Texas Instruments 2017 Annual Report NNoottiiccee ooff 22001188 AAnnnnuuaall MMeeeettiinng aand PPrrooxxyy SStatteemmeenntt OPERATING HIGHLIGHTS (Millions of dollars, except per-share amounts) Income statements 2017 2016 Revenue Gross profit Operating expenses Operating profit Net income $ 14,961 $ 13,370 9,614 3,202 6,083 3,682 8,257 3,098 4,855 3,595 Earnings per share (diluted) $ 3.61 $ 3.48 Cash flows statements Cash flow from operations (GAAP) $ 5,363 $ 4,614 Capital expenditures Free cash flow (non-GAAP) 695 4,668 531 4,083 Note: Free cash flow (non-GAAP) = Cash flow from operations less Capital expenditures. See page 20 for reconciliation. 8% 14% $4.7B ANALOG & EMBEDDED 5- & 10-YEAR CAGR Driving top-line growth, now 90% of TI revenue FREE CASH FLOW GROWTH Reflecting the ongoing strength of our business model RETURNED TO SHAREHOLDERS Demonstrating our commitment to return cash to shareholders “In 2017, we continued making progress on our strategic journey to create a stronger TI and to deliver sustained, long-term results. Our revenue grew 12% and free cash flow expanded to $4.7 billion, or 31.2% of revenue. We are investing in the best products – analog and embedded processing – and the best markets – industrial and automotive – while also strengthening and leveraging our unique competitive advantages that allow us to grow, generate cash and return all free cash flow to our owners. While our work will to making TI stronger every day for our customers, our employees and our owners.” Rich Templeton Chairman, president and CEO Brian Crutcher Executive vice president and COO In January 2018, TI announced that Mr. Crutcher will become president and CEO, effective June 1, and Mr. Templeton will continue as chairman. Shareholder returns Dividends paid Stock repurchases Total cash returned $ 2,104 $ 1,646 never be done, we are committed 2,556 2,132 $ 4,660 $ 3,778 Form 10-K table of contents PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 8 Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 PART II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . 14 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 16 • Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 • • • Results of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Financial condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Liquidity and capital resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 • Non-GAAP financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 • • • Long-term contractual obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Critical accounting policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Changes in accounting standards, Off-balance sheet arrangements, and Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 • • • • • Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Notes to financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 • • • • • • • • • • • • • • (1) Description of business, including segment and geographic area information . . . . . . . . . . . . . . . . . . . . 30 (2) Basis of presentation and significant accounting policies and practices . . . . . . . . . . . . . . . . . . . . . . . . . 31 (3) Restructuring charges/other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (4) Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (5) Profit sharing plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 (6) Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 (7) Financial instruments and risk concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (8) Valuation of debt and equity investments and certain liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (9) Goodwill and acquisition-related intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (10) Postretirement benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 (11) Debt and lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 (12) Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 (13) Supplemental financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 (14) Quarterly financial data (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 T E X A S I N S T R U M E N T S i Report of independent registered public accounting firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . 56 Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . 58 Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Notice regarding forward-looking statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 PART IV Proxy statement table of contents Notice of annual meeting of stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Table of contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Voting procedures, quorum and attendance requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Election of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 5 Board organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Director compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Executive compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Audit Committee report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Proposal to ratify appointment of independent registered public accounting firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Proposal to approve the Texas Instruments 2018 Director Compensation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Equity compensation plan information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Notice regarding forward-looking statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Directions and other annual meeting information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Appendix A (Non-GAAP reconciliations) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 Appendix B (Texas Instruments 2018 Director Compensation Plan) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1 Other information table of contents Comparison of total shareholder return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notice regarding forward-looking statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 ii T E X A S I N S T R U M E N T S UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2017 OR for the transition period from to Commission File Number 1-3761 TEXAS INSTRUMENTS INCORPORATED (Exact name of Registrant as specified in its charter) K - 0 1 M R O F Delaware (State of Incorporation) 12500 TI Boulevard, Dallas, Texas (Address of Principal Executive Offices) 75-0289970 (I.R.S. Employer Identification No.) 75243 (Zip Code) Registrant’s Telephone Number, Including Area Code: 214-479-3773 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, par value $1.00 Name of each exchange on which registered The NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Yes È No ‘ Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer È Accelerated filer ‘ Emerging growth company ‘ If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $76,179,967,734 as of June 30, 2017. Non-accelerated filer ‘ Yes ‘ No È Smaller reporting company ‘ 983,787,502 (Number of shares of common stock outstanding as of February 20, 2018) Part III hereof incorporates information by reference to the Registrant’s proxy statement for the 2018 annual meeting of stockholders. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 1 ITEM 1. Business. PART I We design and make semiconductors that we sell to electronics designers and manufacturers all over the world. We began operations in 1930. We are incorporated in Delaware, headquartered in Dallas, Texas, and have design, manufacturing or sales operations in more than 30 countries. We have two reportable segments: Analog and Embedded Processing. We report the results of our remaining business activities in Other. In 2017, we generated $14.96 billion of revenue. F O R M 1 0 - K Our business model is designed around four sustainable competitive advantages, that we believe, in combination, put us in a unique class of companies. These advantages include (1) a strong foundation of manufacturing and technology, (2) a broad portfolio of differentiated analog and embedded processing products, (3) the broadest reach of market channels and (4) diversity and longevity of our products, markets and customer positions. Our strategic focus, and where we invest the majority of our resources, is on Analog and Embedded Processing, with a particular emphasis on designing and selling those products into the industrial and automotive markets, which we believe represent the best growth opportunities. Analog and embedded processing products sold into industrial and automotive markets provide long product life cycles, intrinsic diversity, and less capital-intensive manufacturing, which we believe offer stability, profitability and strong cash generation. This business model is the foundation of our capital management strategy, which is based on our belief that free cash flow growth, especially on a per-share basis, is important for maximizing shareholder value over the long term. We also believe that free cash flow will be valued only if it is productively invested in the business or returned to shareholders. Free cash flow is cash flow from operations less capital expenditures. The combined effect of these sustainable competitive advantages is that over time we have gained market share in Analog and Embedded Processing and have grown and returned free cash flow. TI’s business model puts us in a unique class of companies with the ability to grow, generate cash, and return that cash to shareholders. Product information Semiconductors are electronic components that serve as the building blocks inside modern electronic systems and equipment. Semiconductors, generally known as “chips,” combine multiple transistors to form a complete electronic circuit. We have tens of thousands of products that are used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution. This broad portfolio includes products that are integral to almost all electronic equipment. Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels. Our segments also reflect how management allocates resources and measures results. In 2017, we reorganized the product lines within our segments to align our business structure with the way our customers select and buy products. Analog Our Analog segment generated $9.90 billion of revenue in 2017. 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 also are 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 running off a battery. Our Analog products are used in many markets, particularly industrial, automotive and personal electronics. Sales of our Analog products generated about 66 percent of our revenue in 2017. According to external sources, the market for analog semiconductors was about $53 billion in 2017. Our Analog segment’s revenue in 2017 was about 19 percent of this fragmented market, the leading position. We believe we are well positioned to increase our market share over time. Our Analog segment includes the following major product lines: Power, Signal Chain and High Volume. Power Power includes products that help customers manage power in electronic systems. Our broad portfolio is designed to manage power requirements across different voltage levels using battery management solutions, portable components, power supply controls, point-of-load products, switches and interfaces, integrated protection devices, high-voltage products, and mobile lighting and display products. 2 TE X A S I N S T R U M E N T S • 2 0 1 7 F O R M 1 0 - K K - 0 1 M R O F Signal Chain Signal Chain includes products that sense, condition and measure real-world signals to allow information to be transferred or converted for further processing and control. Our Signal Chain products, which serve a variety of end markets, include amplifiers, data converters, interface products, motor drives, clocks and sensing products. High Volume High Volume includes integrated analog and standard products that are primarily sold into markets such as personal electronics, industrial and automotive. These products support applications like touch screens and automotive safety systems. Embedded Processing Our Embedded Processing segment generated $3.50 billion of revenue in 2017. Embedded Processing products are the “brains” of many types of electronic equipment. Embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. Our devices vary from simple, low-cost microcontrollers used in electric toothbrushes to highly specialized, complex devices used in automotive applications such as infotainment systems and advanced driver assistance systems (ADAS). Our Embedded Processing products are used in many markets, particularly industrial and automotive. An important characteristic of our Embedded Processing products is that our customers often invest their own research and development (R&D) to write software that operates on our products. This investment tends to increase the length of our customer relationships because many customers prefer to re-use software from one product generation to the next. Sales of Embedded Processing products generated about 23 percent of our revenue in 2017. According to external sources, the market for embedded processors was about $20 billion in 2017. Our Embedded Processing segment’s revenue in 2017 was about 18 percent of this fragmented market, among the leaders. We believe we are well positioned to increase our market share over time. Our Embedded Processing segment includes the following major product lines: Connected Microcontrollers and Processors. Connected Microcontrollers Connected Microcontrollers includes microcontrollers, microcontrollers with integrated wireless capabilities and stand-alone wireless connectivity solutions. Microcontrollers are self-contained systems with a processor core, memory and peripherals that are designed to control a set of specific tasks for electronic equipment. Microcontrollers tend to have minimal requirements for memory, program length and software complexity. Our products are used in a wide range of applications and incorporate both wired and wireless communication with integrated analog functions to enable electronic equipment to sense, connect, log and transfer data. Processors Processors includes digital signal processors (DSPs) and applications processors. DSPs perform mathematical computations almost instantaneously to process or improve digital data. Applications processors are designed for specific computing activity. Other We report the results of our remaining business activities in Other, which includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other generated $1.56 billion of revenue in 2017 and includes revenue from DLP® products (primarily used in projectors to create high- definition images), calculators and certain custom semiconductors known as application-specific integrated circuits (ASICs). 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; restructuring charges; and certain corporate-level items, such as litigation expenses, environmental costs, insurance settlements, and gains and losses from other activities, including asset dispositions. Financial information with respect to our segments and our operations outside the United States is contained in Note 1 to the financial statements, which is included in Item 8, “Financial Statements and Supplementary Data.” Risks attendant to our foreign operations are described in Item 1A, “Risk Factors.” TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 3 Markets for our products The table below lists the major markets for our products in 2017 and the estimated percentage of our 2017 revenue that the market represented. The chart also lists, in declining order of our revenue, the sectors within each market. Market Industrial (35% of TI revenue) F O R M 1 0 - K Automotive (19% of TI revenue) Personal electronics (25% of TI revenue) Communications equipment (12% of TI revenue) Enterprise systems (6% of TI revenue) Other (calculators and other) (3% of TI revenue) Market characteristics Competitive landscape Sector Factory automation and control Building automation Medical/healthcare/fitness Grid infrastructure Test and measurement Motor drives Space/avionics/defense Appliances Power delivery Electronic point of sale Display Industrial transportation Lighting Industrial other Infotainment and cluster Passive safety Advanced driver assistance systems (ADAS) Hybrid/electric vehicle and powertrain Body electronics and lighting Mobile phones Personal and notebook computers Portable electronics Storage Tablets Printers and other peripherals Home theater and entertainment Wearables (non-medical) TV Gaming Wireless infrastructure Telecom infrastructure Enterprise switching Residential Projectors Servers Multi-function printers High-performance computing Thin client Despite recent consolidation, the analog and embedded processing markets remain highly fragmented. As a result, we face significant global competition from dozens of large and small companies, including both broad-based suppliers and niche suppliers. Our competitors also include emerging companies, particularly in Asia, that sell products into the same markets in which we operate. 4 TE X A S I N S T R U M E N T S • 2 0 1 7 F O R M 1 0 - K K - 0 1 M R O F We believe that competitive performance in the semiconductor market generally depends on several factors, including the breadth of a company’s product line, the strength and depth of its channels to market, technological innovation, product development execution, technical support, customer service, quality, reliability, capacity and price. In addition, manufacturing process technologies that provide differentiated levels of performance are a competitive factor for our Analog products and customers’ prior investments in software development is a competitive factor for our Embedded Processing products. Product cycle The global semiconductor market is characterized by constant, though generally incremental, advances in product designs and manufacturing processes. Semiconductor prices and manufacturing costs tend to decline over time as manufacturing processes and product life cycles mature. Market cycle The “semiconductor cycle” refers to the ebb and flow of supply and demand and the building and depleting of inventories. The semiconductor market historically has been characterized by periods of tight supply caused by strengthening demand and/or insufficient manufacturing capacity, followed by periods of surplus inventory caused by weakening demand and/or excess manufacturing capacity. These are typically referred to as upturns and downturns in the semiconductor cycle. The semiconductor cycle could be affected by the significant time and money required to build and maintain semiconductor manufacturing facilities. We employ several strategies to dampen the effect of the semiconductor cycle on TI. We acquire our manufacturing facilities and equipment ahead of demand, which usually allows us to acquire this capacity at lower costs. We focus our resources on our Analog and Embedded Processing segments, which serve diverse markets and diverse customers. This diversity reduces our dependence on the performance of a single market or small group of customers. Additionally, we utilize consignment inventory programs with our customers and distributors that give us improved insight into customer demand. Seasonality Our revenue is subject to some seasonal variation. Historically, our sequential revenue growth rate tends to be weaker in the first and fourth quarters when compared with the second and third quarters. Customers, sales and distribution We sell our products to about 100,000 customers. Our customer base is diverse, with more than one-third of our revenue derived from customers outside our largest 100. We market and sell our semiconductor products through direct sales and distributors, and online. We have sales or marketing offices in more than 30 countries, and we continue to expand and enhance our online presence. About 65 percent of our sales are fulfilled through distribution channels. Our distributors maintain an inventory of our products and sell directly to a wide range of customers. They also sell products from our competitors. Manufacturing Semiconductor manufacturing begins with a sequence of photolithographic and chemical processing steps that fabricate a number of semiconductor devices on a thin silicon wafer. Each device on the wafer is packaged and tested. The entire process takes place in highly specialized facilities and requires an average of 12 weeks, with most products being completed within 6 to 14 weeks. We own and operate semiconductor manufacturing facilities in North America, Asia, Japan and Europe. These include both wafer fabrication and assembly/test facilities. Our facilities require substantial investment to construct and are largely fixed-cost assets once in operation. We do most of our manufacturing in-house. This strategic decision to directly control our manufacturing helps ensure a consistent supply of products for our customers and also allows us to invest in technology that differentiates the features of our products. We have focused on creating a competitive manufacturing cost advantage by increasing factory loadings of our advanced analog 300- millimeter wafers, which have about a 40 percent cost advantage per unpackaged chip over 200-millimeter wafers. 300-millimeter wafers will support the majority of our Analog growth going forward. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 5 Additionally, we keep our manufacturing costs low by using mature assets acquired ahead of demand when their prices are most attractive. We expect to continue to maintain sufficient internal manufacturing capacity to meet the vast majority of our production needs, and to obtain manufacturing equipment to support new technology developments and revenue growth. To supplement our manufacturing capacity and maximize our responsiveness to customer demand, we use the capacity of outside suppliers, commonly known as foundries, and subcontractors. In 2017, we sourced about 20 percent of our total wafers from external foundries and about 40 percent of our assembly/test services from subcontractors. Research and development F O R M 1 0 - K Our R&D expense was $1.51 billion in 2017, compared with $1.36 billion in 2016 and $1.27 billion in 2015. We continually grow and strengthen our broad Analog and Embedded Processing portfolios through disciplined allocation of R&D resources. We invest in R&D to develop differentiated products, with a particular emphasis on designing for the industrial and automotive markets. We conduct most of our R&D internally. We also closely engage with a wide range of third parties, including software suppliers, universities and select industry consortia, and we collaborate with our foundry suppliers on semiconductor manufacturing technology. Inventory Our long-term inventory strategy is to maintain high levels of customer service and stable lead times, minimize inventory obsolescence and improve manufacturing asset utilization. To capitalize on manufacturing efficiencies, we build in advance of demand low-volume, long-lived devices with a broad customer base and a low risk of obsolescence. Additionally, we sometimes maintain product inventory in unfinished wafer form to allow greater flexibility in periods of high demand. Further, we have improved insight into demand and are better able to manage our factory loadings because over time we have increased consignment inventory programs with our customers and distributors. About 60 percent of TI revenue is fulfilled from consignment programs. Our strategy and expected customer demand will cause our inventory levels to fluctuate over time. Longer term, we expect to carry more inventory than we have in the past as we move towards higher consignment levels and more long-lived, low-volume devices to serve industrial customers, a growing portion of our business. Backlog We define backlog as of a particular date as purchase orders with a customer-requested delivery date within a specified length of time. Our backlog at any particular date may not be indicative of revenue for any future period. As customer requirements and industry conditions change, orders may be subject to cancellation or modification of terms such as pricing, quantity or delivery date. Customer order placement practices continually evolve based on customers’ individual business needs and capabilities, as well as industry supply and capacity considerations. Further, our consignment programs do not result in backlog because the order occurs at the same time as delivery, i.e., when the customer pulls the product from consigned inventory. Our backlog of orders was $1.32 billion at December 31, 2017, and $1.09 billion at December 31, 2016. Raw materials We purchase materials, parts and supplies from a number of suppliers. In some cases we purchase such items from sole source suppliers. The materials, parts and supplies essential to our business are generally available at present, and we believe that such materials, parts and supplies will be available in the foreseeable future. Intellectual property We own many patents, and have many patent applications pending, in the United States and other countries in fields relating to our business. We have developed a strong, broad-based patent portfolio and continually add patents to that portfolio. We also have license agreements, which vary in duration, involving rights to our portfolio or those of other companies. We do not consider our business materially dependent upon any one patent or patent license. We often participate in industry initiatives to set technical standards. Our competitors may participate in the same initiatives. Participation in these initiatives may require us to license certain of our patents to other companies on reasonable and non-discriminatory terms. 6 TE X A S I N S T R U M E N T S • 2 0 1 7 F O R M 1 0 - K We own trademarks that are used in the conduct of our business. These trademarks are valuable assets, the most important of which are “Texas Instruments” and our corporate monogram. Acquisitions and divestitures From time to time we consider acquisitions and divestitures. We focus on transactions that are a strategic fit and strengthen our portfolio, and that also meet our financial objectives. Executive officers of the Registrant The following is an alphabetical list of the names and ages of the executive officers of the company and the positions or offices with the company held by each person named: Name Age Position Niels Anderskouv Stephen A. Anderson Ellen L. Barker Brian T. Crutcher * R. Gregory Delagi Haviv Ilan Rafael R. Lizardi Kevin J. Ritchie Richard K. Templeton * Cynthia Hoff Trochu Julie M. Van Haren Darla H. Whitaker Bing Xie 48 56 55 45 55 49 45 61 59 54 49 52 50 Senior Vice President Senior Vice President Senior Vice President and Chief Information Officer Director, Executive Vice President and Chief Operating Officer Senior Vice President Senior Vice President Senior Vice President, Chief Financial Officer and Chief Accounting Officer Senior Vice President Director, Chairman of the Board, President and Chief Executive Officer Senior Vice President, Secretary and General Counsel Senior Vice President Senior Vice President Senior Vice President * On January 18, 2018, Mr. Crutcher was appointed to succeed Mr. Templeton as president and chief executive officer, effective June 1, 2018. Mr. Templeton will continue as chairman of the board. The term of office of these officers is from the date of their election until their successor shall have been elected and qualified. All have been employees of the company for more than five years. Messrs. Anderson, Crutcher, Delagi, Ritchie and Templeton and Ms. Whitaker have served as executive officers of the company for more than five years. Ms. Trochu and Mr. Xie became executive officers of the company in 2015. Messrs. Anderskouv, Ilan and Lizardi and Mses. Barker and Van Haren became executive officers of the company in 2017. Mr. Anderskouv was previously an executive officer of the company from 2012 to 2014. K - 0 1 M R O F Employees At December 31, 2017, we had 29,714 employees. Available information Our internet address is www.ti.com. Information on our website is not part of this report. We make available free of charge through our Investor Relations website our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed with the SEC. Also available through the TI Investor Relations website are reports filed by our directors and executive officers on Forms 3, 4 and 5, and amendments to those reports. Available on our website at www.ti.com/corporategovernance are: (i) our Corporate Governance Guidelines; (ii) charters for the Audit, Compensation, and Governance and Stockholder Relations Committees of our board of directors; (iii) our Code of Conduct; and (iv) our Code of Ethics for TI Chief Executive Officer and Senior Finance Officers. Stockholders may request copies of these documents free of charge by writing to Texas Instruments Incorporated, P.O. Box 660199, MS 8657, Dallas, Texas, 75266-0199, Attention: Investor Relations. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 7 F O R M 1 0 - K ITEM 1A. Risk Factors. You should read the following risk factors in conjunction with the factors discussed elsewhere in this and other of our filings with the Securities and Exchange Commission (SEC) and in materials incorporated by reference into these filings. These risk factors are intended to highlight certain factors that may affect our financial condition and results of operations and are not meant to be an exhaustive discussion of risks that apply to TI, a company with broad international operations. Like other companies, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate and our performance and the performance of our customers. Similarly, the price of our securities is subject to volatility due to fluctuations in general market conditions, actual financial results that do not meet our and/or the investment community’s expectations, changes in our and/or the investment community’s expectations for our future results and other factors, many of which are beyond our control. We face substantial competition that requires us to respond rapidly to product development and pricing pressures. We face intense technological and pricing competition in the markets in which we operate. We expect this competition will continue to increase from large competitors and from small competitors serving niche markets, and also from emerging companies, particularly in Asia, that sell products into the same markets in which we operate. For example, we may face increased competition as a result of China actively promoting and reshaping its domestic semiconductor industry through policy changes and investment. These actions may restrict us from participating in the China market or may prevent us from competing effectively with Chinese companies. Certain competitors possess sufficient financial, technical and management resources to develop and market products that may compete favorably against our products, and consolidation among our competitors may allow them to compete more effectively. Additionally, traditional intellectual property licensors are increasingly providing functionality, designs and complete hardware or software solutions that compete with our products. The price and product development pressures that result from competition may lead to reduced profit margins and lost business opportunities in the event that we are unable to match the price declines or cost efficiencies, or meet the technological, product, support, software or manufacturing advancements of our competitors. Changes in expected demand for our products could have a material adverse effect on our results of operations. Our customers include companies in a wide range of end markets and sectors within those markets. If demand in one or more sectors within our end markets declines or the rate of growth slows, our results of operations may be adversely affected. The cyclical nature of the semiconductor market may lead to significant and rapid increases and decreases in product demand. Additionally, the loss or significant curtailment of purchases by one or more of our large customers, including curtailments due to a change in the design or manufacturing sourcing policies or practices of these customers, or the timing of customer or distributor inventory adjustments, may adversely affect our results of operations and financial condition. Our results of operations also might suffer because of a general decline in customer demand resulting from, for example: uncertainty regarding the stability of global credit and financial markets; natural events or domestic or international political, social, economic or other conditions; breaches of customer information technology systems that disrupt customer operations; or a customer’s inability to access credit markets and other sources of needed liquidity. Our ability to match inventory and production with the product mix needed to fill orders may affect our ability to meet a quarter’s revenue forecast. In addition, when responding to customers’ requests for shorter shipment lead times, we manufacture products based on forecasts of customers’ demands. These forecasts are based on multiple assumptions. If we inaccurately forecast customer demand, we may hold inadequate, excess or obsolete inventory that would reduce our profit margins and adversely affect our results of operations and financial condition. Our global operations subject us to risks associated with domestic or international political, social, economic or other conditions. We have facilities in more than 30 countries. About 85 percent of our revenue comes from shipments to locations outside the United States; in particular, shipments of products into China typically represent a large portion of our revenue. We are exposed to political, social and economic conditions, security risks, terrorism or other hostile acts, health conditions, labor conditions, and possible disruptions in transportation, communications and information technology networks of the various countries in which we operate, including the United States. Additionally, certain countries where we operate have experienced, and other countries may experience, increasing protectionism that may impact global trade. This could result in an adverse effect on our operations and our financial results. In addition, our global operations expose us to periods when the U.S. dollar significantly fluctuates in relation to the non-U.S. currencies in which we transact business. The remeasurement of non-U.S. dollar transactions can have an adverse effect on our results of operations and financial condition. 8 TE X A S I N S T R U M E N T S • 2 0 1 7 F O R M 1 0 - K K - 0 1 M R O F Our operating results and our reputation could be adversely affected by breaches or disruptions of information technology systems. Breaches or disruptions of our information technology systems or the systems of our customers, vendors and other third parties could be caused by factors such as computer viruses, system failures, restricted network access, unauthorized access, terrorism, employee malfeasance, or human error. These events could, among other things, compromise our information technology networks; result in corrupt or lost data or the unauthorized release of our, our customers’ or our suppliers’ confidential or proprietary information; cause a disruption to our manufacturing and other operations; result in the release of personal data; or cause us to incur costs associated with increased protection, remediation or penalties, any of which could adversely affect our operating results and our reputation. Cybersecurity threats are frequent and constantly evolving, thereby increasing the difficulty of defending against them. Our results of operations could be affected by natural events in the locations in which we operate. We have manufacturing, data and design facilities and other operations in locations subject to natural occurrences such as severe weather, geological events or health epidemics that could disrupt operations. A natural disaster that results in a prolonged disruption to our operations may adversely affect our results and financial condition. Rapid technological change in markets we serve requires us to develop new technologies and products. Rapid technological change in markets we serve could contribute to shortened product life cycles and a decline in average selling prices of our products. Our results of operations depend in part upon our ability to successfully develop, manufacture and market innovative products in a timely manner. We make significant investments in research and development to improve existing technology and products and develop new ones to meet changing customer demands. In some cases, we might not realize a return on our investments because they are generally made before commercial viability can be assured. Further, projects that are commercially viable may not contribute significant revenue until at least a few years after they are completed. We face supply chain and manufacturing risks. We rely on third parties to supply us with goods and services in a cost-effective and timely manner. Our access to needed goods and services may be adversely affected by potential disputes with suppliers or disruptions in our suppliers’ operations as a result of, for example: quality excursions; uncertainty regarding the stability of global credit and financial markets; domestic or international political, social, economic and other conditions; natural events in the locations in which our suppliers operate; or limited or delayed access to key raw materials, natural resources and utilities. Additionally, a breach of our suppliers’ information technology systems could result in a release of our confidential or proprietary information. If our suppliers are unable to access credit markets and other sources of needed liquidity, we may be unable to obtain needed supplies, collect accounts receivable or access needed technology. In particular, our manufacturing processes and critical manufacturing equipment require that certain key raw materials, natural resources and utilities be available. Limited or delayed access to and high costs of these items could adversely affect our results of operations. Our products contain materials that are subject to conflict minerals reporting requirements. Our relationships with customers and suppliers may be adversely affected if we are unable to describe our products as conflict-free. Additionally, our costs may increase if one or more of our customers demand that we change the sourcing of materials we cannot identify as conflict-free. Our inability to timely implement new manufacturing technologies or install manufacturing equipment could adversely affect our results of operations. We subcontract a portion of our wafer fabrication and assembly and testing of our products, and we depend on third parties to provide advanced logic manufacturing process technology development. We do not have long-term contracts with all of these suppliers, and the number of alternate suppliers is limited. Reliance on these suppliers involves risks, including possible shortages of capacity in periods of high demand, suppliers’ inability to develop and deliver advanced logic manufacturing process technology in a timely, cost effective, and appropriate manner and the possibility of suppliers’ imposition of increased costs on us. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 9 F O R M 1 0 - K Our operations could be affected by the complex laws, rules and regulations to which our business is subject. We are subject to complex laws, rules and regulations affecting our domestic and international operations relating to, for example, the environment, safety and health; exports and imports; bribery and corruption; tax; data privacy and protection; labor and employment; competition; market access; intellectual property ownership and infringement; and the movement of currency. Compliance with these laws, rules and regulations may be onerous and expensive and could restrict our ability to manufacture or ship our products and operate our business. If we fail to comply or if we become subject to enforcement activity, we could be subject to fines, penalties or other legal liability. Furthermore, should these laws, rules and regulations be amended or expanded, or new ones enacted, we could incur materially greater compliance costs or restrictions on our ability to manufacture our products and operate our business. Some of these complex laws, rules and regulations – for example, those related to environmental, safety and health requirements – may particularly affect us in the jurisdictions in which we manufacture products, especially if such laws and regulations: require the use of abatement equipment beyond what we currently employ; require the addition or elimination of a raw material or process to or from our current manufacturing processes; or impose costs, fees or reporting requirements on the direct or indirect use of energy, natural resources, or materials or gases used or emitted into the environment in connection with the manufacture of our products. A substitute for a prohibited raw material or process might not be available, or might not be available at reasonable cost. Our results of operations and our reputation could be affected by warranty claims, product liability claims, product recalls or legal proceedings. We could be subject to claims based on warranty, product liability, epidemic or delivery failures, or other grounds relating to our products, manufacturing, services, designs, communications or cybersecurity that could lead to significant expenses as we defend such claims or pay damage awards or settlements. In the event of a claim, we may also incur costs if we decide to compensate the affected customer or end consumer. We maintain product liability insurance, but there is no guarantee that such insurance will be available or adequate to protect against all such claims. In addition, it is possible for one of our customers to recall a product containing a TI part, for example, with respect to products used in automotive applications or handheld electronics, which may cause us to incur costs and expenses relating to the recall. Any of these events could adversely affect our results of operations, financial condition and our reputation. Our results of operations could be affected by changes in tax-related matters. We have facilities in more than 30 countries and as a result are subject to taxation and audit by a number of taxing authorities. Tax rates vary among the jurisdictions in which we operate. A number of factors could cause our tax rate to increase, including a change in the jurisdictions in which our profits are earned and taxed; a change in the mix of profits from those jurisdictions; changes in available tax credits; changes in applicable tax rates; changes in tariff regulations or surcharges; changes in accounting principles; or adverse resolution of audits by taxing authorities. We have deferred tax assets on our balance sheet. Changes in applicable tax laws and regulations or in our business performance could affect our ability to realize those deferred tax assets, which could also affect our results of operations. If our tax rate increases, our results of operations could be adversely affected. In addition, we are subject to laws and regulations in various jurisdictions that determine how much profit has been earned and when it is subject to taxation in that jurisdiction. Changes in these laws and regulations, including those that align with the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting recommendations, could affect the locations where we are deemed to earn income, which could in turn affect our results of operations. Each quarter we forecast our tax liability based on our forecast of our performance for the year. If that performance forecast changes, our forecasted tax liability will change. Our initial estimates of the financial impact of the U.S. Tax Cuts and Jobs Act, enacted in December 2017, may change as we refine our analysis and as additional guidance becomes available. If in the future we repatriate any of the earnings represented by non-cash, operating assets such as inventory and fixed assets, we might incur incremental non-U.S. taxes, which could affect our results of operations. Our results of operations and financial condition could be adversely affected if a customer or a distributor suffers a loss with respect to our inventory. We have consignment inventory programs in place for some of our largest customers and distributors. If a customer or distributor were to experience a loss with respect to TI-consigned inventory, our results of operations and financial condition may be adversely affected if we do not recover the full value of the lost inventory from the customer, distributor or insurer, or if our recovery is delayed. 10 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K K - 0 1 M R O F Our results of operations could be adversely affected by our distributors’ promotion of competing product lines or our distributors’ financial performance. In 2017, about 65 percent of our revenue was generated from sales of our products through distributors. Our distributors carry competing product lines, and our sales could be affected if our distributors promote competing products over our products. Moreover, our results of operations could be affected if our distributors suffer financial difficulties that result in their inability to pay amounts owed to us. Disputes with or the loss of a significant number of distributors could be disruptive or harmful to our current business. Our margins may vary over time. Our profit margins may be adversely affected by a number of factors, including decreases in customer demand and shipment volume; obsolescence of our inventory; shifts in our product mix; changes in tariffs; changes in our manufacturing processes; and new accounting pronouncements or changes in existing accounting practices or standards. In addition, we operate in a highly competitive market environment that might adversely affect pricing for our products. Because we own much of our manufacturing capacity, a significant portion of our operating costs is fixed. In general, these fixed costs do not decline with reductions in customer demand or factory loadings, and can adversely affect profit margins as a result. Our performance depends in part on our ability to enforce our intellectual property rights and to maintain freedom of operation. Access to worldwide markets depends in part on the continued strength of our intellectual property portfolio in all jurisdictions where we conduct business. There can be no assurance that, as our business evolves, we will obtain the necessary intellectual property rights, or that we will be able to independently develop the technology, software or know-how necessary to conduct our business or that we can do so without infringing the intellectual property rights of others. To the extent that we have to rely on licensed technology from others, there can be no assurance that we will be able to obtain licenses at all or on terms we consider reasonable. We may, directly or indirectly, face infringement claims from third parties, including non-practicing entities that have acquired patents to pursue enforcement actions against other companies. We may also face infringement claims where we or our customers make, use or sell products and where the intellectual property laws may be less established or less predictable. These assertions, whether or not of any merit, could expose us to claims for damages and/or injunctions from third parties, as well as claims for indemnification by our customers in instances where we have a contractual or other legal obligation to indemnify them against damages resulting from infringement claims. We actively enforce and protect our own intellectual property rights. However, our efforts cannot prevent all misappropriation or improper use of our protected technology and information, including, for example, third parties’ use of our patented or copyrighted technology, or our trade secrets in their products without the right to do so, or third parties’ sale of counterfeit products bearing our trademark. The risk of unfair copying or cloning may impede our ability to sell our products. The laws of countries where we operate may not protect our intellectual property rights to the same extent as U.S. laws. Our debt could affect our operations and financial condition. From time to time, we issue debt securities with various interest rates and maturities. While we believe we will have the ability to service this debt, our ability to make principal and interest payments when due depends upon our future performance, which will be subject to general economic conditions, industry cycles, and business and other factors affecting our operations, including our other risk factors, many of which are beyond our control. In addition, our obligation to make principal and interest payments could divert funds that otherwise would be invested in our operations or returned to shareholders, or could cause us to raise funds by, for example, issuing new debt or equity or selling assets. Our results of operations and liquidity could be affected by changes in the financial markets. We maintain bank accounts, one or more multi-year revolving credit agreements, and a portfolio of investments to support the financing needs of the company. Our ability to fund our operations, invest in our business, make strategic acquisitions, service our debt obligations and meet our cash return objectives depends upon continuous access to our bank and investment accounts, and may depend on access to our bank credit lines that support commercial paper borrowings and provide additional liquidity through short-term bank loans. If we are unable to access these accounts and credit lines (for example, due to instability in the financial markets), our results of operations and financial condition could be adversely affected and our ability to access the capital markets or redeem our investments could be restricted. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 11 F O R M 1 0 - K Increases in health care and pension benefit costs could affect our results of operations and financial condition. Federal and state health care reform programs could increase our costs with regard to medical coverage of our employees, which could reduce profitability and affect our results of operations and financial condition. In addition, obligations related to our pension and other postretirement plans reflect assumptions that affect the planned funding and costs of these plans, including the actual return on plan assets, discount rates, plan participant population demographics and changes in pension regulations. Changes in these assumptions may affect plan funding, cash flow and results of operations, and our costs and funding obligations could increase significantly if our plans’ actual experience differs from these assumptions. Our continued success depends in part on our ability to retain and recruit a sufficient number of qualified employees in a competitive environment. Our continued success depends in part on the retention and recruitment of skilled personnel, including engineering, management, marketing, technical and staff personnel. Skilled and experienced personnel in our industry are in high demand, and competition for their talents is intense. There can be no assurance that we will be able to successfully retain and recruit the key engineering, management and technical personnel that we require to execute our business strategy. Our ability to recruit internationally or deploy employees to various locations may be limited by immigration laws. Our ability to successfully implement business and organizational changes could affect our business plans and results of operations. From time to time, we undertake business and organizational changes, including acquisitions, divestitures and restructuring actions, to support or carry out our strategic objectives. Our failure to successfully implement these changes could adversely affect our business plans and operating results. For example, we may not realize the expected benefits of an acquisition if we are unable to timely and successfully integrate acquired operations, product lines and technology, and our pre-acquisition due diligence may not identify all possible issues and risks that might arise with respect to an acquisition. Further, we may not achieve or sustain the expected growth or cost savings benefits of business and organizational changes, and restructuring charges could differ materially in amount and timing from our expectations. Material impairments of our goodwill or intangible assets could adversely affect our results of operations. We have a significant amount of goodwill and intangible assets on our consolidated balance sheet. Charges associated with impairments of goodwill or intangible assets could adversely affect our financial condition and results of operations. ITEM 1B. Unresolved Staff Comments. Not applicable. 12 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K K - 0 1 M R O F ITEM 2. Properties. Our principal executive offices are located at 12500 TI Boulevard, Dallas, Texas. The following table indicates the general location of our principal manufacturing and design operations and the reportable segments that make major use of them. Except as otherwise indicated, we own these facilities. Analog Embedded Processing Dallas, Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sherman, Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tucson, Arizona * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Santa Clara, California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Portland, Maine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chengdu, China † . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shanghai, China * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Freising, Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bangalore, India † . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aizu, Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miho, Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kuala Lumpur, Malaysia † . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Melaka, Malaysia † . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aguascalientes, Mexico * Baguio, Philippines † . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pampanga (Clark), Philippines † . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greenock, Scotland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taipei, Taiwan † . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X X X X X X X X X X X X X X X X X X * Leased. † Portions of the facilities are leased and owned. This may include land leases. X X X X X X X X X X X X Our facilities in the United States contained approximately 13.1 million square feet at December 31, 2017, of which approximately 0.7 million square feet were leased. Our facilities outside the United States contained approximately 10.0 million square feet at December 31, 2017, of which approximately 1.5 million square feet were leased. At the end of 2017, we occupied substantially all of the space in our facilities. Leases covering our currently occupied leased facilities expire at varying dates, generally within the next five years. We believe our current properties are suitable and adequate for their intended purpose. ITEM 3. Legal Proceedings. We are involved in various inquiries and proceedings that arise in the ordinary course of our business. We believe that the amount of our liability, if any, will not have a material adverse effect upon our financial condition, results of operations or liquidity. ITEM 4. Mine Safety Disclosures. Not applicable. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 13 PART II F O R M 1 0 - K ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The information concerning the number of stockholders of record at December 31, 2017, is contained in Item 6, “Summary of Selected Financial Data.” Common stock prices and dividends TI common stock is listed on The NASDAQ Global Select Market. The table below shows the high and low closing prices of TI common stock as reported by Bloomberg L.P. and the dividends paid per common share in each quarter during the past two years. Quarter 1st 2nd 3rd 4th Stock prices: 2017 High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82.20 72.92 58.37 48.03 $ 84.34 76.90 63.30 56.43 $ 89.65 76.41 71.42 61.06 $ 104.82 89.65 74.87 67.60 Dividends paid: 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.50 0.38 $ 0.50 0.38 $ 0.50 0.38 $ 0.62 0.50 Issuer purchases of equity securities The following table contains information regarding our purchases of our common stock during the fourth quarter of 2017. Period October 1, 2017 through October 31, 2017 . . . . . . . . . . . . . . . . . . November 1, 2017 through November 30, 2017 . . . . . . . . . . . . . . . December 1, 2017 through December 31, 2017 . . . . . . . . . . . . . . . Total Number of Shares Purchased 2,575,154 3,324,228 1,456,816 Average Price Paid per Share $ 93.49 97.71 97.63 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) 2,560,953 3,324,228 1,456,816 Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) $ 9.71 billion 9.39 billion 9.24 billion Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,356,198 (2) $ 96.22 (2) 7,341,997 $ 9.24 billion (3) (1) (2) (3) All open-market purchases during the quarter were made under the authorization from our board of directors to purchase up to $7.5 billion of additional shares of TI common stock announced September 17, 2015. On September 21, 2017, our board of directors authorized the purchase of an additional $6.0 billion of our common stock. In addition to open-market purchases, 14,201 shares of common stock were surrendered by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock units. As of December 31, 2017, this amount consisted of the remaining portion of the $7.5 billion authorized in September 2015 and the $6.0 billion authorized in September 2017. No expiration date has been specified for these authorizations. 14 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K ITEM 6. Selected Financial Data. (Millions of dollars, except share and per-share amounts) 2017 For Years Ended December 31, 2015 2016 2014 2013 Cash flow data: Cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Free cash flow (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,363 695 4,668 2,104 2,556 $ 4,614 531 4,083 1,646 2,132 $ 4,397 551 3,846 1,444 2,741 $ 4,054 385 3,669 1,323 2,831 $ 3,514 412 3,102 1,175 2,868 Income statement data: Revenue by segment: Analog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,900 3,498 1,563 8,536 3,023 1,811 8,339 2,787 1,874 8,104 2,740 2,201 7,194 2,450 2,561 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,961 13,370 13,000 13,045 12,205 Gross profit (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses (R&D and SG&A) (b) . . . . . . . . . . . . . . . . . . . Acquisition charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges/other (b) Operating profit (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,614 3,202 318 11 6,083 8,257 3,098 319 (15) 4,855 7,575 2,995 329 (71) 4,322 7,447 3,164 330 (50) 4,003 6,400 3,329 341 (192) 2,922 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,682 $ 3,595 $ 2,986 $ 2,821 $ 2,162 K - 0 1 M R O F As a result of accounting rule ASC 260, which requires a portion of Net income to be allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents, diluted earnings per share (EPS) is calculated using the following: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income allocated to RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,682 (33) $ 3,595 (44) $ 2,986 (42) $ 2,821 (43) $ 2,162 (36) Income allocated to common shares for diluted EPS . . . . . . . . . . $ 3,649 $ 3,551 $ 2,944 $ 2,778 $ 2,126 Average diluted shares outstanding, in millions . . . . . . . . . . . . . . Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared per common share . . . . . . . . . . . . . . . . 1,012 3.61 2.12 $ $ 1,021 3.48 1.64 $ $ 1,043 2.82 1.40 $ $ 1,080 2.57 1.24 $ $ 1,113 1.91 1.07 $ $ (a) (b) Free cash flow is a non-GAAP measure derived by subtracting Capital expenditures from Cash flows from operating activities. Prior periods reclassified to conform to the 2017 presentation, having adopted ASU 2017-07. See Note 2 to the financial statements. (Millions of dollars, except Other data items) Balance sheet data: Cash, cash equivalents and short-term investments . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt Other data – Number of: Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders of record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 2016 December 31, 2015 2014 2013 $ 4,469 17,642 500 3,577 $ 3,490 16,431 631 2,978 $ 3,218 16,230 1,000 3,120 $ 3,541 17,372 1,001 3,630 $ 3,829 18,554 1,000 4,145 29,714 14,260 29,865 14,910 29,977 15,563 31,003 16,361 32,209 17,213 See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Financial Statements and Supplementary Data. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 15 F O R M 1 0 - K ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview We design, make and sell semiconductors to electronics designers and manufacturers all over the world. Our business model is designed around the following four sustainable competitive advantages, that we believe, in combination, put us in a unique class of companies: • A strong foundation of manufacturing and technology. We invest in manufacturing technologies and do most of our manufacturing in-house. This strategic decision to directly control our manufacturing helps ensure a consistent supply of products for our customers and also allows us to invest in technology that differentiates the features of our products. We have focused on creating a competitive manufacturing cost advantage by increasing factory loadings of our advanced analog 300-millimeter wafers, which have about a 40 percent cost advantage per unpackaged chip over 200-millimeter wafers. 300-millimeter wafers will support the majority of our Analog growth going forward. Additionally, we keep our manufacturing costs low by using mature assets acquired ahead of demand when their prices are most attractive. • Broad portfolio of differentiated analog and embedded processing semiconductors. Our customers need multiple chips for their systems. The breadth of our portfolio means we can solve more of these needs than our competitors, which gives us access to more customers and the opportunity to sell more products and generate more revenue per customer system. We invest more than $1 billion each year to develop new products for our portfolio, which includes tens of thousands of products. • Broadest reach of market channels. Customers often begin their initial product selection process and design-in journey on our website, and the breadth of our portfolio attracts more customers to our website than any of our competitors. Our web presence, combined with our global sales force that is also greater in size than those of our competitors, are advantages that give us unique access to about 100,000 customers designing TI semiconductors into their end products. • Diversity and longevity of our products, markets and customer positions. Together, the attributes above result in diverse and long-lived positions that deliver high terminal value to our shareholders. Because of the breadth of our portfolio, we are not dependent on any single product, and because of the breadth of our markets we are not dependent on any single application or customer. Some of our products generate revenue for decades, which strengthens the return on our investments. Our strategic focus, and where we invest the majority of our resources, is on Analog and Embedded Processing, with a particular emphasis on designing and selling those products into the industrial and automotive markets, which we believe represent the best growth opportunities. Analog and embedded processing products sold into industrial and automotive markets provide long product life cycles, intrinsic diversity, and less capital-intensive manufacturing, which we believe offer stability, profitability and strong cash generation. This business model is the foundation of our capital management strategy, which is based on our belief that free cash flow growth, especially on a per share basis, is important for maximizing shareholder value over the long term. We also believe that free cash flow will be valued only if it is productively invested in the business or returned to shareholders. The combined effect of these sustainable competitive advantages is that over time we have gained market share in Analog and Embedded Processing and have grown free cash flow. Our business model puts us in a unique class of companies with the ability to grow, generate cash, and return that cash to shareholders. Management’s discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. In the following discussion of our results of operations: • Our segments represent groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels, and how management allocates resources and measures results. See Note 1 to the financial statements for more information regarding our segments. • All dollar amounts in the tables are stated in millions of U.S. dollars. • When we discuss our results: O Unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are evidenced by fluctuations in shipment volumes. O New products tend not to have a significant impact on our revenue in any given period because we sell such a large number of products. 16 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K O From time to time, our revenue and gross profit are affected by changes in demand for higher-priced or lower-priced products, which we refer to as changes in the “mix” of products shipped. O Because we own much of our manufacturing capacity, a significant portion of our operating cost is fixed. When factory loadings decrease, our fixed costs are spread over reduced output and, absent other circumstances, our profit margins decrease. Conversely, as factory loadings increase, our fixed costs are spread over increased output and, absent other circumstances, our profit margins increase. Increases and decreases in factory loadings tend to correspond to increases and decreases in demand. O Over time, we have been allocating resources from areas like manufacturing support and SG&A into R&D activities. • The recently enacted U.S. Tax Cuts and Jobs Act (the Tax Act) will reduce our annual operating tax rate, which does not include discrete tax items, from 31 percent in 2017 to an ongoing rate of about 18 percent starting in 2019, comprehending the benefits of exports and having manufacturing, R&D and intellectual property in the United States. In 2018, our annual operating tax rate is expected to be about 23 percent, 5 percentage points higher, primarily due to a transitional non-cash expense. For an explanation of the term “annual operating tax rate,” see the Non-GAAP financial information section after the Liquidity and capital resources section. • In the first quarter of 2017, we adopted ASU 2017-07 related to certain pension and other retiree benefit costs. We applied the new standard on a full retrospective basis for all periods presented in the Consolidated Statements of Income, which have been recast as a result. See Note 2 to the financial statements for more details. • As of January 1, 2017, we no longer recognize royalties as revenue; instead, they are recorded as OI&E. We continue to receive royalties from arrangements involving license rights to our patent portfolio. Although we expect royalties to continue for many years, they are of decreasing significance to our core operations. K - 0 1 M R O F Results of operations We continued to perform well in 2017, reflecting our focus on Analog and Embedded Processing, with a particular emphasis on the industrial and automotive markets. These products serve highly diverse markets with thousands of applications and have long-term growth opportunities. In 2017, Analog and Embedded Processing represented 90 percent of revenue. Gross margin of 64.3 percent reflected the quality of our product portfolio, as well as the efficiency of our manufacturing strategy. Our focus on Analog and Embedded Processing allows us to generate strong cash flow from operations. Our cash flow from operations of $5.36 billion underscored the strength of our business model. Free cash flow was $4.67 billion and represented 31.2 percent of revenue, up from 30.5 percent a year ago. During 2017, we returned $4.66 billion to shareholders through a combination of stock repurchases and dividends, consistent with our strategy to return all of our free cash flow to shareholders. Our dividends represented 45 percent of free cash flow, underscoring their sustainability. Free cash flow is a non-GAAP financial measure. See the Non-GAAP financial information section. Details of financial results – 2017 compared with 2016 Revenue of $14.96 billion was up $1.59 billion, or 12 percent, due to higher revenue from Analog and Embedded Processing. Gross profit of $9.61 billion was up $1.36 billion, or 16 percent, primarily due to higher revenue. As a percentage of revenue, gross profit increased to 64.3 percent from 61.8 percent. Operating expenses (R&D and SG&A) were $3.20 billion compared with $3.10 billion, as we continued our ongoing allocation of resources to R&D activities. Acquisition charges of $318 million were non-cash. See Note 13 to the financial statements. Restructuring charges/other was a charge of $11 million compared with a credit of $15 million in 2016. These amounts are included in Other for segment reporting purposes. See Note 3 to the financial statements. Operating profit was $6.08 billion, or 40.7 percent of revenue, compared with $4.86 billion, or 36.3 percent of revenue. OI&E was $75 million of income compared with $155 million in 2016. See Note 13 to the financial statements. Our Provision for income taxes was $2.40 billion compared with $1.34 billion. The increase was due to the enactment of the Tax Act and, to a lesser extent, higher income before income taxes. Our effective tax rate, which includes discrete tax items, was 39 percent in 2017 and 27 percent in 2016. This change was due to tax adjustments made in 2017 as a result of the Tax Act. See Note 6 to the financial statements for a reconciliation of the U.S. statutory income tax rate to the effective tax rate. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 17 Net income was $3.68 billion compared with $3.60 billion. EPS was $3.61 compared with $3.48. Segment results – 2017 compared with 2016 Analog (includes Power, Signal Chain and High Volume product lines) F O R M 1 0 - K Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,900 4,468 45.1% $ 8,536 3,416 40.0% 16% 31% 2017 2016 Change Analog revenue increased due to Power and Signal Chain. High Volume also grew, but to a lesser extent. Operating profit increased primarily due to higher revenue and associated gross profit. Embedded Processing (includes Connected Microcontrollers and Processors product lines) Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,498 1,143 32.7% $ 3,023 817 27.0% 16% 40% 2017 2016 Change Embedded Processing revenue increased due to growth in both product lines, led by Processors. Operating profit increased primarily due to higher revenue and associated gross profit. Other (includes DLP® products, calculators and custom ASIC products) Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,563 472 30.2% $ 1,811 622 34.3% (14)% (24)% 2017 2016 Change * Includes Acquisition charges and Restructuring charges/other Other revenue declined $248 million primarily due to custom ASIC products and the move of royalties from revenue to OI&E, which began in the first quarter of 2017. Operating profit decreased $150 million. Details of financial results – 2016 compared with 2015 Revenue of $13.37 billion was up $370 million, or 3 percent, from 2015 due to higher revenue from Embedded Processing and Analog. Gross profit was $8.26 billion, an increase of $682 million, or 9 percent, due to lower manufacturing costs and, to a lesser extent, higher revenue. Gross profit margin was 61.8 percent compared with 58.3 percent. Operating expenses were $1.36 billion for R&D and $1.74 billion for SG&A. R&D expense increased $89 million, or 7 percent, due to a combination of our allocation of resources into R&D activities and higher compensation-related costs. SG&A expense increased $14 million, primarily due to higher compensation-related costs. Acquisition charges associated with our 2011 acquisition of National Semiconductor were $319 million compared with $329 million. These non-cash charges resulted from the amortization of intangible assets. See Note 13 to the financial statements. Restructuring charges/other was a credit of $15 million, which included a gain on the sale of intellectual property of $40 million that was partially offset by $25 million related to restructuring charges. This compared with a credit of $71 million in 2015, which included gains on sales of assets of $83 million that were partially offset by $12 million related to restructuring charges and other credits. These amounts are included in Other for segment reporting purposes. See Note 3 to the financial statements. Operating profit was $4.86 billion, or 36.3 percent of revenue, compared with $4.32 billion, or 33.2 percent of revenue. OI&E was $155 million of income compared with $16 million of expense. The increase is due to income of $188 million from settlements related to intellectual property infringement. 18 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K K - 0 1 M R O F Our income tax provision was $1.34 billion compared with $1.23 billion. The increase was primarily due to higher income before income taxes, partially offset by a tax benefit for stock compensation. Our annual operating tax rates, which do not include discrete tax items, were 30 percent in 2016 and 29 percent in 2015. Our effective tax rates were 27 percent in 2016 and 29 percent in 2015. Net income was $3.60 billion, an increase of $609 million, or 20 percent. EPS was $3.48 compared with $2.82. EPS benefited $0.13 in 2016 due to the adoption of a stock compensation accounting standard. Segment results – 2016 compared with 2015 Analog Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit Operating profit % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,536 3,416 40.0% $ 8,339 3,077 36.9% 2% 11% 2016 2015 Change Analog revenue increased due to Power and Signal Chain, while High Volume declined. Operating profit increased due to higher gross profit, which benefited from lower manufacturing costs. Embedded Processing Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,023 817 27.0% $ 2,787 611 21.9% 8% 34% 2016 2015 Change Embedded Processing revenue increased due to Processors and, to a lesser extent, Connected Microcontrollers. Processors revenue increased due to the mix of products shipped. Operating profit increased primarily due to higher revenue and associated gross profit. Other Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,811 622 34.3% $ 1,874 634 33.8% (3)% (2)% 2016 2015 Change * Includes Acquisition charges and Restructuring charges/other Other revenue decreased due to, in declining order, royalties, custom ASIC products and calculators. This decrease was partially offset by growth in DLP products. Operating profit decreased $12 million. Financial condition At the end of 2017, total cash (Cash and cash equivalents plus Short-term investments) was $4.47 billion, an increase of $979 million from the end of 2016. Accounts receivable were $1.28 billion at the end of 2017, an increase of $11 million compared with the end of 2016. Days sales outstanding at the end of 2017 were 31 compared with 33 at the end of 2016. Inventory was $1.96 billion at the end of 2017, an increase of $167 million from the end of 2016. Days of inventory at the end of 2017 were 134 compared with 126 at the end of 2016. Liquidity and capital resources Our primary source of liquidity is cash flow from operations. Additional sources of liquidity are Cash and cash equivalents, Short- term investments and a variable rate, revolving credit facility. Cash flows from operating activities for 2017 was $5.36 billion, an increase of $749 million from 2016 that was driven by an increase in Income before income taxes. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 19 Our revolving credit facility is with a consortium of investment-grade banks and allows us to borrow up to $2 billion until March 2022. This credit facility also serves as support for the issuance of commercial paper. As of December 31, 2017, our credit facility was undrawn, and we had no commercial paper outstanding. In 2017, investing activities used $1.13 billion compared with $650 million in 2016. For 2017, Capital expenditures were $695 million compared with $531 million in 2016. Capital expenditures in both periods were primarily for semiconductor manufacturing equipment. In 2017, we had purchases of short-term investments, net of sales, that used cash of $460 million compared with $113 million in 2016. In 2017, we received $40 million from asset sales compared with none in 2016. F O R M 1 0 - K In 2017, financing activities used $3.73 billion compared with $3.81 billion in 2016. In 2017, we received net proceeds of $1.10 billion from the issuance of fixed-rate, long-term debt and repaid $625 million of maturing debt. In 2016, we received net proceeds of $499 million from the issuance of fixed-rate, long-term debt and repaid $1.00 billion of maturing debt. Dividends paid in 2017 were $2.10 billion compared with $1.65 billion in 2016. During 2017, the quarterly dividend increased to $0.62 from $0.50 per share, resulting in an annualized dividend payment of $2.48 per share. During 2016, we increased our quarterly dividend to $0.50 from $0.38 per share. In 2017, we used $2.56 billion to repurchase 30.6 million shares of our common stock. This compared with $2.13 billion used in 2016 to repurchase 35.5 million shares. In 2017, employee exercises of stock options provided cash proceeds of $483 million compared with $472 million in 2016. We had $1.66 billion of Cash and cash equivalents and $2.81 billion of Short-term investments as of December 31, 2017, with our U.S. entities owning about 80 percent of these amounts combined at the end of 2017. We believe we have the necessary financial resources and operating plans to fund our working capital needs, capital expenditures, dividend and debt-related payments, and other business requirements for at least the next 12 months. In 2017, we recorded a provisional tax liability of $690 million on indefinitely reinvested earnings of our non-U.S. subsidiaries related to the enactment of the Tax Act. This amount will be paid over eight years and is not expected to have a significant impact on our liquidity. Non-GAAP financial information This MD&A includes references to free cash flow and ratios based on that measure. These are financial measures that were not prepared in accordance with generally accepted accounting principles in the United States (GAAP). Free cash flow was calculated by subtracting Capital expenditures from the most directly comparable GAAP measure, Cash flows from operating activities (also referred to as cash flow from operations). We believe that free cash flow and the associated ratios provide insight into our liquidity, our cash-generating capability and the amount of cash potentially available to return to shareholders, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures. Reconciliation to the most directly comparable GAAP-based measures is provided in the table below. For Years Ended December 31, 2016 2017 2015 Cash flow from operations (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,363 (695) $ 4,614 (531) $ 4,397 (551) Free cash flow (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,668 $ 4,083 $ 3,846 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,961 $ 13,370 $ 13,000 Cash flow from operations as a percent of revenue (GAAP) Free cash flow as a percent of revenue (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.8% 31.2% 34.5% 30.5% 33.8% 29.6% This MD&A also includes references to an annual operating tax rate, a non-GAAP term we use to describe the estimated annual effective tax rate, a GAAP measure that by definition does not include discrete tax items. We believe the term annual operating tax rate more clearly communicates that discrete tax items are excluded from such rate. The term also helps differentiate from the effective tax rate, which includes discrete tax items. No adjustments are made to the estimated annual effective tax rate when using the term annual operating tax rate. 20 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K K - 0 1 M R O F Long-term contractual obligations Contractual Obligations Long-term debt (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase commitments (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax on indefinitely reinvested earnings (c) . . . . . . . . . . . . . . . . . . . . Operating leases (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation plans (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2018 581 391 55 68 15 Payments Due by Period 2021/2022 2019/2020 Thereafter $ 1,385 601 110 94 49 $ 1,133 67 110 53 51 $ 1,414 $ 1,385 35 415 56 112 Total $ 4,484 1,094 690 271 227 Total (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,110 $ 2,239 $ 2,003 $ 6,766 (a) (b) (c) (d) (e) (f) Includes the related interest payments and amounts classified as the current portion of long-term debt, specifically obligations that will mature within 12 months. Includes payments for software licenses and contractual arrangements with suppliers where there is a fixed, non-cancellable payment schedule or minimum payments due with a reduced delivery schedule. Excluded from the table are cancellable arrangements. Includes the provisional amount of the tax on indefinitely reinvested earnings related to the enactment of the Tax Act. See Note 6 to the financial statements for more details. Includes minimum payments for leased facilities and equipment and purchases of industrial gases under contracts accounted for as operating leases. Includes an estimate of payments for certain liabilities that existed at December 31, 2017. Excluded from the table are $300 million of uncertain tax liabilities under ASC 740, as well as any planned future funding contributions to retirement benefit plans. Amounts associated with uncertain tax liabilities have been excluded because of the difficulty in making reasonably reliable estimates of the timing of cash settlements with the respective taxing authorities. Regarding future funding of retirement benefit plans, we plan to contribute about $50 million in 2018, but funding projections beyond 2018 are not practical to estimate due to the rules affecting tax-deductible contributions and the impact from the plans’ asset performance, interest rates and potential U.S. and non-U.S. legislation. Critical accounting policies Our accounting policies are more fully described in Note 2 of the consolidated financial statements. As disclosed in Note 2, the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. However, based on facts and circumstances inherent in developing estimates and assumptions, management believes it is unlikely that applying other estimates and assumptions would have a material impact on the financial statements. We consider the following accounting policies to be those that are most important to the portrayal of our financial condition and that require a higher degree of judgment. Revenue recognition Based on management’s assessment of the revenue recognition criteria, we usually recognize revenue from sales of our products to distributors upon shipment or delivery to the distributors. For our consignment arrangements with distributors, delivery occurs when the distributor pulls product from consignment inventory that we store at designated locations. Recognition is not contingent upon resale of the products to the distributors’ customers in either scenario. Revenue is recognized net of allowances, which are management’s estimates of future credits to be granted to distributors under programs common in the semiconductor industry. These allowances are not material and generally include special pricing arrangements, product returns due to quality issues, and incentives designed to maximize growth opportunities. Allowances are based on analysis of historical data and contractual terms and are recorded when revenue is recognized. We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 21 F O R M 1 0 - K Income taxes In determining Net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax provisions and the resultant tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. In the ordinary course of global business, there may be many transactions and calculations where the ultimate tax outcome is uncertain. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. As part of our financial process, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to be ultimately recoverable. In this process, certain relevant criteria are evaluated including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior years that can be used to absorb net operating losses and credit carrybacks, and taxable income in future years. Our judgment regarding future recoverability of our deferred tax assets based on these criteria may change due to various factors, including changes in U.S. or international tax laws and changes in market conditions and their impact on our assessment of taxable income in future periods. These changes, if any, may require material adjustments to the deferred tax assets and an accompanying reduction or increase in Net income in the period when such determinations are made. Also, our plans for the permanent reinvestment or eventual repatriation of the accumulated earnings of certain non-U.S. operations could change. Such changes could have a material effect on tax expense in future years. Inventory valuation allowances Inventory is valued net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. Statistical allowances are determined quarterly for raw materials and work-in-process based on historical disposals of inventory for salability and obsolescence reasons. For finished goods, quarterly statistical allowances are determined by comparing inventory levels of individual parts to historical shipments, current backlog and estimated future sales in order to identify inventory judged unlikely to be sold. A specific allowance for each material type will be carried if there is a significant event not captured by the statistical allowance. Examples are an end-of-life part or demand with imminent risk of cancellation. Allowances are also calculated quarterly for instances where inventoried costs for individual products are in excess of market prices for those products. Actual future write- offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and other factors. Changes in accounting standards See Note 2 to the financial statements for information on new accounting standards. Off-balance sheet arrangements As of December 31, 2017, we had no significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. Commitments and contingencies See Note 12 to the financial statements for a discussion of our commitments and contingencies. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. Foreign exchange risk The U.S. dollar is the functional currency for financial reporting. Our non-U.S. entities own assets or liabilities denominated in U.S. dollars or other currencies. Exchange rate fluctuations can have a significant impact on taxable income in those jurisdictions, and consequently on our effective tax rate. 22 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Our balance sheet also reflects amounts remeasured from non-U.S. dollar currencies. Because most of the aggregate non-U.S. dollar balance sheet exposure is hedged by forward currency exchange contracts, based on year-end 2017 balances and currency exchange rates, a hypothetical 10 percent plus or minus fluctuation in non-U.S. currency exchange rates relative to the U.S. dollar would result in a pre-tax currency exchange gain or loss of about $6 million. We use these forward currency exchange contracts to reduce the earnings impact exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. For example, at year-end 2017, we had forward currency exchange contracts outstanding with a notional value of $365 million to hedge net balance sheet exposures (including $140 million to sell Japanese yen, $59 million to sell British pound sterling and $49 million to sell euros). Similar hedging activities existed at year-end 2016. Interest rate risk We have the following potential exposure to changes in interest rates: (1) the effect of changes in interest rates on the fair value of our investments in cash equivalents and short-term investments, which could produce a gain or a loss; and (2) the effect of changes in interest rates on the fair value of our debt. As of December 31, 2017, a hypothetical 100 basis point increase in interest rates would decrease the fair value of our investments in cash equivalents and short-term investments by $8 million and decrease the fair value of our long-term debt by $141 million. Because interest rates on our long-term debt are fixed, changes in interest rates would not affect the cash flows associated with long-term debt. K - 0 1 M R O F Equity risk Long-term investments at year-end 2017 include the following: • Investments in mutual funds – includes mutual funds that were selected to generate returns that offset changes in certain liabilities related to deferred compensation arrangements. The mutual funds hold a variety of debt and equity investments. • Investments in venture capital funds – includes investments in limited partnerships (accounted for under either the equity or cost method). • Equity investments – includes non-marketable (non-publicly traded) equity securities. Investments in mutual funds are stated at fair value. Changes in prices of the mutual fund investments are expected to offset related changes in deferred compensation liabilities such that a 10 percent increase or decrease in the investments’ fair values would not materially affect operating results. Non-marketable equity securities and some venture capital funds are stated at cost. Impairments deemed to be other-than-temporary are expensed in Net income. Investments in the remaining venture capital funds are stated using the equity method. See Note 8 to the financial statements for details of equity and other long-term investments. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 23 ITEM 8. Financial Statements and Supplementary Data. List of Financial Statements (Item 15(a)) Income for each of the three years in the period ended December 31, 2017 Comprehensive income for each of the three years in the period ended December 31, 2017 Balance sheets at December 31, 2017 and 2016 Cash flows for each of the three years in the period ended December 31, 2017 Stockholders’ equity for each of the three years in the period ended December 31, 2017 Schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. F O R M 1 0 - K 24 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Consolidated Statements of Income (Millions of dollars, except share and per-share amounts) For Years Ended December 31, 2016 2017 2015 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenue (COR) $ 14,961 5,347 $ 13,370 5,113 $ 13,000 5,425 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit Research and development (R&D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative (SG&A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges/other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense), net (OI&E) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest and debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,614 1,508 1,694 318 11 6,083 75 78 6,080 2,398 8,257 1,356 1,742 319 (15) 4,855 155 80 4,930 1,335 7,575 1,267 1,728 329 (71) 4,322 (16) 90 4,216 1,230 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,682 $ 3,595 $ 2,986 K - 0 1 M R O F Earnings per common share (EPS): Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 3.68 3.61 $ $ 3.54 3.48 $ $ 2.86 2.82 Average shares outstanding (millions): Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 991 1,012 1,003 1,021 1,030 1,043 Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.12 $ 1.64 $ 1.40 As a result of accounting rule ASC 260, which requires a portion of Net income to be allocated to unvested restricted stock units (RSUs) on which we pay dividend equivalents, diluted EPS is calculated using the following: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income allocated to RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,682 (33) $ 3,595 (44) $ 2,986 (42) Income allocated to common stock for diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,649 $ 3,551 $ 2,944 See accompanying notes. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 25 Consolidated Statements of Comprehensive Income (Millions of dollars) For Years Ended December 31, 2015 2016 2017 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) $ 3,682 $ 3,595 $ 2,986 Net actuarial losses of defined benefit plans: Adjustment, net of tax effect of ($26), $6 and $36 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recognized within Net income, net of tax effect of ($27), ($25) and ($25) Prior service credit of defined benefit plans: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment, net of tax effect of $1, $0 and ($11) Recognized within Net income, net of tax effect of $1, $2 and $0 . . . . . . . . . . . . . . . . . . . Derivative instruments: Recognized within Net income, net of tax effect of $0, $0 and ($1) . . . . . . . . . . . . . . . . . . Other comprehensive income (loss), net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 56 (2) (5) 1 142 (43) 51 — (3) 1 6 (74) 53 20 — 1 — Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,824 $ 3,601 $ 2,986 F O R M 1 0 - K See accompanying notes. 26 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Consolidated Balance Sheets (Millions of dollars, except share amounts) Assets Current assets: December 31, 2017 2016 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowances of ($8) and ($17) Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,656 2,813 1,278 126 1,089 742 1,957 1,030 8,734 $ 1,154 2,336 1,267 102 954 734 1,790 910 7,457 Property, plant and equipment at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,789 (2,125) 4,923 (2,411) Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition-related intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overfunded retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,664 268 4,362 946 264 110 208 86 2,512 235 4,362 1,264 374 52 96 79 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,642 $ 16,431 K - 0 1 M R O F Liabilities and stockholders’ equity Current liabilities: Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Underfunded retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 466 722 128 442 2,258 3,577 89 78 1,303 7,305 $ 631 396 710 83 444 2,264 2,978 129 33 554 5,958 Stockholders’ equity: Preferred stock, $25 par value. Authorized – 10,000,000 shares Participating cumulative preferred. None issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — Common stock, $1 par value. Authorized – 2,400,000,000 shares Shares issued – 1,740,815,939 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury common stock at cost Shares: 2017 – 757,657,217; 2016 – 744,831,978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss), net of taxes (AOCI) Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,741 1,776 34,662 (27,458) (384) 10,337 1,741 1,674 33,107 (25,523) (526) 10,473 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,642 $ 16,431 See accompanying notes. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 27 Consolidated Statements of Cash Flows (Millions of dollars) Cash flows from operating activities For Years Ended December 31, 2016 2017 2015 F O R M 1 0 - K Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to Net income: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of acquisition-related intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) from changes in: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in funded status of retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,682 $ 3,595 $ 2,986 539 318 47 242 — 112 (7) (167) 76 51 (3) 468 21 (16) 605 319 31 252 (40) (202) (108) (99) (81) 72 36 333 (73) (26) 766 319 48 286 (85) (55) 77 93 94 (142) 7 11 (23) 15 Cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,363 4,614 4,397 Cash flows from investing activities Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from common stock transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (695) 40 (4,555) 4,095 (12) (1,127) 1,099 (625) (2,104) (2,556) 483 (31) (3,734) 502 1,154 (531) — (3,503) 3,390 (6) (650) 499 (1,000) (1,646) (2,132) 472 (3) (3,810) 154 1,000 (551) 110 (2,767) 2,892 14 (302) 498 (1,000) (1,444) (2,741) 396 (3) (4,294) (199) 1,199 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,656 $ 1,154 $ 1,000 See accompanying notes. 28 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Consolidated Statements of Stockholders’ Equity (Millions of dollars, except per-share amounts) Common Stock Paid-in Capital Retained Earnings Treasury Common Stock AOCI Balance, December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,741 $ 1,368 $ 29,653 $ (21,840) $ (532) 2015 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared and paid ($1.40 per share) . . . . . . . . . . . . . . . . Common stock issued for stock-based awards . . . . . . . . . . . . . . . . Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefit for stock compensation . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss), net of taxes . . . . . . . . . . . . . . . Dividend equivalents paid on restricted stock units . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — — — (116) — 286 90 — — 1 2,986 (1,444) — — — — — (19) — — — 513 (2,741) — — — — — — — — — — — — — — K - 0 1 M R O F Balance, December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,741 1,629 31,176 (24,068) (532) 2016 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared and paid ($1.64 per share) . . . . . . . . . . . . . . . . Common stock issued for stock-based awards . . . . . . . . . . . . . . . . Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss), net of taxes . . . . . . . . . . . . . . . Dividend equivalents paid on restricted stock units . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — — (204) — 252 — — (3) 3,595 (1,646) — — — — (18) — — — 677 (2,132) — — — — — — — — — 6 — — Balance, December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,741 1,674 33,107 (25,523) (526) 2017 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared and paid ($2.12 per share) . . . . . . . . . . . . . . Common stock issued for stock-based awards . . . . . . . . . . . . . Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss), net of taxes . . . . . . . . . . . . Dividend equivalents paid on restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other — — — — — — — — — — (138) — 242 — — (2) 3,682 (2,104) — — — — (17) (6) — — 621 (2,556) — — — — — — — — — 142 — — Balance, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,741 $ 1,776 $ 34,662 $ (27,458) $ (384) See accompanying notes. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 29 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. Beginning January 2017, we reorganized the product lines within our reportable segments – Analog and Embedded Processing – to align our business structure with the way our customers select and buy products. These changes had no effect on either our previously reported consolidated financial statements or our reportable segment amounts. Our two reportable segments are established along major categories of products as follows: F O R M 1 0 - K • Analog – consisting of the following product lines: Power, Signal Chain and High Volume. • Embedded Processing – consisting of the following product lines: Connected Microcontrollers and Processors. We report the results of our remaining business activities in Other. Other includes operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other includes DLP® products, calculators and custom ASIC products. As of January 1, 2017, we no longer recognize royalties as revenue; instead, they are now recorded as OI&E. Prior period amounts were not material. In Other, we also include items that are not used in evaluating the results of or in allocating resources to our segments. Examples of these items include Acquisition charges (see Note 13); restructuring charges (see Note 3); and certain corporate-level items, such as litigation expenses, environmental costs, insurance settlements, and gains and losses from other activities, including asset dispositions. We allocate the remainder of our expenses associated with corporate activities to our operating segments based on specific methodologies, such as percentage of operating expenses or headcount. Our centralized manufacturing and support organizations, such as facilities, procurement and logistics, provide support to our operating segments, including those in Other. Costs incurred by these organizations, including depreciation, are charged to the segments on a per-unit basis. Consequently, depreciation expense is not an independently identifiable component within the segments’ results and, therefore, is not provided. With the exception of goodwill, we do not identify or allocate assets by operating segment, nor does the chief operating decision maker evaluate operating segments using discrete asset information. We have no material intersegment revenue. The accounting policies of the segments are the same as those described below in the summary of significant accounting policies and practices. Segment information Revenue: For Years Ended December 31, 2016 2017 2015 Analog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,900 3,498 1,563 $ 8,536 3,023 1,811 $ 8,339 2,787 1,874 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,961 $ 13,370 $ 13,000 Operating profit: Analog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,468 1,143 472 $ 3,416 817 622 $ 3,077 611 634 Total operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,083 $ 4,855 $ 4,322 Operating profit in the prior periods has been recast as a result of our early adoption of a new accounting standard related to pension and other retiree benefit costs. See Note 2 for additional information. 30 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Geographic area information The following geographic area information includes revenue, based on product shipment destination, and property, plant and equipment, based on physical location. The revenue information is not necessarily indicative of the geographic area in which the end applications containing our products are ultimately consumed because our products tend to be shipped to the locations where our customers manufacture their products. Specifically, many of our products are shipped to our customers in China who may include these parts in the manufacture of their own end products, which they may in turn export to their customers around the world. For Years Ended December 31, 2016 2017 2015 Revenue: United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe, Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest of world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,901 8,824 2,907 1,049 280 $ 1,682 8,024 2,393 1,040 231 $ 1,612 7,910 2,163 1,127 188 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,961 $ 13,370 $ 13,000 K - 0 1 M R O F (a) Revenue from products shipped into China, including Hong Kong, was $6.6 billion in 2017, $6.0 billion in 2016 and $5.8 billion in 2015. 2017 December 31, 2016 2015 Property, plant and equipment: United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe, Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest of world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,469 964 97 118 16 $ 1,372 908 98 115 19 $ 1,370 958 130 122 16 Total property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,664 $ 2,512 $ 2,596 (a) Property, plant and equipment at our two sites in the Philippines was $437 million, $412 million and $471 million as of December 31, 2017, 2016 and 2015, respectively. 2. Basis of presentation and significant accounting policies and practices Basis of presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The basis of these financial statements is comparable for all periods presented herein, except for the adoption of a new accounting standard in 2016 related to stock compensation, which included certain provisions applied prospectively. The consolidated financial statements include the accounts of all subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in these notes, except per-share amounts, are stated in millions of U.S. dollars unless otherwise indicated. We have reclassified certain amounts in the prior periods’ financial statements to conform to the 2017 presentation, retrospectively applying the new accounting standard related to pension and other retiree benefit costs. See Changes in accounting standards – adopted standards for current period for further information. The preparation of financial statements requires the use of estimates from which final results may vary. Significant accounting policies and practices Revenue recognition We recognize revenue from sales of our products, including sales to our distributors, when title and risk of loss pass, which usually occurs upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order; when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. For sales to distributors, payment is due on our standard commercial terms and is not contingent upon resale of the products. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 31 Revenue from sales of our products that are subject to inventory consignment agreements, including consignment arrangements with distributors, is recognized in accordance with the principles discussed above. Delivery occurs when the customer or distributor pulls product from consignment inventory that we store at designated locations. We recognize revenue net of allowances, which are management’s estimates of future credits to be granted to customers or distributors under programs common in the semiconductor industry. These allowances, which are not material, generally include special pricing arrangements, product returns due to quality issues and incentives designed to maximize growth opportunities. Allowances are based on analysis of historical data and contractual terms and are recorded when revenue is recognized. We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner. F O R M 1 0 - K In addition, we record allowances for accounts receivable that we estimate may not be collected. We monitor collectability of accounts receivable primarily through review of the accounts receivable aging. When collection is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. We recognize in revenue shipping fees, if any, received from customers. We include shipping and handling costs in COR. The majority of our customers pay these fees directly to third parties. Advertising costs We expense advertising and other promotional costs as incurred. This expense was $39 million in 2017, $44 million in 2016 and $46 million in 2015. Income taxes We account for income taxes using an asset and liability approach. We record the amount of taxes payable or refundable for the current year and the deferred tax assets and liabilities for future tax consequences of events that have been recognized in the financial statements or tax returns. We record a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized. Other assessed taxes Some transactions require us to collect taxes such as sales, value-added and excise taxes from our customers. These transactions are presented in our Consolidated Statements of Income on a net (excluded from revenue) basis. Earnings per share (EPS) Unvested share-based payment awards that contain non-forfeitable rights to receive dividends or dividend equivalents, such as our restricted stock units (RSUs), are considered to be participating securities and the two-class method is used for purposes of calculating EPS. Under the two-class method, a portion of Net income is allocated to these participating securities and, therefore, is excluded from the calculation of EPS allocated to common stock, as shown in the table below. Computation and reconciliation of earnings per common share are as follows (shares in millions): 2017 Net Income Shares EPS Basic EPS: Net income . . . . . . . . . . . . . . . . . . . Income allocated to RSUs . . . . . . . . $ 3,682 (34) Income allocated to common stock for For Years Ended December 31, 2016 Shares EPS Net Income $ 3,595 (45) Net Income $ 2,986 (43) 2015 Shares EPS basic EPS calculation . . . . . . . . . . . $ 3,648 991 $ 3.68 $ 3,550 1,003 $ 3.54 $ 2,943 1,030 $ 2.86 Adjustment for dilutive shares: Stock compensation plans . . . . . . . . 21 18 13 Diluted EPS: Net income . . . . . . . . . . . . . . . . . . . Income allocated to RSUs . . . . . . . . $ 3,682 (33) $ 3,595 (44) $ 2,986 (42) Income allocated to common stock for diluted EPS calculation . . . . . . . . . . $ 3,649 1,012 $ 3.61 $ 3,551 1,021 $ 3.48 $ 2,944 1,043 $ 2.82 32 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Potentially dilutive securities representing 6 million and 12 million shares of common stock that were outstanding in 2017 and 2015, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive. No potentially dilutive securities were excluded from the computation of diluted earnings per common share during 2016. Investments We present investments on our Consolidated Balance Sheets as cash equivalents, short-term investments or long-term investments, which are detailed as follows: • Cash equivalents and short-term investments – We consider investments in debt securities with maturities of 90 days or less from the date of our investment to be cash equivalents. We consider investments in debt securities with maturities beyond 90 days from the date of our investment as being available for use in current operations and include them in short- term investments. The primary objectives of our cash equivalent and short-term investment activities are to preserve capital and maintain liquidity while generating appropriate returns. • Long-term investments – Long-term investments consist of mutual funds, venture capital funds and non-marketable K - 0 1 M R O F equity securities. • Classification of investments – Depending on our reasons for holding the investment and our ownership percentage, we classify our investments as either available for sale, trading, equity method or cost method, which are more fully described in Note 8. We determine cost or amortized cost, as appropriate, on a specific identification basis. Inventories Inventories are stated at the lower of cost or estimated net realizable value. Cost is generally computed on a currently adjusted standard cost basis, which approximates cost on a first-in first-out basis. Standard cost is based on the normal utilization of installed factory capacity. Cost associated with underutilization of capacity is expensed as incurred. Inventory held at consignment locations is included in our finished goods inventory. Consigned inventory was $303 million and $334 million as of December 31, 2017 and 2016, respectively. We review inventory quarterly for salability and obsolescence. A statistical allowance is provided for inventory considered unlikely to be sold. The statistical allowance is based on an analysis of historical disposal activity, historical customer shipments, as well as estimated future sales. A specific allowance for each material type will be carried if there is a significant event not captured by the statistical allowance. We write off inventory in the period in which disposal occurs. Property, plant and equipment; acquisition-related intangibles; and other capitalized costs Property, plant and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Our cost basis includes certain assets acquired in business combinations that were initially recorded at fair value as of the date of acquisition. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. We amortize acquisition-related intangibles on a straight-line basis over the estimated economic life of the assets. Capitalized software licenses generally are amortized on a straight-line basis over the term of the license. Fully depreciated or amortized assets are written off against accumulated depreciation or amortization. Impairments of long-lived assets We regularly review whether facts or circumstances exist that indicate the carrying values of property, plant and equipment or other long-lived assets, including intangible assets, are impaired. We assess the recoverability of assets by comparing the projected undiscounted net cash flows associated with those assets to their respective carrying amounts. Any impairment charge is based on the excess of the carrying amount over the fair value of those assets. Fair value is determined by available market valuations, if applicable, or by discounted cash flows. Goodwill and indefinite-lived intangibles Goodwill is not amortized but is reviewed for impairment annually or more frequently if certain impairment indicators arise. We perform our annual goodwill impairment test as of October 1 for our reporting units, which compares the fair value for each reporting unit to its associated carrying value, including goodwill. See Note 9 for additional information. Foreign currency The functional currency for our non-U.S. subsidiaries is the U.S. dollar. Accounts recorded in currencies other than the U.S. dollar are remeasured into the functional currency. Current assets (except inventories), deferred taxes, other assets, current liabilities and long-term liabilities are remeasured at exchange rates in effect at the end of each reporting period. Property, plant and equipment with associated depreciation and inventories are valued at historical exchange rates. Revenue and expense accounts other than depreciation for each month are remeasured at the appropriate daily rate of exchange. Currency exchange gains and losses from remeasurement are credited or charged to OI&E. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 33 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. F O R M 1 0 - K We do not use derivatives for speculative or trading purposes. Changes in accounting standards – adopted standards for current period Accounting Standards Update (ASU) No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory This standard requires current and deferred taxes resulting from the intra-entity transfer of any assets other than inventory to be recognized for financial reporting purposes when the transfer occurs rather than postpone recognition until the asset has been sold to an outside party, as currently allowed. This standard is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings and is effective for interim and annual periods beginning January 1, 2018. We elected to adopt this standard in the first quarter of 2017. The effect on our financial position and results of operations was not material. ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost This standard amends the income statement presentation of the components of net periodic benefit cost for defined benefit pension and other postretirement plans. This standard requires us to: (1) disaggregate the current service cost component from the other components of net periodic benefit cost (the “other components”) and present it in the same line items on the statement of income as other current compensation costs for related employees and (2) present the other components outside of operating profit (i.e., in OI&E). This standard is required to be applied retrospectively and is effective for interim and annual periods beginning January 1, 2018. We elected to adopt this standard as of January 1, 2017. Adoption of this standard did not impact Revenue, Net income, Earnings per common share or Cash flows from operating activities. The following components on the Consolidated Statements of Income were affected: COR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SG&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating profit: Analog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OI&E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in accounting standards – standards not yet adopted For The Years Ended December 31, 2015 2016 Reported Recast Reported Recast $ 5,130 8,240 1,370 1,767 $ 5,113 8,257 1,356 1,742 $ 5,440 7,560 1,280 1,748 $ 5,425 7,575 1,267 1,728 3,380 801 618 4,799 211 3,416 817 622 4,855 155 3,048 596 630 4,274 32 3,077 611 634 4,322 (16) ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures, which we are currently evaluating. It is effective for interim and annual reporting periods beginning January 1, 2018. This standard permits early adoption and the use of either the retrospective or cumulative-effect transition method. We plan on adopting this standard using the cumulative-effect (i.e., modified retrospective) transition method, which will result in an adjustment to retained earnings for the cumulative effect of applying this guidance to contracts in process as of January 1, 2018. Under this approach, we will not restate the prior financial statements presented. 34 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K K - 0 1 M R O F Based on our current assessment, we do not expect the new standard to have a material impact on our financial position and results of operations, as it is not expected to materially change the manner or timing in which we recognize revenue. We recognize revenue on sales to customers and distributors upon satisfaction of our performance obligations when the goods are shipped. For consignment sales, we recognize revenue when the goods are pulled from consignment inventory. Beginning January 1, 2017, we no longer recognize in revenue royalty income from licensing our patent portfolios; however, we are still required to apply the recognition, measurement and disclosure provisions of this new standard to our royalty income. We believe the most significant impact of the new standard will be to accelerate the timing of recognizing royalty income in OI&E, although the effect of such change on the results of operations and financial position recognized in any individual reporting period is not expected to be material. This change will have no effect on the recognition and timing of cash flows over any affected periods. ASU No. 2016-02, Leases (Topic 842) This standard requires all leases that have a term of over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard will be effective for our interim and annual periods beginning January 1, 2019, and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We do not plan to adopt this standard early. We are currently evaluating the potential impact of this standard on our financial position, but we do not expect it to have a material impact on our results of operations. ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments This standard requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which requires waiting to recognize a loss until it is probable of having been incurred. There are other provisions within the standard that affect how impairments of other financial assets may be recorded and presented, and that expand disclosures. This standard will be effective for our interim and annual periods beginning January 1, 2020, and permits earlier application but not before periods beginning January 1, 2019. The standard will be applied using a modified retrospective approach. We are currently evaluating the potential impact of this standard, but we do not expect it to have a material impact on our financial position and results of operations. Other standards We do not expect the following standards to have a material impact on our financial position and results of operations. We plan to adopt these standards as of their effective dates. ASU ASU No. 2016-01 ASU No. 2017-01 ASU No. 2017-05 ASU No. 2017-12 Description Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities Business Combinations (Topic 805): Clarifying the Definition of a Business 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 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities Effective Date January 1, 2018 January 1, 2018 January 1, 2018 January 1, 2019 3. Restructuring charges/other Restructuring charges/other is comprised of the following components: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges (a) Gains on sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges/other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For Years Ended December 31, 2015 2016 2017 $ 11 — — $ 11 $ 25 (40) — $ (15) $ 14 (83) (2) $ (71) (a) Includes severance and benefits, accelerated depreciation, changes in estimates or other exit costs. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 35 Restructuring charges/other are recognized in Other for segment reporting purposes. Restructuring charges Beginning January 2017, we reorganized the product lines within our two reportable segments. We recognized a related $18 million of restructuring charges for severance and benefit costs in 2016 and an additional $3 million in 2017. Any further charges are not expected to be material. As of December 31, 2017, $16 million has been paid to terminated employees for severance and benefits. We announced in January 2016 our intention to phase out a manufacturing facility in Greenock, Scotland. We are moving production from this facility to more cost-effective 200-millimeter TI manufacturing facilities in Germany, Japan and Maine. Total restructuring charges, primarily severance and related benefit costs associated with the expected reduction of about 350 jobs, are estimated to be about $40 million. We recognized charges of $8 million in 2017, $7 million in 2016 and $17 million in 2015. These charges were comprised of severance and benefits costs, as well as accelerated depreciation. The remaining charges are expected to be recognized through 2019. F O R M 1 0 - K Changes in accrued restructuring balances Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash items (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) Reflects charges for impacts of accelerated depreciation and changes in exchange rates. 2017 $ 40 11 (1) (21) $ 29 2016 $ 32 25 (6) (11) $ 40 2015 $ 57 14 — (39) $ 32 The restructuring accrual balances are primarily reported as a component of either Accrued expenses and other liabilities or Other long-term liabilities on our Consolidated Balance Sheets, depending on the expected timing of payment. Gains on sales of assets In 2016, we recognized a gain of $40 million on the sale of intellectual property. We recognized $83 million of gains on sales of assets in 2015. This included $48 million associated with the sale of a site in Plano, Texas, and $34 million associated with the sale of a manufacturing facility in Houston, Texas. 4. Stock compensation We have stock options outstanding to participants under long-term incentive plans. The option price per share may not be less than the fair market value of our common stock on the date of the grant. The options have a 10-year term and generally vest ratably over four years. Our options continue to vest after the option recipient retires. We also have RSUs outstanding under long-term incentive plans. Each RSU represents the right to receive one share of TI common stock on the vesting date, which is generally four years after the date of grant. Upon vesting, the shares are issued without payment by the grantee. Our RSUs continue to vest after the recipient retires. Holders of RSUs receive an annual cash payment equivalent to the dividends paid on our common stock. We have options and RSUs outstanding to non-employee directors under director compensation plans. The plans generally provide for annual grants of stock options and RSUs, a one-time grant of RSUs to each new non-employee director and the issuance of TI common stock upon the distribution of stock units credited to deferred compensation accounts established for such directors. We also have an employee stock purchase plan under which options are offered to all eligible employees in amounts based on a percentage of the employee’s compensation, subject to a cap. Under the plan, the option price per share is 85 percent of the fair market value on the exercise date. 36 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Total stock compensation expense recognized is as follows: COR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SG&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For Years Ended December 31, 2015 2016 2017 $ 36 59 147 — $ 242 $ 40 60 152 — $ 252 $ 47 60 169 10 $ 286 These amounts include expenses related to non-qualified stock options, RSUs and stock options offered under our employee stock purchase plan and are net of estimated forfeitures. We recognize compensation expense for non-qualified stock options and RSUs on a straight-line basis over the minimum service period required for vesting of the award, adjusting for estimated forfeitures based on historical activity. Awards issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis. Options issued under our employee stock purchase plan are expensed over a three-month period. K - 0 1 M R O F 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: Weighted average grant date fair value, per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average assumptions used: Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected lives (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected dividend yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For Years Ended December 31, 2015 2016 2017 $ 16.49 $ 10.03 $ 9.49 24% 7.2 2.36% 2.52% 22% 7.3 25% 7.3 1.72% 1.64% 2.87% 2.52% We determine expected volatility on all options granted using available implied volatility rates. We believe that market-based measures of implied volatility are currently the best available indicators of the expected volatility used in these estimates. We determine expected lives of options based on the historical option exercise experience of our optionees using a rolling 10-year average. We believe the historical experience method is the best estimate of future exercise patterns currently available. Risk-free interest rates are determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options. Expected dividend yields are based on the annualized approved quarterly dividend rate and the current market price of our common stock at the time of grant. No assumption for a future dividend rate change is included unless there is an approved plan to change the dividend in the near term. The fair value per share of RSUs is determined based on the closing price of our common stock on the date of grant. Our employee stock purchase plan is a discount-purchase plan and consequently the Black-Scholes-Merton option-pricing model is not used to determine the fair value per share of these awards. The fair value per share under this plan equals the amount of the discount. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 37 F O R M 1 0 - K 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 Outstanding grants, December 31, 2016 . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options exercised/RSUs vested . . . . . . . . . . . . . . . Forfeited and expired . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares 52,265,788 6,474,732 (13,313,019) (672,908) Outstanding grants, December 31, 2017 . . . . . . . . . . . . . 44,754,593 Weighted Average Exercise Price per Share $ 41.89 79.28 37.13 57.12 48.49 Shares 12,332,379 1,604,469 (4,419,464) (291,741) 9,225,643 RSUs Weighted Average Grant Date Fair Value per Share $ 44.44 79.52 33.65 54.34 55.40 The weighted average grant date fair values per share of RSUs granted in 2017, 2016 and 2015 were $79.52, $53.98 and $53.22, respectively. In 2017, 2016 and 2015, the total grant date fair values of shares vested from RSU grants were $149 million, $178 million and $114 million, respectively. As of December 31, 2017, the number of shares remaining available for future issuance under these plans was 53,595,374. Summarized information about stock options outstanding as of December 31, 2017, is as follows: Exercise Price Range $14.47 to 20.00 . . . . . . . . . . . . . . . 20.01 to 30.00 . . . . . . . . . . . . . . . 30.01 to 40.00 . . . . . . . . . . . . . . . 40.01 to 50.00 . . . . . . . . . . . . . . . 50.01 to 60.00 . . . . . . . . . . . . . . . 60.01 to 70.00 . . . . . . . . . . . . . . . 70.01 to 80.00 . . . . . . . . . . . . . . . 80.01 to 97.29 . . . . . . . . . . . . . . . Number Outstanding (Shares) 1,230,810 2,559,613 9,441,380 7,466,229 17,689,385 — 6,347,174 20,002 14.47 to 97.29 . . . . . . . . . . . . . . . 44,754,593 Stock Options Outstanding Options Exercisable Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price per Share 1.1 1.9 4.3 6.1 7.6 — 9.1 9.7 6.4 $ 14.97 23.86 33.02 44.10 53.42 — 79.19 88.81 48.49 Number Exercisable (Shares) 1,230,810 2,559,613 9,441,380 4,403,409 4,472,432 — 6,470 — 22,114,114 Weighted Average Exercise Price per Share $ 14.97 23.86 33.02 44.10 53.61 — 71.03 — 37.34 In 2017, 2016 and 2015, the aggregate intrinsic values (i.e., the difference in the closing market price on the date of exercise and the exercise price paid by the optionee) of options exercised were $632 million, $424 million and $290 million, respectively. Summarized information as of December 31, 2017, about outstanding stock options that are vested and expected to vest, as well as stock options that are currently exercisable, is as follows: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of outstanding (shares) Weighted average remaining contractual life (in years) . . . . . . . . . . . . . . . . . . . . . . . . Weighted average exercise price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intrinsic value (millions of dollars) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,804,402 6.3 48.12 2,467 $ $ Outstanding Stock Options (Fully Vested and Expected to Vest) (a) Options Exercisable 22,114,114 4.8 37.34 1,484 $ $ (a) Includes effects of expected forfeitures of approximately 1 million shares. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $2,504 million. As of December 31, 2017, the total future compensation cost related to equity awards not yet recognized in our Consolidated Statements of Income was $237 million, consisting of $108 million related to unvested stock options and $129 million related to unvested RSUs. The $237 million is expected to be recognized as follows: $123 million in 2018, $73 million in 2019, $37 million in 2020 and $4 million in 2021. 38 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Employee stock purchase plan Options outstanding under the employee stock purchase plan as of December 31, 2017, had an exercise price equal to 85 percent of the fair market value of TI common stock on the date of automatic exercise. The automatic exercise occurred on January 2, 2018, resulting in an exercise price of $89.74 per share. Of the total outstanding options, none were exercisable as of December 31, 2017. Employee stock purchase plan transactions are as follows: Outstanding grants, December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee Stock Purchase Plan (Shares) 283,400 984,536 (1,065,757) Outstanding grants, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,179 Exercise Price $ 62.55 55.19 67.62 89.74 K - 0 1 M R O F The weighted average grant date fair values per share of options granted under the employee stock purchase plans in 2017, 2016 and 2015 were $12.99, $9.79 and $7.89, respectively. In 2017, 2016 and 2015, the total intrinsic value of options exercised under these plans was $13 million, $12 million and $12 million, respectively. As of December 31, 2017, the number of shares remaining available for future issuance under this plan was 35,402,636. Effect on shares outstanding and treasury shares Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2017, $9.24 billion of stock repurchase authorizations remain, and no expiration date has been specified. Our current practice is to issue shares of common stock from treasury shares upon exercise of stock options, distribution of director deferred compensation and vesting of RSUs. The following table reflects the changes in our treasury shares: Balance, December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares used for: Stock Options RSUs Treasury Shares 694,189,127 51,384,339 Stock options/RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock applied to exercises or taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director deferred stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,953,455) 8,562 (1,532,264) — (3,386,415) 845,164 — — (7,531) Total issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,477,157) (2,541,251) (16,018,408) Balance, December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares used for: Stock options/RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock applied to exercises or taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director deferred stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 729,547,527 35,480,036 (13,587) (14,516,606) (5,639,666) — 1,336,476 — — (1,362,202) — Total issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,878,808) (4,303,190) (20,181,998) Balance, December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares used for: Stock options/RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock applied to exercises or taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director deferred stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 744,831,978 30,570,129 (4,750) (13,313,019) (4,419,464) — 1,058,100 — — (1,065,757) — Total issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,378,776) (3,361,364) (17,740,140) Balance, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 757,657,217 TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 39 The effects on cash flows are as follows: For Years Ended December 31, 2016 2017 2015 F O R M 1 0 - K Proceeds from common stock transactions (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit realized from stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reduction to deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefit for stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 483 341 (91) 250 $ $ $ 472 255 (105) 150 $ $ $ 396 171 (81) 90 (a) Net of taxes paid for employee shares withheld of $83 million in 2017, $70 million in 2016 and $46 million in 2015. 5. Profit sharing plans Profit sharing benefits are generally formulaic and determined by one or more subsidiary or company-wide financial metrics. We pay profit sharing benefits primarily under the company-wide TI Employee Profit Sharing Plan. This plan provides for profit sharing to be paid based solely on TI’s operating margin for the full calendar year. Under this plan, TI must achieve a minimum threshold of 10 percent operating margin before any profit sharing is paid. At 10 percent operating margin, profit sharing will be 2 percent of eligible payroll. The maximum amount of profit sharing available under the plan is 20 percent of eligible payroll, which is paid only if TI’s operating margin is at or above 35 percent for a full calendar year. We recognized $355 million, $346 million and $309 million of profit sharing expense under the TI Employee Profit Sharing Plan in 2017, 2016 and 2015, respectively. 6. Income taxes Income before income taxes is comprised of the following components: For Years Ended December 31, 2016 2017 2015 U.S. Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,130 950 $ 3,953 977 $ 3,218 998 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,080 $ 4,930 $ 4,216 Provision for income taxes is comprised of the following components: . . . . . . . . . . U.S. federal Non-U.S. . . . . . . . . . . . . U.S. state . . . . . . . . . . . . Current $ 2,101 173 12 Total . . . . . . . . . . . . . . . $ 2,286 2017 Deferred $ 51 61 — $ 112 For Years Ended December 31, 2016 Deferred Total Current $ 1,289 238 10 $ (122) (80) — $ 1,167 158 10 Total $ 2,152 234 12 Current $ 1,110 168 7 2015 Deferred $ (72) 14 3 Total $ 1,038 182 10 $ 2,398 $ 1,537 $ (202) $ 1,335 $ 1,285 $ (55) $ 1,230 Principal reconciling items from the U.S. statutory income tax rate to the effective tax rate (Provision for income taxes as a percentage of Income before income taxes) are as follows: For Years Ended December 31, 2016 2017 2015 U.S. statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Tax Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. excess tax benefit for stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-U.S. effective tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. tax benefit for manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. R&D tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of changes to uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 12.7 (4.1) (2.5) (1.6) (1.1) 0.7 0.2 0.1 39.4% 35.0% — — (3.7) (1.5) (1.2) 0.6 0.3 0.6 27.1% 35.0% — — (4.0) (1.6) (1.3) 0.2 0.3 0.6 29.2% 40 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K The U.S. Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017. The Tax Act reduces the U.S. statutory income tax rate from 35 percent to 21 percent and requires companies to pay a tax on indefinitely reinvested earnings of certain non-U.S. subsidiaries that were previously tax deferred. We have not completed our accounting for the tax effects of enactment of the Tax Act. We have made reasonable estimates of the tax on indefinitely reinvested earnings and the effects on our existing deferred tax balances. This resulted in additional tax expense in 2017 of $773 million, an increase of 12.7 percentage points to our effective tax rate. The combined effects of the tax on indefinitely reinvested earnings and the revaluation of our deferred tax balances are included as a component of income tax expense from continuing operations. Details on provisional amounts are as follows: • Indefinitely reinvested earnings – The tax on indefinitely reinvested earnings is based on our non-U.S. post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes, and resulted in an increase in income tax expense of $714 million. We have not yet completed our calculation of the total post-1986 E&P for these non-U.S. subsidiaries. Further, the tax on indefinitely reinvested earnings is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 non-U.S. E&P previously deferred from U.S. income taxes and finalize the amounts held in cash or other specified assets. • Deferred tax assets and liabilities – We remeasured deferred tax assets and liabilities based on the U.S. statutory income tax rate of 21 percent. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was $59 million. K - 0 1 M R O F The Tax Act also included the global intangible low-taxed income (GILTI) tax for years beginning in 2018. We will account for the effects of GILTI as a component of income tax expense in the future period in which the tax arises. The earnings represented by non-cash operating assets, such as fixed assets and certain inventory, will continue to be permanently reinvested outside the United States. The tax on indefinitely reinvested earnings eliminates any additional U.S. taxation of these earnings upon repatriation to the United States. Consequently, no U.S. tax provision has been made for the future remittance of these earnings. However, withholding taxes in certain non-U.S. jurisdictions will be incurred upon repatriation of available cash to the United States. A provision has been made for deferred taxes on these undistributed earnings to the extent that dividend payments from these subsidiaries are expected to result in a withholding tax liability. As of December 31, 2017, we have no basis differences that would result in material unrecognized deferred tax liabilities. Our effective tax rate is affected by U.S. tax benefits and tax rates applicable to our operations in many of the jurisdictions in which we operate, most of which were lower than the U.S. statutory income tax rate prior to enactment of the Tax Act. These non-U.S. tax rates are generally statutory in nature and without expiration. The primary components of deferred tax assets and liabilities are as follows: Deferred tax assets: Deferred loss and tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories and related reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement costs for defined benefit and retiree health care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets, before valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets, after valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Acquisition-related intangibles and fair-value adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2017 2016 $ 256 119 107 93 38 9 622 (165) 457 (207) (64) (271) $ 214 219 220 145 82 81 961 (128) 833 (460) (32) (492) Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 186 $ 341 TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 41 The deferred tax assets and liabilities based on tax jurisdictions are presented on our Consolidated Balance Sheets as follows: Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2017 2016 $ $ 264 (78) 186 $ $ 374 (33) 341 We make an ongoing assessment regarding the realization of U.S. and non-U.S. deferred tax assets. This assessment is based on our evaluation of relevant criteria, including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, taxable income in prior carryback years and expectations for future taxable income. Valuation allowances increased by $37 million in 2017 and decreased by $58 million in 2016. These changes had no impact to Net income in 2017 and had a $63 million benefit to Net income in 2016. F O R M 1 0 - K We have U.S. and non-U.S. tax loss carryforwards of approximately $6 million, none of which will expire before the year 2027. Cash payments made for income taxes, net of refunds, were $1.80 billion, $1.15 billion and $1.17 billion in 2017, 2016 and 2015, respectively. Uncertain tax positions We operate in a number of tax jurisdictions, and our income tax returns are subject to examination by tax authorities in those jurisdictions who may challenge any item on these tax returns. Because the matters challenged by authorities are typically complex, their ultimate outcome is uncertain. Before any benefit can be recorded in our financial statements, we must determine that it is “more likely than not” that a tax position will be sustained by the appropriate tax authorities. We recognize accrued interest related to uncertain tax positions and penalties as components of OI&E. The changes in the total amounts of uncertain tax positions are as follows: Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements with tax authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 2016 2015 $ 243 17 42 (1) (1) $ 84 4 189 (2) (32) $ 108 11 3 (21) (17) Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300 $ 243 $ 84 Interest income (expense) recognized in the year ended December 31 . . . . . . . . . . . . . . . . . . . . . . . . $ (19) $ 4 Interest receivable (payable) as of December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (38) $ 13 $ $ 8 9 The liability for uncertain tax positions is a component of Other long-term liabilities on our Consolidated Balance Sheets. All of the $300 million and the $243 million liabilities for uncertain tax positions as of December 31, 2017 and 2016, respectively, are comprised of positions that, if recognized, would lower the effective tax rate. If these liabilities are ultimately realized, $13 million and $12 million of existing deferred tax assets in 2017 and 2016, respectively, would also be realized. These deferred tax assets are related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation. As of December 31, 2017, the statute of limitations remains open for U.S. federal tax returns for 2010 and following years. Audit activities related to our U.S. federal tax returns through 2012 have been completed except for certain pending tax treaty procedures for relief from double taxation. The procedures for relief from double taxation pertain to U.S. federal tax returns for the years 2006 through 2011. The audit of the U.S. federal tax returns for 2013 through 2015 is underway. In non-U.S. jurisdictions, the years open to audit represent the years still open under the statute of limitations. With respect to major jurisdictions outside the United States, our subsidiaries are no longer subject to income tax audits for years before 2007. 42 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K K - 0 1 M R O F 7. Financial instruments and risk concentration Financial instruments We hold derivative financial instruments such as forward foreign currency exchange contracts, the fair value of which was not material as of December 31, 2017. Our forward foreign currency exchange contracts outstanding as of December 31, 2017, had a notional value of $365 million to hedge our non-U.S. dollar net balance sheet exposures, including $140 million to sell Japanese yen, $59 million to sell British pound sterling and $49 million to sell euros. Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our deferred compensation liabilities, are carried at fair value. Our postretirement plan assets are carried at fair value or net asset value per share. The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. The carrying value of our long-term debt approximates the fair value as measured using broker-dealer quotes, which are Level 2 inputs. See Note 8 for a description of fair value and the definition of Level 2 inputs. Risk concentration We are subject to counterparty risks from financial institutions, customers and issuers of debt securities. Financial instruments that could subject us to concentrations of credit risk are primarily cash deposits, cash equivalents, short-term investments and accounts receivable. To manage our credit risk exposure, we place cash investments in investment-grade debt securities and limit the amount of credit exposure to any one issuer. We also limit counterparties on cash deposits and financial derivative contracts to financial institutions with investment-grade ratings. Concentrations of credit risk with respect to accounts receivable are limited due to our large number of customers and their dispersion across different industries and geographic areas. We maintain allowances for expected returns, disputes, adjustments, incentives and collectability. These allowances are deducted from accounts receivable on our Consolidated Balance Sheets. Details of these accounts receivable allowances are as follows: Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts charged (credited) to operating results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries and write-offs, net Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 $ 17 (9) — $ 8 2016 $ 7 10 — $ 17 2015 $ 12 (5) — $ 7 Major customer No end customer accounted for 10 percent or more of revenue in 2017 or 2016. In 2015, Apple Inc. accounted for approximately 11 percent of revenue, recognized primarily in our Analog segment. 8. Valuation of debt and equity investments and certain liabilities Debt and equity investments We classify our investments as available for sale, trading, equity method or cost method. Most of our investments are classified as available for sale. Available-for-sale and trading securities are stated at fair value, which is generally based on market prices or broker quotes. See Fair-value considerations below. Unrealized gains and losses on available-for-sale securities are recorded as an increase or decrease, net of taxes, in AOCI on our Consolidated Balance Sheets. We record other-than-temporary impairments on available-for-sale securities in OI&E in our Consolidated Statements of Income. We classify certain mutual funds as trading securities. These mutual funds hold a variety of debt and equity investments intended to generate returns that offset changes in certain deferred compensation liabilities. We record changes in the fair value of these mutual funds and the related deferred compensation liabilities in SG&A. Our other investments are not measured at fair value but are accounted for using either the equity method or cost method. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity- method investments are reflected in OI&E based on our ownership share of the investee’s financial results. Gains and losses on cost-method investments are recorded in OI&E when realized or when an impairment of the investment’s value is warranted based on our assessment of the recoverability of each investment. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 43 Details of our investments are as follows: December 31, 2017 December 31, 2016 Cash and Cash Equivalents Short-Term Investments Long-Term Investments Cash and Cash Equivalents Short-Term Investments Long-Term Investments Measured at fair value: Available-for-sale securities: Money market funds . . . . . . . . . . . . Corporate obligations . . . . . . . . . . . U.S. government agency and Treasury securities . . . . . . . . . . . Trading securities: Mutual funds . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . Other measurement basis: Equity-method investments . . . . . . . Cost-method investments . . . . . . . . Cash on hand . . . . . . . . . . . . . . . . . $ 525 172 700 — 1,397 — — 259 F O R M 1 0 - K $ — 698 $ — — $ 2,115 — 2,813 — — — — 236 236 26 6 — 346 107 490 — 943 — — 211 $ — 544 $ — — 1,792 — 2,336 — — — — 201 201 25 9 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,656 $ 2,813 $ 268 $ 1,154 $ 2,336 $ 235 As of December 31, 2017 and 2016, unrealized gains and losses associated with our available-for-sale investments were not material. We did not recognize any credit losses related to available-for-sale investments in 2017, 2016 and 2015. All of our debt securities classified as available for sale as of December 31, 2017, have maturities within one year. In 2017, 2016 and 2015, the proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $4.10 billion, $3.39 billion and $2.89 billion, respectively. Gross realized gains and losses from these sales were not material. Other-than-temporary declines and impairments in the values of our debt and equity investments, which were recognized in OI&E, were not material in 2017, 2016 and 2015. Fair-value considerations We measure and report certain financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level hierarchy discussed below indicates the extent and level of judgment used to estimate fair-value measurements. • Level 1 – Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date. • Level 2 – Uses inputs other than Level 1 that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. We utilize a third-party data service to provide Level 2 valuations. We verify these valuations for reasonableness relative to unadjusted quotes obtained from brokers or dealers based on observable prices for similar assets in active markets. • Level 3 – Uses inputs that are unobservable, supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models that utilize management estimates of market participant assumptions. As of December 31, 2017 and 2016, we had no Level 3 assets or liabilities, other than certain assets held by our postretirement plans. 44 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K The following are our assets and liabilities that were accounted for at fair value on a recurring basis. These tables do not include cash on hand, assets held by our postretirement plans, or assets and liabilities that are measured at historical cost or any basis other than fair value. December 31, 2017 Level 2 Level 1 Total December 31, 2016 Level 2 Level 1 Total Assets: Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. government agency and Treasury securities . . . . . . . . . Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 525 — 2,765 236 $ — $ 870 50 — 525 870 2,815 236 $ 346 — 2,042 201 $ — $ 651 240 — 346 651 2,282 201 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,526 $ 920 $ 4,446 $ 2,589 $ 891 $ 3,480 Liabilities: Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 255 255 $ — $ $ — $ 255 255 $ $ 218 218 $ — $ $ — $ 218 218 K - 0 1 M R O F 9. Goodwill and acquisition-related intangibles Goodwill by segment as of December 31, 2017 and 2016, is as follows: Analog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill $ 4,158 172 32 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,362 We perform our annual goodwill impairment test as of October 1 and determine whether the fair value of each of our reporting units is in excess of its carrying value. Determination of fair value is based upon management estimates and judgment, using unobservable inputs in discounted cash flow models to calculate the fair value of each reporting unit. These unobservable inputs are considered Level 3 measurements, as described in Note 8. In 2017, 2016 and 2015, we determined no impairment was indicated. The components of Acquisition-related intangibles are as follows: Amortization Period (Years) Gross Carrying Amount December 31, 2017 Accumulated Amortization Developed technology . . . . . Customer relationships . . . . 7 - 10 8 Total . . . . . . . . . . . . . . . . . $ 2,130 810 $ 2,940 $ 1,361 633 $ 1,994 Gross Carrying Amount December 31, 2016 Accumulated Amortization $ 2,130 810 $ 2,940 $ 1,144 532 $ 1,676 Net $ 769 177 $ 946 Net $ 986 278 $ 1,264 Amortization of acquisition-related intangibles was $318 million, $319 million and $319 million in 2017, 2016 and 2015, respectively. Fully amortized assets are written off against accumulated amortization. Remaining estimated amortization of acquisition-related intangibles is as follows: 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 318 288 198 142 Amortization of Acquisition-Related Intangibles TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 45 F O R M 1 0 - K 10. Postretirement benefit plans Plan descriptions We have various employee retirement plans, including defined contribution, defined benefit and retiree health care benefit plans. For qualifying employees, we offer deferred compensation arrangements. U.S. retirement plans Our principal retirement plans in the United States are a defined contribution plan; an enhanced defined contribution plan; and qualified and non-qualified defined benefit pension plans. The defined benefit plans were closed to new participants in 1997, and then current participants were allowed to make a one-time election to continue accruing a benefit in the plans, or to cease accruing a benefit and instead to participate in the enhanced defined contribution plan described below. Both defined contribution plans offer an employer-matching savings option that allows employees to make pre-tax contributions to various investment choices. Employees who elected to continue accruing a benefit in the qualified defined benefit pension plans may also participate in the defined contribution plan, where employer-matching contributions are provided for up to 2 percent of the employee’s annual eligible earnings. Employees who elected not to continue accruing a benefit in the defined benefit pension plans, and employees hired after November 1997 and through December 31, 2003, may participate in the enhanced defined contribution plan. This plan provides for a fixed employer contribution of 2 percent of the employee’s annual eligible earnings, plus an employer-matching contribution of up to 4 percent of the employee’s annual eligible earnings. Employees hired after December 31, 2003, do not receive the fixed employer contribution of 2 percent of the employee’s annual eligible earnings. As of December 31, 2017 and 2016, as a result of employees’ elections, TI’s U.S. defined contribution plans held shares of TI common stock totaling 10 million shares and 11 million shares valued at $1.00 billion and $796 million, respectively. Dividends paid on these shares in 2017 and 2016 were $22 million and $20 million, respectively. Effective April 1, 2016, the TI common stock fund was frozen to new contributions or transfers into the fund. Our aggregate expense for the U.S. defined contribution plans was $61 million in 2017 and $60 million in 2016 and 2015. The defined benefit pension plans include employees still accruing benefits, as well as employees and participants who no longer accrue service-related benefits, but instead, may participate in the enhanced defined contribution plan. Benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation. We intend to contribute amounts to this plan to meet the minimum funding requirements of applicable local laws and regulations, plus such additional amounts as we deem appropriate. The non-qualified defined benefit plans are unfunded and closed to new participants. U.S. retiree health care benefit plan U.S. employees who meet eligibility requirements are offered medical coverage during retirement. We make a contribution toward the cost of those retiree medical benefits for certain retirees and their dependents. The contribution rates are based upon various factors, the most important of which are an employee’s date of hire, date of retirement, years of service and eligibility for Medicare benefits. The balance of the cost is borne by the plan’s participants. Employees hired after January 1, 2001, are responsible for the full cost of their medical benefits during retirement. Non-U.S. retirement plans We provide retirement coverage for non-U.S. employees, as required by local laws or to the extent we deem appropriate, through a number of defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances. As of December 31, 2017 and 2016, as a result of employees’ elections, TI’s non-U.S. defined contribution plans held TI common stock valued at $27 million and $20 million, respectively. Dividends paid on these shares of TI common stock in 2017 and 2016 were not material. 46 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K 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 2016 2017 2015 U.S. Retiree Health Care 2015 2016 2017 Non-U.S. Defined Benefit 2015 2016 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . Amortization of prior service cost (credit) . . . . . . Recognized net actuarial loss . . . . . . . . . . . . . . Net periodic benefit costs . . . . . . . . . . . . . . . . . Settlement losses . . . . . . . . . . . . . . . . . . . . . . . $ 22 42 (41) — 14 37 36 $ 22 42 (41) — 21 44 21 $ 22 43 (48) — 19 36 25 $ 5 17 (17) (4) 3 4 — $ 5 20 (20) (3) 7 9 — $ 5 20 (22) 2 8 13 — $ 37 44 (62) (2) 28 45 2 $ 34 52 (68) (2) 25 41 2 $ 35 53 (76) (2) 24 34 2 Total, including other postretirement losses . . . . $ 73 $ 65 $ 61 $ 4 $ 9 $ 13 $ 47 $ 43 $ 36 K - 0 1 M R O F With our early adoption of ASU 2017-07, all defined benefit and retiree health care benefit plan expense components other than service cost are recognized in OI&E in our Consolidated Statements of Income. Service cost is recognized within Operating profit. See Note 2 for additional information. For the U.S. qualified pension and retiree health care plans, the expected return on plan assets component of net periodic benefit cost is based upon a market-related value of assets. In accordance with U.S. GAAP, the market-related value of assets is the fair value adjusted by a smoothing technique whereby certain gains and losses are phased in over a period of three years. Changes in the benefit obligations and plan assets for defined benefit and retiree health care benefit plans are as follows: U.S. Defined Benefit 2017 2016 U.S. Retiree Health Care 2016 2017 Non-U.S. Defined Benefit 2017 2016 Change in plan benefit obligation Benefit obligation at beginning of year: . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medicare subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effects of exchange rate changes . . . . . . . . . . . . . . . . . . $ 1,030 22 42 — (9) — 109 (196) — — $ 1,033 22 42 — (9) — 27 (85) — — $ 434 5 17 9 (39) — (15) — 3 — $ 463 5 20 10 (38) 1 (27) — — — $ 2,361 37 44 6 (90) — (52) (13) — 176 $ 2,231 34 52 6 (77) — 259 (8) — (136) Benefit obligation at end of year (BO) . . . . . . . . . . . . . . . . . $ 998 $ 1,030 $ 414 $ 434 $ 2,469 $ 2,361 Change in plan assets Fair value of plan assets at beginning of year: . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . Employer contributions (qualified plans) . . . . . . . . . . . . . Employer contributions (non-qualified plans) . . . . . . . . . . Participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effects of exchange rate changes . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets at end of year (FVPA) . . . . . . . . . . . Funded status (FVPA – BO) at end of year . . . . . . . . . . . . . . . . $ 1,034 123 25 18 — (9) (196) — — $ 1,019 79 15 15 — (9) (85) — — $ 434 44 1 — 9 (39) — — (55) $ 441 20 1 — 10 (38) — — — $ 2,309 148 56 — 6 (90) (13) 177 — $ 2,134 227 160 — 6 (77) (8) (133) — $ $ 995 $ 1,034 $ 394 $ 434 $ 2,593 $ 2,309 (3) $ 4 $ (20) $ — $ 124 $ (52) TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 47 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 2017 Overfunded retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities & Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Underfunded retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58 $ — $ 150 $ 208 (13) (48) — (20) (5) (21) (18) (89) Funded status (FVPA – BO) at end of 2017 . . . . . . . . . . . . . . . . . . . . . . $ (3) $ (20) $ 124 $ 101 2016 Overfunded retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities & Other long-term liabilities . . . . Underfunded retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Funded status (FVPA – BO) at end of 2016 . . . . . . . . . . . . . . . . . . . . . . . . $ 66 (9) (53) $ 4 $ 3 — (3) $ — $ 27 (6) (73) $ (52) $ 96 (15) (129) $ (48) F O R M 1 0 - K Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute about $50 million to our retirement benefit plans in 2018. The amounts shown for underfunded U.S. defined benefit plans were for non-qualified pension plans, which we do not fund because contributions to them are not tax deductible. Accumulated benefit obligations, which are generally less than the projected benefit obligations as they exclude the impact of future salary increases, were $899 million and $926 million as of December 31, 2017 and 2016, respectively, for the U.S. defined benefit plans, and $2.33 billion and $2.22 billion as of December 31, 2017 and 2016, respectively, for the non-U.S. defined benefit plans. The change in AOCI is as follows: U.S. Defined Benefit Net Actuarial Loss U.S. Retiree Health Care Non-U.S. Defined Benefit Total Net Actuarial Loss Prior Service Credit Net Actuarial Loss Prior Service Credit Net Actuarial Loss Prior Service Credit AOCI balance, net of taxes, December 31, 2016 . . . . . . . . . . $ 133 $ 58 $ (11) $ 351 $ (6) $ 542 $ (17) Changes in AOCI by category: Adjustments . . . . . . . . . . . . . . . Recognized within Net income . . . . . . . . . . . . . . . . . Tax effect . . . . . . . . . . . . . . . . . Total change to AOCI . . . . . . . . AOCI balance, net of taxes, 28 (51) 8 (15) (41) (3) 15 (29) 3 4 (2) 5 (105) (29) 30 (104) — 2 — 2 (118) (83) 53 (148) 3 6 (2) 7 December 31, 2017 . . . . . . . . . . $ 118 $ 29 $ (6) $ 247 $ (4) $ 394 $ (10) The estimated amounts of net actuarial loss and unrecognized prior service credit included in AOCI as of December 31, 2017, that are expected to be amortized into net periodic benefit cost over the next fiscal year are: $17 million and none for the U.S. defined benefit plans; $2 million and ($3) million for the U.S. retiree health care benefit plan; and $20 million and ($2) million for the non-U.S. defined benefit plans. 48 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Information on plan assets We report and measure the plan assets of our defined benefit pension and other postretirement plans at fair value. The tables below set forth the fair value of our plan assets using the same three-level hierarchy of fair-value inputs described in Note 8. With the adoption of ASU 2015-07, certain assets are no longer subject to disclosure by level of fair value but have been included in the tables below to permit reconciliation to the total plan assets. December 31, 2017 Level 1 Level 2 Level 3 Other (a) Total Assets of U.S. defined benefit plan: Fixed income securities and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ — — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ Assets of U.S. retiree health care plan: Fixed income securities and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets of non-U.S. defined benefit plans: Fixed income securities and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 132 — $ 132 $ 16 7 — $ 23 $ $ 2 — 2 $ 183 23 — $ 206 (a) Consists of bond index and equity index funds, measured at net asset value per share. 654 341 995 111 149 260 $ $ $ $ 654 341 995 245 149 394 K - 0 1 M R O F $ — $ — $ — $ $ — $ 1,646 717 — — 1 $ 1,845 747 1 $ 1 $ 2,363 $ 2,593 December 31, 2016 Level 1 Level 2 Level 3 Other (a) Total Assets of U.S. defined benefit plan: Fixed income securities and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ — — — 685 349 $ 685 349 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ 1,034 $ 1,034 Assets of U.S. retiree health care plan: Fixed income securities and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets of non-U.S. defined benefit plans: Fixed income securities and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 180 — $ 180 $ 19 5 — $ 24 $ $ 3 — 3 $ 127 18 — $ 145 $ — $ — $ — $ 44 207 251 $ $ 227 207 434 $ — $ 1,508 629 — — 3 $ 1,654 652 3 $ 3 $ 2,137 $ 2,309 (a) Consists of bond index and equity index funds, measured at net asset value per share. The investments in our major benefit plans largely consist of low-cost, broad-market index funds to mitigate risks of concentration within market sectors. Our investment policy is designed to better match the interest rate sensitivity of the plan assets and liabilities. The appropriate mix of equity and bond investments is determined primarily through the use of detailed asset-liability modeling studies that look to balance the impact of changes in the discount rate against the need to provide asset growth to cover future service cost. Most of our plans around the world have a greater proportion of fixed income securities with return characteristics that are more closely aligned with changes in the liabilities caused by discount rate volatility. For the U.S. plans, we utilize an option collar strategy to reduce the volatility of returns on investments in U.S. equity funds. The only Level 3 asset in our worldwide benefit plans for the periods presented is a diversified property fund in a non-U.S. pension plan. These investments are valued using inputs from the fund managers and internal models. Changes to the fair value of this fund since December 31, 2015, have not been material, and are due to redemptions. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 49 F O R M 1 0 - K Assumptions and investment policies U.S. Defined Benefit U.S. Retiree Health Care 2017 2016 2017 2016 Non-U.S. Defined Benefit 2016 2017 Weighted average assumptions used to determine benefit obligations: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term pay progression . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.75% 4.29% 3.63% 4.08% 1.84% 1.76% 2.96% 3.11% 3.30% 3.30% n/a n/a Weighted average assumptions used to determine net periodic benefit cost: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term pay progression . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.21% 4.40% 4.08% 4.40% 1.76% 2.41% 4.30% 4.60% 4.10% 4.40% 2.60% 3.18% 3.11% 3.21% 3.30% 3.30% n/a n/a 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: Fixed income securities and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65% 35% 55% – 65% 35% – 45% 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 Benefit U.S. Retiree Health Care Fixed income securities and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66% 66% 62% 52% 34% 34% 38% 48% U.S. Defined Benefit U.S. Retiree Health Care 2017 2016 2017 2016 Non-U.S. Defined Benefit 60% – 100% 0% – 40% Non-U.S. Defined Benefit 2016 2017 71% 72% 29% 28% None of the plan assets related to the defined benefit pension plans and retiree health care benefit plan are directly invested in TI common stock. As of December 31, 2017, we do not expect to return any of the defined benefit pension plans’ assets to TI in the next 12 months. The following assumed future benefit payments to plan participants in the next 10 years are used to measure our benefit obligations. Almost all of the payments, which may vary significantly from these assumptions, will be made from plan assets and not from company assets. 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 – 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140 111 83 90 87 410 $ 30 31 31 30 30 139 $ 86 87 89 90 94 495 U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit 50 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Assumed health care cost trend rates for the U.S. retiree health care benefit plan as of December 31 are as follows: Assumed health care cost trend rate for next year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ultimate trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year in which ultimate trend rate is reached . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 7.50% 5.00% 2028 2016 6.75% 5.00% 2024 A one percentage point increase or decrease in health care cost trend rates over all future periods would have increased or decreased the accumulated postretirement benefit obligation for the U.S. retiree health care benefit plan as of December 31, 2017, by $1 million. The service cost and interest cost components of 2017 plan expense would have increased or decreased by less than $1 million. Deferred compensation arrangements We have a deferred compensation plan that allows U.S. employees whose base salary and management responsibility exceed a certain level to defer receipt of a portion of their cash compensation. Payments under this plan are made based on the participant’s distribution election and plan balance. Participants can earn a return on their deferred compensation based on notional investments in the same investment funds that are offered in our defined contribution plans. As of December 31, 2017, our liability to participants of the deferred compensation plans was $255 million and is recorded in Other long-term liabilities on our Consolidated Balance Sheets. This amount reflects the accumulated participant deferrals and earnings thereon as of that date. As of December 31, 2017, we held $236 million in mutual funds related to these plans that are recorded in Long-term investments on our Consolidated Balance Sheets, and serve as an economic hedge against changes in fair values of our other deferred compensation liabilities. We record changes in the fair value of the liability and the related investment in SG&A as discussed in Note 8. K - 0 1 M R O F 11. Debt and lines of credit Short-term borrowings We maintain a line of credit to support commercial paper borrowings, if any, and to provide additional liquidity through bank loans. As of December 31, 2017, we had a variable-rate revolving credit facility from a consortium of investment-grade banks that allows us to borrow up to $2 billion until March 2022. The interest rate on borrowings under this credit facility, if drawn, is indexed to the applicable London Interbank Offered Rate (LIBOR). As of December 31, 2017, our credit facility was undrawn and we had no commercial paper outstanding. Long-term debt We retired $250 million of maturing debt in March 2017 and another $375 million in June 2017. In May 2017, we issued an aggregate principal amount of $600 million of fixed-rate, long-term debt. The offering consisted of the reissuance of $300 million of 2.75% notes due in 2021 at a premium and the issuance of $300 million of 2.625% notes due in 2024 at a discount. We incurred $3 million of issuance and other related costs. The proceeds of the offerings were $605 million, net of the original issuance discount and premium, and were used for the repayment of maturing debt and general corporate purposes. In November 2017, we issued a principal amount of $500 million of fixed-rate, long-term debt due in 2027. We incurred $3 million of issuance and other related costs. The proceeds of the offering were $494 million, net of the original issuance discount, and were used for general corporate purposes. In May 2016, we issued a principal amount of $500 million of fixed-rate, long-term debt due in 2022. We incurred $3 million of issuance and other related costs. The proceeds of the offering were $499 million, net of the original issuance discount, and were used toward the repayment of a portion of $1.0 billion of maturing debt retired in May 2016. In May 2015, we issued a principal amount of $500 million of fixed-rate, long-term debt due in 2020. We incurred $3 million of issuance and other related costs. The proceeds of the offering were $498 million, net of the original issuance discount, and were used toward the repayment of a portion of the debt that matured in August 2015. We retired $250 million of maturing debt in April 2015 and another $750 million in August 2015. TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 51 Long-term debt outstanding is as follows: Notes due 2017 at 0.875% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes due 2017 at 6.60% (assumed with National acquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes due 2018 at 1.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes due 2019 at 1.65% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes due 2020 at 1.75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes due 2021 at 2.75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes due 2022 at 1.85% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes due 2023 at 2.25% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes due 2024 at 2.625% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes due 2027 at 2.90% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unamortized discounts, premiums and debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total debt, including net unamortized discounts, premiums and debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of long-term debt F O R M 1 0 - K December 31, 2017 2016 $ — $ — 500 750 500 550 500 500 300 500 250 375 500 750 500 250 500 500 — — 4,100 (23) 4,077 (500) 3,625 (16) 3,609 (631) Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,577 $ 2,978 Interest and debt expense was $78 million in 2017, $80 million in 2016 and $90 million in 2015. This was net of the amortization of the debt discounts, premiums and debt issuance costs. Cash payments for interest on long-term debt were $75 million in 2017, $88 million in 2016 and $99 million in 2015. Capitalized interest was not material. 12. Commitments and contingencies Purchase commitments Some of our purchase commitments include payments for software licenses and contractual agreements with suppliers where there is a fixed, non-cancellable payment schedule or minimum payments due with a reduced delivery schedule. Operating leases We conduct certain operations in leased facilities and also lease a portion of our data processing and other equipment. In addition, certain long-term supply agreements to purchase industrial gases are accounted for as operating leases. Lease agreements frequently include purchase and renewal provisions and require us to pay taxes, insurance and maintenance costs. Rental and lease expense incurred was $81 million, $86 million and $98 million in 2017, 2016 and 2015, respectively. As of December 31, 2017, we had committed to make the following minimum payments under our purchase commitments and non-cancellable operating leases: Purchase Commitments Operating Leases 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter $ 391 367 234 37 30 35 $ 68 45 49 29 24 56 Indemnification guarantees We routinely sell products with an intellectual property indemnification included in the terms of sale. Historically, we have had only minimal, infrequent losses associated with these indemnities. Consequently, we cannot reasonably estimate any future liabilities that may result. 52 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Warranty costs/product liabilities We accrue for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability. Historically, we have experienced a low rate of payments on product claims. Although we cannot predict the likelihood or amount of any future claims, we do not believe they will have a material adverse effect on our financial condition, results of operations or liquidity. Our stated warranties for semiconductor products obligate us to repair, replace or credit the purchase price of a covered product back to the buyer. Product claim consideration may exceed the price of our products. General We are subject to various legal and administrative proceedings. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity. 13. Supplemental financial information Acquisition charges Acquisition charges represent the ongoing amortization of intangible assets resulting from the acquisition of National Semiconductor Corporation. These amounts are included in Other for segment reporting purposes, consistent with how management measures the performance of its segments. See Note 9 for additional information. K - 0 1 M R O F Other income (expense), net (OI&E) For Years Ended December 31, 2016 2017 2015 Royalty income (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from settlements related to intellectual property infringement . . . . . . . . . . . . . . . . . . . . . . . . . Pension and other retiree benefit costs (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other (c) $ 119 — (61) 17 $ — $ — — (48) 32 188 (56) 23 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75 $ 155 $ (16) (a) (b) As of January 1, 2017, royalties are recorded in OI&E. See Note 1 for additional information. Reflects the adoption of ASU 2017-07. See Note 2 for additional information. (c) Other includes interest and lease income, investment and currency gains and losses, and tax interest income and expense. Prepaid expenses and other current assets December 31, Prepaid taxes on intercompany inventory profits, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 $ 768 262 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,030 2016 $ 566 344 $ 910 Property, plant and equipment at cost Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n/a 5 - 40 2 - 10 Depreciable Lives (Years) December 31, $ 2017 127 2,467 2,195 $ 2016 127 2,753 2,043 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,789 $ 4,923 TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 53 Other long-term liabilities December 31, Long-term portion of tax on indefinitely reinvested earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 $ 635 668 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,303 2016 $ — 554 $ 554 F O R M 1 0 - K Accumulated other comprehensive income (loss), net of taxes (AOCI) December 31, 2017 2016 Postretirement benefit plans: Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior service credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flow hedge derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (394) 10 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (384) $ (542) 17 (1) $ (526) Details on amounts reclassified out of Accumulated other comprehensive income (loss), net of taxes, to Net income Our Consolidated Statements of Comprehensive Income include items that have been recognized within Net income in 2017, 2016 and 2015. The table below details where these transactions are recorded in our Consolidated Statements of Income. For Years Ended December 31, 2016 2017 2015 Impact to Related Statement of Income Line Net actuarial losses of defined benefit plans: Recognized net actuarial loss and Settlement losses (a) Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83 (27) $ 76 (25) $ 78 (25) Decrease to OI&E Decrease to Provision for income taxes Recognized within Net income, net of taxes . . . . . . . . . . . $ 56 $ 51 $ 53 Decrease to Net income Prior service credit of defined benefit plans: Amortization of prior service cost (credit) (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect $ (6) 1 $ (5) 2 $ — Increase to OI&E — Increase to Provision for income taxes Recognized within Net income, net of taxes . . . . . . . . . . . $ (5) $ (3) $ — Increase to Net income Derivative instruments: Amortization of treasury-rate locks . . . . . . . . . . . . . . . . . . Tax effect 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ Recognized within Net income, net of taxes . . . . . . . . . . . $ 1 (a) Detailed in Note 10. 14. Quarterly financial data (unaudited) $ $ 1 — 1 $ $ 2 (1) 1 Increase to Interest and debt expense Decrease to Provision for income taxes Decrease to Net income As a result of our early adoption of ASU 2017-07, we have recast Gross profit and Operating profit for 2016 to conform to the new presentation. See Note 2 for additional information. Revenue . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . Included in Operating profit: Acquisition charges . . . . . . . . . . Restructuring charges/other . . . . Operating profit . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . Basic EPS . . . . . . . . . . . . . . . . . . . Diluted EPS . . . . . . . . . . . . . . . . . . 4th $ 3,750 2,440 79 3 1,563 344 $ 0.35 $ 0.34 2017 Quarters 3rd 2nd 1st 4th 2016 Quarters 3rd 2nd $ 4,116 2,656 $ 3,693 2,374 $ 3,402 2,144 $ 3,414 2,137 $ 3,675 2,284 $ 3,273 2,007 80 1 1,788 1,285 $ 1.29 $ 1.26 79 3 1,480 1,056 $ 1.05 $ 1.03 80 4 1,252 997 $ 0.99 $ 0.97 80 (20) 1,332 1,047 $ 1.04 $ 1.02 80 1 1,408 1,018 $ 1.00 $ 0.98 79 2 1,131 819 $ 0.81 $ 0.79 1st $ 3,008 1,829 80 2 984 711 $ 0.70 $ 0.69 54 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Report of independent registered public accounting firm To the Shareholders and the Board of Directors of Texas Instruments Incorporated Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Texas Instruments Incorporated (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2018 expressed an unqualified opinion thereon. K - 0 1 M R O F Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 1952. Dallas, Texas February 22, 2018 TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 55 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. ITEM 9A. Controls and Procedures. Disclosure controls and procedures F O R M 1 0 - K An evaluation as of the end of the period covered by this report was carried out under the supervision and with the participation of TI’s management, including its chief executive officer and chief financial officer, of the effectiveness of the design and operation of TI’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the chief executive officer and chief financial officer concluded that those disclosure controls and procedures were effective. Internal control over financial reporting Report by management on internal control over financial reporting The management of TI is responsible for establishing and maintaining effective internal control over financial reporting. TI’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements issued for external purposes in accordance with generally accepted accounting principles. There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the fourth quarter of 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. TI management assessed the effectiveness of internal control over financial reporting as of December 31, 2017. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria) in Internal Control – Integrated Framework. Based on our assessment, we believe that, as of December 31, 2017, our internal control over financial reporting is effective based on the COSO criteria. TI’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which immediately follows this report. 56 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Report of independent registered public accounting firm on internal control over financial reporting To the Shareholders and the Board of Directors of Texas Instruments Incorporated Opinion on internal control over financial reporting We have audited Texas Instruments Incorporated’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Texas Instruments Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Texas Instruments Incorporated as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes, and our report dated February 22, 2018 expressed an unqualified opinion thereon. K - 0 1 M R O F Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report by management on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Dallas, Texas February 22, 2018 TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 57 ITEM 9B. Other Information. Not applicable. PART III ITEM 10. Directors, Executive Officers and Corporate Governance. The information with respect to directors’ names, ages, positions, term of office and periods of service, which is contained under the caption “Election of directors” in our proxy statement for the 2018 annual meeting of stockholders, is incorporated herein by reference to such proxy statement. The information with respect to directors’ business experience, which is contained under the caption “Diversity and qualifications” in our proxy statement for the 2018 annual meeting of stockholders, is incorporated herein by reference to such proxy statement. F O R M 1 0 - K The information with respect to Section 16(a) beneficial ownership reporting compliance contained under the caption of the same name in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement. A list of our executive officers and their biographical information appears in Part I, Item 1 of this report. Code of Ethics We have adopted the Code of Ethics for TI Chief Executive Officer and Senior Finance Officers. A copy of the Code can be found on our website at www.ti.com/corporategovernance. We intend to satisfy the disclosure requirements of the SEC regarding amendments to, or waivers from, the Code by posting such information on the same website. Audit Committee The information contained under the caption “Committees of the board” with respect to the audit committee and the audit committee financial expert in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement. ITEM 11. Executive Compensation. The information contained under the captions “Director compensation” and “Executive compensation” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement, provided that the Compensation Committee report shall not be deemed filed with this Form 10-K. The information contained under the caption “Compensation committee interlocks and insider participation” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Equity compensation plan information The information contained under the caption “Equity compensation plan information” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement. Security ownership of certain beneficial owners and management The information that is contained under the captions “Security ownership of certain beneficial owners” and “Security ownership of directors and management” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement. 58 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K ITEM 13. Certain Relationships and Related Transactions, and Director Independence. The information contained under the captions “Related person transactions” and “Director independence” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement. ITEM 14. Principal Accountant Fees and Services. The information with respect to principal accountant fees and services contained under the caption “Proposal to ratify appointment of independent registered public accounting firm” in our proxy statement for the 2018 annual meeting of stockholders is incorporated herein by reference to such proxy statement. K - 0 1 M R O F TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 59 ITEM 15. Exhibits, Financial Statement Schedules. PART IV The financial statements are listed in the index included in Item 8, “Financial Statements and Supplementary Data.” Designation of Exhibit Description of Exhibit Restated Certificate of Incorporation of the Registrant, dated April 18, 1985, as amended By-Laws of the Registrant Indenture Officer’s Certificate Officer’s Certificate Officer’s Certificate Officer’s Certificate Officer’s Certificate Officer’s Certificate Officer’s Certificate Incorporated by Reference Form File Number Date of Filing Exhibit Number Filed or Furnished Herewith 10-K 001-3761 February 24, 2015 3(a) 8-K 8-K 8-K 8-K 8-K 8-K 8-K 8-K 8-K 001-3761 December 12, 2016 001-3761 May 23, 2011 001-3761 May 23, 2011 001-3761 May 8, 2013 001-3761 March 12, 2014 001-3761 001-3761 001-3761 May 6, 2015 May 6, 2016 May 4, 2017 001-3761 November 3, 2017 3 4.2 4.3 4.2 4.2 4.1 4.1 4.1 4.1 The Registrant has omitted certain instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). The Registrant undertakes to furnish a copy of such instruments to the Securities and Exchange Commission upon request. TI Deferred Compensation Plan, as amended * TI Employees Non-Qualified Pension Plan, effective January 1, 2009, as amended * TI Employees Non-Qualified Pension Plan II * Texas Instruments Long-Term Incentive Plan, adopted April 15, 1993 * Texas Instruments 2000 Long-Term Incentive Plan as amended October 16, 2008 * Texas Instruments 2003 Long-Term Incentive Plan as amended October 16, 2008 Texas Instruments Executive Officer Performance Plan as amended September 17, 2009 * Texas Instruments Restricted Stock Unit Plan for Directors, as amended, dated April 16, 1998 Texas Instruments Directors Deferred Compensation Plan, as amended, dated April 16, 1998 Texas Instruments 2003 Director Compensation Plan as amended January 19, 2012 Form of Non-Qualified Stock Option Agreement for Executive Officers under the Texas Instruments 2009 Long-Term Incentive Plan * 10-K 10-K 10-K 10-K 001-3761 February 24, 2016 001-3761 February 24, 2016 001-3761 February 24, 2016 001-3761 February 24, 2012 10(a) 10(b) 10(c) 10(c) 10-K 001-3761 February 24, 2015 10(e) 10-K 001-3761 February 24, 2015 10(f) 10-K 001-3761 February 24, 2015 10(g) 10-K 001-3761 February 24, 2012 10(h) 10-K 001-3761 February 24, 2012 10(i) 10-K 001-3761 February 24, 2015 10(j) 10-K 001-3761 February 23, 2017 10(k) F O R M 1 0 - K 3(a) 3(b) 4(a) 4(b) 4(c) 4(d) 4(e) 4(f) 4(g) 4(h) 4(i) 10(a) 10(b) 10(c) 10(d) 10(e) 10(f) 10(g) 10(h) 10(i) 10(j) 10(k) 60 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Designation of Exhibit 10(l) Description of Exhibit Form of Restricted Stock Unit Award Agreement for Executive Officers under the Texas Instruments 2009 Long-Term Incentive Plan * Incorporated by Reference Form File Number Date of Filing 10-K 001-3761 February 23, 2017 Exhibit Number 10(l) Filed or Furnished Herewith 10(m) 10(n) 12 21 23 31(a) 31(b) 32(a) 32(b) Texas Instruments 2009 Long-Term Incentive Plan as amended April 21, 2016 * DEF 14A 001-3761 March 9, 2016 Appendix B 10-K 001-3761 February 23, 2017 10(n) Texas Instruments 2009 Director Compensation Plan as amended January 19, 2012 Ratio of Earnings to Fixed Charges List of Subsidiaries of the Registrant Consent of Independent Registered Public Accounting Firm Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer Section 1350 Certification of Chief Executive Officer Section 1350 Certification of Chief Financial Officer 101.ins Instance Document 101.sch XBRL Taxonomy Schema 101.cal XBRL Taxonomy Calculation Linkbase 101.Def XBRL Taxonomy Definitions Document 101.lab XBRL Taxonomy Labels Linkbase 101.pre XBRL Taxonomy Presentation Linkbase * Management compensation plans and arrangements K - 0 1 M R O F X X X X X X X X X X X X X TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 61 F O R M 1 0 - K Notice regarding forward-looking statements This report includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as TI or its management “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of similar import. Similarly, statements herein that describe TI’s business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in forward-looking statements. We urge you to carefully consider the following important factors that could cause actual results to differ materially from the expectations of TI or our management: • Market demand for semiconductors, particularly in our end markets; • Our ability to compete in products and prices in an intensely competitive industry; • Customer demand that differs from forecasts and the financial impact of inadequate or excess company inventory that results from demand that differs from projections; • Economic, social and political conditions in the countries in which we, our customers or our suppliers operate, including security risks; global trade policies; political and social instability; health conditions; possible disruptions in transportation, communications and information technology networks; and fluctuations in foreign currency exchange rates; • Evolving cybersecurity threats to our information technology systems or those of our customers or suppliers; • Natural events such as severe weather, geological events or health epidemics in the locations in which we, our customers or our suppliers operate; • Our ability to develop, manufacture and market innovative products in a rapidly changing technological environment; • Timely implementation of new manufacturing technologies and installation of manufacturing equipment, and the ability to obtain needed third-party foundry and assembly/test subcontract services; • Availability and cost of raw materials, utilities, manufacturing equipment, third-party manufacturing services and manufacturing technology; • Compliance with or changes in the complex laws, rules and regulations to which we are or may become subject, or actions of enforcement authorities, that restrict our ability to manufacture or ship our products or operate our business, or subject us to fines, penalties or other legal liability; • Product liability or warranty claims, claims based on epidemic or delivery failure, or other claims relating to our products, manufacturing, services, design or communications, or recalls by our customers for a product containing one of our parts; • Changes in tax law and accounting standards that can impact the tax rate applicable to us, the jurisdictions in which profits are determined to be earned and taxed, adverse resolution of tax audits, increases in tariff rates, and the ability to realize deferred tax assets; • A loss suffered by one of our customers or distributors with respect to TI-consigned inventory; • Financial difficulties of our distributors or their promotion of competing product lines to our detriment, or the loss of a significant number of distributors; • Losses or curtailments of purchases from key customers or the timing and amount of distributor and other customer inventory adjustments; • Our ability to maintain or improve profit margins, including our ability to utilize our manufacturing facilities at sufficient levels to cover our fixed operating costs, in an intensely competitive and cyclical industry and despite changes in the regulatory environment; • Our ability to maintain and enforce a strong intellectual property portfolio and maintain freedom of operation in all jurisdictions where we conduct business; or our exposure to infringement claims; • Instability in the global credit and financial markets that affects our ability to fund our daily operations, invest in the business, make strategic acquisitions, or make principal and interest payments on our debt; • Increases in health care and pension benefit costs; • Our ability to recruit and retain skilled engineering, management and technical personnel; • Our ability to successfully integrate and realize opportunities for growth from acquisitions, or our ability to realize our expectations regarding the amount and timing of restructuring charges and associated cost savings; and • Impairments of our non-financial assets. For a more detailed discussion of these factors see the Risk Factors discussion in Item 1A of this report. The forward-looking statements included in this report are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances. 62 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES TEXAS INSTRUMENTS INCORPORATED By: /s/ Rafael R. Lizardi Rafael R. Lizardi Senior Vice President, Chief Financial Officer and Chief Accounting Officer Date: February 22, 2018 Each person whose signature appears below constitutes and appoints each of Richard K. Templeton, Rafael R. Lizardi, and Cynthia Hoff Trochu, or any of them, each acting alone, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in his or her name, place and stead, in any and all capacities in connection with the annual report on Form 10-K of Texas Instruments Incorporated for the year ended December 31, 2017, to sign any and all amendments to the Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of the 22nd day of February 2018. K - 0 1 M R O F Signature /s/ Ralph W. Babb, Jr. Ralph W. Babb, Jr. /s/ Mark A. Blinn Mark A. Blinn /s/ Todd M. Bluedorn Todd M. Bluedorn /s/ Daniel A. Carp Daniel A. Carp /s/ Janet F. Clark Janet F. Clark /s/ Carrie S. Cox Carrie S. Cox /s/ Brian T. Crutcher Brian T. Crutcher /s/ Jean M. Hobby Jean M. Hobby /s/ Ronald Kirk Ronald Kirk Title Director Director Director Director Director Director Director, Executive Vice President and Chief Operating Officer Director Director TE X AS I NSTRU ME NTS • 2017 F ORM 10 -K 63 Signature /s/ Pamela H. Patsley Pamela H. Patsley /s/ Robert E. Sanchez Robert E. Sanchez /s/ Wayne R. Sanders Wayne R. Sanders /s/ Richard K. Templeton Richard K. Templeton /s/ Rafael R. Lizardi Rafael R. Lizardi Title Director Director Director Director, Chairman of the Board, President and Chief Executive Officer Senior Vice President, Chief Financial Officer and Chief Accounting Officer F O R M 1 0 - K 64 T E X AS I N S T RU M E N TS • 201 7 FOR M 10- K NOTICE OF ANNUAL MEETING OF STOCKHOLDERS April 26, 2018 Dear Stockholder: You are cordially invited to attend the 2018 annual meeting of stockholders on Thursday, April 26, 2018, in the auditorium on our property at 12500 TI Boulevard, Dallas, Texas, at 8:30 a.m. (Central time). See “Attendance requirements” for important information about attending the annual meeting. At the meeting we will consider and act upon the following matters: • the election of directors for the next year, • advisory approval of the company’s executive compensation, • approval of the Texas Instruments 2018 Director Compensation Plan, • ratification of the appointment of Ernst & Young LLP as the company’s independent registered public accounting firm for 2018, and • such other matters as may properly come before the meeting. Stockholders of record at the close of business on February 26, 2018, are entitled to vote at the annual meeting. We urge you to vote your shares as promptly as possible by: (1) accessing the internet website, (2) calling the toll-free number or (3) signing, dating and mailing the enclosed proxy. Sincerely, Cynthia Hoff Trochu Senior Vice President, Secretary and General Counsel Dallas, Texas March 13, 2018 T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 1 TABLE OF CONTENTS Voting procedures, quorum and attendance requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Election of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . Nominees for directorship . . . . . . . . . . . . . . . . . . . . Director nomination process . . . . . . . . . . . . . . . . . . . Director candidate recommendations . . . . . . . . . . . . Stockholder nomination of directors . . . . . . . . . . . . . Director nominees . . . . . . . . . . . . . . . . . . . . . . . . . . Diversity and qualifications . . . . . . . . . . . . . . . . . . . . Communications with the board . . . . . . . . . . . . . . . . Corporate governance . . . . . . . . . . . . . . . . . . . . . . . Annual meeting attendance . . . . . . . . . . . . . . . . . . . Director independence . . . . . . . . . . . . . . . . . . . . . . . Board organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board and committee meetings . . . . . . . . . . . . . . . . Committees of the board . . . . . . . . . . . . . . . . . . . . . Board leadership structure . . . . . . . . . . . . . . . . . . . . Risk oversight by the board . . . . . . . . . . . . . . . . . . . Director compensation . . . . . . . . . . . . . . . . . . . . . . . . . Executive compensation . . . . . . . . . . . . . . . . . . . . . . . . Proposal regarding advisory approval of the company’s executive compensation . . . . . . . . . . . Compensation Discussion and Analysis . . . . . . . . . . Executive summary . . . . . . . . . . . . . . . . . . . . . . . Detailed discussion . . . . . . . . . . . . . . . . . . . . . . . Compensation philosophy and elements . . . . . . Comparator group . . . . . . . . . . . . . . . . . . . . . . Analysis of compensation determinations . . . . . Equity dilution . . . . . . . . . . . . . . . . . . . . . . . . . Process for equity grants . . . . . . . . . . . . . . . . . Recoupment policy . . . . . . . . . . . . . . . . . . . . . Most recent stockholder advisory vote on executive compensation . . . . . . . . . . . . . . . Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation following employment termination or change in control . . . . . . . . . . Stock ownership guidelines and policy against hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consideration of tax and accounting treatment of compensation . . . . . . . . . . . . . . . . . . . . . 3 5 5 6 6 7 7 7 10 10 10 10 11 11 11 14 14 15 17 17 18 18 19 19 20 21 27 27 27 28 28 29 29 29 Compensation Committee report . . . . . . . . . . . . . . . Summary compensation table . . . . . . . . . . . . . . . . . Grants of plan-based awards . . . . . . . . . . . . . . . . . . Outstanding equity awards at fiscal year-end . . . . . . Option exercises and stock vested . . . . . . . . . . . . . . Pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-qualified deferred compensation . . . . . . . . . . . . Potential payments upon termination or change in control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit Committee report Proposal to ratify appointment of independent registered public accounting firm . . . . . . . . . . . . . . . Proposal to approve the Texas Instruments 2018 Director Compensation Plan . . . . . . . . . . . . . . . . . . . Equity compensation plan information . . . . . . . . . . . . . Additional information . . . . . . . . . . . . . . . . . . . . . . . . . Voting securities . . . . . . . . . . . . . . . . . . . . . . . . . . . Security ownership of certain beneficial owners . . . . Security ownership of directors and management . . . Related person transactions . . . . . . . . . . . . . . . . . . . Compensation committee interlocks and insider participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholder proposals and nominations for 2019 . . . Benefit plan voting . . . . . . . . . . . . . . . . . . . . . . . . . . Section 16(a) beneficial ownership reporting compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Telephone and internet voting . . . . . . . . . . . . . . . . . Stockholders sharing the same address . . . . . . . . . . Electronic delivery of proxy materials and copies of 30 30 32 33 35 35 38 39 43 43 43 45 47 48 48 48 48 50 52 52 52 52 53 53 53 our Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . Notice regarding forward-looking statements . . . . . . . . Directions and other annual meeting information . . . . . Appendix A (Non-GAAP reconciliations) . . . . . . . . . . . . . Appendix B (Texas Instruments 2018 Director 53 54 55 A-1 Compensation Plan) . . . . . . . . . . . . . . . . . . . . . . . . . B-1 P R O X Y S T A T E M E N T 2 TE X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T PROXY STATEMENT – MARCH 13, 2018 EXECUTIVE OFFICES 12500 TI BOULEVARD, DALLAS, TX 75243 MAILING ADDRESS: P.O. BOX 660199, DALLAS, TX 75266-0199 Voting procedures, quorum and attendance requirements TI’s board of directors requests your proxy for the annual meeting of stockholders on April 26, 2018. If you sign and return the enclosed proxy, or vote by telephone or on the internet, you authorize the persons named in the proxy to represent you and vote your shares for the purposes mentioned in the notice of annual meeting. This proxy statement and related proxy are being distributed on or about March 13, 2018. If you come to the meeting, you can vote in person. If you do not come to the meeting, your shares can be voted only if you have returned a properly signed proxy or followed the telephone or internet voting instructions, which can be found on the enclosed proxy. If you sign and return your proxy but do not give voting instructions, the shares represented by that proxy will be voted as recommended by the board of directors. You can revoke your authorization at any time before the shares are voted at the meeting. A quorum of stockholders is necessary to hold a valid meeting. If at least a majority of the shares of TI common stock issued and outstanding and entitled to vote are present in person or by proxy, a quorum will exist. Abstentions and broker non-votes are counted as present for purposes of establishing a quorum. Broker non-votes occur when a beneficial owner who holds company stock through a broker does not provide the broker with voting instructions as to any matter on which the broker is not permitted to exercise its discretion and vote without specific instruction. Shown below is a list of the matters to be considered at the meeting (each of which is discussed elsewhere in this proxy statement), and the vote required for election or approval, as the case may be. Matter Election of directors. Required Vote for Election or Approval Impact of Abstentions or Broker Non-Votes Majority of votes present in person or by proxy at the meeting and entitled to be cast in the election with respect to a nominee must be cast for that nominee. Abstentions have the same effect as votes against. Broker non-votes are not counted as votes for or against. Advisory vote to approve named executive officer compensation. Majority of votes present in person or by proxy at the meeting must be cast for the proposal. Abstentions and broker non-votes have the same effect as votes against. Proposal to approve the Texas Instruments 2018 Director Compensation Plan. Majority of votes present in person or by proxy at the meeting must be cast for the proposal. Abstentions and broker non-votes have the same effect as votes against. Proposal to ratify appointment of independent registered public accounting firm. Majority of votes present in person or by proxy at the meeting must be cast for the proposal. Abstentions have the same effect as votes against. (Brokers are permitted to exercise their discretion and vote without specific instruction on this matter. Accordingly, there are no broker non-votes.) Any other matter that may properly be submitted at the meeting. Majority of votes present in person or by proxy at the meeting must be cast for the proposal. Abstentions and broker non-votes have the same effect as votes against. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 3 Attendance requirements Attendance at the meeting is limited to stockholders or their legal proxy holders. Each attendee must present a government-issued photo ID and an advance registration form. If you plan to attend the annual meeting in person, you must print your own advance registration form and bring it to the meeting to gain access. • Advance registration forms can be printed by clicking on the “Register for Meeting” button found at www.proxyvote.com and following the instructions provided. You will need the 16-digit control number included on your notice, proxy card or voting instruction form. You must request your advance registration form by 11:59 p.m. April 25, 2018. • If you are unable to print your advance registration form, please call Stockholder Meeting Registration Phone Support (toll free) at 1-844-318-0137 or (international toll call) at 1-925-331-6070 for assistance. • On the day of the meeting, you will be required to present valid government-issued photo ID, such as a driver’s license or passport, with your advance registration form. You may be denied entrance if the required identification and form are not presented. Guest advance registration forms are not available. Exceptions may be granted to stockholders who require a companion in order to facilitate their own attendance (for example, due to a physical disability) by contacting Investor Relations. Additionally, if you plan to attend as proxy for a stockholder of record, you must present a valid legal proxy from the stockholder of record to you. If you plan to attend as proxy for a street name stockholder, you must present a valid legal proxy from the stockholder of record (i.e., the bank, broker or other holder of record) to the street name stockholder that is assignable and a valid legal proxy from the street name stockholder to you. Stockholders may appoint only one proxy holder to attend on their behalf. P R O X Y S T A T E M E N T 4 TE X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T Election of directors Directors are elected at the annual meeting to hold office until the next annual meeting and until their successors are elected and qualified. The board of directors has designated the following persons as nominees: RALPH W. BABB, JR., MARK A. BLINN, TODD M. BLUEDORN, DANIEL A. CARP, JANET F. CLARK, CARRIE S. COX, BRIAN T. CRUTCHER, JEAN M. HOBBY, RONALD KIRK, PAMELA H. PATSLEY, ROBERT E. SANCHEZ and RICHARD K. TEMPLETON. If you return a proxy that is not otherwise marked, your shares will be voted FOR each of the nominees. Nominees for directorship All of the nominees for directorship are directors of the company. For a discussion of each nominee’s qualifications to serve as a director of the company, see “Board diversity and nominee qualifications.” If any nominee becomes unable to serve before the meeting, the persons named as proxies may vote for a substitute or the number of directors will be reduced accordingly. Directors RALPH W. BABB, JR. Age 69 Director since 2010 Member, Governance and Stockholder Relations Committee MARK A. BLINN Age 56 Director since 2013 Chair, Audit Committee TODD M. BLUEDORN Age 54 Director since 2017 Member, Audit Committee JANET F. CLARK Age 63 Director since 2015 Member, Audit Committee CARRIE S. COX Age 60 Director since 2004 Member, Governance and Stockholder Relations Committee BRIAN T. CRUTCHER Age 45 Director since 2017 RONALD KIRK Age 63 Director since 2013 Member, Governance and Stockholder Relations Committee PAMELA H. PATSLEY Age 61 Director since 2004 Member, Compensation Committee ROBERT E. SANCHEZ Age 52 Director since 2011 Chair, Compensation Committee DANIEL A. CARP Age 69 Director since 1997 Member, Compensation Committee JEAN M. HOBBY Age 57 Director since 2016 Member, Audit Committee RICHARD K. TEMPLETON Age 59 Chairman since 2008 and director since 2003 T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 5 Director not standing for re-election WAYNE R. SANDERS Age 70 Lead Director; Chair, Governance and Stockholder Relations Committee Mr. Sanders, a highly valued director since 1997, has attained the age of 70 and is therefore ineligible under the company’s by-laws to stand for re-election at the 2018 annual meeting. Subject to their re-election by stockholders, Mr. Blinn and Mr. Kirk have been duly elected as new lead director and new GSR chair, respectively, to take effect immediately following the 2018 annual meeting of stockholders. Director nomination process The board is responsible for approving nominees for election as directors. To assist in this task, the board has designated a standing committee, the Governance and Stockholder Relations Committee (the GSR Committee), which is responsible for reviewing and recommending nominees to the board. The GSR Committee is comprised solely of independent directors as defined by the rules of the NASDAQ Stock Market (NASDAQ) and the board’s corporate governance guidelines. Our board of directors has adopted a written charter for the GSR Committee. It can be found on our website at www.ti.com/corporategovernance. Director candidate recommendations It is a long-standing policy of the board to consider prospective board nominees recommended by stockholders. A stockholder who wishes to recommend a prospective board nominee for the GSR Committee’s consideration can write to the Secretary of the GSR Committee, Texas Instruments Incorporated, P.O. Box 655936, MS 8658, Dallas, TX 75265-5936. The GSR Committee will evaluate the stockholder’s prospective board nominee in the same manner as it evaluates other nominees. Criteria In evaluating prospective nominees, the GSR Committee looks for the following minimum qualifications, qualities and skills: • Outstanding achievement in the individual’s personal career. • Relevant commercial expertise. • International operations experience. • Financial acumen. • Government experience. • Soundness of judgment. • Ability to make independent, analytical inquiries. • Ability to represent the total corporate interests of TI (a director will not be selected to, nor will he or she be expected to, represent the interests of any particular group). • Board diversity (viewpoints, gender, ethnicity). • Willingness and ability to devote the time required to perform board activities adequately. Directors should not serve on the boards of more than three other public companies. Outside board memberships In evaluating prospective nominees, the GSR Committee will consider the number of other boards on which the individual serves as director, and in particular the board’s policy that directors should not serve on the boards of more than three other public companies. The board is sensitive to the fact that a director’s service in an executive role at another company can be time consuming. In this regard, the board reviewed Mr. Bluedorn’s outside directorships at Lennox International, Inc. and Eaton Corporation, plc, and determined that they enhance the breadth and depth of experience on the board. Because of these directorships, Mr. Bluedorn brings to the company a unique combination of specialized knowledge and experience in the industrial market, an area in which the company has publicly disclosed its intent to focus R&D investments. He also brings a familiarity with the challenges posed by 6 TE X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T complex international manufacturers. Additionally, Mr. Bluedorn has held senior management positions at United Technologies, such as leading its Otis Elevator and Carrier (HVAC) business, that provide the board with important perspective on the industrial market. There is a strong consensus among the directors that Mr. Bluedorn is willing and able to devote the time required to perform board activities, and that his service with Lennox and Eaton will not interfere with his duties to the company and its shareholders. Mr. Bluedorn has served on the boards of Lennox and Eaton since 2007 and 2010, respectively, so his familiarity with his roles and responsibilities at those organizations enables him to devote the balance of his time to his service on the board. Also, two of Mr. Bluedorn’s directorships (Lennox and TI) are located within ten miles of each other in the Dallas, Texas area, and Mr. Bluedorn’s exemplary attendance record at both Lennox and Eaton, as well as at the company, indicate his commitment to devoting sufficient time to board duties. Stockholder nomination of directors Under the company’s by-laws, a stockholder, or a group of up to 20 stockholders, owning at least 3 percent of the company’s outstanding common stock continuously for at least three years, may nominate and include in the company’s proxy materials director nominees constituting up to the greater of two individuals or 20 percent of the board of directors, provided that the stockholder(s) and the nominee(s) satisfy the requirements specified in the by-laws. The company’s by-laws also allow stockholders to nominate directors without involving the GSR Committee or including the nominee in the company’s proxy materials. To do so, stockholders must comply with the requirements set forth in the by-laws, which can be found on our website at www.ti.com/corporategovernance. Director nominees All nominees for directorship are currently directors of the company, including Mr. Crutcher, who was elected to the board effective July 19, 2017. He is the only director nominee at the 2018 annual meeting of stockholders who is standing for election by the stockholders for the first time. The board believes its current size is within the desired range as stated in the board’s corporate governance guidelines. Diversity and qualifications As indicated by the criteria above, the board prefers a mix of background and experience among its members. The board does not follow any ratio or formula to determine the appropriate mix. Rather, it uses its judgment to identify nominees whose backgrounds, attributes and experiences, taken as a whole, will contribute to the high standards of board service at the company. Maintaining a balance of tenure among the directors is part of the board’s consideration. Longer-serving directors bring valuable experience with the company and familiarity with the strategic and operational challenges it has faced over the years, while newer directors bring fresh perspectives and ideas. To help maintain this balance, the company has a mandatory retirement policy, pursuant to which directors cannot stand for election after reaching age 70. The effectiveness of the board’s approach to board composition decisions is evidenced by the directors’ participation in the insightful and robust, yet respectful, deliberation that occurs at board and committee meetings, and in shaping the agendas for those meetings. Nominee assessment As it considered director nominees for the 2018 annual meeting, the board kept in mind that the most important issues it considers typically relate to the company’s strategic direction; succession planning for senior executive positions; the company’s financial performance; the challenges of running a large, complex enterprise, including the management of its risks; major acquisitions and divestitures; and significant research and development (R&D) and capital investment decisions. These issues arise in the context of the company’s operations, which primarily involve the manufacture and sale of semiconductors all over the world into industrial, automotive, personal electronics, communications equipment and enterprise systems markets. As described below, each of our director nominees has achieved an extremely high level of success in his or her career, whether at multi-billion dollar, multinational corporate enterprises or significant governmental organizations. In these positions, each has been directly involved in the challenges relating to setting the strategic direction and managing the financial performance, personnel and processes of large, complex organizations. Each has had exposure to effective leaders and has developed the ability to judge leadership qualities. Ten of the director nominees have experience in serving on the board of directors of at least one other major corporation, and one has served in high political office, all of which provides additional relevant experience on which each nominee can draw. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 7 T N E M E T A T S Y X O R P In concluding that each nominee should serve as a director, the board relied on the specific experiences and attributes listed below and on the direct personal knowledge, born of previous service on the board, that each of the nominees brings insight to board deliberations as well as a willingness to ask challenging questions. Mr. Babb • As chairman and CEO of Comerica Incorporated and Comerica Bank (2002-present) and through a long career in banking, has gained first-hand experience in managing large, complex institutions, as well as insight into financial markets. • As Audit Committee chair at the company (2013-April 20, 2017), chief financial officer of Comerica Incorporated and Comerica Bank (1995-2002), controller and later chief financial officer of Mercantile Bancorporation (1978-1995), and auditor and later audit manager at the accounting firm of Peat Marwick Mitchell & Co. (1971-1978), has gained extensive audit knowledge and experience in audit- and financial control-related matters. Mr. Blinn • As CEO and a director of Flowserve Corporation (2009-2017), has gained first-hand experience in managing a large, multinational corporation operating in global industrial markets, with ultimate management responsibility for the organization’s financial performance and significant capital and R&D investments. • As Audit Committee chair at the company (April 21, 2017-present), chief financial officer of Flowserve Corporation (2004- 2009), chief financial officer of FedEx Kinko’s Office and Print Services Inc. (2003-2004) and vice president and controller of Centex Corporation (2000-2002), has developed a keen appreciation for audit- and financial control-related matters. Is also a director of Kraton Corporation (2017-present). Mr. Bluedorn • As chairman (2012-present) and CEO and a director (2007-present) of Lennox International Inc., has gained first-hand experience in managing a large, multinational corporation operating in global industrial markets, with ultimate management responsibility for the corporation’s financial performance and its significant investments in capital and R&D. Is also a director of Eaton Corporation plc (2010-present). Mr. Carp • As chairman and CEO (2000-2005) and president (1997-2001, 2002-2003) of Eastman Kodak Company, has gained first- hand experience in managing a large, multinational corporation focused on worldwide electronics markets, with ultimate management responsibility for the corporation’s financial performance and its significant investments in capital and R&D. • As a director of Delta Air Lines, Inc. (2007-present), a director of Norfolk Southern Corporation (2006-present) and a director of Liz Claiborne, Inc. (2006-2009), has helped oversee the strategy and operations of major multinational corporations in various industries, including some that are capital-intensive. Ms. Clark • As executive vice president (2007-2013) and chief financial officer (2004-2013) of Marathon Oil Corporation, has developed a keen appreciation for audit- and financial control-related matters. • As a director of Goldman Sachs Private Middle Market Credit LLC (2016-present), Goldman Sachs BDC, Inc. (2015-present) and EOG Resources, Inc. (2014-present) and as a former director of Exterran Holdings, Inc. (and its predecessor company, Universal Compression Holdings, Inc.) (2003-2011) and Dell Inc. (2011-2013), has helped oversee the strategy and operations of other large, multinational corporations, including one with a focus on technology. Ms. Cox • As chairman (2013-present), CEO and a director (2010-present) of Humacyte, Inc., executive vice president and president of Global Pharmaceuticals at Schering-Plough Corporation (2003-2009) and executive vice president and president of Global Prescription Business at Pharmacia Corporation (1997-2003), has gained first-hand experience in managing large, multinational organizations focused on medical-related markets, with responsibility for those organizations’ financial performance and significant capital and R&D investments. Is also a director of Cardinal Health, Inc. (2009-present) and Celgene Corporation (2009-present). 8 TE X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T Mr. Crutcher • As a TI employee for over 20 years, serving the last seven years at a senior level at the company, including senior vice president (2010-2014), executive vice president (2014-present), chief operating officer (January 19, 2017-present) and director (July 19, 2017-present), has experience leading large, complex semiconductor operations and keen insight into the current and future state of the semiconductor industry. Ms. Hobby • As global strategy officer (2013-2015), technology, media and telecom sector leader (2008-2013) and chief financial officer (2005-2008) at PricewaterhouseCoopers LLP, has gained extensive audit knowledge and experience in audit- and financial control-related matters and technology. • As a director of Integer Holdings Corporation (and its predecessor company, Greatbatch, Inc.) (2015-present), and CA, Inc. (February 1, 2018-present), has helped oversee the strategy and operations of other multinational corporations. Mr. Kirk • As U.S. Trade Representative (2009-2013), has gained first-hand experience in managing a complex organization that operates on an international scale and developed insight into issues bearing on global economic activity, international trade policies and strategies and the workings of foreign governments. • As Senior Of Counsel of Gibson, Dunn & Crutcher LLP (2013-present), and as a partner of Vinson & Elkins, LLP (2005- 2009), has gained first-hand experience as an advisor to numerous multinational companies. • As a director of Brinker International, Inc. (1997-2009), Dean Foods Company (1997-2009), and Macquarie Infrastructure Corporation (2016-present), has helped oversee the strategy and operations of other large corporations. Ms. Patsley • As executive chairman (2016-February 2, 2018) and chairman and CEO (2009-2015) of MoneyGram International, Inc., senior executive vice president of First Data Corporation (2000-2007) and president and CEO of Paymentech, Inc. (1991- 2000), has gained first-hand experience in managing large, multinational organizations, including the application of technology in the financial services sector, with ultimate management responsibility for financial performance and significant capital investments. • As Audit Committee chair at the company (2006-2013), a member of the audit committee at Dr Pepper Snapple Group, Inc., chief financial officer of First USA, Inc. (1987-1994) and an auditor at KPMG Peat Marwick for almost six years before joining First USA, has developed a keen appreciation for audit- and financial control-related matters. • As a director of Dr Pepper Snapple Group, Inc. (2008-present), Hilton Grand Vacations, Inc. (January 2017-present) and a director of Molson Coors Brewing Company (2005-2009), has helped oversee the strategy and operations of other major multinational corporations. Mr. Sanchez • As chairman and CEO (2013-present), president (2012-2014) and chief operating officer (2012) of Ryder System, Inc. and as president of its Global Fleet Management Solutions business segment (2010-2012), has gained first-hand experience in managing a large, multinational, transportation-related organization, with responsibility for the organization’s financial performance and significant capital investments. • As executive vice president and chief financial officer (2007-2010) and as senior vice president and chief information officer (2003-2005) of Ryder System, Inc., has developed a keen appreciation for audit- and financial control-related issues and gained first-hand experience with all technology-related functions of a large, multinational corporation focused on transportation and logistics. T N E M E T A T S Y X O R P Mr. Templeton • As a 37-year veteran of the semiconductor industry, serving the last 22 years at a senior level at the company, including as chairman since 2008, CEO since 2004 and director since 2003, has developed a deep knowledge of all aspects of the company and of the semiconductor industry. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 9 Communications with the board Stockholders and others who wish to communicate with the board, a board committee or an individual director may write to them at: P.O. Box 655936, MS 8658, Dallas, TX 75265-5936. All communications sent to this address will be shared with the board, committee or individual director as applicable. Corporate governance The board has a long-standing commitment to responsible and effective corporate governance. We annually conduct extensive governance reviews and engage in investor outreach specific to governance and executive compensation matters. The board’s corporate governance guidelines (which include the director independence standards), the charters of each of the board’s committees, TI’s code of conduct, our code of ethics for our CEO and senior financial officers and our by-laws are available on our website at www.ti.com/corporategovernance. Stockholders may request copies of these documents free of charge by writing to Texas Instruments Incorporated, P.O. Box 660199, MS 8657, Dallas, TX 75266-0199, Attn: Investor Relations. Annual meeting attendance It is a policy of the board to encourage directors to attend each annual meeting of stockholders. Such attendance allows for direct interaction between stockholders and board members. In 2017, all directors then in office and standing for re-election attended TI’s annual meeting of stockholders. Director independence The board has determined that each of our directors is independent except for Mr. Templeton and Mr. Crutcher. In connection with this determination, information was reviewed regarding directors’ business and charitable affiliations, directors’ immediate family members and their employers, and any transactions or arrangements between the company and such persons or entities. The board has adopted the following standards for determining independence. A. In no event will a director be considered independent if: 1. 2. He or she is a current partner of or is employed by the company’s independent auditors; A family member of the director is (a) a current partner of the company’s independent auditors or (b) currently employed by the company’s independent auditors and personally works on the company’s audit; 3. Within the current or preceding three fiscal years he or she was, and remains at the time of the determination, a partner in or a controlling shareholder, an executive officer or an employee of an organization that in the current year or any of the past three fiscal years (a) made payments to, or received payments from, the company for property or services, (b) extended loans to or received loans from, the company, or (c) received charitable contributions from the company, in an amount or amounts which, in the aggregate in such fiscal year, exceeded the greater of $200,000 or 2 percent of the recipient’s consolidated gross revenues for that year (for purposes of this standard, “payments” excludes payments arising solely from investments in the company’s securities and payments under non-discretionary charitable contribution matching programs); or 4. Within the current or preceding three fiscal years a family member of the director was, and remains at the time of the determination, a partner in or a controlling shareholder or an executive officer of an organization that in the current year or any of the past three fiscal years (a) made payments to, or received payments from, the company for property or services, (b) extended loans to or received loans from the company, or (c) received charitable contributions from the company, in an amount or amounts which, in the aggregate in such fiscal year, exceeded the greater of $200,000 or 2 percent of the recipient’s consolidated gross revenues for that year (for purposes of this standard, “payments” excludes payments arising solely from investments in the company’s securities and payments under non-discretionary charitable contribution matching programs). P R O X Y S T A T E M E N T B. 10 In no event will a director be considered independent if, within the preceding three years: 1. He or she was employed by the company (except in the capacity of interim chairman of the board, chief executive officer or other executive officer, provided the interim employment did not last longer than one year); He or she received more than $120,000 during any twelve-month period in compensation from the company (other than (a) compensation for board or board committee service, (b) compensation received for former service lasting no longer than one year as an interim chairman of the board, chief executive officer or other executive officer and (c) benefits under a tax-qualified retirement plan, or non-discretionary compensation); A family member of the director was employed as an executive officer by the company; 2. 3. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 4. 5. 6. 7. 8. A family member of the director received more than $120,000 during any twelve-month period in compensation from the company (excluding compensation as a non-executive officer employee of the company); He or she was (but is no longer) a partner or employee of the company’s independent auditors and worked on the company’s audit within that time; A family member of the director was (but is no longer) a partner or employee of the company’s independent auditors and worked on the company’s audit within that time; He or she was an executive officer of another entity at which any of the company’s current executive officers at any time during the past three years served on that entity’s compensation committee; or A family member of the director was an executive officer of another entity at which any of the company’s current executive officers at any time during the past three years served on that entity’s compensation committee. C. No member of the Audit Committee may accept directly or indirectly any consulting, advisory or other compensatory fee from the company, other than in his or her capacity as a member of the board or any board committee. Compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the company (provided that such compensation is not contingent in any way on continued service). In addition, no member of the Audit Committee may be an affiliated person of the company except in his or her capacity as a director. D. With respect to service on the Compensation Committee, the board will consider all factors that it deems relevant to determining whether a director has a relationship to the company that is material to that director’s ability to be independent from management in connection with the duties of a Compensation Committee member, including but not limited to: The source of compensation of the director, including any consulting, advisory or compensatory fee paid by the 1. company to the director; and 2. Whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company. E. For any other relationship, the determination of whether it would interfere with the director’s exercise of independent judgment in carrying out his or her responsibilities, and consequently whether the director involved is independent, will be made by directors who satisfy the independence criteria set forth in this section. For purposes of these independence determinations, “company” and “family member” will have the same meaning as under NASDAQ rules. Board organization Board and committee meetings During 2017, the board held nine meetings. The board has three standing committees described below. The committees of the board collectively held 18 meetings in 2017. Each director attended at least 86 percent of the board and relevant committee meetings combined. Overall attendance at board and committee meetings was approximately 96 percent. Committees of the board Audit Committee The Audit Committee is a separately designated standing committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. All members of the Audit Committee are independent under NASDAQ rules and the board’s corporate governance guidelines. From July 20, 2016, to April 20, 2017, the committee members were Mr. Babb (chair), Mr. Blinn, Ms. Clark and Ms. Hobby, with Mr. Bluedorn joining the committee March 1, 2017. Since April 21, 2017, the committee members have been Mr. Blinn (chair), Mr. Bluedorn, Ms. Clark and Ms. Hobby. The Audit Committee is generally responsible for: • Appointing, compensating, retaining and overseeing TI’s independent registered public accounting firm. • Reviewing the annual report of TI’s independent registered public accounting firm related to quality control. • Reviewing TI’s annual and quarterly reports to the SEC, including the financial statements and the “Management’s Discussion and Analysis” portion of those reports, and recommending appropriate action to the board. • Reviewing TI’s audit plans. • Reviewing before issuance TI’s news releases regarding annual and interim financial results and discussing with management any related earnings guidance that may be provided to analysts and rating agencies. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 11 T N E M E T A T S Y X O R P • Discussing TI’s audited financial statements with management and the independent registered public accounting firm, including a discussion with the firm regarding the matters required to be reviewed under applicable legal or regulatory requirements. • Reviewing relationships between the independent registered public accounting firm and TI. • Reviewing and discussing the adequacy of TI’s internal accounting controls and other factors affecting the integrity of TI’s financial reports with management and with the independent registered public accounting firm. • Creating and periodically reviewing TI’s whistleblower policy. • Reviewing TI’s risk assessment and risk management policies. • Reviewing TI’s compliance and ethics program. • Reviewing a report of compliance of management and operating personnel with TI’s code of conduct, including TI’s conflict of interest policy. • Reviewing TI’s non-employee-related insurance programs. • Reviewing changes, if any, in major accounting policies of the company. • Reviewing trends in accounting policy changes that are relevant to the company. • Reviewing the company’s policy regarding investments and financial derivative products. The board has determined that all members of the Audit Committee are financially sophisticated, as the board has interpreted such qualifications in its business judgment. In addition, the board has designated Mr. Blinn as the audit committee financial expert as defined in the Securities Exchange Act of 1934, as amended. The Audit Committee met six times in 2017. The Audit Committee holds regularly scheduled meetings and reports its activities to the board. The committee also continued its long-standing practice of meeting directly with our internal audit staff to discuss the audit plan and to allow for direct interaction between Audit Committee members and our internal auditors. See page 43 for a report of the committee. Compensation Committee All members of the Compensation Committee are independent. From April 21, 2016, to April 20, 2017, the committee members were Mr. Sanchez (chair), Mr. Carp, Ms. Patsley and Christine Todd Whitman (who retired from the board in April 2017). Since April 21, 2017, the committee members have been Mr. Sanchez (Chair), Mr. Carp and Ms. Patsley. The committee is responsible for: • Reviewing the performance of the CEO and determining his compensation. • Setting the compensation of the company’s other executive officers. • Overseeing administration of employee benefit plans. • Making recommendations to the board regarding: P R O X Y S T A T E M E N T O Institution and termination of, revisions in and actions under employee benefit plans that (i) increase benefits only for officers of the company or disproportionately increase benefits for officers of the company more than other employees of the company, (ii) require or permit the issuance of the company’s stock or (iii) require board approval. O Reservation of company stock for use as awards of grants under plans or as contributions or sales to any trustee of any employee benefit plan. • Taking action as appropriate regarding the institution and termination of, revisions in and actions under employee benefit plans that are not required to be approved by the board. • Appointing, setting the compensation of, overseeing and considering the independence of any compensation consultant or other advisor. The Compensation Committee met six times in 2017. The Compensation Committee holds regularly scheduled meetings, reports its activities to the board, and consults with the board before setting annual executive compensation. See page 30 for a report of the committee. In performing its functions, the committee is supported by the company’s Human Resources organization. The committee has the authority to retain any advisors it deems appropriate to carry out its responsibilities. The committee retained Pearl Meyer & Partners as its compensation consultant for the 2017 compensation cycle. The committee instructed the consultant to advise it directly on executive compensation philosophy, strategies, pay levels, decision-making processes and other matters within the scope of the committee’s charter. Additionally, the committee instructed the consultant to assist the company’s Human Resources organization in its support of the committee in these matters with such items as peer-group assessment, analysis of the executive compensation market, and compensation recommendations. 12 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T The Compensation Committee considers it important that its compensation consultant’s objectivity not be compromised by other engagements with the company or its management. In support of this belief, the committee has a policy on compensation consultants, a copy of which may be found on www.ti.com/corporategovernance. During 2017, the committee determined that its compensation consultant was independent of the company and had no conflict of interest. The Compensation Committee considers executive compensation in a multistep process that involves the review of market information, performance data and possible compensation levels over several meetings leading to the annual determinations in January. Before setting executive compensation, the committee reviews the total compensation and benefits of the executive officers and considers the impact that their retirement, or termination under various other scenarios, would have on their compensation and benefits. The CEO and the senior vice president responsible for Human Resources, who is an executive officer, are regularly invited to attend meetings of the committee. The CEO is excused from the meeting during any deliberations or vote on his compensation. No executive officer determines his or her own compensation or the compensation of any other executive officer. As members of the board, the members of the committee receive information concerning the performance of the company during the year and interact with our management. The CEO gives the committee and the board an assessment of his own performance during the year just ended. He also reviews the performance of the other executive officers with the committee and makes recommendations regarding their compensation. The senior vice president responsible for Human Resources assists in the preparation of and reviews the compensation recommendations made to the committee other than for her compensation. The Compensation Committee’s charter provides that it may delegate its power, authority and rights with respect to TI’s long-term incentive plans, employee stock purchase plan and employee benefit plans to (i) one or more committees of the board established or delegated authority for that purpose; or (ii) employees or committees of employees except that no such delegation may be made with respect to compensation of the company’s executive officers. Pursuant to that authority, the Compensation Committee has delegated to a special committee established by the board the authority to, among other things, grant a limited number of stock options and restricted stock units (RSUs) under the company’s long-term incentive plans. The sole member of the special committee is Mr. Templeton. The special committee has no authority to grant, amend or terminate any form of compensation for TI’s executive officers. The Compensation Committee reviews all activity of the special committee. Governance and Stockholder Relations Committee All members of the GSR Committee are independent. From April 21, 2016, to April 20, 2017, the committee members were Mr. Sanders (chair), Ms. Cox and Mr. Kirk. Since April 21, 2017, the committee members have been Mr. Sanders (Chair), Mr. Babb, Ms. Cox and Mr. Kirk. The GSR Committee is generally responsible for: • Making recommendations to the board regarding: O The development and revision of our corporate governance principles. O The size, composition and functioning of the board and board committees. O Candidates to fill board positions. O Nominees to be designated for election as directors. O Compensation of board members. O Organization and responsibilities of board committees. O Succession planning by the company. O Issues of potential conflicts of interest involving a board member raised under TI’s conflict of interest policy. O Election of executive officers of the company. O Topics affecting the relationship between the company and stockholders. O Public issues likely to affect the company. O Responses to proposals submitted by stockholders. • Reviewing: O Contribution policies of the company and the TI Foundation. O Scope of activities of the company’s political action committee. O Revisions to TI’s code of conduct. • Electing officers of the company other than the executive officers. • Overseeing an annual evaluation of the board and the committee. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 13 The GSR Committee met six times in 2017. The GSR Committee holds regularly scheduled meetings and reports its activities to the board. See “Director candidate recommendations” and “Stockholder nomination of directors” for a discussion of stockholder nominations and recommendations and “Communications with the board” for details on how to contact the board. Board leadership structure The board’s current leadership structure combines the positions of chairman and CEO, and includes a lead director who presides at executive sessions and performs the duties listed below. The board believes that this structure, combined with its other practices (such as (a) including on each board agenda an opportunity for the independent directors to comment on and influence the proposed strategic agenda for future meetings and (b) holding an executive session of the independent directors at each board meeting), allows it to maintain the active engagement of independent directors and appropriate oversight of management. The lead director is elected by the independent directors annually. The independent directors have elected Mr. Sanders to serve as lead director until April 26, 2018, on which date Mr. Blinn will become lead director subject to his re-election by stockholders. The duties of the lead director are to: • Preside at all meetings of the board at which the chairman is not present, including executive sessions of the independent directors; • Serve as liaison between the chairman and the independent directors; • Approve information sent to the board; • Approve meeting agendas for the board; • Approve meeting schedules to assure that there is sufficient time for discussion of all agenda items; and • If requested by major shareholders, ensure that he or she is available for consultation and direct communication. In addition, the lead director has authority to call meetings of the independent directors. The board, led by its GSR Committee, regularly reviews the board’s leadership structure. The board’s consideration is guided by two questions: would stockholders be better served and would the board be more effective with a different structure. The board’s views are informed by a review of the practices of other companies and insight into the preferences of top stockholders, as gathered from face-to-face dialogue and review of published guidelines. The board also considers how board roles and interactions would change if its leadership structure changed. The board’s goal is for each director to have an equal stake in the board’s actions and equal accountability to the corporation and its stockholders. The board continues to believe that there is no uniform solution for a board leadership structure. Indeed, the company has had varying board leadership models over its history, at times separating the positions of chairman and CEO and at times combining the two, and now utilizing a lead director. Risk oversight by the board P R O X Y S T A T E M E N T It is management’s responsibility to assess and manage the various risks TI faces. It is the board’s responsibility to oversee management in this effort. In exercising its oversight, the board has allocated some areas of focus to its committees and has retained areas of focus for itself, as more fully described below. Management generally views the risks TI faces as falling into the following categories: strategic, operational, financial and compliance. The board as a whole has oversight responsibility for the company’s strategic and operational risks (e.g., major initiatives, competitive markets and products, sales and marketing, and R&D). Throughout the year the CEO discusses these risks with the board during strategy reviews that focus on a particular business or function. In addition, at the end of the year, the CEO provides a formal report on the top strategic and operational risks. TI’s Audit Committee has oversight responsibility for financial risk (such as accounting, finance, internal controls and tax strategy). Oversight responsibility for compliance risk is shared by the board committees. For example, the Audit Committee oversees compliance with the company’s code of conduct and finance- and accounting-related laws and policies, as well as the company’s compliance program itself; the Compensation Committee oversees compliance with the company’s executive compensation plans and related laws and policies; and the GSR Committee oversees compliance with governance-related laws and policies, including the company’s corporate governance guidelines. The Audit Committee oversees the company’s approach to risk management as a whole. It reviews the company’s risk management process at least annually by means of a presentation by the CFO. 14 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T The board’s leadership structure is consistent with the board and committees’ roles in risk oversight. As discussed above, the board has found that its current structure and practices are effective in fully engaging the independent directors. Allocating various aspects of risk oversight among the committees provides for similar engagement. Having the chairman and CEO review strategic and operational risks with the board ensures that the director most knowledgeable about the company, the industry in which it operates and the competition and other challenges it faces shares those insights with the board, providing for a thorough and efficient process. Director compensation The GSR Committee has responsibility for reviewing and making recommendations to the board on compensation for non-employee directors, with the board making the final determination. The committee has no authority to delegate its responsibility regarding director compensation. In carrying out this responsibility, it is supported by TI’s Human Resources organization. The CEO, the senior vice president responsible for Human Resources and the Secretary review the recommendations made to the committee. The CEO also votes, as a member of the board, on the compensation of non-employee directors. The compensation arrangements in 2017 for the non-employee directors were: • Annual retainer of $85,000 for board and committee service. • Additional annual retainer of $25,000 for service as the lead director. • Additional annual retainer of $30,000 for service as chair of the Audit Committee; $20,000 for service as chair of the Compensation Committee; and $15,000 for service as chair of the GSR Committee. • Annual grant of a 10-year option to purchase TI common stock pursuant to the terms of the Texas Instruments 2009 Director Compensation Plan (Director Plan), which was approved by stockholders in April 2009. The grant date value is $100,000, determined using a Black-Scholes option-pricing model (subject to the board’s ability to adjust the grant downward). These non-qualified options become exercisable in four equal annual installments beginning on the first anniversary of the grant and also will become fully exercisable in the event of termination of service following a change in control (as defined in the Director Plan) of TI. If a director’s service terminates due to death, disability or ineligibility to stand for re-election under the company’s by-laws, or after the director has completed eight years of service, then all outstanding options held by the director shall continue to become exercisable in accordance with their terms. If a director’s service terminates for any other reason, all outstanding options held by the director shall be exercisable for 30 days after the date of termination, but only to the extent such options were exercisable on the date of termination. • Annual grant of restricted stock units pursuant to the Director Plan with a grant date value of $100,000 (subject to the board’s ability to adjust the grant downward). The restricted stock units vest on the fourth anniversary of their date of grant and upon a change in control as defined in the Director Plan. If a director is not a member of the board on the fourth anniversary of the grant, restricted stock units will nonetheless settle (i.e., the shares will issue) on such anniversary date if the director has completed eight years of service prior to termination or the director’s termination was due to death, disability or ineligibility to stand for re-election under the company’s by-laws. The director may defer settlement of the restricted stock units at his or her election. Upon settlement, the director will receive one share of TI common stock for each restricted stock unit. Dividend equivalents are paid on the restricted stock units at the same rate as dividends on TI common stock. The director may defer receipt of dividend equivalents. • $1,000 per day compensation for other activities designated by the chairman. • A one-time grant of 2,000 restricted stock units upon a director’s initial election to the board. The board has determined that annual grants of equity compensation to non-employee directors will be timed to occur when grants are made to our U.S. employees in connection with the annual compensation review process. Accordingly, such equity grants to non-employee directors are made in January. See “Process for equity grants” for a discussion regarding the timing of equity compensation grants. Directors are not paid a fee for meeting attendance, but we reimburse non-employee directors for their travel, lodging and related expenses incurred in connection with attending board, committee and stockholders meetings and other designated events. In addition, non-employee directors may travel on company aircraft to and from these meetings and other designated events. Under the Director Plan, some directors have chosen to defer all or part of their cash compensation until they leave the board (or certain other specified times). These deferred amounts were credited to either a cash account or stock unit account. Cash accounts earn interest from TI at a rate currently based on Moody’s Seasoned Aaa Corporate Bonds. For 2017, that rate was 3.44 percent. Stock unit accounts fluctuate in value with the underlying shares of TI common stock, which will be issued after the deferral period. Dividend equivalents are paid on these stock units. Directors may also defer settlement of the restricted stock units they receive. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 15 T N E M E T A T S Y X O R P We have arrangements with certain customers whereby our employees may purchase consumer products containing TI components at discounted pricing. In addition, the TI Foundation has an educational and cultural matching gift program. In both cases, directors are entitled to participate on the same terms and conditions available to employees. Non-employee directors are not eligible to participate in any TI-sponsored pension plan. 2017 director compensation The following table shows the compensation of all persons who were non-employee members of the board during 2017 for services in all capacities to TI in 2017. Name (1) R. W. Babb, Jr. . . . . . . . . M. A. Blinn . . . . . . . . . . . T. M. Bluedorn . . . . . . . . D. A. Carp . . . . . . . . . . . J. F. Clark . . . . . . . . . . . C. S. Cox . . . . . . . . . . . . J. M. Hobby . . . . . . . . . . R. Kirk . . . . . . . . . . . . . . P. H. Patsley . . . . . . . . . . R. E. Sanchez . . . . . . . . . W. R. Sanders . . . . . . . . C. T. Whitman . . . . . . . . Fees Earned or Paid in Cash ($) (2) $ 95,000 $ 105,000 $ 70,833 $ 85,000 $ 85,000 $ 85,000 $ 85,000 $ 85,000 $ 85,000 $ 113,333 $ 116,667 $ 28,335 Stock Awards ($) (3) $ 99,947 $ 99,947 $ 156,300 $ 99,947 $ 99,947 $ 99,947 $ 99,947 $ 99,947 $ 99,947 $ 99,947 $ 99,947 $ 99,947 Option Awards ($) (4) $99,988 $99,988 — $99,988 $99,988 $99,988 $99,988 $99,988 $99,988 $99,988 $99,988 $99,988 Non-Equity Incentive Plan Compensation ($) — — — — — — — — — — — — Change in Pension Value and Nonqualified Deferred Compensation Earnings (5) — — — — — $ 5,520 — — — — — — All Other Compensation ($) (6) $ 40 $ 40 $ 40 893 $ $20,040 40 $ 40 $ 40 $ $ 40 $10,040 893 $ 40 $ Total ($) $ 294,975 $ 304,975 $ 227,173 $ 285,828 $ 304,975 $ 290,495 $ 284,975 $ 284,975 $ 284,975 $ 323,308 $ 317,495 $ 228,310 (1) Mr. Bluedorn was elected to the board effective March 1, 2017. Ms. Whitman, an independent director, reached the age of 70 by the date of the 2017 annual meeting and therefore was ineligible under the company’s by-laws to stand for re-election at the meeting. (2) (3) Includes amounts deferred at the director’s election. Shown is the aggregate grant date fair value of restricted stock units granted in 2017 calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification™ Topic 718, Compensation-Stock Compensation (ASC 718). The discussion of the assumptions used for purposes of calculating the grant date fair value appears in Note 4 to the financial statements contained in Item 8 (“Note 4 to the financial statements”) in TI’s annual report on Form 10-K for the year ended December 31, 2017. Each restricted stock unit represents the right to receive one share of TI common stock. For restricted stock units granted prior to 2007, shares are issued at the time of mandatory retirement from the board (age 70) or upon the earlier of termination of service from the board after completing eight years of service or death or disability. For information regarding share issuances under restricted stock units granted after 2006, see the discussion on pages 34-35. The table below shows the aggregate number of shares underlying outstanding restricted stock units held by the named individuals as of December 31, 2017. The value shown for Mr. Bluedorn represents the one-time restricted stock unit grant he received upon his initial election to the board. Name R. W. Babb, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M. A. Blinn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T. M. Bluedorn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. A. Carp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. F. Clark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. S. Cox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. M. Hobby . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. Kirk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. H. Patsley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. E. Sanchez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W. R. Sanders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. T. Whitman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted Stock Units (in Shares) 18,296 9,271 2,000 34,960 5,150 28,296 3,261 7,271 9,271 7,271 16,871 20,100 16 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T (4) Shown is the aggregate grant date fair value of options granted in 2017 calculated in accordance with ASC 718. The discussion of the assumptions used for purposes of calculating the grant date fair value appears in Note 4 to the financial statements in TI’s annual report on Form 10-K for the year ended December 31, 2017. The terms of these options are as set forth on page 34 except that for options granted before 2010, the grant becomes fully exercisable upon a change in control of TI. The table below shows the aggregate number of shares underlying outstanding stock options held by the named individuals as of December 31, 2017. Name R. W. Babb, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M. A. Blinn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T. M. Bluedorn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. A. Carp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. F. Clark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. S. Cox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. M. Hobby . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. Kirk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. H. Patsley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. E. Sanchez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W. R. Sanders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. T. Whitman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options (in Shares) 53,642 21,903 — 53,642 16,055 82,800 6,065 38,893 89,800 38,893 38,893 89,800 (5) (6) SEC rules require the disclosure of earnings on deferred compensation to the extent that the interest rate exceeds a specified rate (Federal Rate), which is 120 percent of the applicable federal long-term interest rate with compounding. Under the terms of the Director Plan, deferred compensation cash amounts earn interest at a rate based on Moody’s Seasoned Aaa Corporate Bonds. For 2017, this interest rate exceeded the Federal Rate by 1.18 percentage points. Shown is the amount of interest earned on the directors’ deferred compensation accounts that was in excess of the Federal Rate. Consists of (a) the annual cost ($40 per director) of premiums for travel and accident insurance policies, (b) contributions under the TI Foundation matching gift program of $20,000 for Ms. Clark and $10,000 for Mr. Sanchez and (c) for Messrs. Carp and Sanders, third-party administration fees for the Director Award Program. Each director whose service commenced prior to June 20, 2002, is eligible to participate in the Director Award Program, a charitable donation program under which we will contribute a total of $500,000 per eligible director to as many as three educational institutions recommended by the director and approved by us. The contributions are made following the director’s death. Directors receive no financial benefit from the program, and all charitable deductions belong to the company. In accordance with SEC rules, we have included the company’s annual costs under the program in All Other Compensation of the directors who participate. The cost attributable to each of Messrs. Carp and Sanders for their participation in this program was $853. Executive compensation We are providing shareholders the opportunity to cast advisory votes on named executive officer compensation as required by Section 14A of the Securities Exchange Act. Proposal regarding advisory approval of the company’s executive compensation The “named executive officers” are the chief executive officer, each person who served as the chief financial officer during 2017 and the three other most highly compensated executive officers, as named in the compensation tables on pages 30-42. We ask shareholders to approve the following resolution: RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed in this proxy statement pursuant to the Securities and Exchange Commission’s compensation disclosure rules, including the Compensation Discussion and Analysis, compensation tables and narrative discussion on pages 18-42 of this proxy statement, is hereby approved. We encourage shareholders to review the Compensation Discussion and Analysis section of the proxy statement, which follows. It discusses our executive compensation policies and programs and explains the compensation decisions relating to the named executive officers for 2017. We believe that the policies and programs serve the interests of our shareholders and that the compensation received by the named executive officers is commensurate with the performance and strategic position of the company. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 17 T N E M E T A T S Y X O R P Although the outcome of this annual vote is not binding on the company or the board, the Compensation Committee of the board will consider it when setting future compensation for the executive officers. The board of directors recommends a vote FOR the annual resolution approving the named executive officer compensation for 2017, as disclosed in this proxy statement. Compensation Discussion and Analysis This section describes TI’s compensation program for executive officers. It will provide insight into the following: • The elements of the 2017 compensation program, why we selected them and how they relate to one another; and • How we determined the amount of compensation for 2017. The executive officers of TI have the broadest job responsibilities and policy-making authority in the company. We hold them accountable for the company’s performance and for maintaining a culture of strong ethics. Details of compensation for our CEO, both individuals who served as CFO during 2017 and the three other highest paid individuals who were executive officers in 2017 (collectively called the “named executive officers”) can be found in the tables following the Compensation Committee report. Executive summary • TI’s compensation program is structured to pay for performance and deliver rewards that encourage executives to think and act in both the short- and long-term interests of our shareholders. The majority of total compensation for our executives each year comes in the form of variable cash and equity compensation. Variable cash is tied to the short-term performance of the company, and the value of equity is tied to the long-term performance of the company. We believe our compensation program holds our executive officers accountable for the financial and competitive performance of TI. • 2017 compensation decisions for the CEO: O Base salary was increased by 2.1 percent over 2016. O The grant date fair value of equity compensation awarded in 2017 increased by 12 percent from 2016, reflecting an effort to align with the projected market range for similarly situated CEOs in our comparator group. O The bonus decision was based primarily on the following performance results in 2017: 2017 Absolute Performance 2017 Relative Performance* Revenue Growth: Total TI Profit from Operations as a % of Revenue (PFO %) Total Shareholder Return (TSR) 11.9% 40.7% 46.8% Median Above median Above median P R O X Y S T A T E M E N T Year-on-Year Change in CEO Bonus (2017 bonus compared with 2016) 5% change * Relative to semiconductor competitors as outlined under “Comparator group;” includes estimates and projections of certain competitors’ financial results. See “Analysis of compensation determinations – Bonus – Assessment of 2017 performance” for details of the Compensation Committee’s assessment of TI’s performance. (It is important to note that the median growth rate of competitor companies includes the effect of acquisitions, whereas TI’s growth rate is entirely organic.) • Our executive compensation program is designed to encourage executive officers to pursue strategies that serve the interests of the company and shareholders, and not to promote excessive risk-taking by our executives. It is built on a foundation of sound corporate governance and includes: O Executive officers do not have employment contracts and are not guaranteed salary increases, bonus amounts or awards of equity compensation. O We have never repriced stock options. We do not grant reload options. We grant equity compensation with double- trigger change-in-control terms, which accelerate the vesting of grants only if the grantee has been terminated involuntarily within a limited time after a change in control of the company. 18 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T O Bonus and equity compensation awards are subject to clawback as described under “Recoupment policy” below. O We do not provide excessive perquisites. We provide no tax gross-ups for perquisites. O We do not guarantee a return or provide above-market returns on compensation that has been deferred. O Pension benefits are calculated on salary and bonus only; the proceeds earned on equity or other performance awards are not part of the pension calculation. Detailed discussion Compensation philosophy and elements The Compensation Committee of TI’s board of directors is responsible for setting the compensation of all TI executive officers. The committee consults with the other independent directors and its compensation consultant, Pearl Meyer & Partners, before setting annual compensation for the executives. The committee chair regularly reports on committee actions at board meetings. The primary elements of our executive compensation program are as follows: Near-term compensation, paid in cash Base Salary Purpose Strategy Basic, least variable form of compensation, designed to provide a stable source of income Generally, target market median, giving appropriate consideration to job scope and tenure, to attract and retain highly qualified executives Terms Paid twice monthly Profit Sharing Purpose Broad-based program designed to emphasize that each employee contributes to the company’s profitability and can share in it Strategy Pay according to a formula that focuses employees on a company goal, and at a level that will affect behavior. Profit sharing is paid in addition to any performance bonus awarded for the year. For the last 13 years, the formula has been based on company-level annual operating profit margin. The formula was set by the TI board. The committee’s practice has been not to adjust amounts earned under the formula. Terms Payable in a single cash payment shortly after the end of the performance year As in recent years, the formula for 2017 was: • Below 10% company-level annual operating profit as a percentage of revenue (“Margin”): no profit sharing • At 10% Margin: profit sharing = 2% of base salary • At Margin above 10%: profit sharing increases by 0.5% of base salary for each percentage point of Margin between 10% and 24%, and 1% of base salary for each percentage point of Margin above 24%. The maximum profit sharing is 20% of base salary. In 2017, TI delivered Margin of 40.7%. As a result, all eligible employees, including executive officers, received profit sharing of 20% of base salary. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 19 Performance Bonus Purpose Strategy To motivate executives and reward them according to the company’s relative and absolute performance and the executive’s individual performance Determined primarily on the basis of one-year and three-year company performance on certain measures (revenue growth percent, operating margin and total shareholder return1) as compared with competitors and on our strategic progress in key markets and with customers. These factors have been chosen to reflect our near- term financial performance as well as our progress in building long-term shareholder value. The committee aims to pay total cash compensation (base salary, profit sharing and bonus) appropriately above median if company performance is above that of competitors, and pay total cash compensation appropriately below the median if company performance is below competitors. The committee does not rely on formulas or performance targets or thresholds. Instead, it uses its judgment based on its assessment of the factors described above. Terms Determined by the committee and paid in a single payment after the performance year Long-term compensation, awarded in equity Stock Options and Restricted Stock Units Purpose Alignment with shareholders; long-term focus; retention, particularly with respect to restricted stock units Strategy Terms We grant a combination of non-qualified stock options and restricted stock units, generally targeted at the median level of equity compensation awarded to executives in similar positions within the Comparator Group. The terms and conditions of stock options and restricted stock units are summarized under “Outstanding equity awards at fiscal year-end 2017.” The committee’s grant procedures are described under “Process for equity grants.” Comparator group The Compensation Committee considers the market level of compensation when setting the salary, bonuses and equity compensation of the executive officers. To estimate the market level of pay, the committee uses information provided by its compensation consultant and TI’s Compensation and Benefits organization about compensation paid to executives in similar positions at a peer group of companies (the “Comparator Group”). The committee sets the Comparator Group and reviews it annually. In general, the Comparator Group companies (1) are U.S.- based, (2) engage in the semiconductor business, other electronics or information technology activities or use sophisticated manufacturing processes, (3) have executive positions comparable in complexity to those of TI and (4) use forms of executive compensation comparable to TI’s. Shown in the table below is the Comparator Group used for the compensation decisions for 2017. 3M Company Accenture PLC Analog Devices, Inc. Applied Materials, Inc. Broadcom Limited Cisco Systems, Inc. Corning Incorporated DXC Technology Company * Emerson Electric Co. Honeywell International Inc. Intel Corporation Medtronic Public Limited Company Motorola Solutions, Inc. QUALCOMM Incorporated TE Connectivity Ltd. Thermo Fisher Scientific Inc. Western Digital Corporation * formerly Computer Sciences Corporation 1 Total shareholder return refers to the percentage change in the value of a shareholder’s investment in a company over the relevant time period, as determined by dividends paid and the change in the company’s share price during the period. See notes to the Performance summary table under “Analysis of compensation determinations – Bonus.” 20 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T The committee set the Comparator Group in July 2016 for the base salary and equity compensation decisions it made in January 2017. For a discussion of the factors considered by the committee in setting the Comparator Group in July 2016, please see “Comparator group” on pages 21-22 of the company’s 2017 proxy statement. In July 2017, the committee conducted its regular review of the Comparator Group in terms of industry, revenue and market capitalization. With the advice of its compensation consultant, the committee decided to make no change to the group. Accordingly, it used the same Comparator Group for the bonus decisions in January 2018 relating to 2017 performance as it used to set salary and equity compensation in January 2017. The table below compares the Comparator Group to TI in terms of revenue and market capitalization. Company Intel Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cisco Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Honeywell International Inc. Accenture PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3M Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medtronic Public Limited Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QUALCOMM Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thermo Fisher Scientific Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Western Digital Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Broadcom Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DXC Technology Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Emerson Electric Co. Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TE Connectivity Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corning Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Motorola Solutions, Inc. Analog Devices, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Median . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Instruments Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue ($ Billion) * Market Cap ($ Billion) * 62.1 47.8 39.7 35.9 31.0 29.6 22.3 19.8 19.6 17.6 15.9 15.3 14.5 13.1 10.0 6.3 5.1 19.7 14.6 219.3 192.1 116.3 94.6 140.3 111.3 96.1 77.0 24.0 108.9 27.1 45.4 56.0 33.5 28.3 14.7 33.3 85.8 104.0 * Trailing four-quarter revenue and market capitalization is as reported by Thomson Reuters on January 3, 2018. Analysis of compensation determinations Total compensation Before finalizing the compensation of the executive officers, the committee reviewed all elements of compensation. The information included total cash compensation (salary, profit sharing and projected bonus), the grant date fair value of equity compensation, the impact that proposed compensation would have on other compensation elements such as pension, and a summary of benefits that the executives would receive under various termination scenarios. The review enabled the committee to see how various compensation elements relate to one another and what impact its decisions would have on the total earnings opportunity of the executives. In assessing the information, the committee did not target a specific level of total compensation or use a formula to allocate compensation among the various elements. Instead, it used its judgment in assessing whether the total was consistent with the objectives of the program. Based on this review, the committee determined that the level of compensation was appropriate. Mr. Rafael Lizardi, who is our current chief financial officer, became an executive officer effective February 1, 2017. Because he was not an executive officer when base salary and equity compensation determinations were made in January 2017, these components of Mr. Lizardi’s compensation were reviewed with the compensation committee but were set by management and, therefore, are not included in the following analysis of the committee’s process. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 21 Base salary The committee set the 2017 rate of base salary for the following named executive officers as follows: Officer 2017 Annual Rate Change from 2016 Annual Rate R. K. Templeton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. P. March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. T. Crutcher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. J. Ritchie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. G. Delagi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,190,000 682,000 $ 875,000 $ 704,000 $ 700,000 $ 2.1% 2.1% 6.1% 2.0% 2.2% The committee set the 2017 base-salary rate for each of the named executive officers listed above in January 2017. In keeping with its strategy, the committee targeted the annual base-salary rates to be at the estimated median level of salaries expected to be paid to similarly situated executives (considering job scope and tenure) of companies within the Comparator Group in January 2017. The salary differences between the named executive officers were driven primarily by the market rate of pay for each officer and not the application of a formula designed to maintain a differential between the officers. Equity compensation In 2017, the committee awarded equity compensation to each of the named executive officers listed below. The grants are shown in the table under “Grants of plan-based awards in 2017.” The grant date fair value of the awards is reflected in that table and in the “Stock Awards” and “Option Awards” columns of the 2017 summary compensation table. The table below is provided to assist the reader in comparing the grant date fair values and number of shares for each of the years shown in the summary compensation table. Officer R. K. Templeton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. P. March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. T. Crutcher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. J. Ritchie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grant Date Fair Value * Stock Options (In Shares) Restricted Stock Units (In Shares) $ 11,000,014 $ 9,800,055 $ 9,800,023 $ 2,700,048 $ 2,700,035 $ 2,700,017 $ 7,500,034 $ 5,500,031 $ 5,500,029 $ 4,000,056 $ 4,000,014 $ 4,000,045 333,615 489,557 516,440 81,888 134,878 142,285 227,465 274,751 289,839 121,315 199,819 210,792 69,392 92,576 90,842 17,033 25,506 25,028 47,313 51,956 50,983 25,234 37,786 37,079 Year 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 R. G. Delagi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 $ 3,600,090 109,184 22,711 * See notes 2 and 3 to the summary compensation table for information on how grant date fair value was calculated. In January 2017, the committee awarded equity compensation to each of the named executive officers listed above. The committee’s general objective was to award to those officers equity compensation that had a grant date fair value at approximately the median market level, in this case the 40th to 60th percentile of the three-year average of equity compensation (including an estimate of amounts for 2017) granted by the Comparator Group. In assessing the market level, the committee considered information presented by TI’s Compensation and Benefits organization (prepared using data provided by the committee’s compensation consultant) on the estimated value of the awards expected to be granted to similarly situated executives (considering job scope and tenure) of companies within the Comparator Group. The award value was estimated using the same methodology used for financial accounting. 22 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T For each officer, the committee set the desired grant value. The committee decided to allocate the value equally between restricted stock units and options for each officer, to give equal emphasis to promoting retention, motivating the executive and aligning his interests with those of shareholders. Before approving the grants, the committee reviewed the amount of unvested equity compensation held by the officers to assess its retention value. In making this assessment, the committee used its judgment and did not apply any formula, threshold or maximum. This review did not result in an increase or decrease of the awards. The exercise price of the options was the closing price of TI stock on January 26, 2017, the second trading day after the company released its annual and fourth-quarter financial results for 2016. All grants were made under the Texas Instruments 2009 Long- Term Incentive Plan, which shareholders approved in April 2009 and amended in 2016. All grants have the terms described under “Outstanding equity awards at fiscal year-end 2017.” The differences in the equity awards between the named executive officers were primarily the result of differences in the applicable estimated market level of equity compensation for their positions, and not the application of any formula designed to maintain differentials between the officers. Bonus In January 2018, the committee set the 2017 bonus compensation for executive officers based on its assessment of 2017 performance. In setting the bonuses, the committee used the following performance measures to assess the company: • The relative one-year and three-year performance of TI as compared with competitor companies, as measured by O revenue growth, O operating profit as a percentage of revenue, O total shareholder return, and • The absolute one-year and three-year performance of TI on the above measures. In addition, the committee considered strategic progress by reviewing TI competitiveness in key markets with core products and technologies, as well as the strength of relationships with customers. In assessing performance, the committee did not use formulas, thresholds or multiples. Because market conditions can quickly change in our industry, thresholds established at the beginning of a year could prove irrelevant by year-end. The committee believes its approach, which assesses the company’s relative performance in hindsight after year-end, gives it the insight to most effectively and critically judge results and encourages executives to pursue strategies that serve the long-term interests of the company and its shareholders. In the comparison of relative performance, the committee used the following companies (the “competitor companies”): Advanced Micro Devices, Inc. Analog Devices, Inc. Broadcom Limited Infineon Technologies AG Intel Corporation Marvell Technology Group Ltd. Maxim Integrated Products, Inc. Microchip Technology Incorporated NVIDIA Corporation NXP Semiconductors N.V. ON Semiconductor Corporation QUALCOMM Incorporated Skyworks Solutions, Inc. STMicroelectronics N.V. Xilinx, Inc. To the extent the companies had not released financial results for the year or the most recent quarter, the committee based its evaluation on estimates and projections of the companies’ financial results for 2017. This list includes both broad-based and niche suppliers that operate in our key markets or offer technology that competes with our products. The committee considers annually whether the list is still appropriate in terms of revenue, market capitalization and changes in business activities of the companies. In 2017, Intersil Corporation and Linear Technology Corporation were removed from the list after being acquired by other companies. The committee made no other changes to the list of competitor companies in 2017. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 23 T N E M E T A T S Y X O R P Assessment of 2017 performance The committee spent extensive time in December and January assessing TI’s results and strategic progress for 2017. In setting bonuses, the committee considered quantitative and qualitative measures on both an absolute and relative basis and made certain that resulting decisions were founded on both solid data and sound judgment. On both an absolute and relative basis all measures were positive and improved from the prior year, and in relative comparisons with competitors most measures were better than the median. In aggregate, the committee determined that performance in 2017 was stronger than in 2016, both on an absolute and relative basis. Therefore, the committee increased bonuses for 2017 for named executive officers by 5 percent except for two individuals whose bonuses increased to reflect the new roles assumed by these individuals in 2017. Details on the committee’s assessment are below. Revenue and margin • Annual performance O TI’s revenue growth rate of 11.9 percent was higher in 2017 than in the prior year. Compared with competitor companies, TI’s growth rate was below the median. (It is important to note that the median growth rate of competitor companies includes the effect of acquisitions, whereas TI’s growth rate is entirely organic. O Revenues for the company’s core businesses of Analog and Embedded Processing were up 16.0 percent and 15.7 percent, respectively. O Operating profit margin was 40.7 percent, which was above both the prior year’s margin and the median comparison with competitors. • Three-year performance O Compound annual revenue growth for 2015-2017 was 4.7 percent, which was below the median competitor comparison. O Average operating profit for 2015-2017 was 36.9 percent, which was above the median competitor comparison. Total shareholder return (TSR) • TSR was 46.8 percent, better than the median TSR as compared with competitor companies. • The company again generated strong cash, with free cash flow at 31.2 percent of revenue.2 Approximately 100 percent of free cash flow was returned to shareholders in 2017 through share repurchases and dividends. Share repurchases of $2.6 billion reduced outstanding shares by 1.3 percent (net of stock issuances during the year). The quarterly dividend rate increased 24.0 percent (the 16th increase in the last 14 years). Share repurchases and dividend increases are important elements of TI’s capital management strategy. • The balance sheet remained robust, ending the year with cash and short-term investments of $4.5 billion. • The three-year compound annual growth rate for TSR was 28.3 percent, which was above the median competitor comparison. Strategic progress • The company’s business model is designed around four sustainable competitive advantages that in combination put us in a unique class of companies. These advantages include (1) manufacturing and technology, (2) breadth of differentiated product portfolio, (3) channel reach of sales force and TI.com and (4) diversity and longevity of product, market and customer positions. In 2017, the company continued to strengthen and leverage these advantages. • The company’s strategic focus is on analog and embedded processing, with a particular emphasis on designing and selling those products into the industrial and automotive markets, which we believe represent the best growth opportunities. Focused investments in these areas continue to provide the foundation for strong results in the near and long terms. O TI’s broad analog and embedded processing product portfolio includes tens of thousands of products, with more products added each year, offering strong differentiation and longevity. In 2017, 90 percent of TI’s revenue came from Analog and Embedded Processing semiconductors, up from 86 percent in 2016. O We believe the industrial and automotive markets represent the best growth opportunity for the industry for the foreseeable future because of the increasing semiconductor content in these markets. In 2017, approximately 54 percent of TI’s revenue came from industrial and automotive markets, up from approximately 51 percent in 2016. 2 Free cash flow was calculated by subtracting Capital expenditures from the GAAP-based Cash flows from operating activities. For a reconciliation to GAAP, see Appendix A to this proxy statement. 24 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T • TI’s revenue continues to come from a diverse base of thousands of applications. This is an intentional strategy that prevents dependence on a single market, customer or product. • TI’s in-house capability to produce high volumes of Analog semiconductors on 300-millimeter wafers remains a competitive advantage. In 2017, the company again increased production on 300-millimeter wafers, which enabled more chips to be produced per wafer, thereby improving margins and cash generation. • In total, the committee determined that TI’s strategic position was strengthened by management’s decisions and actions in 2017. Performance summary Revenue growth: total TI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Free cash flow as % of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of free cash flow returned to shareholders . . . . . . . . . . . . . . . . . . . . . . . Increase in quarterly dividend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholder return (TSR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-Year 3-Year 4.7% CAGR 11.9% 36.9% average 40.7% 31.2% 30.5% average 99.8% 100.2% average 24.0% 46.8% 82.4% 28.3% CAGR (compound annual growth rate) is calculated using the formula (Ending Value/Beginning Value)1/number of years minus 1. One-year and three-year TSR percentages are obtained from a report generated using a subscription service to Equilar, an executive compensation and corporate governance data firm. Before setting the bonuses for the named executive officers, the committee considered the officers’ individual performance. The performance of Mr. Templeton was judged according to the performance of the company. For the other officers, the committee considered the factors described below in assessing individual performance. In making this assessment, the committee did not apply any formula or performance targets. Mr. March was the chief financial officer until February 1, 2017, at which time Mr. Lizardi became the chief financial officer. The committee noted the financial management of the company. Mr. Crutcher is responsible for all of the company’s business operations and manufacturing. The committee noted the financial performance and strategic position of the product lines and activities for which he is responsible. Mr. Ritchie is responsible for the company’s semiconductor manufacturing operations. The committee noted the performance of those operations, including their cost-competitiveness and inventory management. Mr. Delagi is responsible for the company’s embedded processing and custom product lines. The committee noted the financial performance and strategic position of these product lines. The bonuses awarded for 2017 performance are shown in the table below. The differences in the amounts awarded to the named executive officers were primarily the result of differences in the officers’ level of responsibility and the applicable market level of total cash compensation expected to be paid to similarly situated officers at companies within the Comparator Group. The bonus of each named executive officer was paid under the Executive Officer Performance Plan described in footnote 3 to the 2017 summary compensation table. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 25 Results of the compensation decisions Results of the compensation decisions made by the committee relating to the named executive officers, as well as the results of the compensation decisions made by management and reviewed by the committee for Mr. Lizardi for 2017 are summarized in the following table. This table is provided as a supplement to the summary compensation table for investors who may find it useful to see the data presented in this form. Although the committee does not target a specific level of total compensation, it considers information similar to that in the table to ensure that the sum of these elements is, in its judgment, in a reasonable range. Officer R. K. Templeton . . . . . . . . . . . . . . . . . Year 2017 2016 2015 Salary (Annual Rate) $ 1,190,000 $ 1,166,000 $ 1,143,000 Profit Sharing $ 237,601 $ 232,817 $ 203,877 Bonus $ 3,625,000 $ 3,450,000 $ 3,450,000 Equity Compensation (Grant Date Fair Value) $ 11,000,014 $ 9,800,055 $ 9,800,023 Total $ 16,052,615 $ 14,648,872 $ 14,596,900 R. R. Lizardi . . . . . . . . . . . . . . . . . . . . 2017 K. P. March . . . . . . . . . . . . . . . . . . . . . B. T. Crutcher . . . . . . . . . . . . . . . . . . . K. J. Ritchie . . . . . . . . . . . . . . . . . . . . 2017 2016 2015 2017 2016 2015 2017 2016 2015 R. G. Delagi . . . . . . . . . . . . . . . . . . . . 2017 $ $ $ $ $ $ $ $ $ $ $ 500,000 $ 97,667 $ 850,000 $ 3,000,060 $ 4,447,727 682,000 668,000 649,000 875,000 825,000 800,000 704,000 690,000 670,000 $ 113,950 $ 133,283 $ 115,758 $ 0 $ 1,110,000 $ 1,110,000 $ 2,700,048 $ 2,700,035 $ 2,700,017 $ 3,495,998 $ 4,611,318 $ 4,574,775 $ 174,167 $ 164,583 $ 142,668 $ 2,350,000 $ 2,000,000 $ 1,750,000 $ 7,500,034 $ 5,500,031 $ 5,500,029 $ 10,899,201 $ 8,489,614 $ 8,192,697 $ 140,567 $ 137,667 $ 119,498 $ 1,325,000 $ 1,265,000 $ 1,265,000 $ 4,000,056 $ 4,000,014 $ 4,000,045 $ 6,169,623 $ 6,092,681 $ 6,054,543 700,000 $ 139,750 $ 1,100,000 $ 3,600,090 $ 5,539,840 This table shows the annual rate of base salary for each named executive officer. In the summary compensation table, the “Salary” column shows the actual salary paid in the year. This table has separate columns for profit sharing and bonus. In the summary compensation table, profit sharing and bonus are aggregated in the column for “Non-Equity Incentive Plan Compensation,” in accordance with SEC requirements. Please see notes 2 and 3 to the summary compensation table for information about how grant date fair value was calculated. For Mr. Templeton and Mr. Crutcher, the “Total” for 2017 was higher than for 2016 primarily due to the higher equity awards in 2017, reflecting an effort to align with the projected market range for similarly situated executives in our comparator group. The 2017 decrease in “Total” compensation for Mr. March reflects his retirement. For Mr. Ritchie, the “Total” for 2017 was higher than for 2016 primarily due to the higher bonus award. P R O X Y S T A T E M E N T 26 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T The compensation decisions shown above resulted in the following 2017 compensation mix for the named executive officers: CEO 7% Other NEOs* 19% 11% 2% 23% 1% 69% 68% Base Salary Equity Compensation Profit Sharing Bonus * Average data for the named executive officers other than Mr. Templeton Equity dilution The Compensation Committee’s goal is to keep net annual dilution from equity compensation under 2 percent. “Net annual dilution” means the number of shares under equity awards granted by the committee each year to all employees (net of award forfeitures) as a percentage of the shares of the company’s outstanding common stock. Equity awards granted in 2017 resulted in 0.7 percent net annual dilution. Process for equity grants The Compensation Committee makes grant decisions for equity compensation at its January meeting each year. The dates on which these meetings occur are generally set three years in advance. The January meetings of the board and the committee generally occur in the week or two before we announce our financial results for the previous quarter and year. On occasion, the committee may grant stock options or restricted stock units to executives at times other than January. For example, it has done so in connection with job promotions and for purposes of retention. We do not back-date stock options or restricted stock units. We do not accelerate or delay the release of information due to plans for making equity grants. If the committee meeting falls in the same month as the release of the company’s financial results, the committee’s practice is to make grants effective (i) on the second trading day after the results have been released or (ii) on the meeting day if later. In other months, its practice is to make them effective on the day of committee action. The exercise price of stock options is the closing price of TI stock on the effective date of the grant. Recoupment policy The committee has a policy concerning recoupment (“clawback”) of executive bonuses and equity compensation. Under the policy, in the event of a material restatement of TI’s financial results due to misconduct, the committee will review the facts and circumstances and take the actions it considers appropriate with respect to the compensation of any executive officer whose fraud or willful misconduct contributed to the need for such restatement. Such action may include (a) seeking reimbursement of any bonus paid to such officer exceeding the amount that, in the judgment of the committee, would have been paid had the financial results been properly reported and (b) seeking to recover profits received by such officer during the 12 months after the restated period under equity compensation awards. All determinations by the committee with respect to this policy are final and binding on all interested parties. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 27 Most recent stockholder advisory vote on executive compensation In April 2017, our shareholders cast an advisory vote on the company’s executive compensation decisions and policies as disclosed in the proxy statement issued by the company in March 2017. Approximately 95 percent of the shares voted on the matter were cast in support of the compensation decisions and policies as disclosed. The committee considered this result and determined that it was not necessary at this time to make any material changes to the company’s compensation policies and practices in response to the advisory vote. Benefits Retirement plans The executive officers participate in our retirement plans under the same rules that apply to other U.S. employees. We maintain these plans to have a competitive benefits program and for retention. Like other established U.S. manufacturers, we have had a U.S. qualified defined benefit pension plan for many years. At its origin, the plan was designed to be consistent with those offered by other employers in the diverse markets in which we operated, which at the time included consumer and defense electronics, as well as semiconductors and materials products. In order to limit the cost of the plan, we closed the plan to new participants in 1997. We gave U.S. employees as of November 1997 the choice to remain in the plan, or to have their plan benefits frozen (i.e., no benefit increase attributable to years of service or change in eligible earnings) and begin participating in an enhanced defined contribution plan. Mr. Templeton and Mr. Crutcher chose not to remain in the defined benefit plan. As a result, their benefits under that plan were frozen in 1997, and they participate in the enhanced defined contribution plan. Mr. Lizardi, who joined the company in 2001, also participates in the enhanced defined contribution plan. The other named executive officers have continued their participation in the defined benefit pension plan. The Internal Revenue Code (IRC) imposes certain limits on the retirement benefits that may be provided under a qualified plan. To maintain the desired level of benefits, we have non-qualified defined benefit pension plans for participants in the qualified pension plan. Under the non-qualified plans, participants receive benefits that would ordinarily be paid under the qualified pension plan but for the limitations under the IRC. For additional information about the defined benefit plans, please see “2017 pension benefits.” Employees accruing benefits in the qualified pension plan, including Mr. Delagi and Mr. Ritchie, also are eligible to participate in a qualified defined contribution plan that provides employer matching contributions. The enhanced defined contribution plan, in which Mr. Templeton, Mr. Crutcher and Mr. Lizardi participate, provides for a fixed employer contribution plus an employer matching contribution. In general, if an employee who participates in the pension plan (including an employee whose benefits are frozen as described above) dies after having met the requirements for normal or early retirement, his or her beneficiary will receive a benefit equal to the lump-sum amount that the participant would have received if he or she had retired before death. Having already reached the age of 55 and at least 20 years of employment, Mr. Templeton, Mr. Delagi and Mr. Ritchie are eligible for early retirement under the pension plans. Because benefits under the qualified and non-qualified defined benefit pension plans are calculated on the basis of eligible earnings (salary and bonus), an increase in salary or bonus may result in an increase in benefits under the plans. Salary or bonus increases for Mr. Templeton and Mr. Crutcher do not result in greater benefits for them under the company’s defined benefit pension plans because their benefits under those plans were frozen in 1997. Mr. Lizardi does not participate in the company’s defined benefit pension plans. The committee considers the potential effect on the executives’ retirement benefits when it sets salary and performance bonus levels. Deferred compensation Any U.S. employee whose base salary and management responsibility exceed a certain level may defer the receipt of a portion of his or her salary, bonus and profit sharing. Rules of the U.S. Department of Labor require that this plan be limited to a select group of management or highly compensated employees. The plan allows employees to defer the receipt of their compensation in a tax-efficient manner. Eligible employees include, but are not limited to, the executive officers. We have the plan to be competitive with the benefits packages offered by other companies. The executive officers’ deferred compensation account balances are unsecured and all amounts remain part of the company’s operating assets. The value of the deferred amounts tracks the performance of investment alternatives selected by the participant. These alternatives are identical to those offered to participants in the defined contribution plans described above. The company does not guarantee any minimum return on the amounts deferred. In accordance with SEC rules, no earnings on deferred compensation are shown in the summary compensation table for 2017 because no “above market” rates were earned on deferred amounts in that year. 28 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T Employee stock purchase plan We have an employee stock purchase plan. Under the plan, which our shareholders approved, all employees in the U.S. and certain other countries may purchase a limited number of shares of the company’s common stock at a 15 percent discount. The plan is designed to offer the broad-based employee population an opportunity to acquire an equity interest in the company and thereby align their interests with those of shareholders. Consistent with our general approach to benefit programs, executive officers are also eligible to participate. Health-related benefits Executive officers are eligible under the same plans as all other U.S. employees for medical, dental, vision, disability and life insurance. These benefits are intended to be competitive with benefits offered in the semiconductor industry. Other benefits Executive officers receive only a few benefits that are not available to all other U.S. employees. They are eligible for a company- paid physical and financial counseling. In addition, the board of directors has determined that for security reasons, it is in the company’s interest to require Mr. Templeton to use company aircraft for personal air travel. Please see footnote 6 of the summary compensation table for 2017 and “Potential payments upon termination or change in control – Termination – Perquisites” for further details. The company provides no tax gross-ups for perquisites to any of the executive officers. Compensation following employment termination or change in control None of the executive officers has an employment contract. Executive officers are eligible for benefits on the same terms as other U.S. employees upon termination of employment or a change in control of the company. The current programs are described under “Potential payments upon termination or change in control.” None of the few additional benefits that the executive officers receive continue after termination of employment, except that financial counseling is provided for a transition period following retirement. The committee reviews the potential impact of these programs before finalizing the annual compensation for the named executive officers. The committee did not raise or lower compensation for 2017 based on this review. The Texas Instruments 2009 Long-Term Incentive Plan generally establishes double-trigger change-in-control terms for grants made in 2010 and later years. Under those terms, options become fully exercisable and shares are issued under restricted stock unit awards (to the extent permitted by Section 409A of the IRC) if the grantee is involuntarily terminated within 24 months after a change in control of TI. These terms are intended to encourage employees to remain with the company through a transaction while reducing employee uncertainty and distraction in the period leading up to any such event. Stock ownership guidelines and policy against hedging Our board of directors has established stock ownership guidelines for executive officers. The guideline for the CEO is four times base salary or 125,000 shares, whichever is less. The guideline for other executive officers is three times base salary or 25,000 shares, whichever is less. Executive officers have five years from their election as executive officers to reach these targets. Directly owned shares and restricted stock units count toward satisfying the guidelines. Short sales of TI stock by our executive officers are prohibited. It is against TI policy for any employee, including an executive officer, to engage in trading in “puts” (options to sell at a fixed price), “calls” (similar options to buy), or other options or hedging techniques on TI stock. Consideration of tax and accounting treatment of compensation Section 162(m) of the IRC historically limited the tax deductibility of annual compensation paid to any publicly held corporation’s CEO and three other highest compensated officers excluding the CFO, to the extent that the officer’s compensation (other than qualified performance-based compensation) exceeded $1 million. The Compensation Committee has, in the past, considered the impact of this deductibility limit, although as only one factor in its determination of amounts and forms of compensation. Recent changes in the tax laws eliminated the “performance-based” exception, and the limitation on deductibility has been expanded to include all named executive officers. As a result, beginning in 2018, the company may no longer deduct compensation paid to our named executive officers in excess of $1 million. When setting equity compensation, the committee considers the cost for financial reporting purposes of equity compensation it intends to grant. Its consideration of the cost of grants made in 2017 is discussed under “Analysis of compensation determination for 2017 – Equity compensation.” T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 29 T N E M E T A T S Y X O R P Compensation Committee report The Compensation Committee of the board of directors has furnished the following report: The committee has reviewed and discussed the Compensation Discussion and Analysis (CD&A) with the company’s management. Based on that review and discussion, the committee has recommended to the board of directors that the CD&A be included in the company’s annual report on Form 10-K for 2017 and the company’s proxy statement for the 2018 annual meeting of stockholders. Robert E. Sanchez, Chair Daniel A. Carp Pamela H. Patsley 2017 summary compensation table The table below shows the compensation of the company’s CEO, each person who served as the CFO during 2017 and each of the other three most highly compensated individuals who were executive officers during 2017 (collectively called the “named executive officers” (NEOs)) for services in all capacities to the company in 2017. Name and Principal Position (1) Year Salary ($) Stock Awards ($) (2) Option Awards ($) (3) Non-Equity Incentive Plan Compensation ($) (4) Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (5) All Other Compensation ($) (6) Total ($) Richard K. Templeton . . . . . . 2017 $ 1,188,004 $ 5,500,010 $ 5,500,004 $ 3,862,601 $ 2016 $ 1,164,083 $ 4,900,048 $ 4,900,007 $ 3,682,817 $ 2015 $ 1,140,250 $ 4,900,017 $ 4,900,006 $ 3,653,877 $ Chairman, President & Chief Executive Officer 166,278 $ 329,825 $ 16,546,722 107,604 $ 325,510 $ 15,080,069 13,950 $ 317,702 $ 14,925,802 Rafael R. Lizardi . . . . . . . . . . 2017 $ 488,333 $ 2,000,047 $ 1,000,013 $ 947,667 — $ 60,814 $ 4,496,874 Senior Vice President & Chief Financial Officer Kevin P. March . . . . . . . . . . . 2017 $ 2016 $ 2015 $ Senior Vice President 569,750 $ 1,350,036 $ 1,350,012 $ 666,417 $ 1,350,033 $ 1,350,002 $ 1,243,283 $ 1,079,121 $ 647,417 $ 1,350,010 $ 1,350,007 $ 1,225,758 $ — $ 148,487 $ 3,532,235 5,300 $ 5,694,156 872,191 $ 23,837 $ 5,469,220 113,950 Brian T. Crutcher . . . . . . . . . 2017 $ Executive Vice President & 2016 $ 2015 $ Chief Operating Officer 870,833 $ 3,750,028 $ 3,750,006 $ 2,524,167 $ 822,917 $ 2,750,031 $ 2,750,000 $ 2,164,583 $ 797,917 $ 2,750,023 $ 2,750,006 $ 1,892,668 1,173 $ 160,804 $ 11,057,011 577 $ 155,079 $ 8,643,187 — $ 125,744 $ 8,316,358 Kevin J. Ritchie . . . . . . . . . . . 2017 $ 2016 $ 2015 $ Senior Vice President 702,833 $ 2,000,047 $ 2,000,009 $ 1,465,567 $ 2,082,760 $ 688,333 $ 2,000,013 $ 2,000,001 $ 1,402,667 $ 1,468,531 $ 668,333 $ 2,000,041 $ 2,000,004 $ 1,384,498 $ 1,370,848 $ 5,400 $ 8,256,616 5,300 $ 7,564,845 5,300 $ 7,429,024 P R O X Y S T A T E M E N T R. Gregory Delagi . . . . . . . . . 2017 $ 698,750 $ 1,800,074 $ 1,800,016 $ 1,239,750 $ 1,491,494 $ 16,492 $ 7,046,576 Senior Vice President (1) Mr. March was the company’s chief financial officer through January 31, 2017. Mr. Lizardi became chief financial officer on February 1, 2017. Mr. Templeton will be the company’s president and chief executive officer through May 31, 2018. Mr. Crutcher will become the company’s president and chief executive officer on June 1, 2018. Mr. Templeton will continue as the company’s chairman. (2) Shown is the aggregate grant date fair value of restricted stock unit (RSU) awards calculated in accordance with ASC 718. The discussion of the assumptions used for purposes of the valuation of the awards granted in 2017 appears in Note 4 to the financial statements in TI’s annual report on Form 10-K for the year ended December 31, 2017. For a description of the grant terms, see the discussion following the Outstanding equity awards at fiscal year-end 2017 table. The discussion of the assumptions used for purposes of the valuation of the awards granted in 2016 and 2015 appears in Note 4 to the financial statements in TI’s annual report on Form 10-K for the year ended December 31, 2016, and the financial statements in TI’s annual report on Form 10-K for the year ended December 31, 2015, respectively. 30 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T (3) (4) (5) Shown is the aggregate grant date fair value of options calculated in accordance with ASC 718. The discussion of the assumptions used for purposes of the valuation of options granted in 2017 appears in Note 4 to the financial statements in TI’s annual report on Form 10-K for the year ended December 31, 2017. For a description of the grant terms, see the discussion following the Outstanding equity awards at fiscal year-end 2017 table. The discussion of the assumptions used for purposes of the valuation of the awards granted in 2016 and 2015 appears in Note 4 to the financial statements in TI’s annual report on Form 10-K for the year ended December 31, 2016, and the financial statements in TI’s annual report on Form 10-K for the year ended December 31, 2015, respectively. Consists of performance bonuses paid under the Texas Instruments Executive Officer Performance Plan and profit sharing for 2017. Under the terms of the Executive Officer Performance Plan, each named executive officer is eligible to receive a cash bonus equal to 0.5 percent of the company’s consolidated income (as defined in the plan). However, the Compensation Committee has the discretion to set bonuses at a lower level if it decides it is appropriate to do so. The committee decided to do so for 2017. See “Analysis of compensation determinations for 2017 – Results of the compensation decisions” for the amounts of bonus and profit sharing paid to each of the named executive officers for 2017. The company does not pay above-market earnings on deferred compensation. Therefore, no amounts are reported in this column for deferred compensation. The amounts in this column represent the change in the actuarial value of the named executive officers’ benefits under the qualified defined benefit pension plan (TI Employees Pension Plan) and the non-qualified defined benefit pension plans (TI Employees Non-Qualified Pension Plan and TI Employees Non-Qualified Pension Plan II) from December 31, 2016, through December 31, 2017. This “change in the actuarial value” is the difference between the 2016 and 2017 present value of the pension benefit accumulated as of year-end by the named executive officer, assuming that benefit is not paid until age 65. Mr. Templeton’s and Mr. Crutcher’s benefits under the company’s pension plans were frozen as of December 31, 1997. Mr. Lizardi does not participate in any of the company’s defined benefit pension plans. Mr. March retired from the company on November 1, 2017. He received a partial distribution of his total pension benefit on December 1, 2017. The remainder of his benefit will be distributed on June 1, 2018, as required by Section 409A of the IRC. See the 2017 pension benefits table for additional information. (6) Consists of (i) the amounts in the table below, which result from programs available to all eligible U.S. employees, and (ii) perquisites and personal benefits that meet the disclosure thresholds established by the SEC and are detailed in the paragraph below. Name R. K. Templeton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. R. Lizardi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. P. March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. T. Crutcher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. J. Ritchie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. G. Delagi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401(k) Contribution $ 10,800 $ 10,800 $ 5,400 $ 10,800 $ 5,400 $ 5,400 Defined Contribution Retirement Plan (a) $ 266,752 $ 39,520 N/A $ 150,004 N/A N/A Unused Vacation Time (b) — — $ 143,087 — — — (a) Consists of (i) contributions under the company’s enhanced defined contribution retirement plan of $5,400 and (ii) an additional amount of $261,352 for Mr. Templeton, $144,604 for Mr. Crutcher, and $34,120 for Mr. Lizardi accrued by TI to offset IRC limitations on amounts that could be contributed to the enhanced defined contribution retirement plan, which amount is also shown in the 2017 non-qualified deferred compensation table. (b) Represents payments for unused vacation time that could not be carried forward. The perquisites and personal benefits are as follows: $52,273 for Mr. Templeton, consisting of financial counseling, an executive physical and personal use of company aircraft ($39,950), and $10,494 for Mr. Lizardi and $11,092 for Mr. Delagi, consisting of financial counseling and an executive physical. Financial counseling and an executive physical were made available to the other named executive officers, but the amounts attributable to those officers were below the disclosure thresholds. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 31 Grants of plan-based awards in 2017 The following table shows the grants of plan-based awards to the named executive officers in 2017. Name R. K. Templeton . . . . . . . . . . . R. R. Lizardi . . . . . . . . . . . . . . K. P. March . . . . . . . . . . . . . . B. T. Crutcher . . . . . . . . . . . . . K. J. Ritchie . . . . . . . . . . . . . . R. G. Delagi . . . . . . . . . . . . . . Grant Date 1/26/17 (1) 1/26/17 (1) 1/26/17 (1) 1/26/17 (1) 1/26/17 (1) 1/26/17 (1) 1/26/17 (1) 1/26/17 (1) 1/26/17 (1) 1/26/17 (1) 1/26/17 (1) 1/26/17 (1) Date of Committee Action 1/19/17 1/19/17 1/19/17 1/19/17 1/19/17 1/19/17 1/19/17 1/19/17 1/19/17 1/19/17 1/19/17 1/19/17 All Other Stock Awards: Number of Shares of Stock or Units (#) (2) All Other Option Awards: Number of Securities Underlying Options (#) (3) 333,615 Exercise or Base Price of Option Awards ($/Sh) (4) $ 79.26 69,392 25,234 17,033 47,313 25,234 22,711 60,658 $ 79.26 81,888 $ 79.26 227,465 $ 79.26 121,315 $ 79.26 109,184 $ 79.26 Grant Date Fair Value of Stock and Option Awards (5) $ 5,500,004 $ 5,500,010 $ 1,000,013 $ 2,000,047 $ 1,350,012 $ 1,350,036 $ 3,750,006 $ 3,750,028 $ 2,000,009 $ 2,000,047 $ 1,800,016 $ 1,800,074 (1) (2) (3) (4) (5) In accordance with the grant policy of the Compensation Committee of the board (described under “Process for equity grants”), the grants became effective on the second trading day after the company released its financial results for the fourth- quarter and year 2016. The company released these results on January 24, 2017. The stock awards granted to the named executive officers in 2017 were RSU awards. These awards were made under the company’s 2009 Long-Term Incentive Plan. For information on the terms and conditions of these RSU awards, see the discussion following the Outstanding equity awards at fiscal year-end 2017 table. The options were granted under the company’s 2009 Long-Term Incentive Plan. For information on the terms and conditions of these options, see the discussion following the Outstanding equity awards at fiscal year-end 2017 table. The exercise price of the options is the closing price of TI common stock on January 26, 2017. Shown is the aggregate grant date fair value computed in accordance with ASC 718 for stock and option awards in 2017. The discussion of the assumptions used for purposes of the valuation appears in Note 4 to the financial statements in TI’s annual report on Form 10-K for the year ended December 31, 2017. None of the options or other equity awards granted to the named executive officers was repriced or modified by the company. For additional information regarding TI’s equity compensation grant practices, see the Compensation Discussion and Analysis. P R O X Y S T A T E M E N T 32 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T Outstanding equity awards at fiscal year-end 2017 The following table shows the outstanding equity awards for each of the named executive officers as of December 31, 2017. Option Awards Stock Awards Name R. K. Templeton . . . . . . . . . . . . . . . . . . . R. R. Lizardi . . . . . . . . . . . . . . . . . . . . . . K. P. March . . . . . . . . . . . . . . . . . . . . . . B. T. Crutcher . . . . . . . . . . . . . . . . . . . . . K. J. Ritchie . . . . . . . . . . . . . . . . . . . . . . R. G. Delagi . . . . . . . . . . . . . . . . . . . . . . Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable — 122,389 258,220 452,019 525,000 475,000 — 7,493 11,857 20,756 — 33,719 71,142 124,536 — — — — — — — — — 44,959 94,856 166,047 200,000 175,000 162,500 333,615 (2) 367,168 (3) 258,220 (4) 150,673 (5) — — 60,658 (2) 22,480 (3) 11,858 (4) 6,919 (5) 81,888 (2) 101,159 (3) 71,143 (4) 41,512 (5) 227,465 (2) 206,064 (3) 144,920 (4) 69,187 (5) 121,315 (2) 149,865 (3) 105,396 (4) 61,500 (5) 109,184 (2) 134,879 (3) 94,857 (4) 55,350 (5) — — — Option Exercise Price ($) $ 79.26 $ 52.93 $ 53.94 $ 44.09 $ 32.80 $ 32.36 $ 79.26 $ 52.93 $ 53.94 $ 44.09 $ 79.26 $ 52.93 $ 53.94 $ 44.09 $ 79.26 $ 52.93 $ 53.94 $ 44.09 $ 79.26 $ 52.93 $ 53.94 $ 44.09 $ 79.26 $ 52.93 $ 53.94 $ 44.09 $ 32.80 $ 32.36 $ 34.63 Option Expiration Date 1/26/2027 1/29/2026 1/28/2025 1/23/2024 1/25/2023 1/26/2022 1/26/2027 1/29/2026 1/28/2025 1/23/2024 1/26/2027 1/29/2026 1/28/2025 1/23/2024 1/26/2027 1/29/2026 1/28/2025 1/23/2024 1/26/2027 1/29/2026 1/28/2025 1/23/2024 1/26/2027 1/29/2026 1/28/2025 1/23/2024 1/25/2023 1/26/2022 1/27/2021 Number of Shares or Units of Stock That Have Not Vested (#) 69,392 (6) 92,576 (7) 90,842 (8) 111,137 (9) — — 25,234 (6) 5,668 (7) 4,172 (8) 5,104 (9) 17,033 (6) 25,506 (7) 25,028 (8) 30,620 (9) 47,313 (6) 51,956 (7) 50,983 (8) 51,032 (9) 25,234 (6) 37,786 (7) 37,079 (8) 45,362 (9) 22,711 (6) 34,008 (7) 33,371 (8) 40,826 (9) — — — Market Value of Shares or Units of Stock That Have Not Vested ($) (1) $ 7,247,300 $ 9,668,637 $ 9,487,538 $ 11,607,148 — — $ 2,635,439 591,966 $ 435,724 $ 533,062 $ $ 1,778,927 $ 2,663,847 $ 2,613,924 $ 3,197,953 $ 4,941,370 $ 5,426,285 $ 5,324,665 $ 5,329,782 $ 2,635,439 $ 3,946,370 $ 3,872,531 $ 4,737,607 $ 2,371,937 $ 3,551,796 $ 3,485,267 $ 4,263,867 — — — (1) Calculated by multiplying the number of RSUs by the closing price of TI common stock on December 29, 2017 ($104.44). (2) One-quarter of the shares became exercisable on January 26, 2018, and one-third of the remaining shares become exercisable on each of January 26, 2019, January 26, 2020, and January 26, 2021. (3) One-third of the shares became exercisable on January 29, 2018, and one-half of the remaining shares become exercisable on each of January 29, 2019, and January 29, 2020. (4) One-half of the shares became exercisable on January 28, 2018, and the remaining one-half become exercisable on January 28, 2019. Became fully exercisable on January 23, 2018. Vesting date is February 1, 2021. Vesting date is January 31, 2020. Vesting date is January 31, 2019. Vested on January 31, 2018. (5) (6) (7) (8) (9) T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 33 T N E M E T A T S Y X O R P The “Option Awards” shown in the table above are non-qualified stock options, each of which represents the right to purchase shares of TI common stock at the stated exercise price. The exercise price is the closing price of TI common stock on the grant date. The term of each option is 10 years unless the option is terminated earlier pursuant to provisions summarized in the chart below and in the paragraph following the chart. Options vest (become exercisable) in increments of 25 percent per year beginning on the first anniversary of the date of the grant. The chart below shows the termination provisions relating to stock options outstanding as of December 31, 2017. The Compensation Committee of the board of directors established these termination provisions to promote employee retention while offering competitive terms. Employment Termination Due to Death or Permanent Disability Vesting continues; option remains in effect to end of term Employment Termination (at Least 6 Months after Grant) When Retirement Eligible* Vesting continues; option remains in effect to end of term Employment Termination (at Least 6 Months after Grant) with 20 Years of Credited Service, but Not Retirement Eligible** Option remains in effect to end of term; vesting does not continue after employment termination Employment Termination for Cause Option cancels Other Circumstances of Employment Termination Option remains exercisable for 30 days * Defined for purposes of equity awards made after 2012 as at least age 55 with 10 or more years of TI service or at least age 65. For awards made before 2013, the definition of normal or early retirement eligibility in the relevant pension plan applies (see “2017 pension benefits”). ** This provision is not applicable to grants made after 2012. Options may be cancelled if, during the two years after employment termination, the grantee competes with TI or solicits TI employees to work for another company, or if the grantee discloses TI trade secrets. In addition, for options received while the grantee was an executive officer, the company may reclaim (or “claw back”) profits earned under grants if the officer engages in such conduct. These provisions are intended to strengthen retention and provide a reasonable remedy to TI in case of competition, solicitation of our employees or disclosure of our confidential information. Options granted after 2009 become fully vested if the grantee is involuntarily terminated from employment with TI (other than for cause) within 24 months after a change in control of TI. “Change in control” is defined as provided in the Texas Instruments 2009 Long-Term Incentive Plan and occurs upon (1) acquisition of more than 50 percent of the voting stock or at least 80 percent of the assets of TI or (2) change of a majority of the board of directors in a 12-month period unless a majority of the directors then in office endorsed the appointment or election of the new directors (“Plan definition”). These terms are intended to reduce employee uncertainty and distraction in the period leading up to a change in control, if such an event were to occur. For options granted before 2010, the stock option terms provide that upon a change in control of TI, the option becomes fully vested to the extent it is then outstanding; and if employment termination (except for cause) has occurred within 30 days before the change in control, the change in control is deemed to have occurred first. “Change in control” is defined in these pre-2010 options as (1) acquisition of 20 percent of TI common stock other than through a transaction approved by the board of directors, or (2) change of a majority of the board of directors in a 24-month period unless a majority of the directors then in office have elected or nominated the new directors (together, the “pre-2010 definition”). The “Stock Awards” column in the table of outstanding equity awards at fiscal year-end 2017 are RSU awards. Each RSU represents the right to receive one share of TI common stock on a stated date (the “vesting date”) unless the award is terminated earlier under terms summarized below. In general, the vesting date is approximately four years after the grant date. Each RSU includes the right to receive dividend equivalents, which are paid annually in cash at a rate equal to the amount paid to stockholders in dividends. The table below shows the termination provisions of RSUs outstanding as of December 31, 2017. Employment Termination Due to Death or Permanent Disability Vesting continues; shares are paid at the scheduled vesting date Employment Termination (at Least 6 Months after Grant) When Retirement Eligible Vesting continues; shares are paid at the scheduled vesting date Employment Termination For Cause Other Circumstances of Employment Termination Grant cancels; no shares are issued Grant cancels; no shares are issued P R O X Y S T A T E M E N T 34 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T These termination provisions are intended to promote retention. All RSU awards contain cancellation and clawback provisions like those described above for stock options. The terms provide that, to the extent permitted by Section 409A of the IRC, the award vests upon involuntary termination of TI employment within 24 months after a change in control. Change in control is the Plan definition. These cancellation, clawback and change-in-control terms are intended to conform RSU terms with those of stock options (to the extent permitted by the IRC) and to achieve the objectives described above in the discussion of stock options. In addition to the “Stock Awards” shown in the outstanding equity awards at fiscal year-end 2017 table, Mr. Templeton holds an award of RSUs that was granted in 1995. The award, for 120,000 shares of TI common stock, vested in 2000. Under the award terms, the shares will be issued to Mr. Templeton in March of the year after his termination of employment for any reason. These terms were designed to provide a tax benefit to the company by postponing the related compensation expense until it was likely to be fully deductible. In accordance with SEC requirements, this award is reflected in the 2017 non-qualified deferred compensation table. 2017 option exercises and stock vested The following table lists the number of shares acquired and the value realized as a result of option exercises by the named executive officers in 2017 and the value of any RSUs that vested in 2017. For option exercises, the value realized is calculated by multiplying the number of shares acquired by the difference between the exercise price and the market price of TI common stock on the exercise date. For RSUs, the value realized is calculated by multiplying the number of RSUs that vested by the market price of TI common stock on the vesting date. Name R. K. Templeton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. R. Lizardi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. P. March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. T. Crutcher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. J. Ritchie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. G. Delagi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 pension benefits Option Awards Stock Awards Number of Shares Acquired on Exercise (#) 990,000 5,625 300,000 339,043 266,849 238,750 Value Realized on Exercise ($) $ 57,796,600 $ 257,047 $ 16,750,191 $ 14,093,292 $ 9,480,310 $ 18,206,506 Number of Shares Acquired on Vesting (#) 175,000 7,500 50,000 75,000 66,667 66,667 Value Realized on Vesting ($) $ 13,632,500 $ 584,250 $ 3,895,000 $ 5,842,500 $ 5,193,359 $ 5,193,359 The following table shows the present value as of December 31, 2017, of the benefit of the named executive officers under our qualified defined benefit pension plan (TI Employees Pension Plan) and non-qualified defined benefit pension plans (TI Employees Non-Qualified Pension Plan (which governs amounts earned before 2005) and TI Employees Non-Qualified Pension Plan II (which governs amounts earned after 2004)). In accordance with SEC requirements, the amounts shown in the table do not reflect any named executive officer’s retirement eligibility or any increase in benefits that may result from the named executive officer’s continued employment after December 31, 2017. Name (1) R. K. Templeton (2) . . . . . . K. P. March . . . . . . . . . . . . Plan Name TI Employees Pension Plan TI Employees Non-Qualified Pension Plan TI Employees Non-Qualified Pension Plan II TI Employees Pension Plan TI Employees Non-Qualified Pension Plan TI Employees Non-Qualified Pension Plan II B. T. Crutcher (2) . . . . . . . . TI Employees Pension Plan K. J. Ritchie . . . . . . . . . . . R. G. Delagi . . . . . . . . . . . . TI Employees Pension Plan TI Employees Non-Qualified Pension Plan TI Employees Non-Qualified Pension Plan II TI Employees Pension Plan TI Employees Non-Qualified Pension Plan TI Employees Non-Qualified Pension Plan II Number of Years Credited Service (#) 16 (3) 16 (3) 16 (5) 31.8 (3) 19 (4) 31.8 (5) 0.9 (3) 38 (3) 25 (4) 38 (5) 32 (3) 19 (4) 32 (5) Present Value of Accumulated Benefit ($) $ $ $ 820,318 (6) 373,837 (6) 230,434 (6) — — $ 9,453,650 (7) $ 5,809 (6) $ 1,787,262 (6) $ 667,115 (6) $10,465,884 (6) $ 1,167,992 (6) $ 335,334 (6) $ 6,021,538 (6) Payments During Last Fiscal Year ($) — — — $1,559,211 $ 259,758 — — — — — — — — (1) Mr. Lizardi does not participate in any of the company’s defined benefit pension plans because he joined TI after these plans were closed to new participants. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 35 T N E M E T A T S Y X O R P (2) (3) (4) (5) (6) In 1997, TI’s U.S. employees were given the choice between continuing to participate in the defined benefit pension plans or participating in a new enhanced defined contribution retirement plan. Messrs. Templeton and Crutcher chose to participate in the defined contribution plan. Accordingly, their accrued pension benefits under the qualified and non-qualified plans were frozen (i.e., they will experience no increase attributable to years of service or change in eligible earnings) as of December 31, 1997. Contributions to the defined contribution plan for Mr. Templeton’s and Mr. Crutcher’s benefits are included in the 2017 summary compensation table. For each of the named executive officers, credited service began on the date the officer became eligible to participate in the plan. For Mr. Crutcher, eligibility to participate began on the first day of the month following completion of one year of employment. For each of the other named executive officers, eligibility to participate began on the earlier of 18 months of employment, or January 1 following the completion of one year of employment. Accordingly, each of the named executive officers has been employed by TI for longer than the years of credited service shown above. Credited service began on the date the named executive officer became eligible to participate in the TI Employees Pension Plan as described in note 3 above and ceased at December 31, 2004. Credited service began on the date the named executive officer became eligible to participate in the TI Employees Pension Plan as described in note 3 above. The assumptions and valuation methods used to calculate the present value of the accumulated pension benefits shown are the same as those used by TI for financial reporting purposes and are described in Note 10 to the financial statements contained in Item 8 in TI’s annual report on Form 10-K for the year ended December 31, 2017, except that a named executive officer’s retirement is assumed (in accordance with SEC rules) for purposes of this table to occur at age 65 and no assumption for termination prior to that date is used. The amount of the lump-sum benefit earned as of December 31, 2017, is determined using either (i) the Pension Benefit Guaranty Corporation (PBGC) interest assumption of 1.00 percent or (ii) the Pension Protection Act of 2006 (PPA) corporate bond yield interest assumption of 3.75 percent for the TI Employees Pension Plan and 3.77 percent for the TI Employees Non-Qualified Pension Plans, whichever rate produces the higher lump-sum amount. A discount rate assumption of 3.75 percent for the TI Employees Pension Plan and 3.77 percent for the non-qualified pension plans was used to determine the present value of each lump sum. (7) Mr. March retired from the company on November 1, 2017. His TI Employees Non-Qualified Pension Plan II benefit will be paid to him on June 1, 2018, as required by Section 409A of the IRC. The benefit is calculated using the Plan’s assumptions in effect on December 1, 2017. TI Employees Pension Plan The TI Employees Pension Plan is a qualified defined benefit pension plan. See “Benefits – Retirement plans” for a discussion of the origin and purpose of the plan. Employees who joined the U.S. payroll after November 30, 1997, are not eligible to participate in this plan. A plan participant is eligible for normal retirement under the terms of the plan if he is at least 65 years of age with one year of credited service. A participant is eligible for early retirement if he is at least 55 years of age with 20 years of employment or 60 years of age with five years of employment. As of December 31, 2017, Mr. Templeton and Mr. Ritchie were eligible for early or normal retirement. A participant may request payment of his accrued benefit at termination or any time thereafter. Participants may choose a lump-sum payment or one of six forms of annuity. In order of largest to smallest periodic payment, the forms of annuity are: (i) single life annuity, (ii) 5-year certain and life annuity, (iii) 10-year certain and life annuity, (iv) joint and 50 percent survivor annuity, (v) joint and 75 percent survivor annuity, and (vi) joint and 100 percent survivor annuity. If the participant does not request payment, he will begin to receive his benefit in April of the year after he reaches the age of 701/2 in the form of annuity required under the IRC. The pension formula for the qualified plan is intended to provide a participant with an annual retirement benefit equal to 1.5 percent multiplied by the product of (i) years of credited service and (ii) the average of the five highest consecutive years of his base salary plus bonus up to a limit imposed by the IRS, less a percentage (based on his year of birth, when he elects to retire and his years of service with TI) of the amount of compensation on which his Social Security benefit is based. If an individual takes early retirement and chooses to begin receiving his annual retirement benefit at that time, such benefit is reduced by an early retirement factor. As a result, the annual benefit is lower than the one he would have received at age 65. 36 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T If the participant’s employment terminates due to disability, the participant may choose to receive his accrued benefit at any time prior to age 65. Alternatively, the participant may choose to defer receipt of the accrued benefit until reaching age 65 and then take a disability benefit. The disability benefit paid at age 65 is based on salary and bonus, years of credited service the participant would have accrued to age 65 had he not become disabled and disabled status. The benefit payable in the event of death is based on salary and bonus, years of credited service and age at the time of death, and may be in the form of a lump sum or annuity at the election of the beneficiary. The earliest date of payment is the first day of the second calendar month following the month of death. Leaves of absence, including a bridge to retirement, are credited to years of service under the qualified pension plan. See the discussion of leaves of absence under “Potential payments upon termination or change in control – Termination – Perquisites.” TI employees non-qualified pension plans TI has two non-qualified pension plans: the TI Employees Non-Qualified Pension Plan (Plan I), which governs amounts earned before 2005; and the TI Employees Non-Qualified Pension Plan II (Plan II), which governs amounts earned after 2004. Each is a non-qualified defined benefit pension plan. See “Benefits – Retirement plans” for a discussion of the purpose of the plans. As with the qualified defined benefit pension plan, employees who joined the U.S. payroll after November 30, 1997, are not eligible to participate in Plan I or Plan II. Eligibility for normal and early retirement under these plans is the same as under the qualified plan (see above). Benefits are paid in a lump sum. A participant’s benefits under Plan I and Plan II are calculated using the same formula as described above for the TI Employees Pension Plan. However, the IRS limit on the amount of compensation on which a qualified pension benefit may be calculated does not apply. Additionally, the IRS limit on the amount of qualified benefit the participant may receive does not apply to these plans. Once this non-qualified benefit amount has been determined using the formula described above, the individual’s qualified benefit is subtracted from it. The resulting difference is multiplied by an age-based factor to obtain the amount of the lump-sum benefit payable to an individual under the non-qualified plans. Amounts under Plan I will be distributed when payment of the participant’s benefit under the qualified pension plan commences. Amounts under Plan II will be distributed subject to the requirements of Section 409A of the IRC. Because the named executive officers are among the 50 most highly compensated officers of the company, Section 409A of the IRC requires that they not receive any lump-sum distribution payment under Plan II before the first day of the seventh month following termination of employment. If a participant terminates due to disability, amounts under Plan I will be distributed when payment of the participant’s benefit under the qualified plan commences. For amounts under Plan II, distribution is governed by Section 409A of the IRC, and the disability benefit is reduced to reflect the payment of the benefit prior to age 65. In the event of death, payment under both plans is based on salary and bonus, years of credited service and age at the time of death and will be in the form of a lump sum. The earliest date of payment is the first day of the second calendar month following the month of death. Balances in the plans are unsecured obligations of the company. For amounts under Plan I, in the event of a change in control, the present value of the individual’s benefit would be paid not later than the month following the month in which the change in control occurred. For such amounts, the pre-2010 definition of a change in control (see the discussion following the Outstanding equity awards at fiscal year-end 2017 table) applies. For all amounts accrued under this plan, if a sale of substantially all of the assets of the company occurred, the present value of the individual’s benefit would be distributed in a lump sum as soon as reasonably practicable following the sale of assets. For amounts under Plan II, no distribution of benefits is triggered by a change in control. Leaves of absence, including a bridge to retirement, are credited to years of service under the non-qualified pension plans. For a discussion of leaves of absence, see “Potential payments upon termination or change in control – Termination – Perquisites.” TI Employees Survivor Benefit Plan TI’s qualified and non-qualified pension plans provide that upon the death of a retirement-eligible employee, the employee’s beneficiary receives a payment equal to half of the benefit to which the employee would have been entitled under the pension plans had he retired instead of died. We have a survivor benefit plan that pays the beneficiary a lump sum that, when added to the reduced amounts the beneficiary receives under the pension plans, equals the benefit the employee would have been entitled to receive had he retired instead of died. Because Messrs. Templeton and Ritchie were eligible for early retirement in 2017, their beneficiaries would be eligible for benefits under the survivor benefit plan if they were to die. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 37 T N E M E T A T S Y X O R P 2017 non-qualified deferred compensation The following table shows contributions to each named executive officer’s deferred compensation account in 2017 and the aggregate amount of his deferred compensation as of December 31, 2017. Name R. K. Templeton . . . . . . . . R. R. Lizardi . . . . . . . . . . . K. P. March . . . . . . . . . . . B. T. Crutcher . . . . . . . . . K. J. Ritchie . . . . . . . . . . . R. G. Delagi . . . . . . . . . . . Executive Contributions in Last FY ($) (1) Registrant Contributions in Last FY ($) (2) Aggregate Earnings in Last FY ($) $ 173,640 48,833 — $ 120,000 — — $ 261,352 $ 34,120 — $ 144,604 — — $ 4,211,140 (3) 60,827 $ — 225,479 — — $ Aggregate Withdrawals/ Distributions ($) $ 254,400 (4) — — — — — Aggregate Balance at Last FYE ($) (5) $ 14,576,748 (6) 368,475 $ — $ 1,932,834 — — (1) (2) (3) (4) (5) Amount shown for Mr. Templeton includes a portion of his salary and bonus paid in 2017; for Mr. Crutcher includes a portion of his salary and bonus paid in 2017; and for Mr. Lizardi includes a portion of his salary paid in 2017. Company matching contributions pursuant to the defined contribution plan. These amounts are included in the All Other Compensation column of the 2017 summary compensation table. Consists of: (a) $254,400 in dividend equivalents paid under the 120,000-share 1995 RSU award previously discussed, settlement of which has been deferred until after termination of employment; (b) a $3,776,400 increase in the value of the RSU award (calculated by subtracting the value of the award at year-end 2016 from the value of the award at year-end 2017 (in both cases, the number of RSUs is multiplied by the closing price of TI common stock on the last trading date of the year)); and (c) a $180,340 gain in Mr. Templeton’s deferred compensation account in 2017. Dividend equivalents are paid at the same rate as dividends on TI common stock. Consists of dividend equivalents paid on the RSU award discussed in note 3. All amounts contributed by a named executive officer and by the company in prior years have been reported in the Summary Compensation Table in previously filed proxy statements in the year earned to the extent he was a named executive officer for purposes of the SEC’s executive compensation disclosure. (6) Of this amount, $12,532,800 is attributable to Mr. Templeton’s 1995 RSU award, calculated as described in note 3. The remainder is the balance of his deferred compensation account. See “Benefits – Retirement plans” for a discussion of the purpose of the plan. An employee’s deferred compensation account contains eligible compensation the employee has elected to defer and contributions by the company that are in excess of the IRS limits on (i) contributions the company may make to the enhanced defined contribution plan and (ii) matching contributions the company may make related to compensation the executive officer deferred into his deferred compensation account. Participants in the deferred compensation plan may choose to defer up to (i) 25 percent of their base salary, (ii) 90 percent of their performance bonus, and (iii) 90 percent of profit sharing. Elections to defer compensation must be made in the calendar year prior to the year in which the compensation will be earned. During 2017, participants could choose to have their deferred compensation mirror the performance of one or more of the following mutual funds, each of which is managed by a third party (these alternatives, which may be changed at any time, are the same as those offered to participants in the defined contribution plans): BlackRock MSCI ACWI ex-U.S. IMI Index Non-Lendable Fund F and BlackRock MSCI ACWI ex-U.S. IMI Index Lendable Fund F, Northern Trust Short Term Investment Fund, Northern Trust Aggregate Bond Index Fund-Lending, Northern Trust Russell 1000 Value Index Fund-Lending, Northern Trust Russell 1000 Growth Index Fund-Lending, Northern Trust Russell 2000 Index Fund-Lending, Northern Trust MidCap 400 Index Fund-Lending, Fidelity Puritan Fund, BlackRock Equity Index Fund F, BlackRock (EAFE) (Europe, Australia, Far East) Equity Index Fund F, BlackRock Lifepath Index 2020 Fund F, BlackRock Lifepath Index 2030 Fund F, BlackRock Lifepath Index 2040 Fund F, BlackRock Lifepath Index 2050 Fund F and BlackRock Lifepath Index Retirement Fund F. From among the available investment alternatives, participants may change their instructions relating to their deferred compensation daily. Earnings on a participant’s balance are determined solely by the performance of the investments that the participant has chosen for his plan balance. The company does not guarantee any minimum return on investments. A third party administers the company’s deferred compensation program. A participant may request distribution from the plan in the case of an unforeseeable emergency. To obtain an unforeseeable emergency withdrawal, a participant must meet the requirements of Section 409A of the IRC. Otherwise, a participant’s balance is paid pursuant to his distribution election and is subject to applicable IRC limitations. 38 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T Amounts contributed by the company, and amounts earned and deferred by the participant for which there is a valid distribution election on file, will be distributed in accordance with the participant’s election. Annually participants may elect separate distribution dates for deferred compensation attributable to a participant’s (i) bonus and profit sharing and (ii) salary. Participants may elect that these distributions be in the form of a lump sum or annual installments to be paid out over a period of five or ten consecutive years. Amounts for which no valid distribution election is on file will be distributed three years from the date of deferral. In the event of the participant’s death, payment will be in the form of a lump sum and the earliest date of payment is the first day of the second calendar month following the month of death. For any other circumstance resulting in termination of employment, payments are distributed in accordance with the participant’s valid distribution election. Like the balances under the non-qualified defined benefit pension plans, deferred compensation balances are unsecured obligations of the company. For amounts earned and deferred prior to 2010, a change in control does not trigger a distribution under the plan. For amounts earned and deferred after 2009, distribution occurs, to the extent permitted by Section 409A of the IRC, if the participant is involuntarily terminated within 24 months after a change in control. Change in control is the Plan definition. Potential payments upon termination or change in control None of the named executive officers has an employment contract with the company. They are eligible for benefits on generally the same terms as other U.S. employees upon termination of employment or change in control of the company. TI does not reimburse executive officers for any income or excise taxes that are payable by the executive as a result of payments relating to termination or change in control. For a discussion of the impact of these programs on the compensation decisions for 2017, see “Analysis of compensation determinations for 2017 – Total compensation” and “Compensation following employment termination or change in control.” Termination The following programs may result in payments to a named executive officer whose employment terminates. Most of these programs have been discussed above. Bonus Our policies concerning bonus and the timing of payments are described under “Compensation philosophy and elements.” Whether a bonus would be awarded under other circumstances and in what amount would depend on the facts and circumstances of termination and is subject to the Compensation Committee’s discretion. If awarded, bonuses are paid by the company. Qualified and non-qualified defined benefit pension plans The purposes of these plans are described under “Benefits – Retirement plans.” The formula for determining benefits, the forms of benefit and the timing of payments are described under “2017 pension benefits.” The amounts disbursed under the qualified and non-qualified plans are paid, respectively, by the TI Employees Pension Trust and the company. Survivor benefit plan The purpose of this plan, along with the formula for determining the amount of benefit, the form of benefit and the timing of payments, are described under “2017 pension benefits – TI Employees Survivor Benefit Plan.” Amounts distributed are paid by the TI Employees Health Benefit Trust. Deferred compensation plan The purpose of this plan is described under “Benefits – Deferred Compensation.” The amounts payable under this program depend solely on the performance of investments that the participant has chosen for his plan balance. The timing of payments is discussed under “2017 non-qualified deferred compensation” and except in the case of death, payments are made according to the participant’s distribution election. Amounts distributed are paid by the company. T N E M E T A T S Y X O R P Equity compensation Depending on the circumstances of termination, grantees whose employment terminates may retain the right to exercise previously granted stock options and receive shares under outstanding RSU awards as described in the discussion following the Outstanding equity awards at fiscal year-end 2017 table. RSU awards include a right to receive dividend equivalents. The dividend equivalents are paid annually by the company in a single cash payment after the last dividend payment of the year. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 39 Perquisites Financial counseling is provided to executive officers for a transition period following retirement. Otherwise, no perquisites continue after termination of employment. In the case of a resignation pursuant to a separation arrangement, an executive officer (like other employees above a certain job grade level) will typically be offered a 12-month paid leave of absence before termination, in exchange for a non-compete and non-solicitation commitment and a release of claims against the company. The leave period will be credited to years of service under the pension plans described above. During the leave, the executive officer’s stock options will continue to become exercisable and his RSUs will continue to vest. Amounts paid to an individual during a paid leave of absence are not counted when calculating benefits under the qualified and non-qualified pension plans. In the case of a separation arrangement in which the executive officer will be at least 50 years old and have at least 15 years of employment with the company on his or her last day of active employment before beginning the paid leave of absence, the separation arrangement will typically include an unpaid leave of absence, to commence at the end of the paid leave and end when the executive officer has reached age 55 (bridge to retirement). During the bridge to retirement, years of service will continue to accrue under the qualified and non-qualified pension plans described above. Stock options will continue to become exercisable and RSUs will remain in effect. Change in control Our only program, plan or arrangement providing benefits triggered by a change in control is the TI Employees Non-Qualified Pension Plan. A change in control at December 31, 2017, would have accelerated payment of the balance under that plan. See “2017 pension benefits – TI employees non-qualified pension plans” for a discussion of the purpose of change in control provisions of that plan as well as the circumstances and the timing of payment. Upon a change in control there is no acceleration of vesting of stock options and RSUs granted after 2009. Only upon an involuntary termination (not for cause) within 24 months after a change in control of TI will the vesting of such stock options and RSUs accelerate. See the discussion following the Outstanding equity awards at fiscal year-end 2017 table for further information concerning change in control provisions relating to stock options and RSUs. P R O X Y S T A T E M E N T 40 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T The table below shows the potential payments upon termination or change in control for each of the named executive officers. Form of Compensation R. K. Templeton (1) Qualified Defined Benefit Pension Plan . . . . . . . . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan II . . . . . . . . . . . . Survivor Benefit Plan . . . . . . . . . Deferred Compensation . . . . . . . RSUs . . . . . . . . . . . . . . . . . . . . . Stock Options . . . . . . . . . . . . . . . R. K. Templeton Total . . . . . . R. R. Lizardi Qualified Defined Benefit Pension Plan . . . . . . . . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan II . . . . . . . . . . . . Survivor Benefit Plan . . . . . . . . . Deferred Compensation . . . . . . . RSUs . . . . . . . . . . . . . . . . . . . . . Stock Options . . . . . . . . . . . . . . . R. R. Lizardi Total . . . . . . . . . K. P. March (13) Qualified Defined Benefit Pension Plan . . . . . . . . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan II . . . . . . . . . . . . Survivor Benefit Plan . . . . . . . . . Deferred Compensation . . . . . . . RSUs . . . . . . . . . . . . . . . . . . . . . Stock Options . . . . . . . . . . . . . . . . . . . . . . . . K. P. March Total B. T. Crutcher Qualified Defined Benefit Pension Plan . . . . . . . . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan II . . . . . . . . . . . . Survivor Benefit Plan . . . . . . . . . Deferred Compensation . . . . . . . RSUs . . . . . . . . . . . . . . . . . . . . . Stock Options . . . . . . . . . . . . . . . . . . . . . . B. T. Crutcher Total K. J. Ritchie (1) Qualified Defined Benefit Pension Plan . . . . . . . . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan II . . . . . . . . . . . . Survivor Benefit Plan . . . . . . . . . Deferred Compensation . . . . . . . RSUs . . . . . . . . . . . . . . . . . . . . . Stock Options . . . . . . . . . . . . . . . K. J. Ritchie Total . . . . . . . . . R. G. Delagi Qualified Defined Benefit Pension Plan . . . . . . . . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan . . . . . . . . . . . . . Non-Qual. Defined Benefit Pension Plan II . . . . . . . . . . . . Survivor Benefit Plan . . . . . . . . . Deferred Compensation . . . . . . . RSUs . . . . . . . . . . . . . . . . . . . . . Stock Options . . . . . . . . . . . . . . . . . . . . . . . . R. G. Delagi Total Disability Death Involuntary Termination for Cause Resignation; Involuntary Termination (not for Cause) Retirement Change in Control $ $ $ 1,011,331 (2) 609,677 (5) 224,202 (5) — — $ 50,543,425 (8) $167,919,189 (11) $220,307,824 $ $ 487,120 (3) 220,490 (3) 135,713 (3) $ 822,814 (6) $ $ 2,043,948 (7) $ 50,543,425 (8) $167,919,189 (11) $222,172,699 $ $ $ 962,396 (4) 435,375 (4) 268,366 (4) — — $ $ $ $ $ $ 962,396 (4) 435,375 (4) 268,366 (4) — — 962,396 (4) — 435,375 (4) $ 435,375 (4) 268,366 (4) — — — — — $12,532,800 (9) — $14,198,937 $ 50,543,425 (10) $167,919,189 (11) $220,128,751 $ 50,543,425 (10) $167,919,189 (11) $220,128,751 $12,532,800 (9) — $12,968,175 — — — — — 4,196,190 (8) 5,939,071 (11) $ $ $ 10,135,261 — — — — 368,475 (7) 4,196,190 (8) 5,939,071 (11) $ $ $ $ 10,503,736 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — $ $ 2,237,368 (12) 2,237,368 — — — — — — — — — — — — — — — — $ $ $ 1,559,211 (14) 259,758 (14) 9,453,650 (15) — — — — $ 11,272,619 $ 11,492 (2) $ 2,180 (3) $ 4,509 (4) $ 4,509 (4) — — — — $ 21,022,101 (8) $ 27,835,821 (11) $ 48,869,414 — — — $ 1,932,834 (7) $ 21,022,101 (8) $ 27,835,821 (11) $ 50,792,936 $ — — — — — — 4,509 — — — — — — — — 1,993,953 (4) — — — — — — 4,509 1,993,953 (4) 749,469 (4) $ $ $ $ $ 1,371,524 (3) $ 1,993,953 (4) 513,892 (3) $ 749,469 (4) $ $ 2,238,116 (2) 926,549 (5) $ 12,320,242 (5) — — $ $ $ $ $ 15,191,947 (8) $ 19,808,281 (11) $ 50,485,135 $ 15,191,947 (8) $ 19,808,281 (11) $ 49,241,847 7,910,563 (3) 4,445,640 (6) — $11,498,197 (4) $ 11,498,197 (4) $ 11,498,197 (4) — — — — $14,241,619 — — — — $ 15,191,947 (10) $ 19,808,281 (11) $ 49,241,847 $ 15,191,947 (10) $ 19,808,281 (11) $ 49,241,847 $ 749,469 (4) $ 749,469 (4) $ $ $ 2,190,303 (2) 522,241 (5) 8,624,747 (5) $ $ $ 530,261 (3) $ 1,051,311 (4) 153,560 (3) $ 303,025 (4) 2,743,800 (3) $ 5,441,373 (4) — — $ 13,672,867 (8) $ 73,240,649 (11) $ 98,250,807 $ 13,672,867 (8) $ 73,240,649 (11) $ 90,341,137 — — — $ 6,795,709 $ $ $ 1,051,311 (4) 303,025 (4) 5,441,373 (4) — — $ 55,413,128 (12) $ 62,208,837 — — — — — — — — T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 41 T N E M E T A T S Y X O R P — — — — — 749,469 — $ 303,025 (4) — — — — — 303,025 $ — — — — — — — — — — — — — — — — — — — — — — — — — (1) Messrs. Templeton and Ritchie were retirement eligible for purposes of TI’s defined benefit pension plans and under the terms of their equity compensation awards as of December 31, 2017. (2) (3) (4) (5) (6) (7) (8) The amount shown is the lump-sum benefit payable at age 65 to the named executive officer in the event of termination as of December 31, 2017, due to disability, assuming the named executive officer does not request payment of his disability benefit until age 65. The assumptions used in calculating these amounts are the same as the age-65 lump-sum assumptions used for financial reporting purposes for the company’s audited financial statements for 2017 and are described in note 6 to the 2017 pension benefits table. Value of the benefit payable in a lump sum to the executive officer’s beneficiary calculated as required by the terms of the plan assuming the earliest possible payment date. The plan provides that in the event of death, the beneficiary receives 50 percent of the participant’s accrued benefit, reduced by the age-applicable joint and 50 percent survivor factor. Lump-sum value of the accrued benefit as of December 31, 2017, calculated as required by the terms of the plans assuming the earliest possible payment date. The amount shown is the lump-sum benefit payable at age 65, in the case of the Non-Qualified Defined Benefit Pension Plan, or separation from service in the case of Plan II. The assumptions used are the same as those described in note 2 above. Calculated as required by the terms of the plan assuming the earliest possible payment date. Balance as of December 31, 2017, under the non-qualified deferred compensation plan. For all other termination events, balances are distributed in accordance with the participant’s distribution election. Calculated by multiplying the number of outstanding RSUs by the closing price of TI common stock as of December 29, 2017 ($104.44). In the event of termination due to disability or death, all outstanding awards will continue to vest according to their terms. See the first table under “Outstanding equity awards at fiscal year-end 2017” for the number of unvested RSUs as of December 31, 2017, and the related discussion following that table of an additional outstanding RSU award held by Mr. Templeton. (9) Calculated by multiplying the previously discussed 120,000 vested RSUs by the closing price of TI common stock as of December 29, 2017 ($104.44). (10) Due to retirement eligibility, calculated by multiplying the number of outstanding RSUs held at such termination by the closing price of TI common stock as of December 29, 2017 ($104.44). RSU awards stay in effect and pay out shares according to the vesting schedule. (11) Calculated as the difference between the grant price of all outstanding in-the-money options and the closing price of TI common stock as of December 29, 2017 ($104.44), multiplied by the number of shares under such options as of December 31, 2017. (12) Calculated as the difference between the grant price of all exercisable in-the-money options and the closing price of TI common stock as of December 29, 2017 ($104.44), multiplied by the number of shares under such options as of December 31, 2017. (13) Mr. March retired from the company on November 1, 2017. (14) Benefit paid to Mr. March on December 1, 2017. (15) Calculated using the Plan’s assumptions in effect on December 1, 2017. Amount will be paid on June 1, 2018, as required by Section 409A of the IRC. P R O X Y S T A T E M E N T 42 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T Pay Ratio For 2017, the median of annual total compensation of all employees of our company (other than our CEO), was $78,951. The annual total compensation of our CEO was $16,573,019. Based on this information, the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all employees was approximately 210 to 1. To identify the median of the annual total compensation of all our employees, as well as to determine the annual total compensation of the “median employee,” we used the following methodology and material assumptions, adjustments and estimates: • We selected October 5, 2017, as the date upon which we would identify the “median employee.” • As of this date, our employee population consisted of approximately 29,973 individuals working at the company and consolidated subsidiaries, excluding employees on leaves of absence who are not expected to return to work. • To identify the “median employee,” we used base salary and profit sharing information, each of which is paid to all employees. Salaries were annualized for all permanent employees who were employees for less than the full fiscal year or who were on an unpaid leave of absence during a portion of the year. • We identified and calculated the elements of the median employee’s compensation for 2017 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, including the value of the employee’s health and welfare benefits (estimated for the employee and the employee’s eligible dependents) and retirement-related benefits. • We applied the exchange rate that we utilize in our payroll system, as of the identification date, to convert foreign currency to U.S. dollars. The annual total compensation of our CEO is the amount reported in the “Total” column of our 2017 Summary Compensation Table, adding in the value of health and welfare benefits (estimated for our CEO and his eligible dependents) and retirement- related benefits. This resulted in annual total compensation for purposes of determining the ratio in the amount of $16,573,019. Audit Committee report The Audit Committee of the board of directors has furnished the following report: As noted in the committee’s charter, TI management is responsible for preparing the company’s financial statements. The company’s independent registered public accounting firm is responsible for auditing the financial statements. The activities of the committee are in no way designed to supersede or alter those traditional responsibilities. The committee’s role does not provide any special assurances with regard to TI’s financial statements, nor does it involve a professional evaluation of the quality of the audits performed by the independent registered public accounting firm. The committee has reviewed and discussed with management and the independent accounting firm, as appropriate, (1) the audited financial statements and (2) management’s report on internal control over financial reporting and the independent accounting firm’s related opinions. The committee has discussed with the independent registered public accounting firm, Ernst & Young, the required communications specified by auditing standards together with guidelines established by the SEC and the Sarbanes-Oxley Act. The committee has received the written disclosures and the letter from the independent registered public accounting firm required by the applicable requirements of the Public Company Accounting Oversight Board, regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence, and has discussed with Ernst & Young the firm’s independence. Based on the review and discussions referred to above, the committee recommended to the board of directors that the audited financial statements be included in the company’s annual report on Form 10-K for 2017 for filing with the SEC. Mark A. Blinn, Chair Todd M. Bluedorn Janet F. Clark Jean M. Hobby T N E M E T A T S Y X O R P Proposal to ratify appointment of independent registered public accounting firm The Audit Committee of the board has the authority and responsibility for the appointment, compensation, retention and oversight of the work of TI’s independent registered public accounting firm. The Audit Committee has appointed Ernst & Young LLP to be TI’s T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 43 independent registered public accounting firm for 2018. TI has engaged Ernst & Young or a predecessor firm to serve as the company’s independent registered public accounting firm for over 60 years. In order to assure continuing auditor independence, the Audit Committee periodically considers whether the annual audit of TI’s financial statements should be conducted by another firm. The lead audit partner on the TI engagement serves no more than five consecutive years in that role, in accordance with SEC rules. The Audit Committee Chair and management have direct input into the selection of the lead audit partner. The members of the Audit Committee and the board believe that the continued retention of Ernst & Young to serve as the company’s independent registered public accounting firm is in the best interest of the company and its investors. Consequently, the board asks the stockholders to ratify the appointment of Ernst & Young. If the stockholders do not ratify the appointment, the Audit Committee will consider whether it should appoint another independent registered public accounting firm. Representatives of Ernst & Young are expected to be present and available to respond to appropriate questions at the annual meeting. They have the opportunity to make a statement if they desire to do so; they have indicated that, as of this date, they do not. The fees for services provided by Ernst & Young to the company are described below: Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit-Related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All Other $ 9,774,000 722,000 $ $ 3,088,000 23,000 $ $ 9,664,000 789,000 $ $ 3,238,000 28,000 $ 2017 2016 The services provided were as follows: Audit: our annual audit, including the audit of internal control over financial reporting, reports on Form 10-Q, assistance with public debt offerings, statutory audits required internationally and accounting consultations. Audit-related: including employee benefit plan audits and certification procedures relating to compliance with local-government or other regulatory standards for various non-U.S. subsidiaries. Tax: professional services for tax compliance (preparation and review of income tax returns and other tax-related filings) and tax advice on U.S. and foreign tax matters. All Other: TI Foundation audit and training. P R O X Y S T A T E M E N T Pre-approval policy. The Audit Committee is required to pre-approve the audit and non-audit services to be performed by the independent registered public accounting firm in order to assure that the provision of such services does not impair the firm’s independence. Annually the independent registered public accounting firm and the director of internal audits present to the Audit Committee services expected to be performed by the firm over the next 12 months. The Audit Committee reviews and, as it deems appropriate, pre-approves those services. The services and estimated fees are presented to the Audit Committee for consideration in the following categories: Audit, Audit-related, Tax and All Other (each as defined in Schedule 14A of the Securities Exchange Act). For each service listed in those categories, the committee receives detailed documentation indicating the specific services to be provided. The term of any pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. The Audit Committee reviews on at least a quarterly basis the services provided to date by the firm and the fees incurred for those services. The Audit Committee may revise the list of pre-approved services and related fees from time to time, based on subsequent determinations. In order to respond to time-sensitive requests for services that may arise between regularly scheduled meetings of the Audit Committee, the committee has delegated pre-approval authority to its Chair (the Audit Committee does not delegate to management its responsibilities to pre-approve services). The Chair reports pre-approval decisions to the Audit Committee and seeks ratification of such decisions at the Audit Committee’s next scheduled meeting. 44 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T The Audit Committee or its Chair pre-approved all services provided by Ernst & Young during 2017. The board of directors recommends a vote FOR ratification of the appointment of Ernst & Young LLP as the company’s independent registered public accounting firm for 2018. Proposal to approve the Texas Instruments 2018 Director Compensation Plan The company’s 2009 Director Compensation Plan (the “2009 Plan”) governs equity compensation of the company’s non-employee directors and provides them with the opportunity to defer their compensation. This plan was designed to attract and retain qualified individuals to serve as directors of the company and to increase the proprietary and vested interest of directors in the growth and performance of the company. The board believes that the 2009 Plan has been effective in achieving these objectives and that the company continues to need a plan of this type. The 2009 Plan expires in April 2019. As of December 31, 2017, there were approximately 1.0 million shares of common stock available for grant under the 2009 Plan. The board recommends that stockholders approve the adoption of the Texas Instruments 2018 Director Compensation Plan (the “2018 Director Plan”). If the 2018 Director Plan is approved, the 2009 Plan will remain in effect for awards outstanding under that Plan until no such awards remain outstanding, however, no further awards will be made under the 2009 Plan. Similarly, no additional amounts will be able to be deferred into the 2009 Plan. If stockholders do not approve the 2018 Director Plan, it will not be implemented. The following summary of the 2018 Director Plan is qualified in its entirety by reference to the complete text of the 2018 Director Plan, which is attached to this Proxy Statement as Appendix B. Capitalized terms not separately defined herein have the meanings set forth in the 2018 Director Plan. Principal features of the 2018 Director Plan Types of awards The 2018 Director Plan provides for the grant of the same types of awards as the 2009 Plan: (1) stock options, (2) restricted stock and restricted stock units, and (3) other awards (including stock appreciation rights) valued based on common stock of the company. Shares available for awards Under the 2018 Director Plan, the number of shares of common stock available for issuance will be 2,000,000, plus shares related to terminated or canceled awards granted under the 2018 Director Plan. Shares available for issuance may be adjusted by the Administrator (defined below) to prevent dilution or enlargement of plan benefits because of stock splits and other events. Administrator The 2018 Director Plan will be administered by the board or a committee of directors appointed by the board (the “Administrator”). The Administrator will have the power to, among other things, interpret and administer the plan. Decisions of the Administrator are final and binding on all parties. Grants The 2018 Director Plan provides that each non-employee director will receive an annual grant of options to purchase shares of TI common stock with a grant date value of $100,000, and an annual grant of restricted stock units with a grant date value of $100,000. In addition, each eligible director who is initially elected or appointed after the effective date of the 2018 Director Plan will receive a one-time grant of 2,000 restricted stock units under the 2018 Director Plan. Notwithstanding the foregoing, the total value of awards granted to any director in any given year shall not exceed $500,000 in grant date value. The company targets pay for non-employee directors, including retainer fees, to be at the median level of pay of our Comparator Group. Every two years, the company reviews and considers comparator compensation levels and, as appropriate, considers changes to ensure our director pay remains aligned with this median. The annual option and RSU grants, the one-time RSU grant to initially elected or appointed directors, and the $500,000 annual award limit were determined to be reasonable based on market analysis and total compensation, and to provide adequate flexibility while still imposing a meaningful limit on future grants. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 45 T N E M E T A T S Y X O R P Options will become exercisable in four equal annual installments commencing on the first anniversary date of the grant and expire not more than ten years after the date of grant. It is expected that all options granted under the Plan will be non-qualified options for U.S. tax purposes. Each restricted stock unit will be paid or settled by the issuance of one share of TI common stock as soon as practicable after the fourth anniversary of the date of grant. If a director experiences a Separation from Service within 24 months after a Change in Control, options become immediately exercisable and restricted stock units vest immediately and are paid or settled as soon as practicable. If a dividend or other distribution, recapitalization, stock split, or another corporate event or transaction described in Section 5(d) of the 2018 Director Plan affects our common stock such that an adjustment is appropriate to prevent dilution or enlargement of the benefits, or potential benefits, intended to be made available under the 2018 Director Plan, then an equitable adjustment shall be made to: (i) the number and type of shares (or other securities or property) which may be made the subject of awards, (ii) the number and type of shares (or other securities or property) subject to outstanding awards, and (iii) the grant, purchase or exercise price with respect to any award. The Administrator may not take any other action to reduce the exercise price of any option as established at the time of grant. Awards will be granted for no cash consideration, or for minimal cash consideration if required by applicable law. Awards may provide that upon their exercise the holder will receive cash, stock, other securities, other awards, other property or any combination thereof, as the Administrator will determine. Any shares of stock deliverable under the 2018 Director Plan may consist in whole or in part of authorized and unissued shares or treasury shares. The exercise price of stock under any stock option, the grant price of any stock appreciation right, and the purchase price of any security that may be purchased under any other stock-based award will not be less than 100 percent of the fair market value (as defined in the 2018 Director Plan) of the stock or other security on the date of the grant of the option, right or award. Unless otherwise determined by the Administrator, no award granted under the 2018 Director Plan may be transferred or otherwise encumbered by the individual to whom it is granted, other than by will, by designation of a beneficiary, or by the laws of descent and distribution. During the individual’s lifetime, each award will be exercisable only by the individual or by the individual’s guardian or legal representative. Amendment The board of directors may amend, alter, discontinue or terminate the 2018 Director Plan or any portion of the plan any time. However, stockholder approval must be obtained for any amendment or alteration that would increase the number of shares available for awards or increase the total value of awards that may be granted in any given year (other than in connection with certain corporate events, as described in Section 5(d) of the 2018 Director Plan) or any other material amendment of the 2018 Director Plan. Term No awards may be granted under the 2018 Director Plan after the tenth anniversary of the effective date of the 2018 Director Plan. Deferral P R O X Y S T A T E M E N T Each director will be able to elect, with respect to any year, that all or any portion of his or her eligible cash compensation and restricted stock unit grant be deferred in accordance with the terms of the 2018 Director Plan. Each director will be able to elect that his or her deferred compensation for any year be credited to a cash account, a stock unit account or any combination thereof. New plan benefits The actual number of units granted will depend on the value of our common stock on the date of grant. The following table sets forth the benefits or amounts that would have been received by or allocated to each of the non-employee directors for the fiscal year ending December 31, 2017, had the 2018 Director Plan been in effect on such date. Participant Shares Subject to Options Restricted Stock Units Total ($) Non-Employee Director Group (2) . . . . . . . . . . . . . . . . . . . . . . . . 66,715 (3) 13,871 (4) $ 2,199,285 Texas Instruments 2018 Director Compensation Plan (1) (1) 46 Based on the $79.26 closing price of our common stock on January 26, 2017, when 2017 awards were granted. Number of shares and units reported does not include those that may be credited to a director upon an election to defer all or a portion of the director’s cash compensation or dividend equivalents into stock unit accounts because future elections are not determinable. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T As a result of deferral elections made for 2017: four directors deferred a total of $368,333 of their cash compensation into stock unit accounts under the 2009 Plan; seven directors deferred receipt of their restricted stock units granted in 2017; and five directors deferred receipt of cash dividend equivalents on restricted stock units in the amount of $203,151, which were paid into director stock unit and cash accounts during 2017. (2) (3) (4) Currently, there are 11 non-employee directors. Each non-employee director would have received an option to purchase 6,065 shares of TI common stock had the Plan been in effect in 2017, based on a grant date value of $100,000. Each non-employee director would have received a grant of 1,261 restricted stock units had the plan been in effect in 2017, based on a grant date value of $100,000. The 2018 Director Plan also provides for additional benefits in the form of other stock-based awards. To date, these types of awards have not been utilized and the non-employee directors would not have been eligible for automatic grant of any such awards. Tax matters A participant who receives a grant of an option or a restricted stock unit will not be in receipt of taxable income under the Internal Revenue Code upon the making of the grant. A participant who receives an option under the 2018 Director Plan will generally recognize ordinary income at the time of exercise in the amount of the excess, if any, of the fair market value of the stock on the date of exercise over the option price. Upon payment or settlement of a restricted stock unit award in cash or stock, the participant will recognize ordinary income equal to the value of any cash or shares received. The company will not be allowed any deduction for federal income tax purposes upon the grant of options or restricted stock units. The company will be entitled to a deduction for federal income tax purposes in an amount equal to the ordinary income, if any, realized by a participant who exercises an option. Also, the company will be entitled to a deduction for federal income tax purposes at the same time as, and in an amount equal to, the recognition of ordinary income by a participant in respect of restricted stock unit awards under the 2018 Director Plan and the settlement thereof. A participant will not be deemed to have received any taxable income under the Internal Revenue Code as a result of a deferral election until the participant receives a distribution. When a distribution is made from a cash account or stock unit account, the participant will recognize ordinary income equal to the value of any cash and shares received. The company will be entitled to a deduction for federal income tax purposes at the time a distribution is made from a cash account or stock unit account in an amount equal to the income recognized by the participant. The board of directors recommends a vote FOR the Texas Instruments 2018 Director Compensation Plan. Equity compensation plan information The following table sets forth information about the company’s equity compensation plans as of December 31, 2017. Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) Equity compensation plans approved by security holders . . . . . . . . . . . Equity compensation plans not approved by security holders . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,939,620 (1) 1,391,991 (4) 54,331,611 (5) Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights (b) $ 48.68 (2) $ 48.49 (2) $ 48.67 Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a)) (c) 88,998,010 (3) 0 88,998,010 T N E M E T A T S Y X O R P (1) (2) Includes shares of TI common stock to be issued under the Texas Instruments 2003 Director Compensation Plan (the “2003 Director Plan”), the Texas Instruments 2009 Long-Term Incentive Plan (the “2009 LTIP”) and predecessor stockholder- approved plans, the Texas Instruments 2009 Director Compensation Plan (the “2009 Director Plan”) and the TI Employees 2014 Stock Purchase Plan (the “2014 ESPP”). Restricted stock units and stock units credited to directors’ deferred compensation accounts are settled in shares of TI common stock on a one-for-one basis. Accordingly, such units have been excluded for purposes of computing the weighted- average exercise price. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 47 (3) (4) Shares of TI common stock available for future issuance under the 2009 LTIP, the 2009 Director Plan and the 2014 ESPP. 52,549,619 shares remain available for future issuance under the 2009 LTIP and 1,045,755 shares remain available for future issuance under the 2009 Director Plan. Under the 2009 LTIP and the 2009 Director Plan, shares may be granted in the form of restricted stock units, options or other stock-based awards such as restricted stock. Includes shares to be issued under the Texas Instruments 2003 Long-Term Incentive Plan (the “2003 LTIP”). The 2003 LTIP was replaced by the 2009 LTIP, which was approved by stockholders. No further grants may be made under the 2003 LTIP. Only non-management employees were eligible to receive awards under the 2003 LTIP. The 2003 LTIP authorized the grant of shares in the form of restricted stock units, options or other stock-based awards such as restricted stock. The plan is administered by a committee of independent directors (the Committee). The Committee had the sole discretion to grant to eligible participants one or more equity awards and to determine the number or amount of any award. Except in the case of awards made through assumption of, or in substitution for, outstanding awards previously granted by an acquired company, and except as a result of an adjustment event such as a stock split, the exercise price under any stock option, the grant price of any stock appreciation right, and the purchase price of any security that could be purchased under any other stock-based award under the 2003 LTIP could not be less than 100 percent of the fair market value of the stock or other security on the effective date of the grant of the option, right or award. Also includes shares to be issued under the Texas Instruments Directors Deferred Compensation Plan and the Texas Instruments Restricted Stock Unit Plan for Directors. These plans were replaced by the stockholder-approved 2003 Director Plan (which was replaced by the 2009 Director Plan), and no further grants may be made under them. (5) Includes 44,754,593 shares for issuance upon exercise of outstanding grants of options, 9,225,643 shares for issuance upon vesting of outstanding grants of restricted stock units, 202,179 shares for issuance under the 2014 ESPP and 149,196 shares for issuance in settlement of directors’ deferred compensation accounts. Additional information Voting securities As stated in the notice of annual meeting, holders of record of the common stock at the close of business on February 26, 2018, may vote at the meeting or any adjournment of the meeting. As of February 26, 2018, 983,105,798 shares of TI common stock were outstanding. This is the only class of capital stock entitled to vote at the meeting. Each holder of common stock has one vote for each share held. Security ownership of certain beneficial owners The following table shows the only persons who have reported beneficial ownership of more than 5 percent of the common stock of the company by virtue of filing a schedule 13G with the SEC. Persons generally “beneficially own” shares if they have the right to either vote those shares or dispose of them. More than one person may be considered to beneficially own the same shares. Name and Address Shares Owned at December 31, 2017 Percent of Class The Vanguard Group 100 Vanguard Blvd. Malvern, PA 19355 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,312,134 (1) 8.47% BlackRock, Inc. 55 East 52nd Street New York, NY 10055 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,837,536 (4) 7.0% (1) (2) According to its Form 13G filing, The Vanguard Group has sole voting power for 1,412,120, shared voting power for 223,556, sole dispositive power for 81,711,196 and shared dispositive power for 1,600,938 of these shares. According to its Form 13G filing, BlackRock, Inc. has sole voting power for 58,319,093 shares, and sole dispositive power for 68,837,536 shares. P R O X Y S T A T E M E N T Security ownership of directors and management The following table shows the beneficial ownership of TI common stock by directors, the named executive officers and all executive officers and directors as a group. Each director and named executive officer has sole voting power (except for shares 48 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T obtainable within 60 days, shares subject to RSUs and shares credited to deferred compensation accounts as detailed in the footnotes to the table) and sole investment power with respect to the shares owned. The table excludes shares held by a family member if a director or executive officer has disclaimed beneficial ownership. No director or executive officer has pledged shares of TI common stock. Name Directors R. W. Babb, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M. A. Blinn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T. M. Bluedorn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. A. Carp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. F. Clark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. S. Cox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. T. Crutcher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. M. Hobby . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. Kirk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. H. Patsley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. E. Sanchez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W. R. Sanders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. K. Templeton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management (2) R. R. Lizardi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. P. March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. J. Ritchie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. G. Delagi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All executive officers and directors as a group (3) * less than 1 percent. (1) Included in the shares owned shown above are: Shares Owned at December 31, 2017 Percent of Class 81,898 26,667 2,000 119,226 14,869 103,922 468,785 4,777 36,971 151,085 49,933 80,018 3,119,589 123,510 661,594 341,486 1,164,875 8,248,780 * * * * * * * * * * * * * * * * * * Directors R. W. Babb, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M. A. Blinn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T. M. Bluedorn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. A. Carp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. F. Clark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. S. Cox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. T. Crutcher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. M. Hobby . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. Kirk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. H. Patsley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. E. Sanchez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W. R. Sanders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. K. Templeton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares Obtainable within 60 Days 41,463 9,724 — 41,463 6,511 70,621 267,276 1,516 26,714 77,621 26,714 26,714 2,318,278 Shares Credited to 401(k) Account — — — — — — — — — — — — 13,095 Shares Credited to Deferred Compensation Accounts (b) RSUs (in Shares) (a) 18,296 9,271 2,000 34,960 5,150 28,296 201,284 3,261 7,271 9,271 7,271 16,871 483,947 21,139 7,672 — 42,803 3,208 1,866 — — 986 45,168 7,810 1,659 — (a) The non-employee directors’ RSUs granted before 2007 are settled in TI common stock generally upon the director’s termination of service provided he or she has served at least eight years or has reached the company’s retirement age for directors. RSUs granted after 2006 are settled in TI common stock generally upon the fourth anniversary of the grant date. (b) The shares in deferred compensation accounts are issued following the director’s termination of service. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 49 (2) Included in the shares owned shown above are: Executive Officer R. R. Lizardi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. P. March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. J. Ritchie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R. G. Delagi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Includes: Shares Obtainable within 60 Days 75,686 360,672 194,556 1,018,420 Shares Credited to 401(k) Account — 2,111 — 12,220 RSUs (in Shares) 40,178 98,187 145,461 130,916 (a) (b) (c) (d) 5,624,074 shares obtainable within 60 days; 28,137 shares credited to 401(k) accounts; 1,845,391 shares subject to RSU awards; for the terms of these RSUs, see pages 15 and 34-35; and 132,312 shares credited to certain non-employee directors’ deferred compensation accounts; shares in deferred compensation accounts are issued following a director’s termination of service. Related person transactions Because we believe that company transactions with directors and executive officers of TI or with persons related to TI directors and executive officers present a heightened risk of creating or appearing to create a conflict of interest, we have a written related person transaction policy that has been approved by the board of directors. The policy states that TI directors and executive officers should obtain the approvals or ratifications specified below in connection with any related person transaction. The policy applies to transactions in which: 1. 2. 3. TI or any TI subsidiary is or will be a participant; The amount involved exceeds or is expected to exceed $120,000 in a fiscal year; and Any of the following (a “related person”) has or will have a direct or indirect interest: (a) (b) A TI director or executive officer, or an Immediate Family Member of a director or executive officer; A stockholder owning more than 5 percent of the common stock of TI or an Immediate Family Member of such stockholder, or, if the 5 percent stockholder is not a natural person, any person or entity designated in the Form 13G or 13D filed under the SEC rules and regulations by the 5 percent stockholder as having an ownership interest in TI stock (individually or collectively, a “5 percent holder”); or (c) An entity in which someone listed in (a) above has a 5 percent or greater ownership interest, by which someone listed in (a) is employed, or of which someone listed in (a) is a director, principal or partner. For purposes of the policy, an “Immediate Family Member” is any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law or any person (other than a tenant or employee) sharing the household of a TI director, executive officer or 5 percent holder. The policy specifies that a related person transaction includes, but is not limited to, any financial transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness) or any series of similar transactions or arrangements. P R O X Y S T A T E M E N T 50 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T The required approvals are as follows: Arrangement Involving: Executive officer who is also a member of the TI board, an Immediate Family Member of such person, or an entity in which any of the foregoing has a 5 percent or greater ownership interest Chair of the GSR Committee, chief compliance officer, any of his or her Immediate Family Members, or an entity in which any of the foregoing has a 5 percent or greater ownership interest Any other director or executive officer, an Immediate Family Member of such person, or an entity in which any of the foregoing has a 5 percent or greater ownership interest A 5 percent holder Approval Required by: GSR Committee GSR Committee Chief Compliance Officer in consultation with the Chair of the GSR Committee GSR Committee No member of the GSR Committee will participate in the consideration of a related person arrangement in which such member or any of his or her Immediate Family Members is the related person. The approving body or persons will consider all of the relevant facts and circumstances available to them, including (if applicable) but not limited to: the benefits to the company of the arrangement; the impact on a director’s independence; the availability of other sources for comparable products or services; the terms of the arrangement; and the terms available to unrelated third parties or to employees generally. The primary consideration is whether the transaction between TI and the related person (a) was the result of undue influence from the related person or (b) could adversely influence or appear to adversely influence the judgment, decisions or actions of the director or executive officer in meeting TI responsibilities or create obligations to other organizations that may come in conflict with responsibilities to TI. No related person arrangement will be approved unless it is determined to be in, or not inconsistent with, the best interests of the company and its stockholders, as the approving body or persons shall determine in good faith. The chief compliance officer will provide periodic reports to the committee on related person transactions. Any related person transaction brought to the attention of the chief compliance officer or of which the chief compliance officer becomes aware that is not approved pursuant to the process set forth above shall be terminated as soon as practicable. The board has determined that the following types of transactions pose little risk of a conflict of interest and therefore has deemed them approved: • Compensation paid to a TI director or executive officer for services as such, or where the sole interest in a related person transaction of a TI director, executive officer or 5 percent holder is their position as such; • Transactions where the rates or charges involved are determined by competitive bids, involve the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority; • Transactions involving services as a bank depository of funds, transfer agent, registrar, trustee under a trust indenture or similar services; • Interests of a related person arising only from: O the direct or indirect ownership in another party to the transaction and that ownership, when combined with the ownership of all the other individuals specified in 3(a)-(c) above, is less than 5 percent of the outstanding equity of such party; O an interest as a limited partner in a partnership, and that ownership interest, when combined with all the other ownership interests of the other individuals specified in 3(a)-(c) above, is less than 5 percent of the total ownership interest of the limited partnership; O their position as a director of another corporation or organization; O the ownership of TI stock and all holders of that class of stock receive the same benefit on a pro-rata basis; • Transactions in the ordinary course of business where the only relationship of a TI director or executive officer, or their Immediate Family Member, is as an employee (other than an executive officer) and/or less than a 10 percent beneficial owner of the other entity if (i) the TI director or executive officer is not involved in negotiating the terms of the transaction and (ii) amounts involved for the fiscal year do not exceed the greater of $200,000 or 2 percent of the entity’s consolidated gross revenues for that year; T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 51 T N E M E T A T S Y X O R P • Charitable contributions, grants or endowments by TI or the TI Foundation to an entity where the only relationship of the TI director or executive officer, or their Immediate Family Member, is as a trustee or employee (other than as an executive officer) if the aggregate payments for the fiscal year do not exceed the greater of $200,000 or 2 percent of the recipient’s consolidated gross revenues for that year. “Payments” exclude payments arising solely from investments in TI stock, payments under the TI Director Award Program and payments under non-discretionary charitable contribution matching programs; and • Transactions involving the employment of an Immediate Family Member of a TI director or executive officer if such director or executive officer does not participate in the decisions regarding the hiring, performance evaluation or compensation of the Immediate Family Member and such hiring, performance evaluation or compensation is determined on a basis consistent with TI’s human resources policies. During 2017, the son of R. Gregory Delagi (Senior Vice President) was employed in our facilities organization. Mr. Delagi was not involved in any decisions regarding his son’s employment at TI, and the compensation of his son was consistent with that of similarly situated employees. Compensation committee interlocks and insider participation During 2017, Messrs. Carp and Sanchez and Mses. Patsley and Whitman served on the Compensation Committee. No committee member (i) was an officer or employee of TI, (ii) was formerly an officer of TI or (iii) had any relationship requiring disclosure under the SEC’s rules governing disclosure of related person transactions (Item 404 of Regulation S-K). No executive officer of TI served as a director or member of the compensation committee of another entity, one of whose directors or executive officers served as a member of our board of directors or a member of the Compensation Committee. Cost of solicitation The solicitation is made on behalf of our board of directors. TI will pay the cost of soliciting these proxies. We will reimburse brokerage houses and other custodians, nominees and fiduciaries for reasonable expenses they incur in sending these proxy materials to you if you are a beneficial holder of our shares. Without receiving additional compensation, officials and regular employees of TI may solicit proxies personally, by telephone, fax or email, from some stockholders if proxies are not promptly received. We have also hired Georgeson Inc. to assist in the solicitation of proxies at a cost of $12,000 plus out-of-pocket expenses. Stockholder proposals and nominations for 2019 The table below shows the deadlines for stockholders to submit proposals or director nominations for next year’s annual meeting. Proposals for Inclusion in 2019 Proxy Materials When proposal must be received by Texas Instruments On or before November 13, 2018 Director Nominees for Inclusion in 2019 Proxy Materials (Proxy Access) No earlier than October 14, 2018, and no later than November 13, 2018 Other Proposals/Nominees to be Presented at 2019 Annual Meeting (and Not for Inclusion in Proxy Materials) No earlier than December 27, 2018, and no later than January 26, 2019 Proposals are to be sent to: Texas Instruments Incorporated, 12500 TI Boulevard, MS 8658, Dallas, TX 75243, Attn: Secretary. We reserve the right to reject, rule out of order, or take any other appropriate action with respect to any proposal or nomination that does not comply with these and other applicable requirements. In addition, all suggestions from stockholders concerning the company’s business are welcome and will be carefully considered by TI’s management. To ensure that your suggestions receive appropriate review, the GSR Committee reviews correspondence from stockholders and management’s responses. Stockholders are thereby given access at the board level without having to resort to formal stockholder proposals. Generally, the board prefers you present your views in this manner rather than through the process of formal stockholder proposals. See “Communications with the board” for information on contacting the board. P R O X Y S T A T E M E N T Benefit plan voting If you are a participant in the TI Contribution and 401(k) Savings Plan, or the TI 401(k) Savings Plan, you are a “named fiduciary” under the plans and are entitled to direct the voting of shares allocable to your accounts under these plans. The trustee 52 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T administering your plan will vote your shares in accordance with your instructions. If you wish to instruct the trustee on the voting of shares held for your accounts, you should do so by April 23, 2018, in the manner described in the notice of annual meeting. Additionally, participants under the plans are designated as “named fiduciaries” for the purpose of voting TI stock held under the plans for which no voting direction is received. TI shares held by the TI 401(k) savings plans for which no voting instructions are received by April 23, 2018, will be voted in the same proportions as the shares in the plans for which voting instructions have been received by that date unless otherwise required by law. Section 16(a) beneficial ownership reporting compliance Section 16(a) of the Securities Exchange Act requires certain persons, including the company’s directors and executive officers, to file reports with the SEC regarding beneficial ownership of certain equity securities of the company. Due to an administrative error, there was one late filing for Mr. Xie with respect to a gift of shares. The company believes that all other reports during 2017 were timely filed by its directors and executive officers. Telephone and internet voting Registered stockholders and benefit plan participants. Stockholders with shares registered directly with Computershare (TI’s transfer agent) and participants who beneficially own shares in a TI benefit plan may vote telephonically by calling (800) 690-6903 (within the U.S. and Canada only, toll-free) or via the internet at www.proxyvote.com. The telephone and internet voting procedures are designed to authenticate stockholders’ identities, to allow stockholders to give their voting instructions and to confirm that stockholders’ instructions have been recorded properly. TI has been advised by counsel that the telephone and internet voting procedures, which have been made available through Broadridge Financial Solutions, Inc., are consistent with the requirements of applicable law. Stockholders with shares registered in the name of a brokerage firm or bank. A number of brokerage firms and banks offer telephone and internet voting options. These programs may differ from the program provided to registered stockholders and benefit plan participants. Check the information forwarded by your bank, broker or other holder of record to see which options are available to you. Stockholders voting via the internet should understand that there may be costs associated with electronic access, such as usage charges from telephone companies and internet access providers, that must be borne by the stockholder. Stockholders sharing the same address To reduce the expenses of delivering duplicate materials, we take advantage of the SEC’s “householding” rules that permit us to deliver only one set of proxy materials (or one Notice of Internet Availability of Proxy Materials) to stockholders who share an address unless otherwise requested. If you share an address with another stockholder and have received only one set of these materials, you may request a separate copy at no cost to you by calling Investor Relations at (214) 479-3773 or by writing to Texas Instruments Incorporated, P.O. Box 660199, MS 8657, Dallas, TX 75266-0199, Attn: Investor Relations. For future annual meetings, you may request separate materials, or request that we send only one set of materials to you if you are receiving multiple copies, by calling (866) 540-7095 or writing to Investor Relations at the address given above. Electronic delivery of proxy materials and copies of our Form 10-K As an alternative to receiving printed copies of these materials in future years, we are pleased to offer stockholders the opportunity to receive proxy mailings electronically. To request electronic delivery, vote via the internet at www.proxyvote.com and, when prompted, enroll to receive or access proxy materials electronically in future years. After the meeting date, stockholders holding shares through a broker or bank may request electronic delivery by visiting www.icsdelivery.com/ti and entering information for each account held by a bank or broker. If you are a registered stockholder and would like to request electronic delivery, visit www-us.computershare.com/investor or call TI Investor Relations at (214) 479-3773 for more information. If you are a participant in a TI benefit plan and would like to request electronic delivery, call TI Investor Relations for more information. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 53 Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on April 26, 2018. This 2018 proxy statement and the company’s 2017 annual report are accessible at: www.proxyvote.com. The company’s annual report to stockholders, which contains consolidated financial statements for the year ended December 31, 2017, accompanies this proxy statement. You may also obtain a copy of the company’s annual report on Form 10-K for the year ended December 31, 2017, that was filed with the SEC without charge by writing to Investor Relations, P.O. Box 660199, MS 8657, Dallas, TX 75266-0199. Our Form 10-K is also available in the “Investor Relations” section of our website at www.ti.com. Sincerely, Cynthia Hoff Trochu Senior Vice President, Secretary and General Counsel March 13, 2018 Dallas, Texas Notice regarding forward-looking statements This proxy statement includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Statements herein that describe TI’s business strategy, plans, goals, future capital spending levels and potential for growth, improved profit margins and cash generation are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results and amounts to differ materially from those in forward-looking statements. For a detailed discussion of the risks and uncertainties, see the Risk factors discussion in Item 1A of our annual report on Form 10-K for the year ended December 31, 2017. The forward-looking statements included in this proxy statement are made only as of the date of this proxy statement, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances. P R O X Y S T A T E M E N T 54 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T Directions and other annual meeting information Directions From DFW airport: Take the North Airport exit to IH-635E. Take IH-635E to the Greenville Avenue exit. Turn right (South) on Greenville. Turn right (West) on Forest Lane. Texas Instruments will be on your right at the second traffic light. From Love Field airport: Take Mockingbird Lane East to US-75N (Central Expressway). Travel North on 75N to the Forest Lane exit. Turn right (East) on Forest Lane. You will pass two traffic lights. At the third light, the entrance to Texas Instruments will be on your left. Parking All visitors should park at the South Lobby, where reserved parking will be available. Security Be advised that TI’s security policy forbids weapons, cameras and audio/video recording devices inside TI buildings. All bags will be subject to search upon entry into the building. Attendance For additional information about attending the annual meeting see the discussion under “Attendance requirements” on page 4. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T 55 Appendix A Non-GAAP reconciliations This proxy statement refers to ratios based on free cash flow. These are financial measures that were not prepared in accordance with generally accepted accounting principles in the U.S. (GAAP). Free cash flow is a non-GAAP measure calculated by subtracting Capital expenditures from the most directly comparable GAAP measure, Cash flows from operating activities (also referred to as Cash flow from operations). We believe free cash flow and these ratios based on it provide insight into our liquidity, our cash- generating capability and the amount of cash potentially available to return to shareholders, as well as insight into our financial performance. These non-GAAP measures are supplemental to the comparable GAAP measures and are reconciled in the table below to the most directly comparable GAAP measures. Percentage of Revenue Free Cash Flow as a Percentage of Revenue (Millions of dollars) Revenue . . . . . . . . . . . . . . . . . . . . . . . . . Cash flow from operations (GAAP) . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . For Years Ended December 31, 2016 2017 2015 Total For Years Ended December 31, 2016 2017 2015 Total $ 14,961 $ 5,363 (695) $ 13,370 $ 4,614 (531) $ 13,000 $ 4,397 (551) $ 41,331 $ 14,374 (1,777) 35.8% 34.5% 33.8% 34.8% Free cash flow (non-GAAP) . . . . . . . . . . . . $ 4,668 $ 4,083 $ 3,846 $ 12,597 31.2% 30.5% 29.6% 30.5% P R O X Y S T A T E M E N T A-1 TE X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T Appendix B TEXAS INSTRUMENTS 2018 DIRECTOR COMPENSATION PLAN Dated April 26, 2018 SECTION 1. PURPOSE. The Texas Instruments 2018 Director Compensation Plan (“the Plan”) is intended as a successor plan to the Company’s 2009 Director Compensation Plan. This Plan is designed to attract and retain qualified individuals to serve as directors of the Company and to increase the proprietary and vested interest of such directors in the growth and performance of the Company. This Plan is effective for Awards granted on or after the Effective Date. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) “Account” means a Cash Account or Stock Unit Account established under Section 11 of the Plan. (b) “Administrator” means the Board or a committee of directors designated by the Board to administer the Plan. (c) “Award” means any Option, Restricted Stock Unit, Stock Appreciation Right or other stock-based award under the Plan. (d) “Award Agreement” means any written agreement, contract or other instrument or document evidencing any Award granted under the Plan, which may, but need not, be executed or acknowledged by a Director. An Award Agreement may be in electronic form. (e) “Board” means the Board of Directors of the Company, as constituted from time to time. (f) “Cash Account” means the bookkeeping accounts established or maintained pursuant to Section 11(b)(i) on behalf of each Director who elects pursuant to Section 11(b) to have any of his or her Deferred Compensation credited to a cash account. (g) “Change in Control” shall mean an event that will be deemed to have occurred: (i) On the date any Person, other than (i) the Company or any of its Subsidiaries, (ii) a trustee or other fiduciary holding stock under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding stock pursuant to an offering of such stock, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, acquires ownership of stock of the Company that, together with stock held by such Person, constitutes more than 50 percent of the total fair market value or total voting power of the stock of the Company. However, if any Person is considered to own more than 50 percent of the total fair market value or total voting power of the stock of the Company, the acquisition of additional stock by the same Person is not considered to be a Change in Control; (ii) On the date a majority of members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; or (iii) On the date any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets from the Company that have a total gross fair market value equal to or more than 80 percent of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the Company or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. However, there is no Change in Control when there is such a sale or transfer to (i) a stockholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s then outstanding stock; (ii) an entity, at least 50 percent of the total value or voting power of the stock of which is owned, directly or indirectly, by the Company; (iii) a Person that owns, directly or indirectly, at least 50 percent of the total value or voting power of the outstanding stock of the Company; or (iv) an entity, at least 50 percent of the total value or voting power of the stock of which is owned, directly or indirectly, by a Person that owns, directly or indirectly, at least 50 percent of the total value or voting power of the outstanding stock of the Company. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T B-1 T N E M E T A T S Y X O R P (iv) For purposes of (i), (ii) and (iii) of this Section 2(g): (A) (B) (C) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended; “Person” shall have the meaning given in Section 7701(a)(1) of the Code. Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code; and “Subsidiary” means any entity whose assets and net income are included in the consolidated financial statements of the Company audited by the Company’s independent auditors and reported to stockholders in the annual report to stockholders. (v) Notwithstanding the foregoing, in no case will an event in (i), (ii) or (iii) of this Section 2(g) be treated as a Change in Control unless such event also constitutes a “change in control event” with respect to the Company within the meaning of Treas. Reg. § 1.409A-3(i)(5) or any successor provision. (h) “Code” means the Internal Revenue Code of 1986, as amended. (i) (j) (k) (l) “Company” means Texas Instruments Incorporated, together with any successor thereto. “Deferred Cash Compensation” means that portion of any Director’s Eligible Compensation that is payable in cash and that he or she elects pursuant to Section 11(a) to be deferred in accordance with this Plan. “Deferred Compensation” means that portion of any Director’s Eligible Compensation that he or she elects pursuant to Section 11(a) to be deferred in accordance with this Plan. “Deferred Compensation Account” means a Cash Account or Stock Unit Account containing amounts earned and deferred under this Plan and Restricted Stock Units, the receipt of which a Director has elected to defer. (m) “Director” means a member of the Board who is not an employee of the Company or any subsidiary thereof. (n) “Effective Date” means the date this Plan is approved by stockholders of the Company. (o) (p) “Eligible Compensation” means (i) the cash portion of any compensation payable by the Company to a Director for his or her services as a Director but shall not include any reimbursement by the Company of expenses incurred by a Director incidental to attendance at a meeting of the Company’s stockholders, the Board, or any committee of the Board, or of any other expense incurred on behalf of the Company, (ii) any Restricted Stock Units granted by the Company to a Director for his or her services as a Director, and (iii) any dividend equivalents paid on Restricted Stock Units pursuant to Section 9(d). “Fair Market Value” means the closing price of the Shares on the date specified (or, if there is no trading on The NASDAQ Stock Market on such date, then on the first previous date on which there is such trading) as reported by WSJ.com or Bloomberg L.P., or if unavailable, then by reference to any other source as may be deemed appropriate by the GSR Committee. (q) “GSR Committee” means the Governance and Stockholder Relations Committee of the Board or any successor committee. (r) “Option” means an option granted under this Plan to purchase Shares on the terms and conditions set forth in the Plan and the applicable Award Agreement. (s) “Participant” means an individual who has received an Award or established an Account under the Plan. (t) (u) “Plan” means this Texas Instruments 2018 Director Compensation Plan. “Restricted Stock Unit” means a contractual right granted under this Plan that is denominated in Shares, each of which represents a right to receive a Share on the terms and conditions set forth in the Plan and the applicable Award Agreement. (v) “Secretary” means the Secretary of the Company. B-2 TE X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T (w) “Separation from Service” means a termination of services provided by a Participant as a member of the Board or of the board of directors of any other member of the controlled group of corporations (as defined in Section 414(b) of the Code) which includes the Company (for purposes of this Section 2(x), the controlled group members other than the Company are referred to collectively as “ERISA Affiliates”), whether such termination is voluntary or involuntary, as determined by the Administrator in accordance with Treas. Reg. §1.409A-1(h). In determining whether a Participant has experienced a Separation from Service as a member of the Board or of a board of directors of an ERISA Affiliate, the following provisions shall apply: (i) (ii) (iii) If a Director also provides services to the Company or any ERISA Affiliate as an employee at the time of his Separation from Service as a member of the Board, the services such Participant provides as an employee shall not be taken into account in determining whether the Participant has a Separation from Service as a Director for purposes of this Plan (provided that this Plan is not, at the time of such determination, aggregated under Treas. Reg. §1.409A-1(c)(2)(ii) with any plan in which the Participant participates as an employee). A Participant shall be considered to have experienced a termination of services when the facts and circumstances indicate that the Participant, the Company and each ERISA Affiliate reasonably anticipate that the Participant will perform no further services for the Company or any ERISA Affiliate as a member of the Board (or the board of directors of any ERISA Affiliate), and the Participant’s term as a member of the Board has expired. If a Director is also providing additional services to the Company as an independent contractor, he or she cannot have a Separation from Service for purposes of Section 409A of the Code until he or she has separated from service both as a Director and as an independent contractor. (x) “Shares” shall mean shares of the common stock of the Company, $1.00 par value. (y) “Specified Employee” means any Participant who is determined to be a “key employee” (as defined under Section 416(i) of the Code without regard to paragraph (5) thereof) for the applicable period, as determined annually by the Administrator in accordance with Treas. Reg. §1.409A-1(i). In determining whether a Participant is a Specified Employee, the following provisions shall apply: (i) (ii) Identification of the individuals who fall within the above-referenced definition of “key employee” shall be based upon the 12-month period ending on each December 31st (referred to below as the “identification date”). In applying the applicable provisions of Code Section 416(i) to identify such individuals, “compensation” shall be determined in accordance with Treas. Reg. §1.415(c)2(a) without regard to (i) any safe harbor provided in Treas. Reg. §1.415(c)-2(d), (ii) any of the special timing rules provided in Treas. Reg. §1.415(c)-2(e), and (iii) any of the special rules provided in Treas. Reg. §1.415(c)-2(g); and Each Participant who is among the individuals identified as a “key employee” in accordance with part (i) of this Section 2(z) shall be treated as a Specified Employee for purposes of this Plan if such Participant experiences a Separation from Service during the 12-month period that begins on the April 1st following the applicable identification date. (z) “Stock Appreciation Right” or “SAR” means a right granted pursuant to Section 10 to receive, upon exercise by the Participant, the excess of (i) the Fair Market Value of one Share on the date of exercise or any date or dates during a specified period before the date of exercise over (ii) the grant price of the right, which grant price shall not be less than the Fair Market Value of one Share on the date of grant of the right. (aa) “Stock Unit Account” means the bookkeeping accounts established, pursuant to Section 11(b)(ii), on behalf of each Director who elects, pursuant to Section 11(b), to have any of his or her Deferred Cash Compensation credited to a stock unit account. (bb) “Unforeseeable Emergency” means a severe financial hardship to the Participant resulting from (i) an illness or accident of the Participant or the Participant’s spouse, beneficiary, or dependent (as defined in Section 152 of the Code, without regard to Sections 152(b)(1), (b)(2), and (d)(1)(B) of the Code), (ii) loss of the Participant’s property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the Participant’s control, all as determined by the Administrator based on the relevant facts and circumstances and as provided for in Treas. Reg. §1.409A-3(i)(3) or any successor provision. T N E M E T A T S Y X O R P (cc) “Year” means a calendar year. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T B-3 SECTION 3. ELIGIBILITY. Each Director shall be eligible to defer Eligible Compensation and to receive Awards under the Plan. SECTION 4. ADMINISTRATION. This Plan shall be administered by the Administrator. Subject to the terms of the Plan and applicable law, the Administrator shall have full power and authority to: (i) interpret, construe and administer the Plan and any instrument or agreement relating to, or Award granted or Accounts established under, the Plan; (ii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it deems appropriate for the proper administration of the Plan; and (iii) make any other determination and take any other action that it deems necessary or desirable for the administration of this Plan. All decisions of the Administrator shall be final, conclusive and binding upon all parties, including the Company, the stockholders and the Directors. SECTION 5. SHARES AVAILABLE FOR AWARDS. (a) (b) (c) (d) Subject to adjustment as provided in this Section 5, the number of Shares available for issuance under the Plan shall be 2,000,000 Shares. Notwithstanding anything to the contrary set forth herein, in any given Year, the total value of Awards granted to any Director shall not exceed $500,000 in grant-date value. If, after the effective date of the Plan, (i) any Shares covered by an Award or Stock Unit Account, or to which such an Award relates, are forfeited, or (ii) if an Award or Account expires or is cancelled or is otherwise terminated without the delivery of Shares, then such Shares, to the extent of any such forfeiture, expiration, cancellation, or termination, shall again be, or shall become, available for issuance under the Plan. For purposes of this Section, awards and options granted under any previous director compensation plan of the Company shall be treated as Awards, and accounts established under any such plan shall be treated as Accounts. For the avoidance of doubt, the number of Shares available for issuance under the Plan shall not be increased by: (1) the withholding of Shares as a result of the net settlement of an outstanding Option; (2) the delivery of Shares to pay the exercise price or withholding taxes relating to an Award; or (3) the repurchase of Shares on the open market using the proceeds of an Option’s exercise. Any Shares delivered pursuant to an Award or Stock Unit Account may consist, in whole or in part, of authorized and unissued Shares, of treasury Shares or of both. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Administrator shall equitably adjust any or all of (i) the number of outstanding Restricted Stock Units, (ii) the number and type of Shares credited to Stock Unit Accounts, (iii) the number and type of Shares subject to Options and SARs, (iv) the exercise price with respect to any Option or SAR or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Option or SAR, and (v) the limits specified in Section 5(a); provided, however, that no fractional Restricted Stock Units or Shares shall be issued or outstanding hereunder. Any such adjustment with respect to a “Stock Right” outstanding under the Plan as defined in Section 409A of the Code, shall be made in a manner that is intended to avoid imposition of any additional tax or penalty under Section 409A. SECTION 6. EQUITY GRANT UPON INITIAL ELECTION. (a) (b) Initial Grant. Following the effective date of this Plan, each Director shall, effective as of the date of such individual’s initial election or appointment to the Board, be granted 2,000 Restricted Stock Units. Terms and Conditions. The terms and conditions of each Restricted Stock Unit granted under this Section 6 shall be as described in Section 9. SECTION 7. ANNUAL EQUITY GRANTS. (a) B-4 Annual Grant. Each Director will be granted annually an Option with a grant-date value of approximately $100,000 determined using a Black-Scholes option-pricing model and a Restricted Stock Unit Award with a grant-date value of approximately $100,000, in each case rounded down to the nearest whole share. The Restricted Stock Units granted under this Section 7(a) shall be in addition to any RSUs granted to any Director pursuant to Section 6. TE X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T P R O X Y S T A T E M E N T (b) (c) (d) Effective Date of Annual Grant. In each year the effective date for the annual grant of equity to the Company’s executive officers by the Compensation Committee of the Board (or any successor committee) shall be the date the Options and Restricted Stock Units are granted; provided that in any year in which the Compensation Committee does not grant equity to any of the Company’s executive officers in connection with the annual compensation review process, then the third trading day after the release of the Company’s financial results for the first quarter of such year shall be the date the Options and Restricted Stock Units are granted. Terms and Conditions. The terms and conditions of each Option and Restricted Stock Unit granted under this Section 6 shall be as described in Sections 8 and 9, respectively. Reductions in Awards. Prior to the effective date of any annual grant as described in this Section 7, the Board shall have the right to make reductions in the Awards to be granted under this Section 7. In determining whether to reduce any Award and the amount of any reduction, the Board shall take into consideration such factors as the Board shall determine. SECTION 8. OPTIONS. The Options granted under this Plan will be nonstatutory stock options not intended to qualify under Section 422 of the Code and shall have the terms and conditions described in this Section 8: (a) (b) (c) (d) Price and Term of Options. The purchase price per share of Shares deliverable upon the exercise of each Option shall be 100% of the Fair Market Value per share of the Shares on the effective date of the grant as determined in Section 7(b). Payment. The Secretary shall determine the method or methods by which, and the form or forms, including, without limitation, cash, Shares, or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price, in which payment of the exercise price with respect to an Option may be made or deemed to have been made. Exercisability. Subject to Section 8(d), Options shall become exercisable in four equal annual installments commencing on the first anniversary date of the grant. Termination of Service as a Director. The effect of a Participant’s termination of service as a member of the Board shall be as follows: (i) Termination for cause: All outstanding Options held by the Participant shall be canceled immediately upon termination. (ii) Death: All outstanding Options held by the Participant shall continue to full term, becoming exercisable in accordance with Section 8(c), and shall be exercisable by such Participant’s heirs or legal representatives. (iii) Permanent disability, termination after 8 years of service, or termination for reason of ineligibility to stand for reelection under the Company’s By-Laws: All outstanding Options held by the Participant shall continue to full term, becoming exercisable in accordance with Section 8(c). (iv) Change in Control: If a Participant experiences a Separation From Service (other than for cause) within 24 months after a Change in Control, the provisions of Section 8(c) shall not apply and Options held by the Participant shall be immediately exercisable and shall continue to full term. (v) Other: For any termination other than those specified above, all outstanding Options held by the Participant shall be exercisable for 30 days after the date of termination, only to the extent that such Options were exercisable on the date of termination, except that if the Participant dies within 30 days after his or her termination, then such Participant’s heirs may exercise the Options for a period of up to one year after the Participant’s death, but only to the extent any unexercised portion was exercisable on the date of termination. T N E M E T A T S Y X O R P (e) Option Agreement. Each Option granted under this Plan shall be evidenced by an Award Agreement with the Company, which shall contain the terms and provisions set forth herein and shall otherwise be consistent with the provisions of the Plan. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T B-5 SECTION 9. RESTRICTED STOCK UNITS. Each Restricted Stock Unit granted under this Plan shall be paid or settled by the issuance of one Share and shall have the terms and conditions described in this Section 9: (a) Vesting and Settlement. Subject to Section 9(b) and subject to a Director’s election to defer the settlement of Restricted Stock Units pursuant to Section 11, the shares covered by the Restricted Stock Units shall be paid or settled as soon as practicable after the fourth anniversary of the date of grant. (b) Termination of Service as a Director. The effect of a Participant’s termination of service as a member of the Board shall be as follows: (i) (ii) Death: All outstanding Restricted Stock Units held by the Participant shall continue to full term subject to the other terms and conditions of this Plan, and shares shall be issued to such Participant’s heirs at such times and in such manner as if the Participant were still a member of the Board. Permanent disability, termination after 8 years of service, or termination for reason of ineligibility to stand for reelection under the Company’s By-Laws: All outstanding Restricted Stock Units held by the Participant shall continue to full term subject to the other terms and conditions of this Plan, and shares shall be issued to such Participant at such times and in such manner as if the Participant were still a member of the Board. (iii) Separation From Service after a Change in Control: If a Participant experiences a Separation From Service (other than for cause) within 24 months after a Change in Control, the provisions of Section 9(a) shall not apply and: (A) To the extent permitted without additional tax or penalty by Section 409A of the Code, all shares underlying such Restricted Stock Units held by the Participant (including any such Restricted Stock Units subject to an election to defer settlement under Section 11) will be issued on, or as soon as practicable (but no later than 60 days) after, the Participant’s Separation From Service; provided, however, that if the participant is a Specified Employee upon such Separation From Service, the shares will be issued on, or as soon as practicable (but no more than 10 days) after, the first day of the seventh month following the Separation From Service and any such Restricted Stock Units outstanding under this Plan shall vest and be paid immediately. (B) To the extent that the issuance of shares is not permitted without additional tax or penalty by Section 409A, the Award will continue to full term and the shares will be issued at the issuance date specified in the Award Agreement as if the Participant were still a Director on such date or (for any such Restricted Stock Units subject to an election to defer settlement pursuant to Section 11) in accordance with Section 11(h)(i). (iv) Other: For any termination other than those specified above, all outstanding Restricted Stock Units held by the Participant shall terminate and become void without any shares being issued. (c) (d) P R O X Y S T A T E M E N T Restricted Stock Unit Agreement. Each Restricted Stock Unit Award granted under this Plan shall be evidenced by an Award Agreement with the Company, which shall contain the terms and conditions set forth herein and shall otherwise be consistent with the provisions of this Plan. Right to Dividend Equivalents. Each recipient of Restricted Stock Units under this Plan shall have the right, during the period when such Restricted Stock Units are outstanding and prior to the termination, forfeiture or payment or settlement thereof, to receive dividend equivalents equal to the amount or value of any cash or other distributions or dividends payable on the same number of Shares. The Company shall accumulate dividend equivalents on each dividend payment date and, unless a Director has elected to defer receipt of such dividend equivalents pursuant to Section 11, pay such accumulated amounts without interest in December of each fiscal year, but no later than March 15 of the calendar year following the calendar year in which the related dividend is declared. (e) Issuance of Shares. A stock certificate or certificates shall be registered and issued or other indicia of ownership of shares shall be issued, in the name or for the benefit of the holder of Restricted Stock Units and delivered to such holder as soon as practicable after such Restricted Stock Units have become payable or settleable in accordance with the terms of the Plan. B-6 TE X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T SECTION 10. STOCK APPRECIATION RIGHTS (SARs). (a) SARs may be granted to Directors with such terms and conditions as the Administrator shall determine not inconsistent with the provisions of the Plan. (b) The term of each SAR shall be fixed by the Administrator but shall not exceed 10 years. SECTION 11. DEFERRED COMPENSATION. (a) Deferral Election. Each Director may elect, with respect to any Year, that all or any percentage of his or her Eligible Compensation be deferred in accordance with the terms of this Plan. (b) Cash Compensation Investment Alternatives. Each Director may elect that his or her Deferred Cash Compensation for any Year be credited to a Cash Account or a Stock Unit Account or to any combination thereof. (i) Cash Accounts. (A) The Company shall establish and maintain, as appropriate, separate unfunded Cash Accounts for each Director who has elected that any portion of his or her Deferred Cash Compensation be credited to a Cash Account. (B) As of the date on which any amount of a Director’s Deferred Cash Compensation becomes payable, his or her Cash Account shall be credited with an amount equal to that portion of such Deferred Cash Compensation as such Director has elected be credited to his or her Cash Account. (C) As of the last day of each month, interest on each Cash Account shall be credited on the average of the balances on the first and last day of such month. Interest shall be credited at a rate equivalent to the average yield on corporate bonds rated Aaa by Moody’s Investors Service on September 30 of the preceding Year (or if there is no such yield reported for such date, then on the next preceding date for which such a yield is reported) as published in Federal Reserve Statistical Release H.15, or at such other rate that would qualify as a “reasonable rate of interest” as defined by Section 409A of the Code, as may be determined by the GSR Committee for each Year. (ii) Stock Unit Accounts. (A) The Company shall establish and maintain, as appropriate, separate unfunded Stock Unit Accounts for each Director who has elected that any portion of his or her Deferred Cash Compensation be credited to a Stock Unit Account. (B) As of each date on which any amount of a Director’s Deferred Cash Compensation becomes payable, his or her Stock Unit Account shall be credited with that number of units as are equal to the number of full or fractional Shares as could be purchased at the Fair Market Value on the first trading day preceding such date with the portion of such Deferred Cash Compensation as such Director has elected be credited to his or her Stock Unit Account. (C) As of the payment date for each dividend on Shares declared by the Board, there shall be credited to each Stock Unit Account that number of units as are equal to the number of full or fractional Shares as could be purchased at the Fair Market Value on the first trading day preceding the payment date for such dividend with an amount equal to the product of: (i) the dividend per share, and (ii) the number of units in such Stock Unit Account immediately prior to the record date for such dividend. (c) Restricted Stock Units. Each Director may elect to defer all or a portion of any Restricted Stock Unit Award. (d) Dividend Equivalents. Each Director may elect to defer all or a portion of any dividend equivalents paid on Restricted Stock Units. (e) Time of Election. An election to defer all or any portion of Eligible Compensation for any Year shall be made in writing in the form (“Election Form”) prescribed by the Secretary. T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T B-7 T N E M E T A T S Y X O R P (i) Except as hereinafter provided, to be effective, an Election Form relating to payments for a Year, or to Restricted Stock Units that may be granted in such Year, must be received by the Secretary on or before December 31 of the preceding Year. In the case of a Director’s initial election to the Board, the initial Election Form must be received not more than 30 days following his or her election to the Board and, if received within such 30-day period, the Election Form shall be effective only for Eligible Compensation earned after the election becomes irrevocable pursuant to Section 11(f). The time of election and the time of distribution shall comply in all respects with the applicable requirements of Section 409A of the Code. (f) Irrevocability of Election. A Director’s election to defer all or any portion of his or her Eligible Compensation for any Year shall be irrevocable upon receipt by the Secretary of a completed Election Form from the Director. (g) Form of Distributions. (i) Distributions of amounts credited to each Participant’s Cash Account shall be made in cash. (ii) Distributions of units credited to each Participant’s Stock Unit Account shall be made by issuing to such Participant an equivalent number of Shares. (iii) Distribution of Shares relating to vested Restricted Stock Units the Participant has elected to defer shall be made by issuing to such Participant the whole number of Shares attributable to such vested Restricted Stock Units. Notwithstanding the foregoing, no fractional shares will be issued and any fractional unit will be distributed by payment of cash in the amount represented by such fractional unit based on the Fair Market Value on the date preceding the date of payment. (h) Time of Distributions. (i) Normal Distributions. Except as otherwise hereinafter provided, distributions from a Participant’s Deferred Compensation Account shall be made on the first day of the month following such Participant’s Separation from Service on the Board for any reason other than death. Notwithstanding the foregoing, no distribution may be made to a Specified Employee before the date that is six months after the date of Separation from Service or, if earlier, the date of death. (ii) Change in Control. In the event a Participant experiences a Separation From Service (other than for cause) within 24 months after a Change in Control, then, to the extent permitted without additional tax or penalty by Section 409A of the Code, such Participant shall receive a distribution of the balances credited to the Participant’s Account which are attributable to amounts credited to the account. See Section 9(b)(iii) for the effect of such Separation From Service on deferred Restricted Stock Units. The amounts to be distributed pursuant to this Section 11(h)(ii) shall be paid on, or as soon as practicable (but no later than 60 days) after, the Participant’s Separation from Service, provided, however, that if the Participant is a Specified Employee upon such Separation From Service, the balances credited to the Participant’s Account will be distributed on, or as soon as practicable (but no more than 10 days) after, the first day of the seventh month following such Separation From Service. To the extent that distributions of amounts pursuant to this Section 11(h)(ii) are not permitted without additional tax or penalty by Section 409A of the Code, the affected Participant shall receive distribution of the amounts referred to in this Section 11(h)(ii) in accordance with Section 11(h)(i). (iii) Unforeseeable Emergency. An earlier distribution may be made upon a finding that the Participant is suffering from an Unforeseeable Emergency. A withdrawal on account of Unforeseeable Emergency may not be made to the extent that such emergency is or may be relieved (A) through reimbursement or compensation from insurance or otherwise, (B) by liquidation of the Participant’s assets, to the extent the liquidation of such assets would not cause severe financial hardship, or (C) by cessation of deferrals under the Plan. P R O X Y S T A T E M E N T B-8 TE X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T Withdrawal because of an Unforeseeable Emergency must be limited to the amount reasonably necessary to satisfy the emergency need (which may include amounts necessary to pay any federal, state, local, or foreign income taxes or penalties reasonably anticipated to result from the distribution), as determined by the Administrator, in its sole discretion. The Participant must apply in writing for a payment upon an “Unforeseeable Emergency,” using the form prescribed by the Administrator. The Administrator retains the sole and absolute discretion to grant or deny a payment upon an Unforeseeable Emergency. In the event of approval of a payment upon an Unforeseeable Emergency, the Participant’s outstanding deferral elections under the Plan shall be cancelled. (i) (j) (k) Death of Participant. Notwithstanding the foregoing, in the event of the death of a Participant prior to receipt by such Participant of the full amount of cash and number of shares to be distributed from his or her Deferred Compensation Account, all such cash and/or shares will be distributed to the beneficiary or beneficiaries designated by the Participant, or if no beneficiary has been designated, to the Participant’s estate as soon as practicable following the month in which the death occurred. Shares to be distributed to the Participant in connection with deferred Restricted Stock Units shall also be distributed as described in the preceding sentence but in no event earlier than the fourth anniversary of the date of grant. Certain Rights Reserved by the Company. In the event that, pursuant to Section 13, the Company suspends, modifies or terminates this Plan, the Company shall have the right to distribute to each Participant all amounts in such Participant’s Cash Account or Shares equivalent to units in such Participant’s Stock Unit Account, including, in the case of Stock Unit Accounts, the right to distribute cash equivalent to the units in such Accounts and all Shares attributable to vested Restricted Stock Units that a Participant has elected to defer, provided that any such suspension, modification or termination may be effected without penalty under Section 409A of the Code. Certain Affiliations. In the event that a Participant terminates his or her membership on the Board and becomes affiliated with a government agency, all amounts in such Participant’s Cash Account, shares equivalent to units in such Participant’s Stock Unit Account and Shares attributable to Restricted Stock Units that such Participant has elected to defer will be distributed to the Participant if such payment is necessary to avoid violation of any applicable federal, state, local or foreign ethics or conflict of interest law or if necessary to comply with an ethics agreement with the federal government. SECTION 12. OTHER STOCK-BASED AWARDS. The Administrator is hereby authorized to grant to Directors such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares) as are deemed by the Administrator to be consistent with the purposes of the Plan. Subject to the terms of the Plan, the Administrator shall determine the terms and conditions of such Awards. Shares or other securities delivered pursuant to a purchase right granted under this Section 12 shall be purchased for such consideration, which may be paid by such method or methods and in such form or forms, including, without limitation, cash, Shares, other securities, other Awards, or other property, or any combination thereof, as the Administrator shall determine, the value of which consideration, as established by the Administrator, shall not be less than the Fair Market Value of such Shares or other securities as of the date such purchase right is granted. The Company intends that such other Awards granted pursuant to this Section shall comply with Section 409A of the Code if applicable. SECTION 13. AMENDMENT AND TERMINATION. Except to the extent prohibited by or inconsistent with applicable law: (a) Amendments. The Board may amend, alter, suspend, discontinue or terminate the Plan, including, without limitation, the number of shares subject to Awards granted pursuant to Sections 6, 7 and 10, without the consent of any stockholder, Participant, other holder or beneficiary of any Award, or other person; provided, however, that no such amendment, alteration, suspension, discontinuation or termination shall be made without (i) stockholder approval if such approval is necessary to comply with the listing requirements of The NASDAQ Stock Market or (ii) the consent of the affected Participants, if such action would adversely affect the rights of such Participants under any outstanding Award; and provided further, that no such amendment or alteration shall increase the aggregate number of shares that may be issued under the Plan or increase the total value of Awards that may be granted in any given Year, in each case except as provided in Section 5(d). In addition, any such amendment shall be in compliance with Section 409A of the Code. The Administrator may modify any outstanding Awards to comply with Section 409A without consent from Participants. Notwithstanding any other provision of the Plan or any Award Agreement, no amendment, alteration, suspension, discontinuation or termination of the Plan or any Award Agreement shall be made that would (1) permit Options or SARs to be granted with a per Share exercise T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T B-9 T N E M E T A T S Y X O R P price of less than the Fair Market Value of a Share on the date of grant thereof or (2) except as provided in Section 5(d), (w) reduce the exercise price of any Option or SAR established at the time of grant thereof, (x) be treated as a repricing under U.S. generally accepted accounting principles (“GAAP”), (y) cancel an Option or SAR in exchange for another Option, SAR, restricted stock unit or any other Award, or (z) terminate an Option or SAR in exchange for a cash amount equal to or greater than the excess, if any, of the Fair Market Value of the underlying Shares on the date of cancellation over the exercise price times the number of Shares outstanding under the Award. A cancellation and exchange described in clause (y) of the immediately preceding sentence is prohibited regardless of whether the option, SAR, restricted stock unit or other equity is delivered simultaneously with the cancellation and regardless of whether the cancellation and exchange are treated as a repricing under GAAP or are voluntary on the part of the Participant. (b) Correction of Defects, Omissions and Inconsistencies. The Administrator may correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect. SECTION 14. GENERAL PROVISIONS. (a) No Rights of Stockholders. Neither a Participant nor a Participant’s legal representative shall be, or have any of the rights and privileges of, a stockholder of the Company in respect of any Shares issuable under the Plan in connection with any Award or Account, in whole or in part, unless and until certificates or other indicia of ownership of such shares shall have been issued. (b) Limits of Transfer of Awards. No Award and no right under any such Award, shall be assignable, alienable, saleable or transferable by a Participant otherwise than by will or by the laws of descent and distribution. During the Participant’s lifetime, rights under an Award shall be exercisable only by the Participant, or if permissible under applicable law, by the Participant’s guardian or legal representative. (c) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. (d) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware without giving effect to the principles of conflict of laws thereof. (e) (f) (g) P R O X Y S T A T E M E N T Severability. If any provision of the Plan or any Award Agreement is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction, or as to any person, Award or Account, or would disqualify the Plan or any Award under any law deemed applicable by the Administrator, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Administrator, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such Award shall remain in full force and effect. No Trust or Fund Created. Neither the Plan nor any Award or Account shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and a Participant or any other person. To the extent that any person acquires a right to receive an Award or Account, or Shares pursuant to an Award or Account, from the Company pursuant to this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. Accounts Unsecured. Until distributed, all amounts credited to any Cash Accounts or represented by units credited to any Stock Unit Account shall be property of the Company, available for the Company’s use, and subject to the claims of general creditors of the Company. The rights of any Participant or beneficiary to distributions under this Plan are not subject to anticipation, alienation, sale, transfer, assignment, or encumbrance, and shall not be subject to the debts or liabilities of any Participant or beneficiary. (h) Withholding. The Company shall be authorized to withhold from any Awards granted or any transfer made under any Award or under the Plan or from any dividend equivalents to be paid on Restricted Stock Units the amount (in cash, Shares, other securities, or other property) of any taxes required to be withheld in respect of a grant, exercise, payment or settlement of an Award or any payment of dividend equivalents under Restricted Stock Units or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations of the Company for the payment of any such taxes. B-10 T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T (i) (j) No Right to Continued Board Membership. The grant of an Award or establishment of an Account shall not be construed as giving a Participant the right to be retained as a director of the Company. The Board may at any time fail or refuse to nominate a Participant for election to the Board, and the stockholders of the Company may at any election fail or refuse to elect any Participant to the Board free from any liability or claim under this Plan or any Award or Account. 409A Compliance. The Company makes no representations or covenants that any Award granted or Deferred Compensation arrangement maintained under the Plan will comply with Section 409A of the Code. SECTION 15. EFFECTIVE DATE OF THE PLAN. The Plan shall be effective as of the date of its approval by the stockholders of the Company. SECTION 16. TERM OF THE PLAN. No Award shall be granted or compensation deferred under the Plan after the tenth anniversary of the Effective Date of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted or Account established prior to the termination of the Plan may extend beyond such date, and the authority of the Committee and the Board under Section 12 to amend, alter, adjust, suspend, discontinue, or terminate any such Award or Account, or to waive any conditions or rights thereunder, shall extend beyond such date. T N E M E T A T S Y X O R P T E X A S I N S T R U M E N T S • 2 0 1 8 P R O X Y S T A T E M E N T B-11 (This page intentionally left blank.) T E X A S I N S T R U M E N T S OTHER INFORMATION Comparison of total shareholder return This graph compares TI’s total shareholder return with the S&P 500 Index and the S&P Information Technology Index over a five- year period, beginning December 31, 2012, and ending December 31, 2017. The total shareholder return assumes $100 invested at the beginning of the period in TI common stock, the S&P 500 Index and the S&P Information Technology Index. It also assumes reinvestment of all dividends. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Texas Instruments Incorporated, the S&P 500 Index and the S&P Information Technology Index $400 $350 $300 $250 $200 $150 $100 $50 $0 Texas Instruments Incorporated S&P 500 S&P Information Technology 12/12 12/13 12/14 12/15 12/16 12/17 Texas Instruments Incorporated S&P 500 S&P Information Technology Notice regarding forward-looking statements 12/12 100.00 100.00 100.00 12/13 146.27 132.39 128.43 12/14 182.98 150.51 154.26 12/15 192.47 152.59 163.40 12/16 263.14 170.84 186.03 12/17 386.22 208.14 258.28 This Annual Report includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as TI or its management “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of similar import. Similarly, statements herein that describe TI’s business strategy, ability to generate free cash flow in the future, outlook, objectives, plans, intentions or goals also are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in forward-looking statements. For a more detailed discussion of these factors see the risk factors discussion that begins on page 8 of this report. Forward-looking statements in this report are made only as of the date of this report and we undertake no obligation to update them to reflect subsequent events or circumstances. Among Texas Instruments Incorporated, the S&P 500 Index and the S&P Information Technology Index COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* T E X A S I N S T R U M E N T S 1 (This page intentionally left blank.) T E X A S I N S T R U M E N T S BOARD OF DIRECTORS, EXECUTIVE OFFICERS Directors Executive officers Richard K. Templeton Chairman of the Board, President and Chief Executive Officer, Texas Instruments Incorporated Carrie S. Cox Chairman of the Board and Chief Executive Officer, Humacyte, Inc. Richard K. Templeton* Chairman of the Board, President and Chief Executive Officer Ralph W. Babb, Jr. Chairman of the Board and Chief Executive Officer, Comerica Incorporated and Comerica Bank Mark A. Blinn Retired President and Chief Executive Officer, Flowserve Corporation Todd M. Bluedorn Chairman of the Board and Chief Executive Officer, Lennox International Inc. Brian T. Crutcher Executive Vice President and Chief Operating Officer, Texas Instruments Incorporated Jean M. Hobby Retired Partner, PricewaterhouseCoopers LLP Ronald Kirk Senior Of Counsel, Gibson, Dunn & Crutcher LLP Pamela H. Patsley Retired Executive Chairman, MoneyGram International, Inc. Daniel A. Carp Retired Chairman of the Board and Chief Executive Officer, Eastman Kodak Company Robert E. Sanchez Chairman of the Board and Chief Executive Officer, Ryder System, Inc. Janet F. Clark Retired Executive Vice President and Chief Financial Officer, Marathon Oil Corporation Wayne R. Sanders Retired Chairman of the Board and Chief Executive Officer, Kimberly-Clark Corporation Rafael R. Lizardi Senior Vice President and Chief Financial Officer Kevin J. Ritchie Senior Vice President Cynthia Hoff Trochu Senior Vice President, Secretary and General Counsel Brian T. Crutcher* Executive Vice President and Chief Operating Officer Niels Anderskouv Senior Vice President Stephen A. Anderson Senior Vice President Julie M. Van Haren Senior Vice President Ellen L. Barker Senior Vice President and Chief Information Officer R. Gregory Delagi Senior Vice President Haviv Ilan Senior Vice President Darla H. Whitaker Senior Vice President Bing Xie Senior Vice President *In January 2018, TI announced that Mr. Crutcher will become president and CEO, effective June 1, and Mr. Templeton will continue as chairman. TI Fellows TI Fellows are engineers, scientists or technologists who are recognized by peers and TI management for outstanding performance. Fellows are elected or re-elected every five years based on their exceptional leadership in driving deeper levels of innovation that make TI stronger. Announced in 2017: Baher Haroun named Senior Fellow, Hal Edwards and Vishy Pentakota named Fellows Stockholder and other information Stockholder records information Stockholder correspondence: Computershare P.O. Box 505000 Louisville, KY 40233-5000 Overnight correspondence: Computershare 462 South 4th Street, Suite 1600 Louisville, KY 40202 Toll free: 800-981-8676 Phone: 312-360-5151 Website: www.computershare.com/investor Online inquiries: https://www-us.computershare.com/investor/contact SEC Form 10-K A copy of the company’s annual report to the Securities and Exchange Commission on Form 10-K is available on the Investor Relations website at www.ti.com/ir. Copies of the Form 10-K, including a list of exhibits and any exhibit specifically requested, are available without charge by writing to: Texas Instruments Investor Relations P.O. Box 660199, MS 8657 Dallas, TX 75266-0199 DLP and the platform bar are trademarks of Texas Instruments. All other trademarks are the property of their respective owners. Texas Insts ruments Incocorprpororatedd P.P.O.O. BBoxox 666060191999 DaD lll asas, , TXTX 7752526666-0-0191999 TI.ccomom An equal opporttuniunity ty empem loyer © 2© 2018018 TeTexasxas InInstrstrumeu nts Incorporateedd SZSZZBZB131 44