2015 Annual Report Notice of 2016 Annual Meeting & Proxy Statement Richard K. Templeton To our shareholders: Chairman, President and Chief Executive Officer As we close out 2015, I want to thank you for your investment and Another big change is the emergence of the World Wide Web as an confidence in Texas Instruments. important decision point for semiconductor design-ins and purchases. This has long been common for consumer goods but is newer for It was a good year and our financial results speak well of our company. technical and engineering-based buys. We’ve been investing for several Gross margin was 58.2 percent of revenue and operating margin was years to make TI.com the preferred source for analog and embedded 32.9 percent, both new records. Most importantly, free cash flow margin semiconductors, and today we have what I believe is our industry’s very was a new record at 28.6 percent of revenue, up 170 basis points from best Web experience for design engineers. a year ago. After first investing in new technologies and products for our future, we again returned more than 100 percent of free cash flow Finally, new markets for semiconductors like industrial and automotive dollars to you, our shareholders, in the form of dividends and share are presenting new opportunities as the best sources of growth. This buybacks. Dividends per share increased to $1.52 annualized, up by is particularly good news, because while we aspire in all markets, a factor of 12 in the last decade, and shares outstanding decreased industrial and automotive applications are still in the early stages of to their lowest levels in almost 50 years. We accomplished all of this semiconductor adoption, and our own percentage of revenue from the despite a tepid economy accompanied by headwinds from foreign combination of both has jumped four points, to 46 percent, in just the exchange rates and some end markets. past few years. As I’ve said before in my letters to you, the strength of our company’s I’ll close this letter by reaffirming our intent to care wisely for your performance starts with the right focus and the right strategies. We are investment in us. We know this requires discipline on our part to allocate solid here because we’ve anchored our business model in two pervasive our company’s capital to the best places with the best prospects for semiconductor technologies that are part of virtually every piece of long-term growth and returns. We spend a lot of time making sure we electronics equipment in the world: analog and embedded processing. do this well because it makes the difference in whether we generate The semiconductors from these technologies have long life cycles and returns that are greater than our cost of capital. diverse market exposures that foster growth and good investment returns. They use mature, and therefore, lower-cost manufacturing The outcome of our investments to date has been a set of competitive processes and assets, which allow us to generate more cash and advantages that, taken together, separate us from our peers and are profitability. In 2015, 86 percent of our revenue came from the sale of difficult for others to replicate. These are: 1) our manufacturing strategy Analog and Embedded semiconductors, up from 83 percent in 2014. and technology, including 300-millimeter Analog manufacturing, 2) our Once again, we gained market share in both of these core businesses, broad product portfolio, 3) our unparalleled market reach, and 4) our the sixth consecutive year we’ve done so. diverse and long-lived product positions. They provide tangible benefits, among them: growth, profitability, strong cash generation, and many As you can see, our company has strengthened thanks to these markets and customers to ensure success is not dependent on a single strategies and investments that create long-term value. But we are application or buyer. As a result, TI is in a unique class of companies able not lulled into complacency by our success. We recognize that to grow, generate and return cash to shareholders, and we intend to stay fundamental changes are happening across our industry, and we are here for a long time to come. intent on recognizing and staying ahead of them in order to maximize our company’s competitiveness. Among these changes is the accelerated rate of industry consolidation. Fortunately, we were in front of this curve several years ago when we acquired National Semiconductor. As a result, our customers now have access to a stronger and broader portfolio of Analog and Embedded semiconductors, and we are now enjoying more than an 8 percent return on our investment. Note: Free cash flow (non-GAAP) = Cash flow from operations minus Capital expenditures. See page 21 for details. Form 10-K table of contents PART I Item 1. Business ................................................................................. 2 Item 1A. Risk Factors .............................................................................. 8 Item 1B. Unresolved Staff Comments ................................................................... 13 Item 2. Properties ................................................................................ 13 Item 3. Legal Proceedings .......................................................................... 14 Item 4. Mine Safety Disclosures ..................................................................... 14 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .... 15 Item 6. Selected Financial Data ...................................................................... 16 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ..................... 17 • Overview .......................................................................... 17 • Results of operations ................................................................. 18 • Prior results of operations .............................................................. 19 • Financial condition ................................................................... 20 • Liquidity and capital resources .......................................................... 21 • Non-GAAP financial information ......................................................... 21 • Long-term contractual obligations ........................................................ 22 • Critical accounting policies ............................................................. 22 • Changes in accounting standards, Off-balance sheet arrangements, and Commitments and contingencies ...................................................... 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................................... 24 Item 8. Financial Statements and Supplementary Data ..................................................... 26 • Consolidated Statements of Income ...................................................... 27 • Consolidated Statements of Comprehensive Income .......................................... 28 • Consolidated Balance Sheets ........................................................... 29 • Consolidated Statements of Cash Flows ................................................... 30 • Consolidated Statements of Stockholders’ Equity ............................................. 31 Notes to financial statements .................................................................. 32 • (1) Description of business, including segment and geographic area information ..................... 32 • (2) Basis of presentation and significant accounting policies and practices .......................... 33 • (3) Restructuring charges/other .......................................................... 38 • (4) Stock-based compensation .......................................................... 39 • (5) Profit sharing plans ................................................................ 43 • (6) Income taxes ..................................................................... 43 • (7) Financial instruments and risk concentration ............................................. 46 • (8) Valuation of debt and equity investments and certain liabilities ................................ 46 • (9) Goodwill and acquisition-related intangibles .............................................. 48 • (10) Postretirement benefit plans ........................................................ 49 • (11) Debt and lines of credit ............................................................ 55 • (12) Commitments and contingencies ..................................................... 56 • (13) Supplemental financial information ................................................... 57 • (14) Quarterly financial data (unaudited) ................................................... 59 TEXAS INSTRUMENTS i Report of independent registered public accounting firm ............................................. 60 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ................... 61 Item 9A. Controls and Procedures .................................................................... 61 Item 9B. Other information .......................................................................... 63 PART III Item 10. Directors, Executive Officers and Corporate Governance ............................................. 63 Item 11. Executive Compensation .................................................................... 63 Item 12. Security Ownership of Certain Beneficial Owners