Balance, January 1	$		29			$		40			$		32
Restructuring charges			6					11					25
Non-cash items (a)			(3	)				(1	)				(6	)
Payments			(4	)				(21	)				(11	)
Balance, December 31	$		28			$		29			$		40

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

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

In February 2019, we entered into an agreement to sell our manufacturing facility in Greenock, Scotland. The sale is expected to close during the first quarter of 2019.

13. Supplemental financial information

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

	For Years Ended December 31,
	2018					2017					2016
Other income (a)	$		150			$		163			$		219
Other expense (b)			(52	)				(88	)				(64	)
Total	$		98			$		75			$		155

(a)	Other income includes interest, royalty and lease income; investment gains and losses; and other miscellaneous items. As of January 1, 2017, royalties are recorded in OI&E instead of revenue.

(b)	Other expense includes a portion of pension and other retiree benefit costs. It also includes currency gains and losses and tax interest expense.

Prepaid expenses and other current assets

	December 31,
	2018					2017
Prepaid taxes on intercompany inventory profits, net	$		132			$		768
Other			308					262
Total	$		440			$		1,030

Property, plant and equipment at cost

	Depreciable		December 31,
	Lives (Years)		2018					2017
Land	n/a		$		128			$		127
Buildings and improvements	5 - 40				2,497					2,467
Machinery and equipment	2 - 10				2,800					2,195
Total			$		5,425			$		4,789

Other long-term liabilities

	December 31,
	2018					2017
Long-term portion of tax on indefinitely reinvested earnings	$		506			$		635
Other			684					668
Total	$		1,190			$		1,303

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

	December 31,
	2018					2017
Postretirement benefit plans (a):
Net actuarial loss	$		(473	)		$		(394	)
Prior service credit			2					10
Cash flow hedge derivative instruments			(2	)				—
Total	$		(473	)		$		(384	)

(a)	Includes $30 million for the adoption of ASU 2018-02. See Note 2 for additional information.

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 2018, 2017 and 2016. The table below details where these transactions are recorded in our Consolidated Statements of Income.

		For Years Ended															Impact to
		December 31,															Related Statement
		2018					2017					2016					of Income Lines
Net actuarial losses of defined benefit plans:
Recognized net actuarial loss and settlement losses (a)		$		65			$		83			$		76			Decrease to OI&E
Tax effect				(15	)				(27	)				(25	)		Decrease to provision for income taxes
Recognized within net income, net of taxes		$		50			$		56			$		51			Decrease to net income
Prior service credit of defined benefit plans:
Amortization of prior service credit (a)		$		(4	)		$		(6	)		$		(5	)		Increase to OI&E
Tax effect				1					1					2			Increase to provision for income taxes
Recognized within net income, net of taxes		$		(3	)		$		(5	)		$		(3	)		Increase to net income
Derivative instruments:
Amortization of treasury-rate locks		$		—			$		1			$		1			Increase to interest and debt expense
Tax effect				—					—					—			Decrease to provision for income taxes
Recognized within net income, net of taxes		$		—			$		1			$		1			Decrease to net income

(a)	Detailed in Note 9.

14. Quarterly financial data (unaudited)

		2018 Quarters																				2017 Quarters
		4th					3rd					2nd					1st					4th					3rd					2nd					1st
Revenue		$		3,717			$		4,261			$		4,017			$		3,789			$		3,750			$		4,116			$		3,693			$		3,402
Gross profit				2,407					2,804					2,619					2,447					2,440					2,656					2,374					2,144
Included in operating profit:
Acquisition charges				79					80					79					80					79					80					79					80
Restructuring charges/other				(2	)				1					3					1					3					1					3					4
Operating profit				1,516					1,937					1,712					1,548					1,563					1,788					1,480					1,252
Net income				1,239					1,570					1,405					1,366					344					1,285					1,056					997
Basic EPS		$		1.29			$		1.61			$		1.43			$		1.38			$		0.35			$		1.29			$		1.05			$		0.99
Diluted EPS		$		1.27			$		1.58			$		1.40			$		1.35			$		0.34			$		1.26			$		1.03			$		0.97

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, 2018 and 2017, 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, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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, 2019 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, 2019