Item 8. Financial statements and supplementary data

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Item 8. Financial statements and supplementary data

List of financial statements:

Income for each of the three years in the period ended December 31, 2020
Comprehensive income for each of the three years in the period ended December 31, 2020
Balance sheets as of December 31, 2020 and 2019
Cash flows for each of the three years in the period ended December 31, 2020
Stockholders’ equity for each of the three years in the period ended December 31, 2020

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)	2020		2019		2018
Revenue	$	14,461	$	14,383	$	15,784
Cost of revenue (COR)	5,192		5,219		5,507
Gross profit	9,269		9,164		10,277
Research and development (R&D)	1,530		1,544		1,559
Selling, general and administrative (SG&A)	1,623		1,645		1,684
Acquisition charges	198		288		318
Restructuring charges/other	24		(36)		3
Operating profit	5,894		5,723		6,713
Other income (expense), net (OI&E)	313		175		98
Interest and debt expense	190		170		125
Income before income taxes	6,017		5,728		6,686
Provision for income taxes	422		711		1,106
Net income	$	5,595	$	5,017	$	5,580

Earnings per common share (EPS):
Basic	$	6.05	$	5.33	$	5.71
Diluted	$	5.97	$	5.24	$	5.59

Average shares outstanding (millions):
Basic	921		936		970
Diluted	933		952		990

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	$	5,595	$	5,017	$	5,580
Income allocated to RSUs	(27)		(31)		(42)
Income allocated to common stock for diluted EPS	$	5,568	$	4,986	$	5,538

See accompanying notes.


Consolidated Statements of Comprehensive Income	For Years Ended December 31,
(Millions of dollars)	2020		2019		2018
Net income	$	5,595	$	5,017	$	5,580
Other comprehensive income (loss)
Net actuarial losses of defined benefit plans:
Adjustments, net of tax effect of $3, ($37) and $35	(41)		88		(98)
Recognized within net income, net of tax effect of ($9), ($13) and ($15)	29		38		50
Prior service credit of defined benefit plans:
Adjustments, net of tax effect of $0, $0 and $1	—		—		(6)
Recognized within net income, net of tax effect of $0, $0 and $1	(1)		—		(3)
Derivative instruments:
Change in fair value, net of tax effect of $0, $0 and $1	—		—		(2)



Other comprehensive income (loss), net of taxes	(13)		126		(59)
Total comprehensive income	$	5,582	$	5,143	$	5,521

See accompanying notes.


Consolidated Balance Sheets	December 31,
(Millions of dollars, except share amounts)	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	3,107	$	2,437
Short-term investments	3,461		2,950
Accounts receivable, net of allowances of ($11) and ($8)	1,414		1,074
Raw materials	180		176
Work in process	964		916
Finished goods	811		909
Inventories	1,955		2,001
Prepaid expenses and other current assets	302		299
Total current assets	10,239		8,761
Property, plant and equipment at cost	5,781		5,740
Accumulated depreciation	(2,512)		(2,437)
Property, plant and equipment	3,269		3,303
Long-term investments	49		300
Goodwill	4,362		4,362
Acquisition-related intangibles	152		340
Deferred tax assets	343		197
Capitalized software licenses	122		69
Overfunded retirement plans	246		218
Other long-term assets	569		468
Total assets	$	19,351	$	18,018

Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	550	$	500
Accounts payable	415		388
Accrued compensation	767		714
Income taxes payable	134		46
Accrued expenses and other liabilities	524		475
Total current liabilities	2,390		2,123
Long-term debt	6,248		5,303
Underfunded retirement plans	131		93
Deferred tax liabilities	90		78
Other long-term liabilities	1,305		1,514
Total liabilities	10,164		9,111
Stockholders’ equity:
Preferred stock, $25 par value. Authorized – 10,000,000 shares
Participating cumulative preferred – None issued	—		—
Common stock, $1 par value. Authorized – 2,400,000,000 shares
Shares issued – 1,740,815,939	1,741		1,741
Paid-in capital	2,333		2,110
Retained earnings	42,051		39,898
Treasury common stock at cost
Shares: 2020 – 821,461,787; 2019 – 808,784,381	(36,578)		(34,495)
Accumulated other comprehensive income (loss), net of taxes (AOCI)	(360)		(347)
Total stockholders’ equity	9,187		8,907
Total liabilities and stockholders’ equity	$	19,351	$	18,018

See accompanying notes.


Consolidated Statements of Cash Flows	For Years Ended December 31,
(Millions of dollars)	2020		2019		2018
Cash flows from operating activities
Net income	$	5,595	$	5,017	$	5,580
Adjustments to net income:
Depreciation	733		708		590
Amortization of acquisition-related intangibles	198		288		318
Amortization of capitalized software	61		54		46
Stock compensation	224		217		232
Gains on sales of assets	(4)		(23)		(3)
Deferred taxes	(137)		81		(105)
Increase (decrease) from changes in:
Accounts receivable	(340)		133		71
Inventories	46		216		(282)
Prepaid expenses and other current assets	(79)		265		669
Accounts payable and accrued expenses	63		(93)		(7)
Accrued compensation	63		(15)		(7)
Income taxes payable	(181)		(193)		158
Changes in funded status of retirement plans	(9)		29		36
Other	(94)		(35)		(107)
Cash flows from operating activities	6,139		6,649		7,189

Cash flows from investing activities
Capital expenditures	(649)		(847)		(1,131)
Proceeds from asset sales	4		30		9
Purchases of short-term investments	(5,786)		(3,444)		(5,641)
Proceeds from short-term investments	5,545		2,309		6,708
Other	(36)		32		(23)
Cash flows from investing activities	(922)		(1,920)		(78)

Cash flows from financing activities
Proceeds from issuance of long-term debt	1,498		1,491		1,500
Repayment of debt	(500)		(750)		(500)
Dividends paid	(3,426)		(3,008)		(2,555)
Stock repurchases	(2,553)		(2,960)		(5,100)
Proceeds from common stock transactions	470		539		373
Other	(36)		(42)		(47)
Cash flows from financing activities	(4,547)		(4,730)		(6,329)

Net change in cash and cash equivalents	670		(1)		782
Cash and cash equivalents at beginning of period	2,437		2,438		1,656
Cash and cash equivalents at end of period	$	3,107	$	2,437	$	2,438

See accompanying notes.


Consolidated Statements of Stockholders’ Equity	Common Stock		Paid-in Capital		Retained Earnings		Treasury Common Stock		AOCI
(Millions of dollars, except per-share amounts)
Balance, December 31, 2017	$	1,741	$	1,776	$	34,662	$	(27,458)	$	(384)

2018
Net income	—		—		5,580		—		—
Dividends declared and paid ($2.63 per share)	—		—		(2,555)		—		—
Common stock issued for stock-based awards	—		(55)		—		428		—
Stock repurchases	—		—		—		(5,100)		—
Stock compensation	—		232		—		—		—
Other comprehensive income (loss), net of taxes	—		—		—		—		(59)
Dividend equivalents on RSUs	—		—		(17)		—		—
Cumulative effect of accounting changes	—		—		236		—		(30)
Other	—		(3)		—		—		—
Balance, December 31, 2018	1,741		1,950		37,906		(32,130)		(473)

2019
Net income	—		—		5,017		—		—
Dividends declared and paid ($3.21 per share)	—		—		(3,008)		—		—
Common stock issued for stock-based awards	—		(55)		—		594		—
Stock repurchases	—		—		—		(2,960)		—
Stock compensation	—		217		—		—		—
Other comprehensive income (loss), net of taxes	—		—		—		—		126
Dividend equivalents on RSUs	—		—		(17)		—		—
Other	—		(2)		—		1		—
Balance, December 31, 2019	1,741		2,110		39,898		(34,495)		(347)

2020
Net income	—		—		5,595		—		—
Dividends declared and paid ($3.72 per share)	—		—		(3,426)		—		—
Common stock issued for stock-based awards	—		—		—		470		—
Stock repurchases	—		—		—		(2,553)		—
Stock compensation	—		224		—		—		—
Other comprehensive income (loss), net of taxes	—		—		—		—		(13)
Dividend equivalents on RSUs	—		—		(16)		—		—
Other	—		(1)		—		—		—
Balance, December 31, 2020	$	1,741	$	2,333	$	42,051	$	(36,578)	$	(360)

See accompanying notes.

Notes to financial statements

Description of business, including segment and geographic area information

We design, make and sell semiconductors to electronics designers and manufacturers all over the world. We have two reportable segments, Analog and Embedded Processing, each of which represents groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels.

Analog semiconductors change real-world signals, such as sound, temperature, pressure or images, by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors. Analog semiconductors are also used to manage power in all electronic equipment by converting, distributing, storing, discharging, isolating and measuring electrical energy, whether the equipment is plugged into a wall or using a battery. Our Analog segment consists of two major product lines: Power and Signal Chain.
Embedded Processing products are the digital “brains” of many types of electronic equipment. They are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application.

During 2020, we reorganized the product lines within our Analog segment to simplify our business structure into our Power and Signal Chain product lines. These changes had no effect on either our previously reported consolidated financial statements or our reportable segment results.

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

In Other, we also include items that are not used in evaluating the results of or in allocating resources to our segments. Examples of these items include acquisition charges (see Note 7); restructuring charges (see Note 12); and certain corporate-level items, such as litigation expenses, environmental costs, insurance settlements, and gains and losses from other activities, including asset dispositions. We allocate the remainder of our expenses associated with corporate activities to our operating segments based on specific methodologies, such as percentage of operating expenses or headcount.

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

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

Segment information


	For Years Ended December 31,
	2020		2019		2018
Revenue:
Analog	$	10,886	$	10,223	$	10,801
Embedded Processing	2,570		2,943		3,554
Other	1,005		1,217		1,429
Total revenue	$	14,461	$	14,383	$	15,784

Operating profit:
Analog	$	4,912	$	4,477	$	5,109
Embedded Processing	743		907		1,205
Other	239		339		399
Total operating profit	$	5,894	$	5,723	$	6,713

Geographic area information

The following geographic area information includes revenue, based on product shipment destination, and property, plant and equipment, based on physical location. The geographic revenue information does not necessarily reflect end demand by geography because our products tend to be shipped to the locations where our customers manufacture their products.


	For Years Ended December 31,
	2020		2019		2018
Revenue:
United States	$	1,547	$	1,827	$	2,288
Asia (a)	9,541		8,650		9,240
Europe, Middle East and Africa	2,249		2,707		3,047
Japan	734		796		869
Rest of world	390		403		340
Total revenue	$	14,461	$	14,383	$	15,784

(a)Revenue from products shipped into China was $8.0 billion, $7.2 billion and $7.0 billion in 2020, 2019 and 2018, respectively, which includes shipments to customers that manufacture in China and then export end products to their customers around the world, as well as distributors that transship inventory through China to service other countries.


	December 31,
	2020		2019
Property, plant and equipment:
United States	$	2,036	$	1,998
Asia (a)	1,005		1,046
Europe, Middle East and Africa	52		63
Japan	165		185
Rest of world	11		11
Total property, plant and equipment	$	3,269	$	3,303

(a)Property, plant and equipment at our two sites in the Philippines was $333 million and $394 million as of December 31, 2020 and 2019, respectively. Property, plant and equipment at our sites in China was $370 million and $304 million as of December 31, 2020 and 2019, respectively.

Basis of presentation and significant accounting policies and practices

Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The basis of these financial statements is comparable for all periods presented herein.

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 2020 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. We have a variety of types of contracts with our customers and distributors. In determining whether a contract exists, we evaluate the terms of the arrangement, the relationship with the customer or distributor and their ability to pay.

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

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

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

In addition, we record an allowance for credit losses on 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 credit losses 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 $28 million, $30 million and $34 million in 2020, 2019 and 2018, 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 related to events that have been recognized in the financial statements or tax returns. We record a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized.

Other assessed taxes

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

Leases

We determine if an arrangement is a lease at inception. Leases are included in other long-term assets, accrued expenses and other liabilities, and other long-term liabilities on our Consolidated Balance Sheets.

Lease assets represent our right to use underlying assets for the lease term, and lease liabilities represent our obligations to make lease payments over the lease term. On the commencement date, leases are evaluated for classification, and assets and liabilities are recognized based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the information available at commencement in determining the present value of lease payments. Operating lease expense is generally recognized on a straight-line basis over the lease term. Our lease values include options to extend or not to terminate the lease when it is reasonably certain that we will exercise such options.

We have agreements with lease and non-lease components, which are accounted for as a single lease component. Leases with an initial lease term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Earnings per share (EPS)

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

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


	For Years Ended December 31,
	2020					2019					2018
	Net Income		Shares	EPS		Net Income		Shares	EPS		Net Income		Shares	EPS
Basic EPS:
Net income	$	5,595				$	5,017				$	5,580
Income allocated to RSUs	(27)					(32)					(43)
Income allocated to common stock	$	5,568	921	$	6.05	$	4,985	936	$	5.33	$	5,537	970	$	5.71
Dilutive effect of stock compensation plans			12					16					20

Diluted EPS:
Net income	$	5,595				$	5,017				$	5,580
Income allocated to RSUs	(27)					(31)					(42)
Income allocated to common stock	$	5,568	933	$	5.97	$	4,986	952	$	5.24	$	5,538	990	$	5.59

Potentially dilutive securities representing 4 million, 6 million and 4 million shares of common stock that were outstanding in 2020, 2019 and 2018 respectively, were excluded from the computation of diluted earnings per common share during these periods because their effect would have been anti-dilutive.

Investments

We present investments on our Consolidated Balance Sheets as cash equivalents, short-term investments or long-term investments, which are detailed below. See Note 6 for additional information.

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

Inventories

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

We review inventory quarterly for salability and obsolescence. A statistical allowance is provided for inventory considered unlikely to be sold. The statistical allowance is based on an analysis of historical disposal activity, historical customer shipments, as well as estimated future sales. A specific allowance for each material type will be carried if there is a significant event not captured by the statistical allowance. We write off inventory in the period in which disposal occurs.

Property, plant and equipment; acquisition-related intangibles; and other capitalized costs

Property, plant and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Our cost basis includes certain assets acquired in business combinations that were initially recorded at fair value as of the date of acquisition. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. We amortize acquisition-related intangibles on a straight-line basis over the estimated economic life of the assets. Capitalized software licenses generally are amortized on a straight-line basis over the term of the license. Fully depreciated or amortized assets are written off against accumulated depreciation or amortization.

Impairments of long-lived assets

We regularly review whether facts or circumstances exist that indicate the carrying values of property, plant and equipment or other long-lived assets, including intangible assets, are impaired. We assess the recoverability of assets by comparing the projected undiscounted net cash flows associated with those assets to their respective carrying amounts. Any impairment charge is based on the excess of the carrying amount over the fair value of those assets. Fair value is determined by available market valuations, if applicable, or by discounted cash flows.

Goodwill

Goodwill is reviewed for impairment annually or more frequently if certain impairment indicators arise. We perform our annual goodwill impairment test as of October 1 for our reporting units, which compares the fair value for each reporting unit to its associated carrying value, including goodwill. See Note 7 for additional information.

Foreign currency

The functional currency for our non-U.S. subsidiaries is the U.S. dollar. Accounts recorded in currencies other than the U.S. dollar are remeasured into the functional currency. Current assets (except inventories), deferred taxes, other assets, current liabilities and long-term liabilities are remeasured at exchange rates in effect at the end of each reporting period. Property, plant and equipment with associated depreciation and inventories are valued at historical exchange rates. Revenue and expense accounts other than depreciation for each month are remeasured at the appropriate daily rate of exchange. Currency exchange gains and losses from remeasurement are credited or charged to OI&E.

Derivatives and hedging

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

We are exposed to variability in compensation charges related to certain deferred compensation obligations to employees. We use total return swaps to economically hedge this exposure and offset the related compensation expense, recognizing changes in the value of the swaps and the related deferred compensation liabilities in SG&A.

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

We adopted the following Accounting Standards Updates (ASU) during the current period, none of which had a material impact on our financial position or results of operations.


ASU	Description	Adopted Date
ASU No. 2016-13	Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	January 1, 2020
ASU No. 2018-13	Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement	January 1, 2020
ASU No. 2018-15	Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract	January 1, 2020

Stock compensation

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

We also have RSUs outstanding to participants under long-term incentive plans. Each RSU represents the right to receive one share of TI common stock, issued on the vesting date, which is generally four years after the date of grant. RSUs continue to vest after the recipient retires. Holders of RSUs receive an annual cash payment equivalent to the dividends paid on our common stock.

We have options and RSUs outstanding to non-employee directors under director compensation plans. The plans generally provide for annual grants of stock options and RSUs, a one-time grant of RSUs to each new non-employee director and the issuance of TI common stock upon the distribution of stock units credited to director deferred compensation accounts.

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

Total stock compensation expense recognized is as follows:


	For Years Ended December 31,
	2020		2019		2018
COR	$	21	$	21	$	25
R&D	68		66		69
SG&A	135		130		138
Total	$	224	$	217	$	232

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,
	2020			2019			2018
Weighted average grant date fair value, per share	$	25.55		$	22.08		$	23.20
Weighted average assumptions used:
Expected volatility	26		%	26		%	23		%
Expected lives (in years)	6.8			7.1			7.2
Risk-free interest rates	1.53		%	2.66		%	2.57		%
Expected dividend yields	2.76		%	2.95		%	2.25		%

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

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

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

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

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

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

Long-term incentive and director compensation plans

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


	Stock Options			RSUs
	Shares	Weighted Average Exercise Price per Share		Shares	Weighted Average Grant Date Fair Value per Share
Outstanding grants, December 31, 2019	32,493,944	$	66.57	5,897,800	$	79.62
Granted	4,253,606	130.48		1,005,778	130.59
Stock options exercised/RSUs vested	(8,392,354)	53.28		(2,034,933)	53.88
Forfeited and expired	(359,919)	111.06		(157,021)	103.90
Outstanding grants, December 31, 2020	27,995,277	79.69		4,711,624	100.80

The weighted average grant date fair values per share of RSUs granted in 2020, 2019 and 2018 were $130.59, $106.58 and $110.05, respectively. In 2020, 2019 and 2018, the total grant date fair values of shares vested from RSU grants were $110 million, $125 million and $123 million, respectively.

As of December 31, 2020, the number of shares remaining available for future issuance under these plans was 40,334,683.

Summarized information about stock options outstanding as of December 31, 2020, is as follows:


		Stock Options Outstanding				Options Exercisable
Exercise Price Range		Number Outstanding (Shares)	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price per Share		Number Exercisable (Shares)	Weighted Average Exercise Price per Share
$	28.13 to 161.98	27,995,277	5.8	$	79.69	17,221,451	$	59.33

In 2020, 2019 and 2018, 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 $681 million, $819 million and $561 million, respectively.

Summarized information as of December 31, 2020, about outstanding stock options that are vested and expected to vest, as well as stock options that are currently exercisable, is as follows:


	Outstanding Stock Options (Fully Vested and Expected to Vest) (a)		Options Exercisable
Number of outstanding (shares)	27,596,705		17,221,451
Weighted average remaining contractual life (in years)	5.8		4.4
Weighted average exercise price per share	$	79.13	$	59.33
Intrinsic value (millions of dollars)	$	2,346	$	1,805

(a)Includes effects of expected forfeitures. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $2.36 billion.

As of December 31, 2020, total future compensation related to equity awards not yet recognized in our Consolidated Statements of Income was $237 million, consisting of $103 million related to unvested stock options and $134 million related to unvested RSUs. The $237 million is expected to be recognized as follows: $115 million in 2021, $77 million in 2022, $40 million in 2023 and $5 million in 2024.

Employee stock purchase plan

Options outstanding under the ESPP as of December 31, 2020, had an exercise price equal to 85% of the fair market value of TI common stock on the date of automatic exercise. The automatic exercise occurred on January 4, 2021, resulting in an exercise price of $137.89 per share. Of the total outstanding options, none were exercisable as of December 31, 2020.

ESPP transactions are as follows:


	Shares	Exercise Price
Outstanding grants, December 31, 2019	173,849	$	110.14
Granted	714,680	108.74
Exercised	(745,483)	103.48
Outstanding grants, December 31, 2020	143,046	137.89

The weighted average grant date fair values per share of options granted under the ESPP in 2020, 2019 and 2018 were $19.19, $18.05 and $15.43, respectively. In 2020, 2019 and 2018, the total intrinsic value of options exercised under these plans was $14 million, $13 million and $13 million, respectively.

As of December 31, 2020, the number of shares remaining available for future issuance under this plan was 33,097,602.

Effect on shares outstanding and treasury shares

Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2020, $10.63 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, 2017			757,657,217
Repurchases			49,482,220
Shares used for:
Stock options/RSUs	(8,432,458)	(2,769,994)
Stock applied to taxes	—	553,720
ESPP	(819,878)	—
Director deferred stock units	—	—	(5,181)
Total issued	(9,252,336)	(2,216,274)	(11,468,610)
Balance, December 31, 2018			795,665,646

Repurchases			27,398,701
Shares used for:
Stock options/RSUs	(11,529,174)	(2,370,762)
Stock applied to taxes	—	490,347
ESPP	(798,806)	—
Director deferred stock units	—	—	(71,571)
Total issued	(12,327,980)	(1,880,415)	(14,208,395)
Balance, December 31, 2019			808,784,381

Repurchases			23,430,215
Shares used for:
Stock options/RSUs	(8,392,354)	(2,034,933)
Stock applied to taxes	—	421,518
ESPP	(745,483)	—
Director deferred stock units	—	—	(1,557)
Total issued	(9,137,837)	(1,613,415)	(10,751,252)
Balance, December 31, 2020			821,461,787

The effects on cash flows are as follows:


	For Years Ended December 31,
	2020		2019		2018
Proceeds from common stock transactions (a)	$	470	$	539	$	373

Tax benefit realized from stock compensation	$	195	$	224	$	179
Reduction to deferred tax asset	(44)		(49)		(43)
Excess tax benefit for stock compensation	$	151	$	175	$	136

(a)Net of taxes paid for employee shares withheld of $53 million, $52 million and $60 million in 2020, 2019 and 2018, respectively.

Income taxes

Income before income taxes is comprised of the following components:


	For Years Ended December 31,
	2020		2019		2018
U.S.	$	5,210	$	4,915	$	5,672
Non-U.S.	807		813		1,014
Total	$	6,017	$	5,728	$	6,686

Provision for income taxes is comprised of the following components:


	For Years Ended December 31,
	2020						2019						2018
	Current		Deferred		Total		Current		Deferred		Total		Current		Deferred		Total
U.S. federal	$	357	$	(122)	$	235	$	483	$	25	$	508	$	979	$	(98)	$	881
Non-U.S.	192		(15)		177		135		56		191		225		(8)		217
U.S. state	10		—		10		12		—		12		7		1		8
Total	$	559	$	(137)	$	422	$	630	$	81	$	711	$	1,211	$	(105)	$	1,106

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,
	2020		2019		2018
U.S. statutory income tax rate	21.0	%	21.0	%	21.0	%
U.S. tax benefit for foreign derived intangible income	(6.1)		(4.9)		(5.3)
Impact of changes in uncertain tax positions	(4.0)		(0.1)		—
U.S. excess tax benefit for stock compensation	(2.5)		(3.1)		(2.0)
U.S. R&D tax credit	(1.3)		(1.4)		(1.3)
U.S. Tax Act transitional non-cash expense	—		—		4.2
Other	(0.1)		0.9		(0.1)
Effective tax rate	7.0	%	12.4	%	16.5	%

The earnings represented by non-cash operating assets, such as fixed assets and inventory, will continue to be permanently reinvested outside the United States. Provisions of the U.S. Tax Cuts and Jobs Act (the Tax Act), such as the one-time tax on indefinitely reinvested earnings and the global intangible low-taxed income (GILTI) tax for years beginning in 2018, eliminate any additional U.S. taxation resulting from repatriation of earnings of non-U.S. subsidiaries to the United States. Consequently, no U.S. tax provision has been made for the future remittance of these earnings. However, withholding or distribution taxes in certain non-U.S. jurisdictions will be incurred upon repatriation of available cash to the United States. A provision has been made for deferred taxes on these undistributed earnings to the extent that repatriation of the available cash to the United States is expected to result in a tax liability. As of December 31, 2020, we have no basis differences that would result in material unrecognized deferred tax liabilities.

We have made an allowable policy election to account for the effects of GILTI as a component of income tax expense in the period in which the tax is incurred.

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


	December 31,
	2020		2019
Deferred tax assets:
Deferred loss and tax credit carryforwards	$	207	$	213
Accrued expenses	180		182
Stock compensation	106		109
Inventories and related reserves	105		109
Retirement costs for defined benefit and retiree health care	44		49
Other	3		—
Total deferred tax assets, before valuation allowance	645		662
Valuation allowance	(179)		(180)
Total deferred tax assets, after valuation allowance	466		482
Deferred tax liabilities:
Property, plant and equipment	(116)		(164)
International earnings	(44)		(62)
Acquisition-related intangibles and fair-value adjustments	(40)		(82)
Other	(13)		(55)
Total deferred tax liabilities	(213)		(363)
Net deferred tax asset	$	253	$	119

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


	December 31,
	2020		2019
Deferred tax assets	$	343	$	197
Deferred tax liabilities	(90)		(78)
Net deferred tax asset	$	253	$	119

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 decreased $1 million in 2020 and increased $8 million and $7 million in 2019 and 2018, respectively. These changes had no impact to net income in 2020, 2019 or 2018.

We have no tax loss carryforwards as of December 31, 2020.

Cash payments made for income taxes, net of refunds, were $720 million, $570 million and $705 million in 2020, 2019 and 2018, 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:


	2020		2019		2018
Balance, January 1	$	303	$	286	$	300
Additions based on tax positions related to the current year	3		3		3
Additions for tax positions of prior years	35		63		1
Reductions for tax positions of prior years	(249)		(41)		—
Settlements with tax authorities	—		(8)		(18)
Expiration of the statute of limitations for assessing taxes	(3)		—		—
Balance, December 31	$	89	$	303	$	286

Interest income (expense) recognized in the year ended December 31	$	39	$	9	$	(15)

Interest payable as of December 31	$	8	$	44	$	49

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

All of the $89 million and $303 million liabilities for uncertain tax positions as of December 31, 2020 and 2019, respectively, are comprised of positions that, if recognized, would lower the effective tax rate. If these liabilities are ultimately realized, $2 million of existing deferred tax assets in both 2020 and 2019 would also be realized. Reductions for tax positions of prior years in 2020 include a $249 million tax benefit for the effective settlement of a depreciation-related uncertain tax position. Accrued interest of $46 million related to this uncertain tax position was reversed and included in OI&E.

As of December 31, 2020, 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 2015 have been completed except for certain pending tax treaty procedures for relief from double taxation and an Internal Revenue Service appeals process related to the 2013 through 2015 audit. The procedures for relief from double taxation pertain to U.S. federal tax returns for the years 2007 through 2012.

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

Financial instruments and risk concentration

Financial instruments

We hold derivative financial instruments such as forward foreign currency exchange contracts, the fair value of which was not material as of December 31, 2020. Our forward foreign currency exchange contracts outstanding as of December 31, 2020, had a notional value of $416 million to hedge our non-U.S. dollar net balance sheet exposures, including $147 million to sell Japanese yen, $85 million to sell euros and $82 million to sell British pounds.

Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our deferred compensation liabilities, are carried at fair value. Our postretirement plan assets are carried at fair value or net asset value per share. The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. As of December 31, 2020, the carrying value of long-term debt, including the current portion, was $6.80 billion, and the estimated fair value was $7.78 billion. The estimated fair value is measured using broker-dealer quotes, which are Level 2 inputs. See Note 6 for a description of fair value and the definition of Level 2 inputs.

Risk concentration

We are subject to counterparty risks from financial institutions, customers and issuers of debt securities. Financial instruments that could subject us to concentrations of credit risk are primarily cash deposits, cash equivalents, short-term investments and accounts receivable. To manage our credit risk exposure, we place cash investments in investment-grade debt securities and limit the amount of credit exposure to any one issuer. We also limit counterparties on cash deposits and financial derivative contracts to financial institutions with investment-grade ratings.

Concentrations of credit risk with respect to accounts receivable are limited due to our large number of customers and their dispersion across different industries and geographic areas. We maintain allowances for expected returns, disputes, adjustments, incentives and credit losses. These allowances are deducted from accounts receivable on our Consolidated Balance Sheets.

Accounts receivable allowances changed to reflect amounts charged (credited) to operating results by $3 million, ($11) million and $11 million in 2020, 2019 and 2018, respectively.

Major customer

One of our end customers accounted for 10%, 8% and 8% of revenue in 2020, 2019 and 2018, respectively, recognized primarily in our Analog segment. No end customer accounted for 10% or more of revenue in 2019 or 2018.

Valuation of debt and equity investments and certain liabilities

Investments measured at fair value

Available-for-sale debt investments, money market funds and mutual funds are stated at fair value, which is generally based on market prices or broker quotes. See Fair-value considerations. 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, and any credit losses on available-for-sale debt securities are recorded as an allowance for credit losses with an offset recognized in OI&E in our Consolidated Statements of Income.

Our 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 investments

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

Non-marketable equity securities are measured at cost with adjustments for observable changes in price or impairments. Gains and losses on non-marketable equity investments are recognized in OI&E.

Details of our investments are as follows:


	December 31, 2020						December 31, 2019
	Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments
Measured at fair value:
Money market funds	$	886	$	—	$	—	$	1,213	$	—	$	—
Corporate obligations	256		407		—		174		1,216		—
U.S. government agency and Treasury securities	1,340		3,054		—		604		1,734		—
Mutual funds	—		—		18		—		—		272
Total	2,482		3,461		18		1,991		2,950		272

Other measurement basis:
Equity-method investments	—		—		27		—		—		24
Non-marketable equity investments	—		—		4		—		—		4
Cash on hand	625		—		—		446		—		—
Total	$	3,107	$	3,461	$	49	$	2,437	$	2,950	$	300

As of December 31, 2020 and 2019, 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 2020, 2019 or 2018. All of our debt securities classified as available for sale as of December 31, 2020, have maturities within one year.

In 2020, 2019 and 2018, the proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $5.29 billion, $2.31 billion and $6.71 billion, respectively. Gross realized gains and losses from these sales were not material.

In 2020, we entered into total return swaps to economically hedge the variability of certain deferred compensation obligations to employees. As a result, we received proceeds of $253 million from the sale of investments in mutual funds that were previously being utilized to offset this exposure.

Fair-value considerations

We measure and report certain financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The three-level hierarchy described below indicates the extent and level of judgment used to estimate fair-value measurements.

Level 1 – Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date.
Level 2 – Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. We utilize a third-party data service to provide Level 2 valuations. We verify these valuations for reasonableness relative to unadjusted quotes obtained from brokers or dealers based on observable prices for similar assets in active markets.
Level 3 – Uses inputs that are unobservable, supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models that utilize management estimates of market participant assumptions. As of December 31, 2020 and 2019, we had no Level 3 assets or liabilities.

The following are our assets and liabilities that were accounted for at fair value on a recurring basis. These tables do not include cash on hand, assets held by our postretirement plans, or assets and liabilities that are measured at historical cost or any basis other than fair value.


	December 31, 2020						December 31, 2019
	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Money market funds	$	886	$	—	$	886	$	1,213	$	—	$	1,213
Corporate obligations	—		663		663		—		1,390		1,390
U.S. government agency and Treasury securities	4,394		—		4,394		2,338		—		2,338
Mutual funds	18		—		18		272		—		272
Total assets	$	5,298	$	663	$	5,961	$	3,823	$	1,390	$	5,213

Liabilities:
Deferred compensation	$	350	$	—	$	350	$	298	$	—	$	298
Total liabilities	$	350	$	—	$	350	$	298	$	—	$	298

Goodwill and acquisition-related intangibles

Goodwill by segment as of December 31, 2020 and 2019, is as follows:


	Goodwill
Analog	$	4,158
Embedded Processing	172
Other	32
Total	$	4,362

We perform our annual goodwill impairment test as of October 1 and determine whether the fair value of each of our reporting units is in excess of its carrying value. Determination of fair value is based upon management estimates and judgment, using unobservable inputs in discounted cash flow models to calculate the fair value of each reporting unit. These unobservable inputs are considered Level 3 measurements, as described in Note 6. In 2020, 2019 and 2018, we determined no impairment was indicated.

The components of acquisition-related intangibles are as follows:


		December 31, 2020						December 31, 2019
	Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
Developed technology	8 – 10	$	1,895	$	1,753	$	142	$	2,000	$	1,660	$	340
Other intangibles	5	10		—		10		—		—		—
Total		$	1,905	$	1,753	$	152	$	2,000	$	1,660	$	340

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 $198 million, $288 million and $318 million in 2020, 2019 and 2018, respectively. Fully amortized assets are written off against accumulated amortization. The remaining estimated amortization is $144 million in 2021.

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.

Both defined contribution plans offer an employer-matching savings option that allows employees to make pretax and post-tax contributions to various investment choices. Employees who elected to continue accruing a benefit in the qualified defined benefit pension plans may also participate in the defined contribution plan, where employer-matching contributions are provided for up to 2% of the employee’s annual eligible earnings. Employees who elected not to continue accruing a benefit in the defined benefit pension plans and employees hired after November 1997 and through December 31, 2003, may participate in the enhanced defined contribution plan. This plan provides for a fixed employer contribution of 2% of the employee’s annual eligible earnings, plus an employer-matching contribution of up to 4% of the employee’s annual eligible earnings. Employees hired after December 31, 2003, do not receive the fixed employer contribution of 2% of the employee’s annual eligible earnings.

As of December 31, 2020 and 2019, as a result of employees’ elections, TI’s U.S. defined contribution plans held shares of TI common stock totaling 7 million shares and 8 million shares valued at $1.12 billion and $988 million, respectively. Dividends paid on these shares in 2020 and 2019 were $27 million and $26 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 2020, 2019 and 2018.

The defined benefit pension plans include employees still accruing benefits, as well as employees and participants who no longer accrue service-related benefits, but instead, may participate in the enhanced defined contribution plan. Benefits under the qualified defined benefit pension plan are determined using a formula based on years of service and the highest five consecutive years of compensation. We intend to contribute amounts to this plan to meet the minimum funding requirements of applicable local laws and regulations, plus such additional amounts as we deem appropriate. The non-qualified defined benefit plans are unfunded and closed to new participants.

U.S. retiree health care benefit plan

U.S. employees who meet eligibility requirements are offered medical coverage during retirement. We make a contribution toward the cost of those retiree medical benefits for certain retirees and their dependents. The contribution rates are based upon various factors, the most important of which are an employee’s date of hire, date of retirement, years of service and eligibility for Medicare benefits. The balance of the cost is borne by the plan’s participants. Employees hired after January 1, 2001, are responsible for the full cost of their medical benefits during retirement.

Non-U.S. retirement plans

We provide retirement coverage for non-U.S. employees, as required by local laws or to the extent we deem appropriate, through a number of defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances.

As of December 31, 2020 and 2019, as a result of employees’ elections, TI’s non-U.S. defined contribution plans held TI common stock valued at $36 million and $28 million, respectively. Dividends paid on these shares of TI common stock in 2020 and 2019 were not material.

Effects on our Consolidated Statements of Income and Balance Sheets

Expenses related to defined benefit and retiree health care benefit plans are as follows:


	U.S. Defined Benefit						U.S. Retiree Health Care						Non-U.S. Defined Benefit
	2020		2019		2018		2020		2019		2018		2020		2019		2018
Service cost	$	18	$	18	$	19	$	3	$	3	$	5	$	34	$	31	$	36
Interest cost	31		38		35		13		14		15		38		43		45
Expected return on plan assets	(36)		(41)		(42)		(12)		(14)		(15)		(78)		(86)		(67)
Amortization of prior service cost (credit)	—		—		—		(2)		(1)		(3)		1		1		(1)
Recognized net actuarial loss	7		9		17		—		—		2		14		29		20
Net periodic benefit costs	20		24		29		2		2		4		9		18		33
Settlement losses	16		10		23		—		—		—		1		3		3
Total, including other postretirement losses	$	36	$	34	$	52	$	2	$	2	$	4	$	10	$	21	$	36

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

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

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


	U.S. Defined Benefit				U.S. Retiree Health Care				Non-U.S. Defined Benefit
	2020		2019		2020		2019		2020		2019
Change in plan benefit obligation
Benefit obligation at beginning of year:	$	960	$	874	$	359	$	361	$	2,581	$	2,411
Service cost	18		18		3		3		34		31
Interest cost	31		38		13		14		38		43
Participant contributions	—		—		13		13		7		7
Benefits paid	(12)		(11)		(39)		(41)		(95)		(103)
Settlements	(94)		(66)		—		—		(8)		(12)
Curtailments	—		—		—		—		—		(1)
Actuarial loss (gain)	194		107		40		9		143		193
Plan amendments	—		—		—		—		1		—
Effects of exchange rate changes	—		—		—		—		167		12
Benefit obligation at end of year	$	1,097	$	960	$	389	$	359	$	2,868	$	2,581

Change in plan assets
Fair value of plan assets at beginning of year:	$	987	$	869	$	356	$	330	$	2,661	$	2,410
Actual return on plan assets	164		185		58		53		260		337
Employer contributions (qualified plans)	—		—		1		1		11		9
Employer contributions (non-qualified plans)	16		10		—		—		—		—
Participant contributions	—		—		13		13		7		7
Benefits paid	(12)		(11)		(39)		(41)		(95)		(103)
Settlements	(94)		(66)		—		—		(8)		(12)
Effects of exchange rate changes	—		—		—		—		172		13

Fair value of plan assets at end of year	$	1,061	$	987	$	389	$	356	$	3,008	$	2,661

Funded status at end of year	$	(36)	$	27	$	—	$	(3)	$	140	$	80

The actuarial loss (gain) for all pension plans was primarily related to a change in the discount rate used to measure the benefit obligations of those plans in 2020 and 2019.

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


	U.S. Defined Benefit		U.S. Retiree Health Care		Non-U.S. Defined Benefit		Total
2020
Overfunded retirement plans	$	9	$	3	$	234	$	246
Accrued expenses and other liabilities & other long-term liabilities	(6)		—		(5)		(11)
Underfunded retirement plans	(39)		(3)		(89)		(131)
Funded status at end of 2020	$	(36)	$	—	$	140	$	104

2019
Overfunded retirement plans	$	73	$	—	$	145	$	218
Accrued expenses and other liabilities & other long-term liabilities	(17)		—		(4)		(21)
Underfunded retirement plans	(29)		(3)		(61)		(93)
Funded status at end of 2019	$	27	$	(3)	$	80	$	104

Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute about $10 million to our retirement benefit plans in 2021.

Accumulated benefit obligations, which are generally less than the projected benefit obligations as they exclude the impact of future salary increases, were $992 million and $878 million as of December 31, 2020 and 2019, respectively, for the U.S. defined benefit plans, and $2.72 billion and $2.46 billion as of December 31, 2020 and 2019, respectively, for the non-U.S. defined benefit plans.

The change in AOCI is as follows:


	U.S. Defined Benefit		U.S. Retiree Health Care				Non-U.S. Defined Benefit				Total
	Net Actuarial Loss		Net Actuarial Loss		Prior Service Credit		Net Actuarial Loss		Prior Service Credit		Net Actuarial Loss		Prior Service Credit
AOCI balance, net of taxes, December 31, 2019	$	91	$	(3)	$	(4)	$	259	$	2	$	347	$	(2)
Changes in AOCI by category:
Adjustments	66		(6)		—		(16)		—		44		—
Recognized within net income	(23)		—		2		(15)		(1)		(38)		1
Tax effect	(9)		1		—		14		—		6		—
Total change to AOCI	34		(5)		2		(17)		(1)		12		1
AOCI balance, net of taxes, December 31, 2020	$	125	$	(8)	$	(2)	$	242	$	1	$	359	$	(1)

Information on plan assets

We report and measure the plan assets of our defined benefit pension and other postretirement plans at fair value. The tables below set forth the fair value of our plan assets using the same three-level hierarchy of fair-value inputs described in Note 6.


	December 31, 2020
	Level 1		Level 2		Other (a)		Total
Assets of U.S. defined benefit plan:
Fixed income securities and cash equivalents	$	—	$	—	$	743	$	743
Equity securities	—		—		318		318
Total	$	—	$	—	$	1,061	$	1,061

Assets of U.S. retiree health care plan:
Fixed income securities and cash equivalents	$	29	$	—	$	222	$	251
Equity securities	—		—		138		138
Total	$	29	$	—	$	360	$	389

Assets of non-U.S. defined benefit plans:
Fixed income securities and cash equivalents	$	69	$	146	$	2,063	$	2,278
Equity securities	43		2		685		730
Total	$	112	$	148	$	2,748	$	3,008

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


	December 31, 2019
	Level 1		Level 2		Other (a)		Total
Assets of U.S. defined benefit plan:
Fixed income securities and cash equivalents	$	—	$	—	$	640	$	640
Equity securities	—		—		347		347
Total	$	—	$	—	$	987	$	987

Assets of U.S. retiree health care plan:
Fixed income securities and cash equivalents	$	62	$	—	$	168	$	230
Equity securities	—		—		126		126
Total	$	62	$	—	$	294	$	356

Assets of non-U.S. defined benefit plans:
Fixed income securities and cash equivalents	$	59	$	126	$	1,762	$	1,947
Equity securities	41		2		671		714
Total	$	100	$	128	$	2,433	$	2,661

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

The investments in our major benefit plans largely consist of low-cost, broad-market index funds to mitigate risks of concentration within market sectors. Our investment policy is designed to better match the interest rate sensitivity of the plan assets and liabilities. The appropriate mix of equity and bond investments is determined primarily through the use of detailed asset-liability modeling studies that look to balance the impact of changes in the discount rate against the need to provide asset growth to cover future service cost. Most of our plans around the world have a greater proportion of fixed income securities with return characteristics that are more closely aligned with changes in the liabilities caused by discount rate volatility.

Assumptions and investment policies


	U.S. Defined Benefit		U.S. Retiree Health Care		Non-U.S. Defined Benefit
	2020	2019	2020	2019	2020	2019
Weighted average assumptions used to determine benefit obligations:
Discount rate	2.81%	3.62%	2.74%	3.63%	1.31%	1.46%
Long-term pay progression	3.70%	3.30%	n/a	n/a	3.15%	3.06%

Weighted average assumptions used to determine net periodic benefit cost:
Discount rate	3.42%	4.35%	3.63%	4.30%	1.46%	1.85%
Long-term rate of return on plan assets	4.00%	4.90%	3.50%	4.40%	2.93%	3.62%
Long-term pay progression	3.30%	3.30%	n/a	n/a	3.06%	3.03%

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 is used to establish the discount rate.

Assumptions for the expected long-term rate of return on plan assets are based on future expectations for returns for each asset class and the effect of periodic target asset allocation rebalancing. We adjust the results for the payment of reasonable expenses of the plan from plan assets. We believe our assumptions are appropriate based on the investment mix and long-term nature of the plans’ investments. Assumptions used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries.

The target allocation ranges for the plans that hold a substantial majority of the defined benefit assets are as follows:


	U.S. Defined Benefit	U.S. Retiree Health Care	Non-U.S. Defined Benefit
Fixed income securities and cash equivalents	65% – 80%	65% – 80%	60% – 100%
Equity securities	20% – 35%	20% – 35%	0% – 40%

We rebalance the plans’ investments when they are outside the target allocation ranges.

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


	U.S. Defined Benefit		U.S. Retiree Health Care		Non-U.S. Defined Benefit
	2020	2019	2020	2019	2020	2019
Fixed income securities and cash equivalents	70%	65%	65%	65%	76%	73%
Equity securities	30%	35%	35%	35%	24%	27%

None of the plan assets related to the defined benefit pension plans and retiree health care benefit plan are directly invested in TI common stock.

The following assumed future benefit payments to plan participants in the next 10 years are used to measure our benefit obligations. Almost all of the payments, which may vary significantly from these assumptions, will be made from plan assets and not from company assets.


	2021		2022		2023		2024		2025		2026 – 2030
U.S. Defined Benefit	$	95	$	137	$	102	$	100	$	102	$	490
U.S. Retiree Health Care	29		28		27		26		25		113
Non-U.S. Defined Benefit	99		102		102		105		106		558

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


	2020	2019
Assumed health care cost trend rate for next year	6.75%	7.00%
Ultimate trend rate	5.00%	5.00%
Year in which ultimate trend rate is reached	2028	2028

Deferred compensation plans

We have deferred compensation plans that allow U.S. employees whose base salary and management responsibility exceed a certain level to defer receipt of a portion of their cash compensation. Payments under these plans are made based on the participant’s distribution election and plan balance. Participants can earn a return on their deferred compensation based on notional investments in the same investment funds that are offered in our defined contribution plans.

As of December 31, 2020, our liability to participants of the deferred compensation plans was $350 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. We utilize total return swaps and investments in mutual funds that serve as economic hedges of our exposure to changes in the fair value of these liabilities. We record changes in the fair value of the liability and the related total return swaps and mutual funds in SG&A, as discussed in Note 6. As of December 31, 2020, we held $18 million in mutual funds related to these plans that are recorded in long-term investments on our Consolidated Balance Sheets.

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, 2020, we had a variable-rate revolving credit facility from a consortium of investment-grade banks that allows us to borrow up to $2 billion until March 2024. The interest rate on borrowings under this credit facility, if drawn, is indexed to the applicable London Interbank Offered Rate (LIBOR). As of December 31, 2020, our credit facility was undrawn, and we had no commercial paper outstanding.

Long-term debt

In March 2020, we issued a principal amount of $750 million of fixed-rate, long-term debt due in 2025. We incurred $4 million of issuance costs. The proceeds of the offering were $749 million, net of the original issuance discount, and were used for general corporate purposes and the repayment of maturing debt.

In April 2020, we retired $500 million of maturing debt.

In May 2020, we issued a principal amount of $750 million of fixed-rate, long-term debt due in 2030. We incurred $5 million of issuance costs. The proceeds of the offering were $749 million, net of the original issuance discount, and were used for general corporate purposes.

In March 2019, we issued a principal amount of $750 million of fixed-rate, long-term debt due in 2039. We incurred $7 million of issuance costs. The proceeds of the offering were $743 million, net of the original issuance discount, and were used for general corporate purposes.

In August 2019, we retired $750 million of maturing debt.

In September 2019, we issued a principal amount of $750 million of fixed-rate, long-term debt due in 2029. We incurred $5 million of issuance costs. The proceeds of the offering were $748 million, net of the original issuance discount, and were used for general corporate purposes.

In May 2018, we retired $500 million of maturing debt.

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.

Long-term debt outstanding is as follows:


	December 31,
	2020		2019
Notes due 2020 at 1.75%	$	—	$	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 2025 at 1.375%	750		—
Notes due 2027 at 2.90%	500		500
Notes due 2029 at 2.25%	750		750
Notes due 2030 at 1.75%	750		—
Notes due 2039 at 3.875%	750		750
Notes due 2048 at 4.15%	1,500		1,500
Total debt	6,850		5,850
Net unamortized discounts, premiums and issuance costs	(52)		(47)
Total debt, including net unamortized discounts, premiums and issuance costs	6,798		5,803
Current portion of long-term debt	(550)		(500)
Long-term debt	$	6,248	$	5,303

Interest and debt expense was $190 million, $170 million and $125 million in 2020, 2019 and 2018, respectively. This was net of the amortized discounts, premiums and issuance costs. Cash payments for interest on long-term debt were $182 million, $156 million and $114 million in 2020, 2019 and 2018, respectively. Capitalized interest was not material.

Leases

We conduct certain operations in leased facilities and also lease a portion of our data processing and other equipment. In addition, certain long-term supply agreements to purchase industrial gases are accounted for as operating leases. Lease agreements frequently include renewal provisions and require us to pay real estate taxes, insurance and maintenance costs.

Our leases are included as a component of the following balance sheet lines:


	December 31,
	2020		2019
Other long-term assets	$	319	$	337

Accrued expenses and other liabilities	$	72	$	73
Other long-term liabilities	249		259

Details of our operating leases are as follows:


	For Years Ended December 31,
	2020			2019
Lease cost related to lease liabilities	$	70		$	66
Variable lease cost	36			41

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for lease cost	$	59		$	60

Lease assets obtained in exchange for new lease liabilities	$	59		$	167

Weighted average remaining lease term	8.9 years			8.2 years
Weighted average discount rate	3.02		%	3.37		%

As of December 31, 2020, we had committed to make the following minimum payments under our non-cancellable operating leases:


	2021		2022		2023		2024		2025		Thereafter		Total
Lease payments	$	76	$	60	$	38	$	33	$	26	$	138	$	371
Imputed lease interest													(50)
Total lease liabilities													$	321

Commitments and contingencies

Purchase commitments

Our purchase commitments include payments for software licenses and contractual arrangements with suppliers when there is a fixed, non-cancellable payment schedule or when minimum payments are due with a reduced delivery schedule.

As of December 31, 2020, we had committed to make the following minimum payments under our purchase commitments:


			2021						2022						2023						2024						2025						Thereafter						Total
Purchase commitments			$	400					$	127					$	69					$	31					$	24					$	96					$	747

Indemnification guarantees

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

Warranty costs/product liabilities

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

General

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

Supplemental financial information

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,
	2020		2019		2018
Restructuring charges (a)	$	25	$	(15)	$	6
Gains on sales of assets	(1)		(21)		(3)
Restructuring charges/other	$	24	$	(36)	$	3

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

Changes in accrued restructuring balances


	2020		2019		2018
Balance, January 1	$	—	$	28	$	29
Restructuring charges	25		(15)		6
Non-cash items (a)	1		—		(3)
Payments	(8)		(13)		(4)
Balance, December 31	$	18	$	—	$	28

(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 2020, we recognized $25 million of restructuring charges primarily for severance and benefit costs associated with our Embedded Processing business. As of December 31, 2020, $8 million of payments have been made.

In January 2020, we announced a multiyear plan to close our two remaining factories with 150-millimeter production, which are more than 50 years old and located in Sherman and Dallas, Texas. Production will be transitioned from these sites to our more advanced and cost-effective 300-millimeter wafer fabrication facilities in North Texas. We expect this transition to be completed in the next two to four years. Charges for these closures cannot be reasonably estimated until a later phase of the transition.

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


	For Years Ended December 31,
	2020		2019		2018
Other income (a)	$	327	$	201	$	135
Other expense (b)	(14)		(26)		(37)
Total	$	313	$	175	$	98

(a)Other income includes royalty income, reversals of tax interest accruals, interest and lease income, as well as investment gains and losses.

(b)Other expense includes a portion of pension and other retiree benefit costs, currency gains and losses and miscellaneous items.

Property, plant and equipment at cost


	Depreciable Lives (Years)		December 31,
		2020			2019
Land	n/a		$	125		$	126
Buildings and improvements	5 – 40		2,571			2,504
Machinery and equipment	2 – 10		3,085			3,110
Total			$	5,781		$	5,740

Other long-term liabilities


	December 31,
	2020		2019
Long-term portion of transition tax on indefinitely reinvested earnings	$	457	$	506
Deferred compensation plans	350		298
Operating lease liabilities	249		259
Uncertain tax positions	89		303
Other	160		148
Total	$	1,305	$	1,514

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


	December 31,
	2020		2019
Postretirement benefit plans:
Net actuarial loss	$	(359)	$	(347)
Prior service credit	1		2
Cash flow hedge derivative instruments	(2)		(2)
Total	$	(360)	$	(347)

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 2020, 2019 and 2018. The table below details where these transactions are recorded in our Consolidated Statements of Income.


	For Years Ended December 31,						Impact to Related Statement of Income Lines
	2020		2019		2018
Net actuarial losses of defined benefit plans:
Recognized net actuarial loss and settlement losses (a)	$	38	$	51	$	65	Decrease to OI&E
Tax effect	(9)		(13)		(15)		Decrease to provision for income taxes
Recognized within net income, net of taxes	$	29	$	38	$	50	Decrease to net income

Prior service credit of defined benefit plans:
Amortization of prior service credit (a)	$	(1)	$	—	$	(4)	Increase to OI&E
Tax effect	—		—		1		Increase to provision for income taxes
Recognized within net income, net of taxes	$	(1)	$	—	$	(3)	Increase to net income

(a)Detailed in Note 8.

Quarterly financial data (unaudited)


	2020 Quarters								2019 Quarters
	4th		3rd		2nd		1st		4th		3rd		2nd		1st
Revenue	$	4,076	$	3,817	$	3,239	$	3,329	$	3,350	$	3,771	$	3,668	$	3,594
Gross profit	2,646		2,453		2,082		2,088		2,097		2,446		2,360		2,261
Included in operating profit:
Acquisition charges	47		51		50		50		50		79		80		79
Restructuring charges/other	—		—		24		—		—		—		(36)		—
Operating profit	1,813		1,609		1,228		1,244		1,249		1,589		1,506		1,379
Net income	1,688		1,353		1,380		1,174		1,070		1,425		1,305		1,217

Basic EPS	$	1.83	$	1.47	$	1.50	$	1.25	$	1.14	$	1.51	$	1.38	$	1.29
Diluted EPS	$	1.80	$	1.45	$	1.48	$	1.24	$	1.12	$	1.49	$	1.36	$	1.26

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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 5, 2021, expressed an unqualified opinion thereon.

Basis for opinion

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

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

Critical a****udit matter

The critical audit matter communicated is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Uncertain tax positions


Description of the matter			As discussed in Note 4 to the consolidated financial statements, the Company operates in the United States and multiple international tax jurisdictions, and its income tax returns are subject to examination by tax authorities in those jurisdictions who may challenge any tax position on these returns. Uncertainty in a tax position may arise because tax laws are subject to interpretation. The Company uses significant judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition. Auditing management’s estimate of the amount of tax benefit that qualifies for recognition involved auditor judgment because management’s estimate is complex, requires a high degree of judgment and is based on interpretations of tax laws and legal rulings.

How we addressed the matter in our audit			We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting process for uncertain tax positions. For example, this included controls over the Company’s assessment of the technical merits of tax positions and management’s process to measure the benefit of those tax positions. Among other procedures performed, we involved our tax professionals to assess the technical merits of the Company’s tax positions. This included assessing the Company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. We also evaluated the appropriateness of the Company’s accounting for its tax positions taking into consideration relevant international and local income tax laws and legal rulings. We analyzed the Company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. We also evaluated the adequacy of the Company’s financial statement disclosures in Note 4 to the consolidated financial statements related to these tax matters.

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

Dallas, Texas

February 5, 2021

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