#1Texas Instruments Annual Report 2016 2 Notice of 2017 Annual Meeting and Proxy Statement TEXAS INSTRUMENTS#2Operating highlights (Millions of dollars, except share and per-share amounts) Income statement Revenue Gross profit Operating expenses Operating profit Net income Earnings per share (diluted) 2016 2015 $ 13,370 $ 13,000 8,240 7,560 3,137 3,028 4,799 4,274 3,595 2,986 $ 3.48 $ 2.82 Cash flows statement Cash flow from operations (GAAP) $ 4,614 $ 4,397 Capital expenditures 531 551 Free cash flow (non-GAAP) 4,083 3,846 Shareholder return Dividends paid Shares repurchased $ 1,646 35.5M $ 1,444 51.4M Note: Free cash flow (non-GAAP) = Cash flow from operations less Capital expenditures. See page 21 for reconciliation. "It was a good year and we made solid progress in making TI a stronger company. In 2016, our revenue grew 3%. Gross margin and operating margin expanded to 61.6% and 35.9% of revenue, respectively. Most importantly, free cash flow increased to $4.1 billion, or 30.5% of revenue, reflecting the quality of our product portfolio and the efficiency of our manufacturing strategy." Rich Templeton, chairman, president and CEO 86% Analog & Embedded % of TI Revenue Growing at 8 percent CAGR, combined, since 2004 6% Free Cash Flow Growth Reflecting the ongoing strength of our business model $3.8B Returned to Shareholders Demonstrating our commitment to return cash to shareholders#3Form 10-K table of contents Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PARTI 28 12 13 13 13 PART II Item 5. Item 6. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data 14 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Overview 16 • Results of operations 17 Prior results of operations 18 • Financial condition Liquidity and capital resources 20 20 Non-GAAP financial information 21 Long-term contractual obligations 21 Critical accounting policies 21 Changes in accounting standards, Off-balance sheet arrangements, and Commitments and contingencies Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data . Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Stockholders' Equity 26 22222222 23 Notes to financial statements • (1) Description of business, including segment and geographic area information (2) Basis of presentation and significant accounting policies and practices. (3) Restructuring charges/other. . (4) Stock compensation (5) Profit sharing plans (6) Income taxes • (7) Financial instruments and risk concentration (8) Valuation of debt and equity investments and certain liabilities • (9) Goodwill and acquisition-related intangibles. • (10) Postretirement benefit plans (11) Debt and lines of credit (12) Commitments and contingencies (13) Supplemental financial information ⚫ (14) Quarterly financial data (unaudited) TEXAS INSTRUMENTS 29 30 31 31 32 37 38 43 43 45 46 48 48 55 56 57 གྷཤྰཆེ 54#4ii Report of independent registered public accounting firm Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information. PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services Item 15. Exhibits, Financial Statement Schedules Notice regarding forward-looking statements Signatures Proxy statement table of contents Notice of annual meeting of stockholders Table of contents Voting procedures, quorum and attendance requirements Election of directors Board organization Director compensation Executive compensation PART IV Audit Committee report. Proposal to ratify appointment of independent registered public accounting firm Additional information . . . Notice regarding forward-looking statements Directions and other annual meeting information Appendix A (Non-GAAP reconciliations) Other information table of contents Comparison of total shareholder return Notice regarding forward-looking statements TEXAS INSTRUMENTS 58 59 59 61 2 2 2 2 2 62 62 61 61 61 63 65 66 1 2 3 5 11 14 17 42 43 44 50 51 A-1 1 1#5FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2016 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to Commission File Number 1-3761 TEXAS INSTRUMENTS INCORPORATED Delaware (Exact name of Registrant as specified in its charter) (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 Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ 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 ☑ 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. Yes ☑ No ☐ 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 ☑ 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, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☑ Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ☑ The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $62,805,040,210 as of June 30, 2016. 999,639,733 (Number of shares of common stock outstanding as of February 21, 2017) Part III hereof incorporates information by reference to the Registrant's proxy statement for the 2017 annual meeting of stockholders. TEXAS INSTRUMENTS • 2016 FORM 10-K 1#6FORM 10-K ITEM 1. Business. PARTI 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 2016, we generated $13.37 billion of revenue. We focus our resources on Analog and Embedded Processing because we believe that these segments' long product life cycles, intrinsic diversity and need for less capital-intensive manufacturing provide a combination of 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 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. 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. Additional information regarding each segment follows. Analog Analog generated $8.54 billion of revenue in 2016. 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 personal electronics and industrial. Sales of our Analog products generated about 64 percent of our revenue in 2016. According to external sources, the market for analog semiconductors was about $48 billion in 2016. Our Analog segment's revenue in 2016 was about 18 percent of this fragmented market, the leading position. We believe we are well positioned to increase our market share over time. In 2016, our Analog segment included the following major product lines: High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA). HVAL HVAL included high-volume integrated products that support applications like automotive safety systems, touchscreen controllers, low-voltage motor drivers and integrated motor controllers. Power Power included products that help customers manage power in electronic systems. Our broad portfolio of Power products is designed to manage power requirements using battery management solutions, portable power components, power supply controls and point-of-load products. 2 TEXAS INSTRUMENTS • 2016 FORM 10-K#7FORM 10-K HPA HPA included products that we market to many different customers who use them in manufacturing a wide range of end products. HPA products included high-speed data converters, amplifiers, sensors, high-reliability products, interface products and precision products that are typically used in systems that require high performance. HPA products generally have long life cycles, often more than 10 years. SVA SVA included a broad portfolio of industrial, high-voltage power management, data converter, interface and operational amplifier products used in manufacturing a wide range of electronic systems. SVA products support applications like video and data interface products, high voltage power conversion, and mobile lighting and display systems. SVA products generally have long life cycles, often more than 10 years. SVA consisted primarily of products that we acquired through our purchase of National Semiconductor Corporation in 2011. Embedded Processing Embedded Processing generated $3.02 billion of revenue in 2016. 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, automotive and communications equipment. 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 2016. According to external sources, the market for embedded processors was about $18 billion in 2016. Our Embedded Processing segment's revenue in 2016 was about 17 percent of this fragmented market, among the leaders. We believe we are well positioned to increase our market share over time. In 2016, our Embedded Processing segment included the following major product lines: Processors, Microcontrollers and Connectivity. Processors Processors included 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. Microcontrollers Microcontrollers included 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 and program length, with no operating system and low software complexity. Analog components that control or interface with sensors and other systems are often integrated into microcontrollers. Connectivity Connectivity included products that enable electronic equipment to connect and transfer data wirelessly, with the requirements for speed, data capability, distance, power and security varying depending on the application. Our Connectivity products support many wireless technologies to meet these requirements, including low-power wireless network standards like Sub-1GHz, ZigbeeⓇ and other technologies like Bluetooth® and WiFi. TEXAS INSTRUMENTS . 2016 FORM 10-K 3#8FORM 10-K Other We report the results of our remaining business activities in Other, which included operating segments that do not meet the quantitative thresholds for individually reportable segments and cannot be aggregated with other operating segments. Other generated $1.81 billion of revenue in 2016 and included revenue from DLP® products (primarily used in projectors to create high-definition images), calculators, certain custom semiconductors known as application-specific integrated circuits (ASICS) and royalties received from agreements involving license rights to our patent portfolio. In Other, we also included 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." Markets for our products The table below lists the major markets that used our products in 2016 and the estimated percentage of our 2016 revenue that the market represented. The chart also lists, in declining order of our revenue, the sectors within each market. Market Industrial (33% of TI revenue) Automotive (18% of TI revenue) Personal electronics (26% of TI revenue) Communications equipment (13% of TI revenue) Enterprise systems (6% of TI revenue) Other (calculators, royalties and other) (4% of TI revenue) Sector Factory automation and control Medical/healthcare/fitness Building automation Grid infrastructure Test and measurement Space/avionics/defense Motor drives 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 Storage Portable electronics Tablets Home theater and entertainment Printers and other peripherals TV Wearables (non-medical) Gaming Wireless infrastructure Telecom infrastructure Enterprise switching Residential Projectors Servers High-performance computing Multi-function printers Thin client Electronic point of sale Appliances Power delivery Display Industrial transportation Lighting Industrial other 4 TEXAS INSTRUMENTS • 2016 FORM 10-K#9FORM 10-K Market characteristics Competitive landscape 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. 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, price and scale. The primary competitive factors for our Analog products include design proficiency, a diverse product portfolio to meet wide-ranging customer needs, manufacturing process technologies that provide differentiated levels of performance, applications and sales support, and manufacturing expertise and capacity. The primary competitive factors for our Embedded Processing products are the ability to design and cost-effectively manufacture products, system-level knowledge about targeted end markets, the installed base of software, software expertise, applications and sales support, and a product's performance, integration and power characteristics. 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 to the second and third quarters. 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 completing within 7 to 15 weeks. The cost and lifespan of the equipment and processes we use to manufacture semiconductors vary by technology. Our Analog products and most of our Embedded Processing products can be manufactured using mature and stable, and therefore less expensive, equipment than is needed for manufacturing advanced logic products, such as some of our processor products. TEXAS INSTRUMENTS . 2016 FORM 10-K 5#10FORM 10-K 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 own much of our manufacturing capacity; therefore, a significant portion of our operating cost is fixed and changes in factory loadings can cause short-term variations in profit margins. 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. Our operating focus is more on maximizing long-term free cash flow than minimizing short-term variations in profit margins caused by factory loadings. To this end, we seek to maximize long-term free cash flow by keeping capital expenditures low through opportunistic purchases of facilities and equipment ahead of demand. We expect to maintain sufficient internal manufacturing capacity to meet the vast majority of our production needs. To supplement our manufacturing capacity and maximize our responsiveness to customer demand and return on capital, we utilize the capacity of outside suppliers, commonly known as foundries, and subcontractors. In 2016, we sourced about 20 percent of our total wafers from external foundries and about 40 percent of our assembly/test services from subcontractors. Customers We estimate that we sell our products to about 100,000 customers. Our customer base is diverse, with more than one-third of our revenue deriving from customers outside our largest 100. Sales and distribution 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 our online presence. About 60 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. Inventory Our inventory practices differ by product, but we generally maintain inventory levels that are consistent with our expectations of customer demand. We carry proportionally more inventory of products with long life cycles and a broad customer base. Additionally, we sometimes maintain product inventory in unfinished wafer form, as well as higher finished-goods inventory of low-volume products, allowing greater flexibility in periods of high demand. About 60 percent of TI revenue is fulfilled from consignment inventory programs that we have in place for our large customers and distributors. With these programs, we own inventory that is stored at our customers' and distributors' locations, and we recognize revenue when the product is pulled from consigned inventory. These consignment programs give us improved insight into demand, allowing us to better manage our factory loadings. About 65 percent of our distributor revenue is generated from sales of consigned inventory. 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 $1.09 billion at December 31, 2016, and $0.95 billion at December 31, 2015. Acquisitions, divestitures and investments From time to time we consider acquisitions and divestitures that may strengthen our strategic position. We also make investments directly or indirectly in private companies. Investments are focused primarily on next-generation technologies and markets strategic to us. 6 TEXAS INSTRUMENTS • 2016 FORM 10-K#11Raw 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. 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. Research and development Our R&D expense was $1.37 billion in 2016, compared with $1.28 billion in 2015 and $1.36 billion in 2014. Our primary areas of R&D investment are Analog and Embedded Processing products. We conduct most of our R&D internally. However, 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. 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 * 47 Senior Vice President Stephen A. Anderson 55 Senior Vice President Ellen L. Barker * 54 Brian T. Crutcher 44 Senior Vice President and Chief Information Officer Executive Vice President and Chief Operating Officer R. Gregory Delagi 54 Senior Vice President Haviv llan * 48 Senior Vice President Rafael R. Lizardi ** 44 Kevin P. March ** 59 Kevin J. Ritchie 60 Richard K. Templeton 58 Senior Vice President and Chief Financial Officer Senior Vice President, Principal Financial Officer and Chief Accounting Officer Senior Vice President Director; Chairman of the Board, President and Chief Executive Officer Cynthia Hoff Trochu 53 Senior Vice President, Secretary and General Counsel Julie M. Van Haren *** 48 Senior Vice President Teresa L. West *** 56 Senior Vice President Darla H. Whitaker 51 Senior Vice President Bing Xie 49 Senior Vice President * Effective January 19, 2017. ** *** Effective February 1, 2017, Mr. Lizardi succeeded Mr. March as chief financial officer. Mr. Lizardi will assume the responsibilities of chief accounting officer effective March 1, 2017, at which time Mr. March will cease to be principal financial officer. Mr. March will retire from the company later this year. Effective January 1, 2017, Ms. Van Haren succeeded Ms. West, who will retire from the company on February 28, 2017. TEXAS INSTRUMENTS . 2016 FORM 10-K 7 FORM 10-K#12The 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, March, Ritchie and Templeton and Mses. West and 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. Employees At December 31, 2016, we had 29,865 employees. Available information Our internet address is www.ti.com. Information on our website is not a 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/corporate governance 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. FORM 10-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 of our 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. 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. We make significant investments in research and development to develop new technologies and products to meet changing customer demands, and 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. 8 TEXAS INSTRUMENTS • 2016 FORM 10-K#13FORM 10-K 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 grows at a significantly slower pace than management expects, our results of operations may be adversely affected. The cyclical nature of the semiconductor market may lead to significant and often 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. 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. Our operating results and our reputation could be adversely affected by breaches or disruptions of our information technology systems. Breaches or disruptions of our information technology systems could be caused by computer viruses, system failures, unauthorized access, sabotage, vandalism or terrorism. These events could compromise our information technology networks; result in 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 employee personal data; or cause us to incur increased information technology protection costs, any of which could adversely affect our operating results and our reputation. 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. TEXAS INSTRUMENTS . 2016 FORM 10-K 9#14FORM 10-K 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. 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; and intellectual property ownership and infringement. 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 or communications 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. If our tax rate increases, our results of operations could be adversely affected. A number of factors could cause our taxes 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; or adverse resolution of audits by taxing authorities. 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 could affect the locations where we are deemed to earn income, which could in turn affect our results of operations. 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. 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. 10 TEXAS INSTRUMENTS 2016 FORM 10-K#15FORM 10-K We have not made a provision for U.S. income tax on the portion of our undistributed earnings of our non-U.S. subsidiaries that is considered permanently reinvested outside the United States. If in the future we repatriate any of these foreign earnings, we might incur incremental U.S. income tax, 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 Tl-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. Our results of operations could be adversely affected by our distributors' promotion of competing product lines or our distributors' financial performance. In 2016, about 60 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; and changes in tariffs. 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. There can be no assurance that, as our business expands into new areas, 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. 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, including, for example, third parties' use of our patented technology in their products without the right to do so or third parties' sale of counterfeit products bearing our trademark. Moreover, 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 the other risk factors described under Item 1A, 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. TEXAS INSTRUMENTS . 2016 FORM 10-K 11#16FORM 10-K 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. 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 TEXAS INSTRUMENTS . 2016 FORM 10-K#17ITEM 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. Dallas, Texas Houston, Texas Sherman, Texas Tucson, Arizona * Santa Clara, California South Portland, Maine Chengdu, China t 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 t * Leased. † Portions of the facilities are leased and owned. This may include land leases, particularly for our non-U.S. sites. Embedded Analog Processing X X X X X X X XX X XXXXXXX Our facilities in the United States contained approximately 13.1 million square feet at December 31, 2016, of which approximately 0.7 million square feet were leased. Our facilities outside the United States contained approximately 10.2 million square feet at December 31, 2016, of which approximately 1.5 million square feet were leased. At the end of 2016, 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 both their intended purpose and our current and foreseeable future needs. 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. TEXAS INSTRUMENTS . 2016 FORM 10-K 13 FORM 10-K#18FORM 10-K PART II 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, 2016, 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. Stock prices: 2016 High Low 2015 High Low Dividends paid: 2016 2015 Issuer purchases of equity securities Quarter 1st 2nd 3rd 4th $ 58.37 $ 63.30 $ 71.42 $ 74.87 48.03 56.43 61.06 67.60 59.94 58.73 52.08 58.98 51.78 51.51 43.52 48.44 $ 0.38 $ 0.38 $ 0.38 $ 0.50 0.34 0.34 0.34 0.38 The following table contains information regarding our purchases of our common stock during the fourth quarter of 2016. Total Number of Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Shares Purchased Average Price Paid per Share 2,919,230 $ 69.92 2,919,230 2,857,964 71.23 2,857,964 943,139 71.36 943,139 6,720,333 (2) $ 70.68 Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) $ 6.07 billion Period October 1, 2016 through October 31, 2016 November 1, 2016 through November 30, 2016 December 1, 2016 through December 31, 2016 Total 5.87 billion 5.80 billion 6,720,333 (2) $ 5.80 billion (3) (1) All 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. (2) All purchases during the quarter were open-market purchases. (3) As of December 31, 2016, this amount consisted of the remaining portion of the $ 7.5 billion authorized in September 2015. No expiration date has been specified for this authorization. 14 TEXAS INSTRUMENTS . 2016 FORM 10-K#19ITEM 6. Selected Financial Data. (Millions of dollars, except share and per-share amounts) Cash flow data: Cash flows from operating activities (a) Capital expenditures. Free cash flow (a) (b) Dividends paid Stock repurchases Income statement data: Revenue by segment: For Years Ended December 31, 2014 2016 2015 2013 2012 $ 4,614 $ 4,397 $ 4,054 $ 3,514 $ 3,483 531 551 385 412 495 4,083 3,846 3,669 3,102 2,988 1,646 1,444 1,323 1,175 819 2,132 2,741 2,831 2,868 1,800 Analog Embedded Processing Other 8,536 8,339 8,104 7,194 6,998 3,023 2,787 2,740 2,450 2,257 1,811 1,874 2,201 2,561 3,570 Revenue 13,370 13,000 13,045 12,205 12,825 Gross profit 8,240 7,560 7,427 6,364 6,368 Operating expenses (R&D and SG&A) 3,137 3,028 3,201 3,380 3,681 Acquisition charges 319 329 330 341 450 Restructuring charges/other (15) (71) (51) (189) 264 Operating profit 4,799 4,274 3,947 2,832 1,973 Net income (c) $ 3,595 $ 2,986 $ 2,821 $ 2,162 $ 1,759 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 (c) Income allocated to RSUs $ 3,595 (44) $ 2,986 (42) $ 2,821 (43) $ 2,162 (36) $ 1,759 (31) Income allocated to common shares for diluted EPS (c) $ 3,551 $ 2,944 Average diluted shares outstanding, in millions (c) Diluted EPS (c) 1,021 1,043 $ 2,778 1,080 $ 2,126 $ 1,728 1,113 1,146 Cash dividends declared per common share $ 3.48 $ 2.82 $ 2.57 $ 1.91 $ 1.51 1.64 $ 1.40 $ 1.24 $ 1.07 $ 0.72 (a) Prior periods reclassified to conform to the 2016 presentation, having adopted ASU 2016-09. See Note 2. (b) Free cash flow is a non-GAAP measure derived by subtracting Capital expenditures from Cash flows from operating activities. (c) 2016 amounts reflect the adoption of ASU 2016-09. See Note 2. (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 and commercial paper borrowings Long-term debt Other data - Number of: Employees Stockholders of record 2016 2015 December 31, 2014 2013 2012 $ 3,490 16,431 $ 3,218 16,230 $ 3,541 $ 3,829 $ 3,965 17,372 18,554 19,565 631 2,978 1,000 1,001 1,000 1,500 3,120 3,630 4,145 4,175 29,865 14,910 29,977 31,003 32,209 34,151 15,563 16,361 17,213 18,128 See Notes to the financial statements and Management's discussion and analysis of financial condition and results of operations. TEXAS INSTRUMENTS 2016 FORM 10-K 15 FORM 10-K#20FORM 10-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 carefully constructed around the following attributes: • Industry's broadest 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 can our competitors, which gives us access to more customers and the opportunity to generate more revenue per system. We invest more than $1 billion each year to develop new products for our portfolio. A strong foundation of manufacturing technology and low-cost production. We invest in manufacturing technologies that differentiate the features of our semiconductors, and we do most of our own production in-house, as opposed to outsourcing it. This ability to directly control our manufacturing helps ensure a consistent supply of products for our customers. We produce billions of semiconductors each year on a mixture of 150-, 200- and 300-millimeter wafers, and we are able to keep costs low for manufacturing facilities and equipment because our Analog and much of our Embedded Processing semiconductors can be made using mature assets that we acquire ahead of demand when their prices are most attractive. In 2016, we increased factory loadings by about 15 percent for our Analog semiconductors on 300-millimeter wafers, which have a 40 percent cost advantage per unpackaged chip over 200-millimeter wafers. The majority of our Analog growth will be produced on 300-millimeter wafers, which will be meaningful to the growth of our cash flow over the long term. • Industry's largest market channels. Our global sales force is larger than those of our competitors. The breadth of our portfolio attracts an increasing number of visits to our website, where customers often begin their initial product searches and design-in journey. Our web presence, together with our global sales force, provides us unique access to about 100,000 customers. • Diversity and longevity in our products and in the markets we serve. 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. The combined effect of these attributes is that over time we have grown free cash flow and gained market share in Analog and Embedded Processing. These attributes put 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: . All dollar amounts in the tables are stated in millions of U.S. dollars. When we discuss our results: о Unless otherwise noted, changes in our revenue are attributable to changes in customer demand, which are evidenced by fluctuations in shipment volumes. ○ 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. • 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. о 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. Over time, we have been allocating resources from areas like manufacturing support and SG&A into R&D activities. As a result, R&D expense will continue increasing in 2017. 16 TEXAS INSTRUMENTS . 2016 FORM 10-K#21FORM 10-K • • о Our effective tax rate (Provision for income taxes as a percentage of Income before income taxes) benefits from lower tax rates (compared to the U.S. statutory income tax rate) applicable to our operations in many of the jurisdictions in which we operate and from U.S. tax benefits. These lower non-U.S. tax rates are generally statutory in nature, without expiration and available to companies that operate in those taxing jurisdictions. 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. In the fourth quarter of 2016, we adopted ASU 2016-09 related to stock compensation. We applied the new standard prospectively as of the beginning of 2016 for the Consolidated Statements of Income and on a full retrospective basis for all periods in the Consolidated Statements of Cash Flows. See Note 2 to the financial statements for more details. Results of operations We continued to perform well in 2016, reflecting our focus on Analog and Embedded Processing. These products serve highly diverse markets with thousands of applications, and we believe have dependable long-term growth opportunities. In 2016, Analog and Embedded Processing represented 86 percent of revenue. Gross margin of 61.6 percent for the year reflects 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. In 2016, cash flows from operations were $4.61 billion, up from $4.40 billion in 2015. Free cash flow in 2016 was 30.5 percent of revenue, up from 29.6 percent a year ago and consistent with our targeted range of 20-30 percent of revenue. During the year, we returned $3.78 billion of cash to investors through a combination of stock repurchases and dividends. Our dividends represented 40 percent of free cash flow, underscoring their sustainability. Free cash flow is a non-GAAP financial measure. For a reconciliation to GAAP and an explanation of the reason for providing this non-GAAP measure, see the Non-GAAP financial information section after the Liquidity and capital resources section. 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 $8.24 billion, an increase of $680 million, or 9 percent, due to lower manufacturing costs and, to a lesser extent, higher revenue. Gross profit margin was 61.6 percent compared with 58.2 percent. Operating expenses were $1.37 billion for R&D and $1.77 billion for SG&A. R&D expense increased $90 million, or 7 percent, due to a combination of our ongoing allocation of resources into R&D activities and higher compensation-related costs. SG&A expense increased $19 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 net 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 net 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 $4.80 billion, or 35.9 percent of revenue, compared with $4.27 billion, or 32.9 percent of revenue. OI&E for 2016 was $211 million compared with $32 million. The increase is due to income of $188 million from settlements related to intellectual property infringement. 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 effective tax rates were 27 percent in 2016 and 29 percent in 2015. See Note 6 to the financial statements for a reconciliation of the U.S. statutory income tax rate to the effective tax rate. TEXAS INSTRUMENTS . 2016 FORM 10-K 17#22FORM 10-K 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 application of the new accounting standard related to stock compensation. Segment results - 2016 compared with 2015 Analog (included High Volume Analog & Logic (HVAL), Power Management (Power), High Performance Analog (HPA) and Silicon Valley Analog (SVA) product lines) Revenue Operating profit Operating profit % of revenue 2016 2015 Change $ 8,536 $ 8,339 2% 3,380 39.6% 3,048 36.6% 11% Analog revenue increased primarily due to SVA and HPA. Power also grew, but to a lesser extent, while HVAL declined due to the mix of products shipped. Operating profit increased due to higher gross profit, which benefited from lower manufacturing costs. Embedded Processing (included Processors, Microcontrollers and Connectivity product lines) Revenue Operating profit Operating profit % of revenue. 2016 2015 Change $ 3,023 $2,787 8% 801 596 34% 26.5% 21.4% Embedded Processing revenue increased due to, in declining order, Processors, Microcontrollers and Connectivity. Processors revenue increased due to the mix of products shipped. Operating profit increased primarily due to higher revenue and associated gross profit. Other (included DLP products, calculators, custom ASICS and royalties) Revenue Operating profit * Operating profit % of revenue 2016 2015 Change $1,811 $1,874 (3)% 618 630 34.1% 33.6% (2)% Includes Acquisition charges and Restructuring charges/other Other revenue decreased due to, in declining order, lower royalties, custom ASIC products and calculators. This decrease was partially offset by growth in DLP products. Operating profit decreased $12 million. Prior results of operations In 2015, Analog revenue grew 3 percent, and Embedded Processing revenue grew 2 percent. Analog and Embedded Processing represented 86 percent of revenue in 2015, up from 83 percent in 2014. Gross margin was 58.2 percent for 2015. In 2015, cash flows from operations were $4.40 billion, up from $4.05 billion in 2014. Free cash flow in 2015, was 29.6 percent of revenue, up from 28.1 percent in 2014. During 2015, we returned $4.19 billion of cash to investors through a combination of stock repurchases and dividends. Details of financial results 2015 compared with 2014 Revenue of $13.00 billion was about even with 2014, as higher revenue from Analog and Embedded Processing was offset by lower revenue from Other. Our 2015 revenue was negatively affected by about $150 million from changes in foreign currency exchange rates. Gross profit was $7.56 billion, an increase of $133 million, or 2 percent, due to lower manufacturing costs. Gross profit margin was 58.2 percent of revenue compared with 56.9 percent. 18 TEXAS INSTRUMENTS . 2016 FORM 10-K#23Operating expenses were $1.28 billion for R&D and $1.75 billion for SG&A. R&D expense decreased $78 million, or 6 percent, and SG&A decreased $95 million, or 5 percent. Both comparisons reflect savings from ongoing efforts across the company to align costs with growth opportunities, including the completed restructuring actions in Embedded Processing and Japan. These decreases were partially offset by higher compensation-related costs. Acquisition charges were related to our 2011 acquisition of National Semiconductor and were $329 million, about even with 2014. These non-cash charges were primarily from the amortization of intangible assets. Restructuring charges/other was a net credit of $71 million, which included gains on sales of assets of $83 million that were partially offset by $12 million related to restructuring charges and other credits. This compared with a net credit of $51 million in 2014, reflecting gains on sales of assets of $75 million that were partially offset by restructuring charges and other expenses of $24 million. These amounts are included in Other for segment reporting purposes. Operating profit was $4.27 billion, or 32.9 percent of revenue, compared with $3.95 billion, or 30.3 percent of revenue, in 2014. The income tax provision was $1.23 billion compared with $1.05 billion. The increase in the total tax provision was due to higher income before income taxes and, to a lesser extent, a lower benefit from non-U.S. effective tax rates. Our effective tax rate was 29 percent in 2015 and 27 percent in 2014. Net income was $2.99 billion, an increase of $165 million, or 6 percent, from 2014. EPS was $2.82 compared with $2.57 in 2014. Segment results - 2015 compared with 2014 Analog Revenue Operating profit 2015 2014 Change $ 8,339 $ 8,104 3% 3,048 36.6% 2,786 9% 34.4% Operating profit % of revenue. Analog revenue increased primarily due to HVAL. Power and SVA also grew, but to a lesser extent. HPA declined due to the mix of products shipped. Operating profit increased due to higher revenue and associated gross profit and, to a lesser extent, lower manufacturing costs. Embedded Processing Revenue Operating profit Operating profit % of revenue 2015 $2,787 596 21.4% 2014 Change $ 2,740 384 2% 55% 14.0% Embedded Processing revenue increased due about equally to Connectivity and Microcontrollers, which together offset a decline in Processors. Operating profit increased primarily due to lower operating expenses. Other Revenue Operating profit * Operating profit % of revenue * Includes Acquisition charges and Restructuring charges/other 2015 2014 Change $ 1,874 $ 2,201 (15)% 630 777 (19)% 33.6% 35.3% Other revenue declined primarily due to custom ASICs. Revenue from DLP products also declined, but to a lesser extent. Operating profit declined primarily due to lower revenue and associated gross profit. TEXAS INSTRUMENTS . 2016 FORM 10-K 19 FORM 10-K#24Financial condition At the end of 2016, total cash (Cash and cash equivalents plus Short-term investments) was $3.49 billion, an increase of $272 million from the end of 2015. Accounts receivable were $1.27 billion at the end of 2016. This was an increase of $102 million compared with the end of 2015. Days sales outstanding were 33 at the end of both 2016 and 2015. Inventory was $1.79 billion at the end of 2016. This was an increase of $99 million from the end of 2015. Days of inventory at the end of 2016 were 126 compared with 115 at the end of 2015. 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 2016 was $4.61 billion, an increase of $217 million from 2015 primarily due to an increase in Net income. Our revolving credit facility is with a consortium of investment-grade banks and allows us to borrow up to $2 billion until March 2021. This credit facility also serves as support for the issuance of commercial paper. As of December 31, 2016, our credit facility was undrawn, and we had no commercial paper outstanding. In 2016, investing activities used $650 million compared with $302 million in 2015. For 2016, Capital expenditures were $531 million compared with $551 million in 2015. Capital expenditures in both periods were primarily for semiconductor manufacturing equipment. In 2016, we had purchases of short-term investments, net of proceeds, that used cash of $113 million. In comparison, in 2015 we had proceeds from short-term investments, net of purchases, that provided cash of $125 million. In 2015, we received $110 million from asset sales, compared with none in 2016. In 2016, financing activities used $3.81 billion compared with $4.29 billion in 2015. In 2016, we received proceeds of $499 million from the issuance of fixed-rate, long-term debt (net of original issuance discount) and repaid $1.00 billion of maturing debt. In 2015, we received proceeds of $498 million from the issuance of fixed-rate, long-term debt (net of original issuance discount) and repaid $1.00 billion of maturing debt. Dividends paid in 2016 were $1.65 billion compared with $1.44 billion in 2015, reflecting increases in the dividend rate, partially offset by fewer shares outstanding. During 2016, the quarterly dividend increased to $0.50 from $0.38 per share, resulting in an annualized dividend payment of $2.00 per share. During 2015, we increased our quarterly dividend to $0.38 from $0.34 per share. In 2016, we used $2.13 billion to repurchase 35.5 million shares of our common stock. This compared with $2.74 billion used in 2015 to repurchase 51.4 million shares. Employee exercises of stock options are also reflected in Cash flows from financing activities. In 2016, these exercises provided cash proceeds of $472 million compared with $396 million in 2015. We had $1.15 billion of Cash and cash equivalents and $2.34 billion of Short-term investments as of December 31, 2016, with our U.S. entities owning about 80 percent of these amounts combined at the end of 2016. 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. FORM 10-K 20 20 TEXAS INSTRUMENTS . 2016 FORM 10-K#25Non-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. Cash flow from operations (GAAP) Capital expenditures Free cash flow (non-GAAP) Revenue Cash flow from operations as a percent of revenue (GAAP) Free cash flow as a percent of revenue (non-GAAP) Long-term contractual obligations Contractual Obligations Long-term debt (a) . Purchase commitments (b) Operating leases (c) ... Deferred compensation plans (d) Total (e). $ 4,614 (531) $ 4,083 $ 3,846 For Years Ended December 31, 2016 2015 $ 4,397 (551) 2014 $ 4,054 (385) $ 3,669 $ 13,370 $13,000 $ 13,045 34.5% 33.8% 31.1% 30.5% 29.6% 28.1% Payments Due by Period 2017 2018/2019 2020/2021 Thereafter Total $ 692 $ 1,350 $ 806 $1,021 $ 3,869 132 173 26 5 336 67 75 41 57 240 18 38 37 99 192 $ 909 $1,636 $ 910 $ 1,182 $ 4,637 (a) Includes the related interest payments and amounts classified as the current portion of long-term debt, specifically obligations that will mature within 12 months. (b) 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. However, depending on when certain purchase arrangements may be cancelled, an additional $3 million of cancellation penalties may be required to be paid, which are not reflected in the table. (c) Includes minimum payments for leased facilities and equipment and purchases of industrial gases under contracts accounted for as operating leases. (d) Includes an estimate of payments for certain liabilities that existed at December 31, 2016. (e) Excluded from the table are $243 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 $100 million in 2017, but funding projections beyond 2017 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 In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we use statistical analyses, estimates and projections that affect the reported amounts and related disclosures and may vary from actual results. We consider the following accounting policies to be those that are most important to the portrayal of our financial condition and that require the most subjective judgment. If actual results differ significantly from management's estimates and projections, there could be a significant effect on our financial statements. TEXAS INSTRUMENTS . 2016 FORM 10-K 21 FORM 10-K#26FORM 10-K Revenue recognition We recognize revenue from sales of our products, including sales to our distributors, when title and risk of loss pass, which usually occurs upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order; when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. For sales to distributors, payment is due on our standard commercial terms and is not contingent upon resale of the products. Revenue from sales of our products that are subject to inventory consignment agreements, including consignment arrangements with distributors, is recognized in accordance with the principles discussed above. Delivery occurs when the customer or distributor pulls product from consignment inventory that we store at designated locations. We recognize revenue net of allowances, which are management's estimates of future credits to be granted to customers or distributors under programs common in the semiconductor industry. These allowances, which are not material, generally include volume-based incentives, product returns due to quality issues, incentives designed to maximize growth opportunities and special pricing arrangements. Allowances are based on analysis of historical data, current economic conditions and contractual terms and are recorded when revenue is recognized. We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner. In addition, we record allowances for accounts receivable that we estimate may not be collected. We monitor collectability of accounts receivable primarily through review of the accounts receivable aging. When collection is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. We recognize in revenue shipping fees, if any, received from customers. We include shipping and handling costs in cost of revenue. The majority of our customers pay these fees directly to third parties. 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 U.S. 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 of our non-U.S. operations could change. Such changes could have a material effect on tax expense in future years. In addition to the factors described above, the estimated annual tax rate, which excludes discrete items, reflected in forward- looking statements is based on then-current tax law. Significant changes in tax law enacted during the year could affect these estimates. Retroactive changes in tax law enacted subsequent to the end of a reporting period are reflected in the period of enactment. 22 TEXAS INSTRUMENTS . 2016 FORM 10-K#27Inventory 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, 2016, 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. 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 2016 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 $1 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 2016, we had forward currency exchange contracts outstanding with a notional value of $494 million to hedge net balance sheet exposures (including $158 million to sell Japanese yen and $123 million to sell euros). Similar hedging activities existed at year-end 2015. 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, 2016, 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 $7 million and decrease the fair value of our long-term debt by $104 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. TEXAS INSTRUMENTS . 2016 FORM 10-K 23 FORM 10-K#28Equity risk Long-term investments at year-end 2016 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. FORM 10-K 24 TEXAS INSTRUMENTS . 2016 FORM 10-K#29ITEM 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, 2016 Comprehensive income for each of the three years in the period ended December 31, 2016 Balance sheets at December 31, 2016 and 2015 Cash flows for each of the three years in the period ended December 31, 2016 Stockholders' equity for each of the three years in the period ended December 31, 2016 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. TEXAS INSTRUMENTS . 2016 FORM 10-K 25 FORM 10-K#30FORM 10-K Consolidated Statements of Income (Millions of dollars, except share and per-share amounts) Revenue Cost of revenue (COR) 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 Net income Earnings per common share (EPS): Basic Diluted Average shares outstanding (millions): Basic Diluted For Years Ended December 31, 2016 2015 2014 $ 13,370 $13,000 $ 13,045 5,130 5,440 5,618 8,240 7,560 7,427 1,370 1,280 1,358 1,767 1,748 1,843 319 329 330 (15) (71) (51) 4,799 4,274 3,947 211 32 21 80 90 94 4,930 4,216 3,874 1,335 1,230 1,053 $ 3,595 $ 2,986 $ 2,821 3.54 $ 2.86 $ 2.61 3.48 $ 2.82 $ 2.57 1,003 1,030 1,065 1,021 1,043 1,080 Cash dividends declared per common share 1.64 $ 1.40 $ 1.24 As a result of accounting rule ASC 260, which requires a portion of Net income to be allocated to unvested restricted stock units (RSUS) on which we pay dividend equivalents, diluted EPS is calculated using the following: Net income $ 3,595 $ 2,986 Income allocated to RSUs (44) (42) Income allocated to common stock for diluted EPS $ 3,551 $ 2,944 $ 2,821 (43) $ 2,778 See accompanying notes. 26 TEXAS INSTRUMENTS . 2016 FORM 10-K#31For Years Ended December 31, 2015 2014 Consolidated Statements of Comprehensive Income (Millions of dollars) 2016 Net income Other comprehensive income (loss) Net actuarial gains (losses) of defined benefit plans: Adjustment, net of tax benefit (expense) of $6, $36 and $25 Recognized within Net income, net of tax benefit (expense) of ($25), ($25) and ($21) Prior service (cost) credit of defined benefit plans: Adjustment, net of tax benefit (expense) of $0, ($11) and $0 $3,595 $ 2,986 $ 2,821 (43) (74) (46) 51 53 42 | 20 (1) Recognized within Net income, net of tax benefit (expense) of $2, $0 and $0 (3) | | Derivative instruments: Recognized within Net income, net of tax benefit (expense) of $0, ($1) and ($1) 1 1 1 Other comprehensive income (loss), net of taxes 6 (4) Total comprehensive income $ 3,601 $2,986 $2,817 See accompanying notes. TEXAS INSTRUMENTS . 2016 FORM 10-K 27 FORM 10-K#32FORM 10-K Consolidated Balance Sheets (Millions of dollars, except share amounts) Assets Current assets: December 31, 2016 2015 Cash and cash equivalents Short-term investments Accounts receivable, net of allowances of ($17) and ($7) Raw materials Work in process Finished goods Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment at cost Accumulated depreciation Property, plant and equipment, net Long-term investments Goodwill, net Acquisition-related intangibles, net Deferred income taxes Capitalized software licenses, net Overfunded retirement plans Other assets Total assets 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 $ 1,154 $ 1,000 2,336 2,218 1,267 1,165 102 109 954 846 734 736 1,790 1,691 910 1,000 7,457 7,074 4,923 5,465 (2,411) (2,869) 2,512 2,596 235 221 4,362 4,362 1,264 1,583 374 201 52 46 96 85 79 62 $ 16,431 $ 16,230 631 $ 1,000 396 386 710 664 83 95 444 410 2,264 2,555 2,978 3,120 129 196 Deferred income taxes. 33 37 Deferred credits and other liabilities 554 376 Total liabilities 5,958 6,284 Stockholders' equity: Preferred stock, $25 par value. Authorized - 10,000,000 shares Participating cumulative preferred. None issued. Common stock, $1 par value. Authorized - 2,400,000,000 shares - Shares issued 1,740,815,939 1,741 1,741 Paid-in capital 1,674 1,629 Retained earnings 33,107 31,176 Treasury common stock at cost Shares: 2016-744,831,978; 2015 - 729,547,527 Accumulated other comprehensive income (loss), net of taxes (AOCI) (25,523) (24,068) (526) (532) Total stockholders' equity Total liabilities and stockholders' equity See accompanying notes. 10,473 9,946 $ 16,431 $ 16,230 28 TEXAS INSTRUMENTS . 2016 FORM 10-K#33Consolidated Statements of Cash Flows (Millions of dollars) Cash flows from operating activities Net income.. For Years Ended December 31, 2016 2015 2014 $ 3,595 $ 2,986 $ 2,821 Adjustments to Net income: Depreciation Amortization of acquisition-related intangibles Amortization of capitalized software Stock compensation Gains on sales of assets Deferred income taxes 605 766 850 319 319 321 31 48 59 252 286 277 (40) (85) (73) (202) (55) (61) Increase (decrease) from changes in: Accounts receivable (108) 77 (49) Inventories (99) 93 (53) Prepaid expenses and other current assets (81) 94 65 Accounts payable and accrued expenses 72 (142) (132) Accrued compensation 36 7 89 Income taxes payable 333 == 11 (81) Changes in funded status of retirement plans Other (73) (23) (58) (26) 15 79 Cash flows from operating activities 4,614 4,397 4,054 Cash flows from investing activities Capital expenditures Proceeds from asset sales Purchases of short-term investments Proceeds from short-term investments Other (531) (551) (385) 110 142 (3,503) (2,767) (3,107) 3,390 2,892 2,966 (6) 14 7 (650) (302) (377) Cash flows from investing activities Cash flows from financing activities Proceeds from issuance of long-term debt 499 498 498 Repayment of debt (1,000) (1,000) (1,000) Dividends paid (1,646) (1,444) (1,323) Stock repurchases (2,132) (2,741) (2,831) Proceeds from common stock transactions Other 472 396 554 (3) (3) (3) Cash flows from financing activities (3,810) (4,294) (4,105) Net change in Cash and cash equivalents 154 Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period See accompanying notes. 1,000 (199) 1,199 (428) 1,627 $ 1,154 $ 1,000 $ 1,199 TEXAS INSTRUMENTS . 2016 FORM 10-K 29 FORM 10-K#34FORM 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, 2013 $ 1,741 $ 1,211 $ 28,173 $ (19,790) $ (528) 2014 Net income Dividends declared and paid ($1.24 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 Balance, December 31, 2014 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 Balance, December 31, 2015 2016 Net income Dividends declared and paid ($1.64 per share) Common stock issued for stock-based awards Stock repurchases Stock compensation 2,821 (1,323) (226) 781 (2,831) 277 110 (18) (4) 1,741 1,368 29,653 (21,840) (532) 2,986 (1,444) (116) 513 (2,741) 286 88 90 (19) 1 1,741 1,629 31,176 (24,068) (532) - 3,595 (1,646) (204) 252 677 (2,132) Other comprehensive income (loss), net of taxes Dividend equivalents paid on restricted stock units Other (18) Balance, December 31, 2016 $ 1,741 (3) $1,674 $ 33,107 $ (25,523) $ (526) See accompanying notes. 30 TEXAS INSTRUMENTS . 2016 FORM 10-K#35Notes 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. For 2016, we have two reportable segments, which are established along major categories of products as follows: • Analog consisting of the following product lines: High Volume Analog & Logic, Power Management, High Performance Analog and Silicon Valley Analog. Embedded Processing - consisting of the following product lines: Processors, Microcontrollers and Connectivity. 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, custom ASICS and royalties received from agreements involving license rights to our patent portfolio. 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. The assets and liabilities associated with these organizations are included in Other. 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: Analog. Embedded Processing Other Total revenue Operating profit: Analog. Embedded Processing Other Total operating profit For Years Ended December 31, 2016 2015 2014 $ 8,536 3,023 1,811 $ 13,370 $ 8,339 2,787 1,874 $13,000 $ 8,104 2,740 2,201 $ 13,045 $ 3,380 $ 3,048 $ 2,786 801 618 596 630 384 777 $ 4,799 $ 4,274 $ 3,947 TEXAS INSTRUMENTS . 2016 FORM 10-K 31 FORM 10-K#36FORM 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 2015 2014 Revenue: United States Asia (a) Europe, Middle East and Africa Japan Rest of world Total revenue $ 1,682 $ 1,612 $ 1,625 8,024 7,910 7,915 2,393 2,163 2,294 1,040 1,127 1,032 231 188 179 $ 13,370 $13,000 $ 13,045 (a) Revenue from products shipped into China, including Hong Kong, was $6.0 billion in 2016, $5.8 billion in 2015 and $5.7 billion in 2014. Property, plant and equipment, net: United States Asia (a) Europe, Middle East and Africa Japan Rest of world Total property, plant and equipment, net 2016 December 31, 2015 2014 $ 1,372 $ 1,370 $ 1,436 908 958 1,096 98 130 162 115 122 124 19 16 22 $2,512 $2,596 $ 2,840 (a) Property, plant and equipment, net, at our two sites in the Philippines was $412 million, $471 million and $546 million as of December 31, 2016, 2015 and 2014, respectively. Major customer No end customer accounted for 10 percent or more of revenue in 2016 or 2014. In 2015, Apple Inc. accounted for approximately 11 percent of revenue, recognized primarily in our Analog segment. 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 the fourth quarter of 2016 related to stock compensation, which includes certain provisions applied prospectively. See Changes in accounting standards for further information. 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 2016 presentation, retrospectively applying certain provisions of the new accounting standard related to stock compensation. The preparation of financial statements requires the use of estimates from which final results may vary. 32 TEXAS INSTRUMENTS . 2016 FORM 10-K#37Significant accounting policies and practices Revenue recognition We recognize revenue from sales of our products, including sales to our distributors, when title and risk of loss pass, which usually occurs upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order; when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. For sales to distributors, payment is due on our standard commercial terms and is not contingent upon resale of the products. Revenue from sales of our products that are subject to inventory consignment agreements, including consignment arrangements with distributors, is recognized in accordance with the principles discussed above. Delivery occurs when the customer or distributor pulls product from consignment inventory that we store at designated locations. We recognize revenue net of allowances, which are management's estimates of future credits to be granted to customers or distributors under programs common in the semiconductor industry. These allowances, which are not material, generally include volume-based incentives, product returns due to quality issues, incentives designed to maximize growth opportunities and special pricing arrangements. Allowances are based on analysis of historical data, current economic conditions and contractual terms and are recorded when revenue is recognized. We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner. In addition, we record allowances for accounts receivable that we estimate may not be collected. We monitor collectability of accounts receivable primarily through review of the accounts receivable aging. When collection is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. We recognize in revenue shipping fees, if any, received from customers. We include shipping and handling costs in COR. The majority of our customers pay these fees directly to third parties. Advertising costs We expense advertising and other promotional costs as incurred. This expense was $44 million in 2016, $46 million in 2015 and $45 million in 2014. 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. TEXAS INSTRUMENTS . 2016 FORM 10-K 33 FORM 10-K#38FORM 10-K Earnings per share (EPS) Unvested share-based payment awards that contain non-forfeitable rights to receive dividends or dividend equivalents, such as our restricted stock units (RSUS), are considered to be participating securities and the two-class method is used for purposes of calculating EPS. Under the two-class method, a portion of Net income is allocated to these participating securities and, therefore, is excluded from the calculation of EPS allocated to common stock, as shown in the table below. Computation and reconciliation of earnings per common share are as follows (shares in millions): For Years Ended December 31, 2016 2015 2014 Net Income Shares EPS Net Income Shares EPS Net Income Shares EPS Basic EPS: Net income $3,595 Income allocated to RSUs (45) $ 2,986 (43) $ 2,821 (44) Income allocated to common stock for basic EPS calculation $ 3,550 1,003 $3.54 $2,943 1,030 $2.86 $ 2,777 1,065 $2.61 Adjustment for dilutive shares: Stock compensation plans Diluted EPS: Net income Income allocated to RSUS Income allocated to common stock for diluted EPS calculation 18 13 15 $3,595 (44) $2,986 (42) $2,821 (43) $ 3,551 1,021 $ 3.48 $ 2,944 1,043 $2.82 $2,778 1,080 $ 2.57 No potentially dilutive securities were excluded from the computation of diluted earnings per common share during 2016. Potentially dilutive securities representing 12 million and 11 million shares of common stock that were outstanding in 2015 and 2014, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive. Investments We present investments on our Consolidated Balance Sheets as cash equivalents, short-term investments or long-term investments. Specific details are as follows: • Cash equivalents and short-term investments: We consider investments in debt securities with maturities of 90 days or less from the date of our investment to be cash equivalents. We consider investments in debt securities with maturities beyond 90 days from the date of our investment as being available for use in current operations and include them in short-term investments. The primary objectives of our cash equivalent and short-term investment activities are to preserve capital and maintain liquidity while generating appropriate returns. • Long-term investments: Long-term investments consist of mutual funds, venture capital funds and non-marketable equity securities. Classification of investments: Depending on our reasons for holding the investment and our ownership percentage, we classify our investments as either available for sale, trading, equity method or cost method, which are more fully described in Note 8. We determine cost or amortized cost, as appropriate, on a specific identification basis. Inventories Inventories are stated at the lower of cost or estimated net realizable value. Cost is generally computed on a currently adjusted standard cost basis, which approximates cost on a first-in first-out basis. Standard cost is based on the normal utilization of installed factory capacity. Cost associated with underutilization of capacity is expensed as incurred. Inventory held at consignment locations is included in our finished goods inventory. Consigned inventory was $334 million and $275 million as of December 31, 2016 and 2015, respectively. 34 TEXAS INSTRUMENTS . 2016 FORM 10-K#39FORM 10-K 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 income 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. See Note 13 for additional information. 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 Ol&E. We do not apply hedge accounting to our foreign currency derivative instruments. In connection with the issuance of long-term debt, we use financial derivatives such as treasury-rate lock agreements that are recognized in AOCI and amortized over the life of the related debt. The results of these derivative transactions have not been material. We do not use derivatives for speculative or trading purposes. Changes in accounting standards Adopted standards for current period In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This standard removes the requirement to categorize within the fair value hierarchy certain investments for which fair value is not readily available but measured using the net asset value per share. This standard was effective beginning January 1, 2016, and prior period amounts have been retrospectively adjusted for consistency in presentation. Our adoption of this standard only affects our presentation of fair values of postretirement plan assets in Note 10 and does not impact our financial position and results of operations. TEXAS INSTRUMENTS . 2016 FORM 10-K 35#40FORM 10-K In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard provides for several changes to the accounting for stock compensation, including a requirement that certain income-tax effects of awards be recognized in Net income in the period in which the awards are settled or vested, rather than recognized as Paid-in capital in the equity section of the balance sheet. The standard also changes the presentation of excess tax benefits and statutory tax withholdings in the statement of cash flows. This standard is effective for interim and annual periods beginning January 1, 2017; however, early adoption is permitted. We elected to adopt this standard in the fourth quarter of 2016, which requires us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the adoption. Each of the provisions within this standard has its own specified transition method; some have been applied prospectively and others have been applied on a retrospective basis. The primary effects of early adoption on our financial statements are as follows: • . Income statement effects: Prospective basis - Net excess tax benefits and deficiencies will now be included in Provision for income taxes, rather than in Paid-in capital. The new standard requires this to be adopted on a prospective basis, with an initial adjustment to interim periods in the year of adoption. We recorded adjustments within Provision for income taxes, rather than in Paid-in capital, for excess tax benefits of $43 million, $40 million and $50 million for the first, second and third quarters of 2016, respectively. Excess tax benefits for the fourth quarter of 2016 were $17 million, for a total of $150 million recognized for all of 2016. See Note 6 for more information on income taxes. This standard also affects the average shares outstanding used in the diluted EPS calculation. The effects of these adjustments are shown in the table below. Results for prior annual periods were not affected. Cash flow effects: Retrospective basis - Excess tax benefits are now included in Cash flows from operating activities rather than Cash flows from financing activities in our Consolidated Statements of Cash Flows. We elected to apply this change in presentation retrospectively, and thus, prior periods have been adjusted. Taxes paid for employee shares withheld upon the vesting of RSUs are now included in Cash flows from financing activities in our Consolidated Statements of Cash Flows. This change is required to be applied retrospectively, and thus, prior periods have been adjusted. Under this standard, entities are permitted to make an accounting policy election to either estimate forfeitures on stock compensation awards, as previously required, or to recognize forfeitures as they occur. We elected not to change our policy on accounting for forfeitures and will continue to estimate forfeitures expected to occur in determining the amount of compensation cost to be recognized in each period. The effects of our adoption of the new standard on our unaudited quarterly results for 2016 are as follows: 1st Quarter 2nd 3rd Reported Recast Reported Recast Reported Recast Income statement data: Provision for income taxes $ 282 $ 239 Net income 668 711 $ 323 779 $ 283 819 $ 413 $ 363 968 1,018 Average diluted shares outstanding, in millions Basic EPS 1,018 1,022 1,016 1,020 1,017 1,023 $ 0.65 $ 0.70 $ 0.77 $ 0.65 $ 0.69 $ 0.81 $ 0.95 $ 1.00 $ 0.76 $ 0.79 $ 0.94 $ 0.98 Diluted EPS Cash flow data: Cash flows from operating activities Cash flows from financing activities $ 547 (839) $ 653 (945) $ 1,069 (1,180) $ 1,109 (1,220) $1,413 (676) $ 1,465 (728) Certain annual cash flow information has also been adjusted to reflect select aspects of the new standard that are applied retrospectively. The impact to our previously reported annual results is as follows: Cash flows from operating activities Cash flows from financing activities 36 For Years Ended December 31, 2015 2014 Reported Recast $ 4,268 (4,165) $ 4,397 (4,294) Reported $ 3,892 (3,943) Recast $ 4,054 (4,105) TEXAS INSTRUMENTS . 2016 FORM 10-K#41Standards not yet adopted In May 2014, the FASB issued 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. It is effective for annual and interim reporting periods beginning after December 15, 2017. This standard permits early adoption, but not before December 15, 2016, and permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the potential impact of this standard on our financial position and results of operations, as well as our selected transition method. Based on our preliminary assessment, we believe the new standard will not have a material impact on our financial position and results of operations, as we do not expect to change the manner or timing of recognizing revenue on a majority of our revenue transactions. 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. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Under this standard, all equity investments except those accounted for under the equity method are required to be measured at fair value. Equity investments that do not have a readily determinable fair value may, as a practical expedient, be measured at cost, adjusted for changes in observable prices minus impairment. This standard is effective for our interim and annual periods beginning January 1, 2018. We do not expect this standard to have a material impact on our financial position and results of operations, as nearly all of our equity investments are already recorded at fair value or under the equity method. In February 2016, the FASB issued 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. Early adoption is permitted. We are currently evaluating the timing of adoption and 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. In June 2016, the FASB issued 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 after December 15, 2019, and permits earlier application but not before December 15, 2018. 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. 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 (a) Includes severance and benefits, accelerated depreciation, changes in estimates or other exit costs. Restructuring charges/other are recognized in Other for segment reporting purposes. TEXAS INSTRUMENTS . 2016 FORM 10-K For Years Ended December 31, 2016 2015 $ 14 $ 25 (40) 2014 $ 20 - (83) (2) (75) 4 $ (15) $ (71) $ (51) 37 FORM 10-K#42Restructuring charges In the fourth quarter of 2016, we recognized $18 million of restructuring charges for severance and benefit costs related to the reorganization of product lines that we announced in January 2017. As of December 31, 2016, no payments have been made. We announced in January 2016 our intentions to phase out through the end of 2018 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 $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 the end of 2018. The 2014 restructuring charges were related to prior actions in Embedded Processing and Japan. These actions have been completed. Changes in accrued restructuring balances Balance, January 1 Restructuring charges 2016 2015 2014 $ 32 $ 57 $ 161 25 14 20 Non-cash items (a) (6) Payments (11) (39) (124) Balance, December 31 $ 40 $ 32 57 (a) Reflects charges for impacts of accelerated depreciation and changes in exchange rates. Gains on sales of assets FORM 10-K 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. We recognized $75 million of gains on sales of assets in 2014. This consisted of $30 million associated with the sale of a site in Nice, France; $28 million associated with the sales of real estate in Santa Clara, California; and $17 million of asset sales associated primarily with factory closures in Houston, Texas, and Hiji, Japan. 4. Stock compensation We have stock options outstanding to participants under long-term incentive plans. We also have assumed stock options that were granted by companies that we later acquired. Unless the options are acquisition-related replacement options, 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, and options have a three-month term. 38 TEXAS INSTRUMENTS . 2016 FORM 10-K#43Total stock compensation expense recognized is as follows: For Years Ended December 31, 2015 COR R&D SG&A Acquisition charges Total 2016 2014 $ 40 $ 47 $ 48 60 60 62 152 169 156 10 11 $ 252 $ 286 $ 277 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 expected forfeitures. We issue awards of non-qualified stock options with graded vesting provisions (e.g., 25 percent per year for four years). We recognize the related compensation expense on a straight-line basis over the minimum service period required for vesting of the award, adjusting for expected forfeiture activity. Awards issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis. Our RSUs generally vest four years after the date of grant. We recognize the related compensation expense on a straight-line basis over the vesting period, adjusting for expected forfeiture activity. RSUs issued to employees who are retirement eligible or nearing retirement eligibility are expensed on an accelerated basis. 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, 2016 2015 $ 10.03 $9.49 2014 $ 8.13 25% 7.3 1.72% 22% 7.3 22% 7.3 1.64% 2.45% 2.87% 2.52% 2.72% 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. TEXAS INSTRUMENTS . 2016 FORM 10-K 39 FORM 10-K#44Long-term incentive and director compensation plans Stock option and RSU transactions under our long-term incentive and director compensation plans are as follows: RSUS Weighted Average Stock Options Shares Weighted Average Exercise Price per Share Outstanding grants, December 31, 2015 56,773,983 $ 37.45 Shares 16,055,542 Grant Date Fair Value per Share $ 38.51 Granted 10,974,304 53.02 2,337,976 53.98 Vested RSUs - (5,639,666) 31.64 Forfeited and expired Exercised (965,893) (14,516,606) 48.12 (421,473) 42.63 32.51 Outstanding grants, December 31, 2016 52,265,788 41.89 12,332,379 44.44 FORM 10-K The weighted average grant date fair values per share of RSUs granted in 2016, 2015 and 2014 were $53.98, $53.22 and $44.71, respectively. In 2016, 2015 and 2014, the total grant date fair values of shares vested from RSU grants were $178 million, $114 million and $133 million, respectively. Summarized information about stock options outstanding as of December 31, 2016, is as follows: Exercise Price Range $14.47 to 20.00 Number Outstanding (Shares) 1,996,801 5,130,177 Stock Options Outstanding Weighted Average Remaining Contractual Life (Years) 2.1 Weighted Average Exercise Price per Share $ 14.96 24.59 Options Exercisable Weighted Average Exercise Price per Number Exercisable (Shares) 1,996,801 5,130,177 11,328,597 Share $ 14.96 24.59 ITTAT 20.01 to 30.00 2.6 30.01 to 40.00 14,126,454 5.3 40.01 to 50.00 50.01 to 60.00 9,854,196 21,103,396 7.1 33.06 44.10 8.6 53.44 3,544,639 2,017,172 33.12 44.10 53.96 60.01 to 71.27 54,764 9.7 71.00 14.47 to 71.27 52,265,788 6.6 41.89 24,017,386 33.16 In 2016, 2015 and 2014, 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 $424 million, $290 million and $367 million, respectively. Summarized information as of December 31, 2016, 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) Outstanding Stock Options (Fully Vested and Expected to Vest) (a) Options Exercisable 50,994,139 6.5 24,017,386 4.9 $ 41.63 1,598 ᏌᏊ Ꮚ 33.16 956 (a) Includes effects of expected forfeitures of approximately 1 million shares. Excluding the effects of expected forfeitures, the aggregate intrinsic value of stock options outstanding was $1,624 million. As of December 31, 2016, the total future compensation cost related to equity awards not yet recognized in our Consolidated Statements of Income was $250 million, consisting of $111 million related to unvested stock options and $139 million related to unvested RSUs. The $250 million is expected to be recognized as follows: $129 million in 2017, $80 million in 2018, $37 million in 2019 and $4 million in 2020. 40 40 TEXAS INSTRUMENTS . 2016 FORM 10-K#45Director deferred compensation Directors who retire or resign from the board may receive stock distributions for compensation they elected to defer. Director deferred stock activity is as follows: Director Deferred Stock Outstanding, December 31, 2015 New shares deferred Issued Outstanding, December 31, 2016 Employee stock purchase plan (Shares) 142,913 14,319 (13,587) 143,645 Options outstanding under the employee stock purchase plan as of December 31, 2016, 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 3, 2017, resulting in an exercise price of $62.55 per share. Of the total outstanding options, none were exercisable as of December 31, 2016. Employee stock purchase plan transactions are as follows: Outstanding grants, December 31, 2015 Granted Exercised Employee Stock Purchase Plan (Shares) Exercise Price 372,566 $ 46.19 1,273,036 55.51 (1,362,202) 51.50 283,400 62.55 Outstanding grants, December 31, 2016 The weighted average grant date fair values per share of options granted under the employee stock purchase plans in 2016, 2015 and 2014 were $9.79, $7.89 and $7.34, respectively. In 2016, 2015 and 2014, the total intrinsic value of options exercised under these plans was $12 million per year. Effect on shares outstanding and treasury shares Treasury shares were acquired in connection with the board-authorized stock repurchase program. As of December 31, 2016, $5.80 billion of stock repurchase authorizations remain, and no expiration date has been specified. TEXAS INSTRUMENTS . 2016 FORM 10-K 41 FORM 10-K#46FORM 10-K 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, 2013 Repurchases Shares used for: Stock options/RSUS Stock applied to exercises or taxes ESPP Director deferred stock Total issued Balance, December 31, 2014 Repurchases Shares used for: Stock options/RSUS ... Stock applied to exercises or taxes ESPP Director deferred stock Total issued Balance, December 31, 2015 Repurchases Shares used for: Stock options/RSUs Stock applied to exercises or taxes ESPP Director deferred stock Total issued Balance, December 31, 2016 Shares available for future grants and reserved for issuance are as follows: Stock Options RSUs Treasury Shares 658,012,970 61,665,209 (19,503,382) (5,609,627) 6,618 1,408,701 (1,784,184) (7,178) (21,280,948) (4,200,926) (25,481,874) 694,189,127 51,384,339 (11,953,455) (3,386,415) 8,562 845,164 (1,532,264) (7,531) (13,477,157) (2,541,251) (16,018,408) 729,547,527 35,480,036 (14,516,606) (5,639,666) 1,336,476 (1,362,202) (13,587) (15,878,808) (4,303,190) (20,181,998) 744,831,978 Long-Term December 31, 2016 Director Employee Stock Incentive Compensation Shares Plans Reserved for issuance 123,296,771 Plans (a) 2,341,272 Purchase Plan Total 36,670,572 162,308,615 Shares to be issued upon exercise of outstanding options and RSUs (63,715,186) Available for future grants 59,581,585 (1,026,626) 1,314,646 (283,400) (65,025,212) 36,387,172 97,283,403 (a) Includes 143,645 shares credited to directors' deferred stock accounts that settle in shares of TI common stock. These shares are not included as grants outstanding as of December 31, 2016. The effects on cash flows are as follows: Proceeds from common stock transactions (a) Tax benefit realized from stock compensation Reduction to deferred income tax asset. Excess tax benefit for stock compensation For Years Ended December 31, 2016 2015 $ 472 $ 255 $ 396 $ 171 2014 $ 554 $ 218 (105) (81) (108) $ 150 $ 90 $ 110 (a) Net of taxes paid for employee shares withheld of $70 million in 2016, $46 million in 2015 and $62 million in 2014. 42 TEXAS INSTRUMENTS • 2016 FORM 10-K#475. 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 $346 million, $309 million and $269 million of profit sharing expense under the TI Employee Profit Sharing Plan in 2016, 2015 and 2014, respectively. 6. Income taxes Income before Income Taxes U.S. Non-U.S. Total Provision (Benefit) for Income Taxes U.S. federal Non-U.S. U.S. state Total For Years Ended December 31, For Years Ended December 31, 2016 2015 2014 $ 3,953 977 $ 3,218 998 $ 2,684 1,190 $ 4,930 $ 4,216 $ 3,874 Current 2016 Deferred Total Current 2015 Deferred Total Current 2014 Deferred $1,289 238 10 $ (122) (80) $1,167 $1,110 $ (72) $ 1,038 $ 911 $ (73) Total $ 838 158 10 168 14 182 194 11 205 7 3 10 9 1 10 $1,537 $ (202) $1,335 $ 1,285 $ (55) $1,230 $ 1,114 $ (61) $ 1,053 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: U.S. statutory income tax rate. Non-U.S. effective tax rates U.S. excess tax benefit for stock compensation (a) U.S. tax benefit for manufacturing U.S. R&D tax credit U.S. non-deductible expenses Impact of changes to uncertain tax positions Other Effective tax rate (a) This is related to the adoption of ASU 2016-09 as discussed in Note 2. For Years Ended December 31, 2016 2015 2014 35.0% 35.0% 35.0% (3.7) (4.0) (5.5) (3.0) (1.5) (1.6) (1.3) (1.2) (1.3) (1.5) 0.3 0.3 0.2 0.6 0.2 0.1 0.6 0.6 0.2 27.1% 29.2% 27.2% Our effective tax rate benefits from lower rates (compared with the U.S. statutory income tax rate) applicable to our operations in many of the jurisdictions in which we operate, and from U.S. tax benefits. These lower non-U.S. tax rates are generally statutory in nature, without expiration and available to companies that operate in those taxing jurisdictions. Also included in the non-U.S. effective tax rates reconciling item above are benefits from tax holidays of $30 million, $50 million and $44 million in 2016, 2015 and 2014, respectively. The tax benefits relate to our operations in Malaysia and the Philippines, and expire in 2018 and 2017, respectively. The terms of the Malaysia tax holiday are currently under governmental review as required for the end of the first five years of the holiday period. TEXAS INSTRUMENTS . 2016 FORM 10-K 43 FORM 10-K#48FORM 10-K The primary components of deferred income tax assets and liabilities are as follows: Deferred income tax assets: Stock compensation Accrued expenses Deferred loss and tax credit carryforwards Inventories and related reserves Retirement costs for defined benefit and retiree health care Other Total deferred income tax assets, before valuation allowance Valuation allowance Total deferred income tax assets, after valuation allowance Deferred income tax liabilities: Acquisition-related intangibles and fair-value adjustments International earnings Total deferred income tax liabilities Net deferred income tax asset December 31, 2016 2015 $ 220 $ 244 219 215 214 226 145 147 82 87 81 101 961 1,020 (128) (186) 833 834 (460) (565) (32) (105) (492) (670) $ 341 $ 164 The deferred income tax assets and liabilities based on tax jurisdictions are presented on our Consolidated Balance Sheets as follows: Deferred income tax assets Deferred income tax liabilities Net deferred income tax asset December 31, 2016 2015 $ 374 $ 201 (33) (37) $ 341 $ 164 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. Changes in valuation allowance balances in 2016 and 2015 of $58 million and $9 million, respectively, impacted Net income by $63 million and $0 million, respectively. We have U.S. and non-U.S. tax loss carryforwards of approximately $12 million, none of which will expire before the year 2026. A provision has been made for deferred taxes on undistributed earnings of non-U.S. subsidiaries to the extent that dividend payments from these subsidiaries are expected to result in additional tax liability. The remaining undistributed earnings of approximately $9.03 billion as of December 31, 2016, have been indefinitely reinvested outside of the United States; therefore, no U.S. tax provision has been made for taxes due upon remittance of these earnings. The indefinitely reinvested earnings of our non-U.S. subsidiaries are primarily invested in working capital and property, plant and equipment. Determination of the amount of unrecognized deferred income tax liability is not practical because of the complexities associated with its hypothetical calculation. Cash payments made for income taxes, net of refunds, were $1.15 billion, $1.17 billion and $1.10 billion in 2016, 2015 and 2014, 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. 44 TEXAS INSTRUMENTS . 2016 FORM 10-K#49The 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 Balance, December 31 Interest income (expense) recognized in the year ended December 31 2016 $ 84 2015 $ 108 2014 $ 91 111 189 (2) (32) $ 243 (21) (9) (36) (17) $ 84 $ 108 $ 8 6 Interest receivable (payable) as of December 31 $ 13 SA $ 9 The liability for uncertain tax positions is a component of Deferred credits and other liabilities on our Consolidated Balance Sheets. All of the $243 million liability for uncertain tax positions as of December 31, 2016, is comprised of positions that, if recognized, would benefit the effective tax rate. If these tax liabilities are ultimately realized, $12 million of existing deferred tax assets would also be realized, related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation. All of the $84 million liability for uncertain tax positions as of December 31, 2015, is comprised of positions that, if recognized, would benefit the effective tax rate. If these tax liabilities are ultimately realized, $12 million of existing deferred tax assets would also be realized, related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation. As of December 31, 2016, 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. 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. 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, 2016. Our forward foreign currency exchange contracts outstanding as of December 31, 2016, had a notional value of $494 million to hedge our non-U.S. dollar net balance sheet exposures, including $158 million to sell Japanese yen and $123 million to sell euros. Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our postretirement plan assets and deferred compensation liabilities, are carried at fair value. 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. TEXAS INSTRUMENTS 2016 FORM 10-K 45 FORM 10-K#50FORM 10-K Details of these accounts receivable allowances are as follows: Balance, January 1 Additions charged (credited) to operating results Recoveries and write-offs, net Balance, December 31 8. Valuation of debt and equity investments and certain liabilities Debt and equity investments 2016 2015 2014 $ 7 $ 12 $ 22 10 (5) (9) (1) $ 17 $ 7 $ 12 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 the fair-value discussion 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 Ol&E in our Consolidated Statements of Income. We classify certain mutual funds as trading securities. These mutual funds hold a variety of debt and equity investments intended to generate returns that offset changes in certain deferred compensation liabilities. We record changes in the fair value of these mutual funds and the related deferred compensation liabilities in SG&A. Our other investments are not measured at fair value but are accounted for using either the equity method or cost method. These investments consist of interests in venture capital funds and other non-marketable equity securities. Gains and losses from equity-method investments are reflected in OI&E based on our ownership share of the investee's financial results. Gains and losses on cost-method investments are recorded in OI&E when realized or when an impairment of the investment's value is warranted based on our assessment of the recoverability of each investment. Details of our investments are as follows: December 31, 2016 December 31, 2015 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 346 $ 395 $ Corporate obligations 107 544 132 285 U.S. government agency and Treasury securities 490 1,792 245 1,933 Trading securities: Mutual funds 201 ― - 187 Total 943 2,336 201 772 2,218 187 Other measurement basis: Equity-method investments Cost-method investments Cash on hand Total 25 9 211 228 $ 1,154 $2,336 $ 235 $1,000 $ 2,218 $ 221 25 22 As of December 31, 2016 and 2015, 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 2016, 2015 and 2014. In 2016, 2015 and 2014, the proceeds from sales, redemptions and maturities of short-term available-for-sale investments were $3.39 billion, $2.89 billion and $2.97 billion, respectively. Gross realized gains and losses from these sales were not material. 46 TEXAS INSTRUMENTS . 2016 FORM 10-K#51The following table presents the aggregate maturities of investments in debt securities classified as available for sale as of December 31, 2016: Due One year or less One to two years Fair Value $ 3,254 25 Other-than-temporary declines and impairments in the values of these investments recognized in OI&E were not material in 2016, 2015 and 2014. 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, 2016 and 2015, we had no Level 3 assets or liabilities, other than certain assets held by our postretirement plans. The following are our assets and liabilities that were accounted for at fair value on a recurring basis. These tables do not include cash on hand, assets held by our postretirement plans, or assets and liabilities that are measured at historical cost or any basis other than fair value. Assets: Money market funds Corporate obligations U.S. government agency and Treasury securities Mutual funds Total assets Liabilities: Deferred compensation Total liabilities Level 1 December 31, 2016 Level 2 Total Level 1 December 31, 2015 Level 2 Total $ 346 $ - - 2,042 201 651 240 - $ 346 651 2,282 201 $ 395 $ $ 395 417 1,828 350 187 — 417 2,178 187 $2,589 $ 891 $ 3,480 $ 2,410 $ 767 $ 3,177 $ 218 - $ 218 $ 198 $ $ 198 $ 218 $ SA $ 218 $ 198 $ $ 198 47 TEXAS INSTRUMENTS . 2016 FORM 10-K FORM 10-K#52FORM 10-K 9. Goodwill and acquisition-related intangibles Goodwill, net, by segment as of December 31, 2016 and 2015, is as follows: Analog .. Embedded Processing Other .. Total Goodwill $ 4,158 172 32 $ 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 2016, 2015 and 2014, we determined no impairment was indicated. The components of Acquisition-related intangibles, net, are as follows: Acquisition-Related Intangibles Developed technology . Customer relationships Other intangibles Total December 31, 2016 December 31, 2015 Amortization Period (Years) 7-10 8 Gross Carrying Amount $ 2,130 810 Accumulated Amortization Net $1,144 532 $ 986 278 Gross Carrying Amount $2,131 Accumulated Amortization Net $ 928 $ 1,203 810 431 379 5 - - - 3 2 1 $2,940 $1,676 $1,264 $ 2,944 $ 1,361 $ 1,583 Amortization of acquisition-related intangibles was $319 million, $319 million and $321 million in 2016, 2015 and 2014, respectively, primarily related to developed technology. Fully amortized assets are written off against accumulated amortization. Future estimated amortization of acquisition-related intangibles is as follows: 2017 2018 2019 2020 2021 Amortization of Acquisition-Related Intangibles $318 318 288 198 142 Thereafter 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 U.S. 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. 48 TEXAS INSTRUMENTS . 2016 FORM 10-K#53Both 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, 2016 and 2015, as a result of employees' elections, TI's U.S. defined contribution plans held shares of TI common stock totaling 11 million shares and 13 million shares valued at $796 million and $704 million, respectively. Dividends paid on these shares in 2016 and 2015 were $20 million and $19 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 $60 million in 2016, 2015 and 2014. 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, 2016 and 2015, as a result of employees' elections, TI's non-U.S. defined contribution plans held TI common stock valued at $20 million and $17 million, respectively. Dividends paid on these shares of TI common stock in 2016 and 2015 were not material. Effects on our Consolidated Statements of Income and Balance Sheets Expense related to defined benefit and retiree health care benefit plans is as follows: U.S. Defined Benefit U.S. Retiree Health Care 2016 2015 2014 2016 2015 2014 Non-U.S. Defined Benefit 2016 2015 2014 Service cost $ 22 $ 22 $ 21 $ 5 $ 5 $ 4 $ 34 $ 35 $ 39 Interest cost. 42 43 45 20 20 22 52 53 68 Expected return on plan assets Amortization of prior service cost (credit) (41) (48) (42) (20) (22) (20) (68) (76) (80) (3) 2 4 (2) (2) (2) Recognized net actuarial loss 21 19 26 7 8 7 25 24 24 Net periodic benefit costs 44 36 50 9 13 17 41 34 49 Settlement losses 21 25 5 2 2 1 Curtailment gain Total, including other postretirement losses (gains) . 65 55 $ 61 $ 55 $ 9 $ 13 $ 17 $ 43 $ 36 $ 48 TEXAS INSTRUMENTS . 2016 FORM 10-K 49 FORM 10-K#54FORM 10-K 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 2016 2015 2016 U.S. Retiree Health Care 2015 Non-U.S. Defined Benefit 2016 2015 Change in plan benefit obligation Benefit obligation at beginning of year: $1,033 $ 1,076 $ 463 $ 513 $ 2,231 $ 2,316 Service cost 22 22 5 5 34 35 Interest cost 42 43 20 20 52 53 Participant contributions 10 19 6 6 Benefits paid (9) (38) (46) (73) Medicare subsidy Actuarial loss (gain) Settlements Plan amendments Effects of exchange rate changes 1 3 27 (85) (94) ㅇㅎ (6) (27) (21) 259 14 (8) (18) (30) (136) (102) Benefit obligation at end of year (BO) Change in plan assets Fair value of plan assets at beginning of year: Actual return on plan assets $1,030 $ 1,033 434 $ 463 $2,361 $ 2,231 $1,019 $1,082 $ 441 $ 497 $ 2,134 $ 2,213 Employer contributions (funding of qualified plans) Employer contributions (payments for non-qualified plans) .. Participant contributions Benefits paid 775 79 (24) 20 227 25 15 52 1 1 160 72 15 Settlements Effects of exchange rate changes | | 10 19 6 (9) (8) (38) (46) (77) (73) (85) (94) (8) (18) (133) (91) Other - - (30) - Fair value of plan assets at end of year (FVPA) $ 1,034 $ 1,019 $ 434 $ 441 $ 2,309 $ 2,134 $ 4 $ (14) $ (22) $ (52) $ (97) F |£ | 1 | 6 1 Funded status (FVPA - BO) at end of year 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 2016 Overfunded retirement plans $ 66 $ 3 $ 27 $ 96 Accrued expenses and other liabilities & Deferred credits and other liabilities (9) (6) (15) Underfunded retirement plans (53) (3) (73) (129) Funded status (FVPA - BO) at end of 2016 $ 4 SA (52) (48) 2015 Overfunded retirement plans $ 51 SA | $ 34 $ 85 Accrued expenses and other liabilities & Deferred credits and other liabilities (16) Underfunded retirement plans (49) Funded status (FVPA - BO) at end of 2015 $ (14) $ (22) 22 (22) (6) (125) (22) (196) $ (97) $ (133) 50 TEXAS INSTRUMENTS . 2016 FORM 10-K#55Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute about $100 million to our retirement benefit plans in 2017. 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 $926 million and $948 million as of December 31, 2016 and 2015, respectively, for the U.S. defined benefit plans, and $2.22 billion and $2.09 billion as of December 31, 2016 and 2015, 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 Net Actuarial Loss Prior Service Credit Non-U.S. Defined Benefit Net Actuarial Loss Total Prior Service Credit Net Actuarial Loss Prior Service Credit AOCI balance, net of taxes, December 31, 2015 $ 167 $ 80 $ (13) $ 303 $ (7) $ 550 $ (20) Changes in AOCI by category: Adjustments (10) (27) Recognized within Net income (42) (7) 3 Tax effect 18 12 (1) មិនត 86 49 (27) 2 (76) (11) (1) 19 Total change to AOCI (34) (22) 2 48 1 (8) 523 (2) AOCI balance, net of taxes, December 31, 2016. $ 133 $ 58 $ (11) $ 351 $ (6) $ 542 $ (17) The estimated amounts of net actuarial loss and unrecognized prior service credit included in AOCI as of December 31, 2016, that are expected to be amortized into net periodic benefit cost over the next fiscal year are: $15 million and none for the U.S. defined benefit plans; $4 million and ($4) million for the U.S. retiree health care benefit plan; and $27 million and ($2) million for the non-U.S. defined benefit plans. Information on plan assets We report and measure the plan assets of our defined benefit pension and other postretirement plans at fair value. The tables below set forth the fair value of our plan assets using the same three-level hierarchy of fair-value inputs described in Note 8. With the adoption of ASU 2015-07, certain assets are no longer subject to disclosure by level of fair value but have been included in the tables below to permit reconciliation to the total plan assets. See Note 2 for more information. Level 1 Level 2 December 31, 2016 Level 3 Other (a) Total Assets of U.S. defined benefit plan: Fixed income securities and cash equivalents Equity securities - Total $ 685 349 $ 1,034 $ 685 349 $ 1,034 Assets of U.S. retiree health care plan: Fixed income securities and cash equivalents Equity securities $ 180 3 A 44 $ 227 207 Total $ 180 $ 3 $ 251 207 $ 434 Assets of non-U.S. defined benefit plans: Fixed income securities and cash equivalents $ 19 $ 127 Equity securities. 5 18 $1,508 629 Other - - 3 $ 1,654 652 3 Total $ 24 $ 145 $ 3 $ 2,137 $ 2,309 (a) Consists of bond index and equity index funds, measured at net asset value per share. TEXAS INSTRUMENTS • 2016 FORM 10-K 51 FORM 10-K#56FORM 10-K December 31, 2015 Level 1 Level 2 Level 3 Other (a) Total $ 249 $ 415 355 $ 664 355 $ 249 $ 770 $1,019 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 $ 178 Total $ 178 Assets of non-U.S. defined benefit plans: Fixed income securities and cash equivalents Equity securities Other Total 5 - SA 37 $ 220 221 $ 258 221 $ 441 4 6 $ 109 18 $ 1,385 608 $1,498 632 4 4 $ 10 $ 127 $ 4 $1,993 $ 2,134 (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, 2014, have not been material, and are due to redemptions. Assumptions and investment policies U.S. Defined Benefit 2016 2015 U.S. Retiree Health Care 2016 2015 Non-U.S. Defined Benefit 2016 2015 Weighted average assumptions used to determine benefit obligations: Discount rate Long-term pay progression 4.29% 4.62% 4.08% 4.40% 3.30% 3.30% n/a n/a 1.76% 2.41% 3.11% 3.21% Weighted average assumptions used to determine net periodic benefit cost: Discount rate Long-term rate of return on plan assets Long-term pay progression. . 4.40% 4.33% 4.40% 4.15% 4.60% 5.10% 4.40% 4.70% 3.30% 3.30% n/a n/a 2.41% 2.34% 3.18% 3.55% 3.21% 3.27% 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. 42 52 TEXAS INSTRUMENTS . 2016 FORM 10-K#57Assumptions 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: Asset Category Non-U.S. Defined Benefit U.S. Defined Benefit Fixed income securities and cash equivalents Equity securities 65% U.S. Retiree Health Care 50%-65% 35% 35% - 50% 60% - 100% 0% - 40% We rebalance the plans' investments when they are not within the target allocation ranges. Weighted average asset allocations as of December 31 are as follows: Asset Category Fixed income securities and cash equivalents Equity securities. U.S. Defined Benefit U.S. Retiree Health Care 2016 2015 2016 2015 66% 65% 52% 50% 34% 35% 48% 50% Non-U.S. Defined Benefit 2016 2015 72% 70% 28% 30% 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, 2016, we do not expect to return any of the defined benefit pension plans' assets to TI in the next 12 months. The following assumed future benefit payments to plan participants in the next 10 years are used to measure our benefit obligations. Almost all of the payments, which may vary significantly from these assumptions, will be made from plan assets and not from company assets. U.S. Defined Benefit U.S. Retiree Health Care Non-U.S. Defined Benefit 2017 $ 128 $ 32 $ 82 2018 120 32 84 2019 86 33 87 2020 91 33 89 2021 101 32 91 2022 2026 450 151 489 Assumed health care cost trend rates for the U.S. retiree health care benefit plan as of December 31 are as follows: 2016 2015 Assumed health care cost trend rate for next year Ultimate trend rate Year in which ultimate trend rate is reached 6.75% 7.00% 5.00% 5.00% 2024 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, 2016, by $2 million. The service cost and interest cost components of 2016 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. TEXAS INSTRUMENTS . 2016 FORM 10-K 53 FORM 10-K#58FORM 10-K As of December 31, 2016, our liability to participants of the deferred compensation plans was $218 million and is recorded in Deferred credits and other liabilities on our Consolidated Balance Sheets. This amount reflects the accumulated participant deferrals and earnings thereon as of that date. As of December 31, 2016, we held $201 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. 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, 2016, 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 2021. 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, 2016, our credit facility was undrawn and we had no commercial paper outstanding. Long-term debt 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, which are amortized to Interest and debt expense over the term of the debt. 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, which are amortized to Interest and debt expense over the term of the debt. 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. In March 2014, we issued an aggregate principal amount of $500 million of fixed-rate, long-term debt, with $250 million due in 2017 and $250 million due in 2021. We incurred $3 million of issuance and other related costs, which are amortized to Interest and debt expense over the term of the debt. The proceeds of the offering were $498 million, net of the original issuance discount, and were used toward the repayment of the $1.0 billion of debt that matured in May 2014. Long-term debt outstanding is as follows: Notes due 2016 at 2.375% 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% 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 December 31, 2016 2015 $ 1,000 250 250 375 375 500 500 750 750 500 500 250 250 500 500 500 3,625 4,125 (16) (5) 3,609 4,120 (631) (1,000) $ 2,978 $ 3,120 Long-term debt. Interest and debt expense was $80 million in 2016, $90 million in 2015 and $94 million in 2014. This was net of the amortization of the debt discounts, premiums and debt issuance costs. Cash payments for interest on long-term debt were $88 million in 2016, $99 million in 2015 and $102 million in 2014. Capitalized interest was not material. 54 TEXAS INSTRUMENTS . 2016 FORM 10-K#5912. Commitments and contingencies Purchase commitments Some of our purchase commitments, including software licenses, require minimum payments. 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 $86 million, $98 million and $113 million in 2016, 2015 and 2014, respectively. As of December 31, 2016, we had committed to make the following minimum payments under our purchase commitments and non-cancellable operating leases: 2017 2018 2019 2020 2021 Purchase Commitments Operating Leases $ 132 $ 67 92 47 81 1225 28 24 24 17 57 Thereafter Indemnification guarantees We routinely sell products with an intellectual property indemnification included in the terms of sale. Historically, we have had only minimal, infrequent losses associated with these indemnities. Consequently, we cannot reasonably estimate any future liabilities that may result. Warranty costs/product liabilities We accrue for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability. Historically, we have experienced a low rate of payments on product claims. Although we cannot predict the likelihood or amount of any future claims, we do not believe they will have a material adverse effect on our financial condition, results of operations or liquidity. Our stated warranties for semiconductor products obligate us to repair, replace or credit the purchase price of a covered product back to the buyer. Product claim consideration may exceed the price of our products. General We are subject to various legal and administrative proceedings. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity. TEXAS INSTRUMENTS . 2016 FORM 10-K 55 FORM 10-K#60FORM 10-K 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. Other Income (Expense), Net (OI&E) Income from settlements related to intellectual property infringement Lease income Interest income Investment gains (losses) Currency exchange gains (losses) Tax interest income (expense) Other Total Prepaid Expenses and Other Current Assets Prepaid taxes on intercompany inventory profits, net Other prepaid expenses and current assets Total Property, Plant and Equipment at Cost Land Buildings and improvements Machinery and equipment. Total..... Accumulated Other Comprehensive Income (Loss), Net of Taxes (AOCI) Postretirement benefit plans: Net actuarial loss Prior service credit Cash flow hedge derivative Total 56 TEXAS INSTRUMENTS . 2016 FORM 10-K For Years Ended December 31, 2016 2015 2014 $ 188 $ 14 14 14 11 6 47 7 5 3 5 2 5 (3) (6) 36 8 6 (4) (7) $211 $ 32 $ 21 December 31, 2016 2015 $ 566 344 $ 801 199 $ 910 Depreciable Lives (Years) $ 1,000 December 31, 2016 $ 127 2015 n/a $ 127 5-40 2,753 2,789 2-10 2,043 2,549 $ 4,923 $5,465 December 31, 2016 2015 $ (542) 17 $ (550) 20 (1) (2) $ (526) $ (532)#61Details 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 2016, 2015 and 2014. The table below details where these transactions are recorded in our Consolidated Statements of Income. For Years Ended December 31, 2016 2015 2014 Impact to Related Statement of Income Line Details about AOCI Components Net actuarial gains (losses) of defined benefit plans: Recognized net actuarial loss and Settlement losses (a) Tax effect Recognized within Net income, net of taxes Prior service (cost) credit of defined benefit plans: Amortization of prior service cost (credit) and Curtailment gain (a) Tax effect Recognized within Net income, net of taxes Derivative instruments: Amortization of treasury-rate locks $ 76 $ 78 $ 63 (25) (25) (21) $ 53 $ 42 $ 51 SA (5) - 523 $ (3) SA EA S EA $ 2 $ 2 Tax effect - (1) (1) Recognized within Net income, net of taxes $ 1 $ 1 $ 1 (a) Detailed in Note 10. Increase to Pension expense (b) Decrease to Provision for income taxes Decrease to Net income Decrease to Pension expense (b) Increase to Provision for income taxes Increase to Net income Increase to Interest and debt expense Decrease to Provision for income taxes Decrease to Net income (b) Pension expense is included in COR, R&D, SG&A and Restructuring charges/other. 14. Quarterly financial data (unaudited) As a result of our early adoption of ASU 2016-09, we have recast Net income and EPS for the first three quarters of 2016 to conform to the new presentation. See Note 2 for additional information, including the effects of the change on previously reported quarterly data. Revenue. Gross profit Included in Operating profit: Acquisition charges Restructuring charges/other Operating profit Net income Basic EPS Diluted EPS 4th 2016 Quarters 3rd 2nd 1st 4th 2015 Quarters 3rd 2nd $ 3,414 $ 3,675 2,133 2,280 $ 3,273 2,003 $ 3,008 $ 3,189 $ 3,429 $ 3,232 1st $ 3,150 1,824 1,866 1,997 1,881 1,816 80 80 79 80 81 83 82 83 (20) 2 2 (68) (1) (2) 1,319 1,047 1,395 1,018 1,117 819 968 1,142 1,164 1,010 958 711 836 798 696 656 $ 1.04 $ 1.00 $ 0.81 $ 1.02 $ 0.98 $ 0.79 $ 0.70 $ 0.69 $ 0.81 $ 0.77 $ 0.66 $ 0.62 $ 0.80 $ 0.76 $ 0.65 $ 0.61 TEXAS INSTRUMENTS . 2016 FORM 10-K 57 FORM 10-K#62FORM 10-K Report of independent registered public accounting firm The Board of Directors and Stockholders Texas Instruments Incorporated We have audited the accompanying consolidated balance sheets of Texas Instruments Incorporated and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Texas Instruments Incorporated and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for stock compensation in 2016. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, 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 23, 2017, expressed an unqualified opinion thereon. Dallas, Texas February 23, 2017 58 Ernst & Young LLP TEXAS INSTRUMENTS . 2016 FORM 10-K#63ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. ITEM 9A. Controls and Procedures. Disclosure controls and procedures 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 principal 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 principal 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 2016 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, 2016. 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, 2016, 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. TEXAS INSTRUMENTS . 2016 FORM 10-K 59 FORM 10-K#64Report of independent registered public accounting firm on internal control over financial reporting The Board of Directors and Stockholders Texas Instruments Incorporated We have audited Texas Instruments Incorporated's internal control over financial reporting as of December 31, 2016, 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). Texas Instruments Incorporated'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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. 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. In our opinion, Texas Instruments Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Texas Instruments Incorporated and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016, and our report dated February 23, 2017, expressed an unqualified opinion thereon. Ernst & Young LLP FORM 10-K Dallas, Texas February 23, 2017 60 60 TEXAS INSTRUMENTS . 2016 FORM 10-K#65ITEM 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 2017 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 "Board diversity and nominee qualifications" in our proxy statement for the 2017 annual meeting of stockholders, is incorporated herein by reference to such proxy statement. 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 2017 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/corporate governance. 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 2017 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 2017 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 2017 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 following table sets forth information about the company's equity compensation plans as of December 31, 2016. Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights (b) $42.01 (2) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) 62,380,188 (1) 2,645,024 (4) 65,025,212 (5) $ 41.89 (2) $42.00 Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a)) (c) 97,283,403 (3) 0 97,283,403 TEXAS INSTRUMENTS • 2016 FORM 10-K 61 FORM 10-K#66FORM 10-K (1) 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"). (2) 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. (3) Shares of TI common stock available for future issuance under the 2009 LTIP, the 2009 Director Plan and the 2014 ESPP. 59,581,585 shares remain available for future issuance under the 2009 LTIP and 1,314,646 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. (4) 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 52,265,788 shares for issuance upon exercise of outstanding grants of options, 12,332,379 shares for issuance upon vesting of outstanding grants of restricted stock units, 283,400 shares for issuance under the 2014 ESPP and 143,645 shares for issuance in settlement of directors' deferred compensation accounts. 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 2017 annual meeting of stockholders is incorporated herein by reference to such proxy statement. ITEM 13. Certain Relationships and Related Transactions, and Director Independence. The information contained under the caption "Related person transactions" in our proxy statement for the 2017 annual meeting of stockholders is incorporated herein by reference to such proxy statement. The information contained under the caption "Director independence" in our proxy statement for the 2017 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 2017 annual meeting of stockholders is incorporated herein by reference to such proxy statement. 62 TEXAS INSTRUMENTS . 2016 FORM 10-K#67PART IV ITEM 15. Exhibits, Financial Statement Schedules. The financial statements are listed in the index included in Item 8, "Financial Statements and Supplementary Data." Incorporated by Reference Designation of Exhibit Description of Exhibit 3(a) Restated Certificate of Incorporation of the Registrant, dated April 18, 1985, as amended Form 10-K 001-3761 File Number Date of Filing February 24, 2015 Exhibit Number Filed or Furnished Herewith 3(a) 3(b) By-Laws of the Registrant 4(a) Indenture 8-K 001-3761 8-K 001-3761 December 12, 2016 3 May 23, 2011 4.2 4(b) Officer's Certificate 8-K 001-3761 May 23, 2011 4.3 4(c) Officer's Certificate 8-K 001-3761 May 8, 2013 4.2 4(d) Officer's Certificate 8-K 001-3761 March 12, 2014 4.2 4(e) Officer's Certificate 8-K 001-3761 May 6, 2015 4.1 4(f) 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. 10(a) TI Deferred Compensation Plan, as amended* 10-K 001-3761 10(b) TI Employees Non-Qualified Pension Plan, effective January 1, 2009, as amended* 10-K 001-3761 February 24, 2016 February 24, 2016 10(a) 10(b) 10(c) TI Employees Non-Qualified Pension Plan II* 10-K 001-3761 February 24, 2016 10(c) 10(d) Texas Instruments Long-Term Incentive Plan, 10-K 001-3761 February 24, 2012 10(c) adopted April 15, 1993* 10(e) Texas Instruments 2000 Long-Term Incentive Plan as amended October 16, 2008* 10-K 001-3761 February 24, 2015 10(e) 10(f) Texas Instruments 2003 Long-Term Incentive Plan as amended October 16, 2008 10-K 001-3761 February 24, 2015 10(f) 10(g) Texas Instruments Executive Officer 10-K 001-3761 February 24, 2015 10(g) Performance Plan as amended September 17, 2009* 10(h) Texas Instruments Restricted Stock Unit Plan for Directors, as amended, dated April 16, 1998 10-K 001-3761 February 24, 2012 10(h) 10(i) Texas Instruments Directors Deferred 10-K 001-3761 February 24, 2012 10(i) Compensation Plan, as amended, dated April 16, 1998 10(j) Texas Instruments 2003 Director Compensation Plan as amended January 19, 2012 10-K 001-3761 February 24, 2015 10(j) 10(k) Form of Non-Qualified Stock Option Agreement for Executive Officers under the Texas Instruments 2009 Long-Term Incentive Plan* 10(1) 10(m) Form of Restricted Stock Unit Award Agreement for Executive Officers under the Texas Instruments 2009 Long-Term Incentive Plan* Texas Instruments 2009 Long-Term Incentive Plan as amended April 21, 2016 * DEF 001-3761 14A March 9, 2016 Appendix B 10(n) Texas Instruments 2009 Director Compensation Plan as amended January 19, 2012 TEXAS INSTRUMENTS . 2016 FORM 10-K X 63 X FORM 10-K#68FORM 10-K Incorporated by Reference Designation File Exhibit Filed or Furnished of Exhibit Description of Exhibit Form Number Date of Filing Number Herewith 12 Ratio of Earnings to Fixed Charges X 21 List of Subsidiaries of the Registrant 23 Consent of Independent Registered Public Accounting Firm 31(a) Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer 31(b) Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer 32(a) Section 1350 Certification of Chief Executive Officer 32(b) Section 1350 Certification of Chief Financial Officer 101.ins Instance Document 101.sch XBRL Taxonomy Schema 101.cal 101.Def XBRL Taxonomy Calculation Linkbase XBRL Taxonomy Definitions Document 101.lab XBRL Taxonomy Labels Linkbase 101.pre XBRL Taxonomy Presentation Linkbase * Management compensation plans and arrangements 64 TEXAS INSTRUMENTS . 2016 FORM 10-K X X X X X ×#69FORM 10-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 TI's end markets; . • • • · TI's 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 TI inventory that results from demand that differs from projections; TI's ability to develop, manufacture and market innovative products in a rapidly changing technological environment; Economic, social and political conditions in the countries in which TI, 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; Natural events such as severe weather, geological events or health epidemics in the locations in which TI, our customers or our suppliers operate; Breaches or disruptions of TI's information technology systems or those of our customers or suppliers; • Timely implementation of new manufacturing technologies and installation of manufacturing equipment, or 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 TI is or may become subject, or actions of enforcement authorities, that restrict TI's ability to manufacture or ship our products or operate our business, or subject TI to fines, penalties, or other legal liability; Product liability or warranty claims, claims based on epidemic or delivery failure, or other claims relating to TI products, manufacturing, services, design or communications, or recalls by TI customers for a product containing a Tl part; Changes in the tax rate applicable to TI as the result of changes in tax law, 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 a customer or distributor of TI with respect to TI-consigned inventory; Financial difficulties of distributors or their promotion of competing product lines to TI's 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; • • • • TI's ability to maintain or improve profit margins, including our ability to utilize our manufacturing facilities at sufficient levels to cover its fixed operating costs, in an intensely competitive and cyclical industry; TI's ability to maintain and enforce a strong intellectual property portfolio and maintain freedom of operation; or TI's exposure to infringement claims; Instability in the global credit and financial markets that affects TI's 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; TI's ability to recruit and retain skilled engineering, management and technical personnel; • TI's 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 TI's 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. TEXAS INSTRUMENTS . 2016 FORM 10-K 65#70FORM 10-K SIGNATURES 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. TEXAS INSTRUMENTS INCORPORATED By: /s/ Kevin P. March Kevin P. March Senior Vice President, Principal Financial Officer and Chief Accounting Officer Date: February 23, 2017 Each person whose signature appears below constitutes and appoints each of Richard K. Templeton, Kevin P. March, 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, 2016, 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 on the 23rd day of February 2017. Signature /s/ Ralph W. Babb, Jr. Ralph W. Babb, Jr. /s/ Mark A. Blinn Title Director Director 66 Mark A. Blinn /s/ Daniel A. Carp Director Daniel A. Carp /s/ Janet F. Clark Director Janet F. Clark /s/ Carrie S. Cox Director Carrie S. Cox /s/ Jean M. Hobby Director Jean M. Hobby /s/ Ronald Kirk Director Ronald Kirk /s/ Pamela H. Patsley Pamela H. Patsley TEXAS INSTRUMENTS . 2016 FORM 10-K Director#71Signature /s/ Robert E. Sanchez Robert E. Sanchez /s/ Wayne R. Sanders Wayne R. Sanders /s/ Richard K. Templeton Richard K. Templeton /s/ Christine Todd Whitman Christine Todd Whitman /s/ Kevin P. March Kevin P. March Title Director Director Chairman of the Board; Director; President; Chief Executive Officer Director Senior Vice President; Principal Financial Officer; Chief Accounting Officer TEXAS INSTRUMENTS . 2016 FORM 10-K 67 46 FORM 10-K#72(This page intentionally left blank.) TEXAS INSTRUMENTS#73NOTICE OF ANNUAL MEETING OF STOCKHOLDERS April 20, 2017 TEXAS INSTRUMENTS Dear Stockholder: You are cordially invited to attend the 2017 annual meeting of stockholders on Thursday, April 20, 2017, at the auditorium on our property at 12500 TI Boulevard, Dallas, Texas, at 8:30 a.m. (Central time). Please 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, • advisory approval of annual frequency for future advisory votes on executive compensation, • • ratification of the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for 2017, and such other matters as may properly come before the meeting. Stockholders of record at the close of business on February 21, 2017, 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. Dallas, Texas March 6, 2017 Sincerely, Cynthia Hoff Trochu Senior Vice President, Secretary and General Counsel TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 1 PROXY STATEMENT#74Voting procedures, quorum and attendance requirements. Election of directors TABLE OF CONTENTS 35 3 Stock ownership guidelines and policy against hedging ..... 29 29 Consideration of tax and accounting treatment of compensation Nominees for directorship 30 Director nomination process 6 Compensation Committee report 30 Director candidate recommendations 6 Summary compensation table 31 Stockholder nomination of directors 6 Grants of plan-based awards 32 Director nominees 7 Outstanding equity awards at fiscal year-end 33 Board diversity and nominee qualifications 7 Option exercises and stock vested 35 Communications with the board 9 Pension benefits 36 Corporate governance 9 Non-qualified deferred compensation 38 Annual meeting attendance 10 Potential payments upon termination or change in Director independence. 10 control 39 Board organization 11 Audit Committee report 42 Board and committee meetings 11 Proposal to ratify appointment of independent Committees of the board 11 registered public accounting firm 43 Board leadership structure 13 Additional information 44 Risk oversight by the board 14 Voting securities 44 Director compensation. 14 Security ownership of certain beneficial owners 44 Executive compensation 17 Proposal regarding advisory approval of the Security ownership of directors and management. Related person transactions 45 46 company's executive compensation . . 17 Compensation committee interlocks and insider Proposal regarding advisory vote on future advisory participation votes on executive officer compensation 18 Cost of solicitation Compensation Discussion and Analysis 18 Executive summary 18 Stockholder proposals and nominations for 2018 Benefit plan voting .... 48 48 48 49 Detailed discussion 19 Section 16(a) beneficial ownership reporting Compensation philosophy and elements 19 compliance Comparator group Analysis of compensation determinations Equity dilution Process for equity grants Recoupment policy 22228 21 Telephone and internet voting 27 27 Most recent stockholder advisory vote on executive compensation Benefits 88888 28 Stockholders sharing the same address Electronic delivery of proxy materials and copies of our Form 10-K Notice regarding forward-looking statements Directions and other annual meeting information Appendix A (Non-GAAP reconciliations) . 49 49 49 50 50 51 A-1 28 Compensation following employment termination or change in control 29 20 PROXY STATEMENT 2 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#75EXECUTIVE OFFICES PROXY STATEMENT - MARCH 6, 2017 12500 TI BOULEVARD, DALLAS, TEXAS 75243 MAILING ADDRESS: P.O. BOX 660199, DALLAS, TEXAS 75266-0199 Voting procedures, quorum and attendance requirements TI's board of directors requests your proxy for the annual meeting of stockholders on April 20, 2017. 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 6, 2017. 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. Advisory vote to approve named executive officer compensation. Advisory vote on approval of annual frequency for future advisory votes on executive compensation. Proposal to ratify appointment of independent registered public accounting firm. Any other matter that may properly be submitted at the meeting. Required Vote for Election or Approval 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. Majority of votes present in person or by proxy at the meeting must be cast for the proposal. Majority of votes present in person or by proxy at the meeting must be cast for the proposal. Majority of votes present in person or by proxy at the meeting must be cast for the proposal. Majority of votes present in person or by proxy at the meeting must be cast for the proposal. Impact of Abstentions or Broker Non-Votes Abstentions have the same effect as votes against. Broker non-votes are not counted as votes for or against. Abstentions and broker non-votes have the same effect as votes against. Abstentions and broker non-votes have the same effect as votes against. 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.) Abstentions and broker non-votes have the same effect as votes against. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 3 PROXY STATEMENT#76Attendance requirements Attendance at the meeting is limited to stockholders or their legal proxy holders. Each attendee must present a government-issued photo ID and proof of ownership (see table below) as of the record date. You are a record holder if you hold your shares through our transfer agent, Computershare. You are a beneficial holder if you hold your shares through an intermediary, such as a bank or a broker. If you are a beneficial holder and wish to vote your shares at the meeting, you must bring a legal proxy from your broker, bank or nominee. Guest tickets are not available. Exceptions may be granted to stockholders who require a companion ticket in order to facilitate their own attendance (for example, due to a physical disability) by contacting Investor Relations. Proof of Ownership Copy of an account statement showing stock ownership on the record date Legal proxy from bank, broker or nominee Notice regarding availability of proxy materials (notice and access mailing) Copy of voting instruction form Top half of proxy card Record Holder Beneficial Holder X X 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. PROXY STATEMENT TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 4#77Election 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, JEAN M. HOBBY, RONALD KIRK, PAMELA H. PATSLEY, ROBERT E. SANCHEZ, WAYNE R. SANDERS 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, please 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 68 Director since 2010 Chair, Audit Committee JANET F. CLARK Age 62 Director since 2015 Member, Audit Committee PAMELA H. PATSLEY Age 60 Director since 2004 Member, Compensation Committee MARK A. BLINN Age 55 Director since 2013 Member, Audit Committee CARRIE S. COX Age 59 Director since 2004 Member, Governance and Stockholder Relations Committee ROBERT E. SANCHEZ Age 51 Director since 2011 Lead Director; Chair, Compensation Committee TODD M. BLUEDORN Age 53 Director since 2017 Member, Audit Committee JEAN M. HOBBY Age 56 Director since 2016 Member, Audit Committee WAYNE R. SANDERS Age 69 Director since 1997 Chair, Governance and Stockholder Relations Committee DANIEL A. CARP Age 68 Director since 1997 Member, Compensation Committee RONALD KIRK Age 62 Director since 2013 Member, Governance and Stockholder Relations Committee RICHARD K. TEMPLETON Age 58 Chairman since 2008 and director since 2003 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 5 PROXY STATEMENT#78Director not standing for re-election CHRISTINE TODD WHITMAN Age 70 Member, Compensation Committee Ms. Whitman, a highly valued director since 2003, has attained the age of 70 and is therefore ineligible under the company's by-laws to stand for re-election at the 2017 annual meeting. 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 G&SR Committee), which is responsible for reviewing and recommending nominees to the board. The G&SR 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 G&SR Committee. It can be found on our website at www.ti.com/corporate governance. 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 G&SR Committee's consideration can write to the Secretary of the G&SR Committee, Texas Instruments Incorporated, P.O. Box 655936, MS 8658, Dallas, TX 75265-5936. The G&SR Committee will evaluate the stockholder's prospective board nominee in the same manner as it evaluates other nominees. In evaluating prospective nominees, the G&SR Committee looks for the following minimum qualifications, qualities and skills: Outstanding achievement in the individual's personal career. • • Breadth of experience. • • Soundness of judgment. Ability to make independent, analytical inquiries. Ability to contribute to a diversity of viewpoints among board members. Willingness and ability to devote the time required to perform board activities adequately (in this regard, the G&SR Committee will consider the number of other boards on which the individual serves as a director, and in particular the board's policy that directors should not serve on the boards of more than three other public companies). 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). 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 G&SR 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/corporate governance. PROXY STATEMENT 6 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#79Director nominees All nominees for directorship are currently directors of the company, including two new directors. Ms. Hobby was elected to the board effective July 20, 2016, and Mr. Bluedorn was elected to the board effective March 1, 2017. They are the only director nominees at the 2017 annual meeting of stockholders who are standing for election by the stockholders for the first time. A search firm retained by the company to assist the G&SR Committee in identifying and evaluating potential nominees initially identified Ms. Hobby and Mr. Bluedorn as potential director candidates. The search firm conducted research to identify a number of potential candidates, based on qualifications and skills the G&SR Committee determined that candidates should possess. It then conducted further research on the candidates in whom the G&SR Committee had the most interest. The board believes its current size is within the desired range as stated in the board's corporate governance guidelines. Board diversity and nominee 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. As it considered director nominees for the 2017 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. Eleven 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. 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 (except as to Mr. Bluedorn who joined the board effective March 1, 2017), 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 (April 19, 2013-present), 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-March 31, 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. TEXAS INSTRUMENTS 2017 PROXY STATEMENT 7 PROXY STATEMENT#80• As 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. 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). 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), has helped oversee the strategy and operations of another multinational corporation. 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. PROXY STATEMENT 8 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#81Ms. Patsley • • As executive chairman (2016-present) 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-April 18, 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. Mr. Sanders • As chairman (1992-2003) and CEO (1991-2002) of Kimberly-Clark Corporation, has gained first-hand experience in managing a large, multinational consumer goods corporation, with ultimate management responsibility for its financial performance and its significant capital and R&D investments. • As chairman of Dr Pepper Snapple Group, Inc. (2008-present) and a director of Belo Corporation (2003-2013), has helped oversee the strategy and operations of other large corporations. Mr. Templeton • As a 36-year veteran of the semiconductor industry, serving the last 21 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. 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/corporate governance. 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. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 6 PROXY STATEMENT#82Annual 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 2016, 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. 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. B. C. 10 2. 3. 4. 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; 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 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). In no event will a director be considered independent if, within the preceding three years: 1. 2. 3. 34 4. 5. 6. 7. 8. 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; 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. 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. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT PROXY STATEMENT#83D. E. 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: 1. 2. The source of compensation of the director, including any consulting, advisory or compensatory fee paid by the company to the director; and Whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company. 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 2016, the board held ten meetings. The board has three standing committees described below. The committees of the board collectively held 29 meetings in 2016. Each director attended at least 75 percent of the board and relevant committee meetings combined. Overall attendance at board and committee meetings was approximately 97 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 14, 2015, to April 21, 2016, the committee members were Mr. Babb (chair), Mr. Blinn, Ms. Clark and Ruth J. Simmons (who reached the age of 70 by the 2016 annual meeting and was therefore ineligible to stand for re-election). From April 22, 2016, to July 19, 2016, the committee members were Mr. Babb (chair), Mr. Blinn and Ms. Clark. Since July 20, 2016, the committee members have been Mr. Babb (chair), Mr. Blinn, Ms. Clark and Ms. Hobby with Mr. Bluedorn joining the committee March 1, 2017. 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. 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. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 11 PROXY STATEMENT#84The 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. Babb as the audit committee financial expert as defined in the Securities Exchange Act of 1934, as amended. The Audit Committee met six times in 2016. 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. Please see pages 42-43 for a report of the committee. Compensation Committee All members of the Compensation Committee are independent. Since April 17, 2015, the committee members have been Mr. Sanchez (chair), Mr. Carp, Ms. Patsley and Ms. Whitman. 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: 。 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) the board must approve. • 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 2016. The Compensation Committee holds regularly scheduled meetings, reports its activities to the board, and consults with the board before setting annual executive compensation. Please 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 2016 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. 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/corporate governance. During 2016, 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. PROXY STATEMENT 12 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#85The 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 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 the grant activity of the special committee. Governance and Stockholder Relations Committee All members of the G&SR Committee are independent. Since April 17, 2015, the committee members have been Mr. Sanders (chair), Ms. Cox and Mr. Kirk. The G&SR Committee is generally responsible for: Making recommendations to the board regarding: о The development and revision of our corporate governance principles. о о The size, composition and functioning of the board and board committees. Candidates to fill board positions. • Nominees to be designated for election as directors. • Compensation of board members. 。 Organization and responsibilities of board committees. 。 Succession planning by the company. о о Issues of potential conflicts of interest involving a board member raised under TI's conflict of interest policy. Election of executive officers of the company. 。 Topics affecting the relationship between the company and stockholders. o Public issues likely to affect the company. • Responses to proposals submitted by stockholders. Reviewing: • о Contribution policies of the company and the TI Foundation. 。 Scope of activities of the company's political action committee. • 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. The G&SR Committee met seven times in 2016. The G&SR Committee holds regularly scheduled meetings and reports its activities to the board. Please 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. Sanchez to serve as lead director. 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. TEXAS INSTRUMENTS 2017 PROXY STATEMENT 13 PROXY STATEMENT#86In addition, the lead director has authority to call meetings of the independent directors. The board, led by its G&SR 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 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 G&SR 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. 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. PROXY STATEMENT Director compensation The G&SR 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 2016 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 G&SR Committee. 14 TEXAS INSTRUMENTS 2017 PROXY STATEMENT#87• 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. Please 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 TI events. In addition, non-employee directors may travel on company aircraft to and from these meetings and other designated events. On occasion, directors' spouses are invited to attend board events; the spouses' expenses incurred in connection with attendance at those events are also reimbursed. 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 2016, that rate was 4.00 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. 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. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 15 PROXY STATEMENT#882016 director compensation The following table shows the compensation of all persons who were non-employee members of the board during 2016 for services in all capacities to TI in 2016. Fees Earned Name (1) or Paid in Cash ($) (2) Stock Awards Option Awards ($) (3) ($) (4) Non-Equity Incentive Plan Compensation ($) Change in Pension Value and Nonqualified Deferred Compensation Earnings (5) All Other Compensation ($) (6) Total ($) R. W. Babb, Jr. $ 123,333 $ 99,985 $ 99,991 M. A. Blinn $ 85,000 $ 99,985 $ 99,991 D. A. Carp J. F. Clark $ 85,000 $ 99,985 $ 99,991 SASS $ 40 $ 323,349 $ 6,540 $291,516 818 $285,794 $ 85.000 $ 99,985 $ 99,991 $ 20,040 $305,016 C. S. Cox $ 85,000 $ 99,985 $ 99,991 $ 7,324 $ 5,040 $297,340 J. M. Hobby $ 38,159 $ 130,900 $ 40 $ 169,099 R. Kirk P. H. Patsley R. E. Sanchez W. R. Sanders $ 85,000 $ 99,985 $ 99,991 40 $285,016 $ 85,000 $ 99,985 $ 99,991 $ 40 $285,016 R. J. Simmons C. T. Whitman $ 121,667 $ 99,985 $ 100,000 $ 99,985 $ 28,335 $ 99,985 $ 85,000 $ 99,985 $ 99,991 $ 10,040 $ 331,683 $ 99,991 $ 818 $ 300,794 $ 99,991 $ 831 $ 10,040 $ 239,182 $ 99,991 $ 1,040 $286,016 (1) Ms. Hobby was elected to the board effective July 20, 2016. Ms. Simmons, an independent director, reached the age of 70 by the date of the 2016 annual meeting and therefore was ineligible under the company's by-laws to stand for re-election at the meeting. Mr. Bluedorn was elected to the board effective March 1, 2017, and accordingly received no compensation for services as a TI director in 2016. (2) Includes amounts deferred at the director's election. (3) Shown is the aggregate grant date fair value of restricted stock units granted in 2016 calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification TM 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, 2016. 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, please see the discussion on page 15. The table below shows the aggregate number of shares underlying outstanding restricted stock units held by the named individuals as of December 31, 2016. The value shown for Ms. Hobby represents the one-time restricted stock unit grant she received upon her initial election to the board. PROXY STATEMENT 16 Name R. W. Babb, Jr. M. A. Blinn D. A. Carp J. F. Clark C. S. Cox J. M. Hobby R. Kirk P. H. Patsley R. E. Sanchez W. R. Sanders R. J. Simmons C. T. Whitman TEXAS INSTRUMENTS • 2017 PROXY STATEMENT Restricted Stock Units (in Shares) 17,035 8,010 33,699 3,889 27,035 2,000 8,010 11,058 9,058 18,658 25,035 24,535#89(4) Shown is the aggregate grant date fair value of options granted in 2016 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, 2016. The terms of these options are as set forth on page 15 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, 2016. Name R. W. Babb, Jr. M. A. Blinn D. A. Carp J. F. Clark C. S. Cox J. M. Hobby R. Kirk P. H. Patsley R. E. Sanchez W. R. Sanders R. J. Simmons C. T. Whitman Options (in Shares) 69,735 32,828 90,735 9,990 90,735 32,828 90,735 59,733 69,735 40,168 90,735 (5) 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 2016, this interest rate exceeded the Federal Rate by 1.74 percentage points. Shown is the amount of interest earned on the directors' deferred compensation accounts that was in excess of the Federal Rate. (6) 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 $6,500 for Mr. Blinn, $20,000 for Ms. Clark, $5,000 for Ms. Cox, $10,000 for Mr. Sanchez and Ms. Simmons, and $1,000 for Ms. Whitman 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 $778. 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, chief financial officer and the three other most highly compensated executive officers, as named in the compensation tables on pages 31-42. 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 2016. 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. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 17 PROXY STATEMENT#90Although 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 2016, as disclosed in this proxy statement. Proposal regarding advisory vote on future advisory votes on executive officer compensation The board asks shareholders to cast an advisory vote on whether future advisory votes on executive officer compensation should be held every year, every two years or every three years. The board requests that shareholders vote in favor of future advisory votes to be held annually. An annual advisory vote will allow our shareholders to provide us with their direct and timely input on our compensation philosophy, policies and practices and is consistent with our policy of seeking input from, and engaging in discussions with, our shareholders on corporate governance matters and our executive compensation philosophy, policies and practices. Although the outcome of the vote is not binding on the company, the board will consider the outcome when setting the frequency of future advisory votes. The board of directors recommends a vote of EVERY YEAR for future advisory votes on the compensation of the company's executive officers. 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 2016 compensation program, why we selected them and how they relate to one another; and How we determined the amount of compensation for 2016. 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, CFO and the three other highest paid individuals who were executive officers in 2016 (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. PROXY STATEMENT 18 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#91• 2016 compensation decisions for the CEO: о Base salary was increased by 2 percent over 2015. о • The bonus decision was based primarily on the following performance results in 2016: The grant date fair value of equity compensation awarded in 2016 was unchanged from 2015. 2016 Absolute Performance Revenue Growth: Total TI 2.8% Profit from Operations as a % of Revenue (PFO%) 35.9% Total Shareholder Return (TSR) 36.7% Year-on-Year Change in CEO Bonus (2016 bonus compared with 2015) 0% change 2016 Relative Performance* Below median Above median Above median * 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 2016 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. If the effect of acquisitions were excluded from competitor companies, we estimate that TI's growth rate would be at or above the median growth rate.) 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: о Executive officers do not have employment contracts and are not guaranteed salary increases, bonus amounts or awards of equity compensation. • 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. о о о о Bonus and equity compensation awards are subject to clawback as described under "Recoupment policy" below. We do not provide excessive perquisites. We provide no tax gross-ups for perquisites. We do not guarantee a return or provide above-market returns on compensation that has been deferred. 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 Pay below market median in order to weight total compensation to the performance-based elements described below Terms Paid twice monthly TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 19 PROXY STATEMENT#92Profit Sharing Purpose Strategy Terms Performance Bonus Purpose Strategy Terms Broad-based program designed to emphasize that each employee contributes to the company's profitability and can share in it 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 12 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. Payable in a single cash payment shortly after the end of the performance year As in recent years, the formula for 2016 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 2016, TI delivered Margin of 35.9%. As a result, all eligible employees, including executive officers, received profit sharing of 20.0% of base salary. 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. 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 Strategy Terms Alignment with shareholders; long-term focus; retention, particularly with respect to restricted stock units We grant a combination of nonqualified 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 2016." The committee's grant procedures are described under "Process for equity grants." 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 TEXAS INSTRUMENTS 2017 PROXY STATEMENT PROXY STATEMENT#93Comparator group The Compensation Committee considers the market level of compensation when setting the salary, bonuses and equity compensation of the executive officers. The committee targets salary below market median in order to weight total compensation to performance-based elements. 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. Historically, the Comparator Group companies (1) are U.S.-based, (2) engage in the semiconductor business or other electronics or information technology activities, (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 2016. Analog Devices, Inc. Applied Materials, Inc. Broadcom Corporation Computer Sciences Corporation eBay Inc. * EMC Corporation * Emerson Electric Co. Intel Corporation Motorola Solutions, Inc. QUALCOMM Incorporated Seagate Technology * TE Connectivity Ltd. Western Digital Corporation Xerox Corporation * * Removed in July 2016 The committee set the Comparator Group in July 2015 for the base salary and equity compensation decisions it made in January 2016. For a discussion of the factors considered by the committee in setting the Comparator Group in July 2015, please see "Comparator group" on pages 19-20 of the company's 2016 proxy statement. In July 2016, the committee conducted its regular review of the Comparator Group in terms of industry, revenue and market capitalization and noted that with recent merger, divestiture and reorganization activity, certain companies had either been eliminated or were no longer appropriate. The committee determined that with few direct competitors of similar size and complexity as the company, the peer group should be broadened to incorporate industries of similar size and complexity, including companies that use sophisticated manufacturing processes. Potential additions to the Comparator Group were screened based on financial comparability to company metrics, including market capitalization to revenue ratios, operating margin and free cash flow margin. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 21 21 PROXY STATEMENT#94With the advice of its compensation consultant, the committee decided to remove four companies from the Comparator Group and to add eight. The resulting Comparator Group was used for the bonus decisions in January 2017 relating to 2016 performance. As reconstituted, 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. The table below compares the current Comparator Group to TI in terms of revenue and market capitalization. Revenue Company Intel Corporation Cisco Systems, Inc. ** Honeywell International Inc. ** Accenture PLC ** 3M Company ** Medtronic Public Limited Company QUALCOMM Corporation Thermo Fisher Scientific Inc. Emerson Electric Co. Western Digital Corporation Broadcom Limited ** TE Connectivity Ltd. Applied Materials, Inc. Corning Incorporated ** Motorola Solutions, Inc. Computer Sciences Corporation Analog Devices, Inc. Median ($ Billion) Market Cap ($ Billion) 57.9 173.4 48.9 153.3 39.3 88.5 35.3 72.5 30.1 107.1 ** 29.0 97.0 23.6 96.6 ** 18.0 56.8 14.5 36.7 14.3 19.8 13.2 70.9 12.2 24.5 10.8 34.4 9.1 23.1 5.8 13.9 5.4 8.1 3.4 22.3 14.5 56.8 Texas Instruments Incorporated 13.1 73.5 * Trailing four-quarter revenue is as reported by Thomson Reuters on January 4, 2017. Market capitalization is as of January 4, 2017, as reported by Thomson Reuters. ** Added in July 2016. Broadcom Corporation was removed after being acquired by Avago Technologies Limited; however, Avago Technologies Limited was renamed Broadcom Limited and was added to the list. 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. Base salary The committee set the 2016 rate of base salary for the named executive officers as follows: PROXY STATEMENT Officer R. K. Templeton. K. P. March B. T. Crutcher K. J. Ritchie S. A. Anderson 22 22 2016 Annual Rate Change from 2015 Annual Rate $ 1,166,000 2.0% $ 668,000 2.9% $ 825,000 3.1% $ 690,000 3.0% $ 618,000 3.0% TEXAS INSTRUMENTS 2017 PROXY STATEMENT#95** The committee set the 2016 base-salary rate for each of the named executive officers in January 2016. In keeping with its strategy, the committee set the annual base-salary rates to be below 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 2016. 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 2016, the committee awarded equity compensation to each of the named executive officers. The grants are shown in the table under "Grants of plan-based awards in 2016." The grant date fair value of the awards is reflected in that table and in the "Stock Awards" and "Option Awards" columns of the 2016 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 Year Grant Date Fair Value * Stock Options Restricted Stock Units (In Shares) (In Shares) 2016 $9,800,055 489,557 92,576 2015 $ 9,800,023 516,440 90,842 2014 $ 9,800,034 602,692 111,137 K. P. March 2016 $ 2,700,035 134,878 25,506 2015 $2,700,017 142,285 25,028 2014 $2,700,039 166,048 30,620 B. T. Crutcher 2016 $ 5,500,031 274,751 51,956 2015 $ 5,500,029 289,839 50,983 2014 $ 4,500,008 276,747 51,032 K. J. Ritchie 2016 $ 4,000,014 199,819 37,786 2015 $ 4,000,045 210,792 37,079 2014 $ 4,000,015 245,997 45,362 S. A. Anderson 2016 $ 3,800,028 189,828 35,897 2015 $ 3,800,037 200,252 35,225 2014 $ 2,700,039 $2,000,003 ** 166,048 30,620 ** 41,745 ** * See notes 1 and 2 to the summary compensation table for information on how grant date fair value was calculated. Retention grant made in June 2014, when Mr. Anderson assumed new responsibilities. In January 2016, the committee awarded equity compensation to each of the named executive officers. 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 2016) 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. 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. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 23 PROXY STATEMENT#96The exercise price of the options was the closing price of TI stock on January 29, 2016, the second trading day after the company released its annual and fourth-quarter financial results for 2015. All grants were made under the Texas Instruments 2009 Long- Term Incentive Plan, which shareholders approved in April 2009. All grants have the terms described under "Outstanding equity awards at fiscal year-end 2016." 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 2017, the committee set the 2016 bonus compensation for executive officers based on its assessment of 2016 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, 。 operating profit as a percentage of revenue, о total shareholder return, and The absolute one-year and three-year performance of TI on the above measures. In addition, the committee considered our strategic progress by reviewing how competitive we are in key markets with our core products and technologies, as well as the strength of our relationships with customers. One-year relative performance on the three measures and one-year strategic progress were the primary considerations in the committee's assessment of the company's 2016 performance. 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 Intersil Corporation Linear Technology 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. 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 2016, three companies were removed from the list after being acquired by other companies. Also, in July 2016, the committee added Skyworks Solutions, Inc. to increase the overall comparability of the group to TI. The committee made no other changes to the list of competitor companies in 2016. Assessment of 2016 performance The committee spent extensive time in December and January assessing TI's results and strategic progress for 2016. 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 an absolute basis all measures were positive and improved from the prior year, and in relative comparisons with competitors most measures were as good as or better than the median. In aggregate, the committee determined that performance in 2016 was strong and on par with the prior year, which also was strong. Therefore, the committee held bonuses for 2016 performance to the same levels they were in 2015 for named executive officers, except for one individual whose bonus increased to reflect the growth of his role and the increased impact he had on the performance of the company. Details on the committee's assessment are below. PROXY STATEMENT 24 24 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#97Revenue and margin • Annual performance ○ TI's revenue growth rate of 2.8 percent was higher in 2016 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. If the effect of acquisitions were excluded from competitor companies, we estimate TI's growth rate would be at or above the median growth rate.) O Revenues for the company's core businesses of Analog and Embedded Processing were up 2.4 percent and 8.5 percent, respectively. 。 Operating profit margin was 35.9 percent, which was above both the prior year's margin and the median comparison with competitors. Three-year performance • Compound annual revenue growth for 2014-2016 was 3.1 percent, which was below the median competitor comparison. • Average operating profit for 2014-2016 was 33.0 percent, which was above the median competitor comparison. Total shareholder return (TSR) • TSR was 36.7 percent, better than the median TSR as compared with competitor companies. · • The company again generated strong cash, with free cash flow at 30.5 percent of revenue.² Approximately 93 percent of free cash flow was returned to shareholders in 2016 through share repurchases and dividends. Share repurchases of $2.1 billion reduced outstanding shares by 1.5 percent (net of stock issuances during the year). The quarterly dividend rate increased 31.6 percent (the 15th increase in the last 13 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 $3.5 billion. The three-year compound annual growth rate for TSR was 21.6 percent, which was above the median competitor comparison. Strategic progress • The company's strategic focus on Analog and Embedded Processing semiconductors continues to provide the foundation for strong results in the near and long terms. The products in TI's portfolio number in the tens of thousands and offer strong differentiation and longevity, with more products added each year. In 2016, • • • 86 percent of TI's revenue came from Analog and Embedded Processing semiconductors. 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 2016, 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 2016. 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) Performance summary 1-Year 3-Year 2.8% 35.9% 3.1% CAGR 33.0% average 30.5% 29.4% average 92.5% 104.9% average 31.6% 66.7% 36.7% 21.6% CAGR CAGR (compound annual growth rate) is calculated using the formula (Ending Value/Beginning Value)1/number of years minus 1. 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. TEXAS INSTRUMENTS 2017 PROXY STATEMENT 25 PROXY STATEMENT#98One-year TSR % = (adjusted closing price of the company's stock at year-end 2016, divided by 2015 year-end adjusted closing price) minus 1. The adjusted closing price is as shown under Historical Prices for the company's stock on Yahoo Finance and reflects stock splits and reinvestment of dividends. Three-year TSR CAGR % = (adjusted closing price of the company's stock at year-end 2016, divided by 2013 year-end adjusted closing price) 1/3 minus 1. Adjusted closing price is as described above. 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 is the chief financial officer. The committee noted the financial management of the company. Mr. Crutcher is responsible for all of the company's product lines and sales activities. The committee noted the financial performance and strategic position of the product lines and activities for which he is responsible. Mr. Anderson is responsible for the company's analog semiconductor product lines. The committee noted the financial performance and strategic position of the product lines 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. The bonuses awarded for 2016 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 under "Consideration of tax and accounting treatment of compensation" and footnote 3 to the 2016 summary compensation table. Results of the compensation decisions Results of the compensation decisions made by the committee relating to the named executive officers for 2016 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. Equity Compensation (Grant Date Fair Value) $ 9,800,055 $9,800,023 $ 9,800,034 Total $ 14,648,872 $ 14,596,900 $ 14,528,975 $ 4,611,318 $ 4,574,775 $ 4,535,923 Year Salary (Annual Rate) Profit Sharing 2016 $ 1,166,000 2015 $ 1,143,000 $ 232,817 $ 203,877 2014 $ 1,110,000 $ 168,941 Bonus $ 3,450,000 $ 3,450,000 $ 3,450,000 K. P. March 2016 $ 668,000 $ 133,283 2015 $ 649,000 $ 115,758 2014 $630,000 $ 95,884 $ 1,110,000 $ 1,110,000 $ 1,110,000 $ 2,700,035 $ 2,700,017 $2,700,039 B. T. Crutcher 2016 $ 825,000 $164,583 2015 $ 800,000 2014 $ 775,000* $ 142,668 $ 112,860 $ 2,000,000 $ 1,750,000 $1,510,000 $ 5,500,031 $ 8,489,614 $ 5,500,029 $ 8,192,697 $ 4,500,008 $ 6,897,868 K. J. Ritchie 2016 $ 690,000 2015 $ 670,000 2014 $ 650,000 $ 137,667 $ 1,265,000 $ 4,000,014 $ 6,092,681 $ 119,498 $ 98,872 $ 1,265,000 $ 1,265,000 $ 4,000,045 $ 4,000,015 $ 6,054,543 $ 6,013,887 S. A. Anderson 2016 $ 618,000 2015 $ 600,000 2014 $ 550,000 * $123,300 $106,535 $ 77,635 $ 1,000,000 $ 1,000,000 $ 925,000 $ 3,800,028 $ 3,800,037 $ 5,541,328 $ 5,506,572 $ 4,700,042 $ 6,252,677 PROXY STATEMENT * Annual rate effective July 2014 26 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#99This table shows the annual rate of base salary as set by the committee. 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 1 and 2 to the summary compensation table for information about how grant date fair value was calculated. For Mr. Crutcher, the "Total" for 2016 was higher than for 2015 primarily due to the higher bonus in 2016, reflecting his growth in his role as Executive Vice President and the increased impact he had on the performance of the company. For the other officers, including Mr. Templeton, the "Total" for 2016 increased slightly from 2015 because of increases in base salary, as well as increased profit sharing, reflecting the increased profits of the company. Both the bonus for 2016 and the value of 2016 equity compensation granted to each of these other officers were held flat. The compensation decisions shown above resulted in the following 2016 compensation mix for the named executive officers: 2% 23% CEO 8% 22% 2% Other NEOS* 11% Equity dilution Base Salary 67% Equity Compensation 65% Profit Sharing Bonus * Average data for the named executive officers other than Mr. Templeton 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 2016 resulted in 1.2 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) 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. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 27 27 PROXY STATEMENT#100Recoupment 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. Most recent stockholder advisory vote on executive compensation In April 2016, 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 2016. 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. Anderson, who joined the company in 1999, 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 "2016 pension benefits." Employees accruing benefits in the qualified pension plan, including the named executive officers other than Mr. Templeton, Mr. Crutcher and Mr. Anderson, 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. Anderson 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. March 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. Anderson 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. PROXY STATEMENT 28 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#101Deferred 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 2016 because no "above market" rates were earned on deferred amounts in that year. 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 the CEO to use company aircraft for personal air travel. Please see footnote 5 of the summary compensation table for 2016 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 2016 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. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 29 PROXY STATEMENT#102Consideration of tax and accounting treatment of compensation Section 162(m) of the IRC generally denies a deduction to any publicly held corporation for compensation paid in a taxable year to the company'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) exceeds $1 million. The Compensation Committee considers the impact of this deductibility limit on the compensation that it intends to award. The committee exercises its discretion to award compensation that does not meet the requirements of Section 162(m) when applying the limits of Section 162(m) would frustrate or be inconsistent with our compensation policies and/or when the value of the foregone deduction would not be material. The committee has exercised this discretion when awarding restricted stock units that vest over time, without performance conditions to vesting. The committee believes it is in the best interest of the company and our shareholders that restricted stock unit awards provide for the retention of our executive officers in all market conditions. The Texas Instruments Executive Officer Performance Plan is intended to ensure that performance bonuses under the plan are fully tax deductible under Section 162(m). The plan, which shareholders approved in 2002, is further described following the table under "Grants of plan-based awards in 2016." The committee's general policy is to award bonuses within the plan, although the committee reserves the discretion to pay a bonus outside the plan if it determines that it is in the best interest of the company and our shareholders to do so. The committee set the bonuses of the named executive officers for 2016 performance at the levels described under "Analysis of compensation determinations for 2016 - Bonus." The bonuses were awarded within the plan. 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 2016 is discussed under "Analysis of compensation determination for 2016 Equity compensation." 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 2016 and the company's proxy statement for the 2017 annual meeting of stockholders. PROXY STATEMENT Robert E. Sanchez, Chair Daniel A. Carp Pamela H. Patsley Christine Todd Whitman 30 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#1032016 summary compensation table The table below shows the compensation of the company's CEO, CFO and each of the other three most highly compensated individuals who were executive officers during 2016 (collectively called the "named executive officers") for services in all capacities to the company in 2016. Name and Principal Position Richard K. Templeton Chairman, President & Chief Executive Officer Kevin P. March Year Salary ($) Change in Pension Value Stock Awards ($) (1) Option Awards ($) (2) and Non-Equity Nonqualified Incentive Plan Deferred Compensation Compensation Compensation ($) (3) Earnings ($) (4) ($) (5) All Other Total ($) 2016 $ 1,164,083 $ 4,900,048 $ 4,900,007 $ 3,682,817 $ 107,604 $325,510 $ 15,080,069 2015 $1,140,250 $ 4,900,017 $ 4,900,006 $3,653,877 $ 13,950 $317,702 $14,925,802 2014 $ 1,107,083 $ 4,900,030 $ 4,900,004 $ 3,618,941 $ 199,552 $318,084 $ 15,043,694 2016 $ 2015 $ 2014 $ Senior Vice President & Chief Financial Officer 666,417 $ 1,350,033 $1,350,002 $1,243,283 $1,079,121 $ 5,300 $ 5,694,156 647,417 $ 1,350,010 $ 1,350,007 $1,225,758 $ 872,191 $ 23,837 $ 5,469,220 628,333 $ 1,350,036 $ 1,350,003 $ 1,205,884 $1,621,825 $ 20,509 $ 6,176,590 Brian T. Crutcher 2016 $ Chief Operating Officer & Executive Vice President 2015 $ 2014 $ 822,917 $2,750,031 $2,750,000 $2,164,583 $ 577 $155,079 $ 8,643,187 797,917 $2,750,023 $2,750,006 $ 1,892,668 $ $ 125,744 $ 8,316,358 739,583 $2,250,001 $2,250,007 $ 1,622,860 $ 1,112 $110,688 $ 6,974,251 Kevin J. Ritchie 2016 $ Senior Vice President 2015 $ 2014 $ 688,333 $2,000,013 $ 2,000,001 $ 1,402,667 $1,468,531 $ 5,300 $ 7,564,845 668,333 $2,000,041 $ 2,000,004 $ 1,384,498 $ 1,370,848 5,300 $ 7,429,024 647,917 $2,000,011 $ 2,000,004 $ 1,363,872 $ 2,146,473 $ $ 5,200 $ 8,163,477 Stephen A. Anderson 2016 $ 616,500 $ 1,900,028 $ 1,900,000 $1,123,300 $ $ 93,763 $ 5,633,591 Senior Vice President 2015 $ 595,833 $1,900,037 $1,900,000 $1,106,535 $ 2014 $ 508,750 $ 3,350,039 $ 1,350,003 $ 1,002,635 $ $ 86,566 $ 5,588,971 - $ 74,202 $ 6,285,629 (1) 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 2016 appears in Note 4 to the financial statements in TI's annual report on Form 10-K for the year ended December 31, 2016. For a description of the grant terms, please see the discussion following the Outstanding equity awards at fiscal year-end 2016 table. The discussion of the assumptions used for purposes of the valuation of the awards granted in 2015 and 2014 appears in Note 4 to the financial statements in TI's annual report on Form 10-K for the year ended December 31, 2015, and Note 5 to the financial statements in TI's annual report on Form 10-K for the year ended December 31, 2014, respectively. (2) 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 2016 appears in Note 4 to the financial statements in TI's annual report on Form 10-K for the year ended December 31, 2016. For a description of the grant terms, please see the discussion following the Outstanding equity awards at fiscal year-end 2016 table. The discussion of the assumptions used for purposes of the valuation of the awards granted in 2015 and 2014 appears in Note 4 to the financial statements in TI's annual report on Form 10-K for the year ended December 31, 2015, and Note 5 to the financial statements in TI's annual report on Form 10-K for the year ended December 31, 2014, respectively. (3) Consists of performance bonuses paid under the Texas Instruments Executive Officer Performance Plan and profit sharing for 2016. 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 2016. Please see "Analysis of compensation determinations for 2016 - Results of the compensation decisions" for the amounts of bonus and profit sharing paid to each of the named executive officers for 2016. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 31 PROXY STATEMENT#104(4) 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, 2015, through December 31, 2016. This "change in the actuarial value" is the difference between the 2015 and 2016 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. Anderson does not participate in any of the company's defined benefit pension plans. (5) 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 K. P. March B. T. Crutcher K. J. Ritchie S. A. Anderson 401(k) Contribution Defined Contribution Retirement Unused Vacation Plan (a) Time (b) $ 10,600 $265,320 $ 2,308 $ 5,300 $ N/A $ 10,600 $ 133,761 $ 5,300 N/A $ $ $ 10,600 $ 83,163 (a) Consists of (i) contributions under the company's enhanced defined contribution retirement plan of $5,300 and (ii) an additional amount of $260,020 for Mr. Templeton, $128,461 for Mr. Crutcher, and $77,863 for Mr. Anderson 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 2016 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: $47,282 for Mr. Templeton, consisting of financial counseling, an executive physical and personal use of company aircraft ($32,026), and $10,718 for Mr. Crutcher, consisting of financial counseling and an executive physical. Financial counseling and an executive physical were made available to the other named executive officers, but the amounts attributable to those officers were below the disclosure thresholds. Grants of plan-based awards in 2016 The following table shows the grants of plan-based awards to the named executive officers in 2016. PROXY STATEMENT Name Grant Date Date of Committee Action All Other Stock Awards: Number of Shares of Stock or Units All Other Option Exercise Awards: Number of or Base Price of Securities (#) (2) Underlying Options (#) (3) Option Awards ($/Sh) Grant Date Fair Value of Stock (4) and Option Awards (5) R. K. Templeton . 1/29/16 (1) 1/21/16 489,557 $ 52.93 $ 4,900,007 1/29/16 (1) 1/21/16 92,576 $ 4,900,048 K. P. March 1/29/16 (1) 1/21/16 134,878 $ 52.93 $ 1,350,002 1/29/16 (1) 1/21/16 25,506 $1,350,033 B. T. Crutcher 1/29/16 (1) 1/29/16 (1) 1/21/16 1/21/16 274,751 $ 52.93 $2,750,000 51,956 $2,750,031 K. J. Ritchie 1/29/16 (1) 1/21/16 199,819 $ 52.93 $2,000,001 1/29/16 (1) 1/21/16 37,786 $ 2,000,013 S. A. Anderson 1/29/16 (1) 1/21/16 189,828 $ 52.93 $1,900,000 1/29/16 (1) 1/21/16 35,897 $1,900,028 (1) 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 2015. The company released these results on January 27, 2016. 32 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#105Number of Securities Underlying Unexercised Options (#) Name Unexercisable R. K. Templeton 489,557 (2) 129,110 387,330 (3) 301,346 301,346 (4) 393,750 131,250 (5) (2) The stock awards granted to the named executive officers in 2016 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, please see the discussion following the Outstanding equity awards at fiscal year-end 2016 table. (3) The options were granted under the company's 2009 Long-Term Incentive Plan. For information on the terms and conditions of these options, please see the discussion following the Outstanding equity awards at fiscal year-end 2016 table. (4) The exercise price of the options is the closing price of TI common stock on January 29, 2016. (5) Shown is the aggregate grant date fair value computed in accordance with ASC 718 for stock and option awards in 2016. 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, 2016. 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, please see the Compensation Discussion and Analysis. Outstanding equity awards at fiscal year-end 2016 The following table shows the outstanding equity awards for each of the named executive officers as of December 31, 2016. Number of Securities Underlying Unexercised Options (#) Exercisable Stock Awards Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($) (1) $ 6,755,271 $ 6,628,741 8,109,667 $ 12,769,750 Option Awards Option Exercise Price ($) $ 52.93 $ 53.94 $ 44.09 $ 32.80 475,000 $ 32.36 450,000 $ 34.63 Option Expiration Date 1/29/2026 1/28/2025 1/23/2024 1/25/2023 1/26/2022 1/27/2021 92,576 (6) 90,842 (7) 111,137 (8) 175,000 (9) 540,000 $ 23.05 1/28/2020 K. P. March 134,878 (2) $ 52.93 35,571 106,714 (3) $ 53.94 83,024 83,024 (4) $ 44.09 112,500 37,500 (5) $ 32.80 150,000 $ 32.36 1/29/2026 1/28/2025 1/23/2024 1/25/2023 1/26/2022 25,506 (6) 25,028 (7) $ 1,861,173 $ 1,826,293 30,620 (8) $ 2,234,341 50,000 (9) $ 3,648,500 B. T. Crutcher 274,751 (2) $ 52.93 72,459 217,380 (3) $ 53.94 1/29/2026 1/28/2025 51,956 (6) $ 3,791,229 50,983 (7) $ 3,720,230 138,374 (4) $ 44.09 1/23/2024 51,032 (8) $ 3,723,805 56,250 (5) $ 32.80 1/25/2023 75,000 (9) $ 5,472,750 K. J. Ritchie 199,819 (2) $ 52.93 1/29/2026 37,786 (6) $ 2,757,244 52,698 158,094 (3) $ 53.94 1/28/2025 37,079 (7) S. A. Anderson 50,063 83,024 122,999 (4) 50,000 (5) 189,828 (2) 150,189 (3) 83,024 (4) 34,375 (5) $ 44.09 1/23/2024 45,362 (8) $ 2,705,655 $ 3,310,065 $ 32.80 $ 52.93 1/29/2026 $53.94 1/28/2025 $ 44.09 1/23/2024 $ 32.80 1/25/2023 1/25/2023 66,667 (9) $ 4,864,691 35,897 (6) 35,225 (7) $ 2,619,404 $ 2,570,368 30,620 (8) $ 2,234,341 45,834 (9) $ 3,344,507 41,745 (10) $ 3,046,133 (1) Calculated by multiplying the number of RSUS by the closing price of TI common stock on December 30, 2016 ($72.97). (2) One-quarter of the shares became exercisable on January 29, 2017, and one-third of the remaining shares become exercisable on each of January 29, 2018, January 29, 2019, and January 29, 2020. TEXAS INSTRUMENTS 2017 PROXY STATEMENT 33 PROXY STATEMENT#106(3) One-third of the shares became exercisable on January 28, 2017, and one-half of the remaining shares become exercisable on each of January 28, 2018, and January 28, 2019. (4) One-half of the shares became exercisable on January 23, 2017, and the remaining one-half become exercisable on January 23, 2018. (5) Became fully exercisable on January 25, 2017. (6) Vesting date is January 31, 2020. (7) Vesting date is January 31, 2019. (8) Vesting date is January 31, 2018. (9) Vested on January 31, 2017. (10) Vesting date is July 31, 2018. 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 ten 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, 2016. 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 the end of the term; vesting does not continue after employment termination Employment Termination for Cause Other Circumstances of Employment Termination Option cancels 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 "2016 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"). PROXY STATEMENT 34 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#107The "Stock Awards" column in the table of outstanding equity awards at fiscal year-end 2016 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, 2016. 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 For grants made after 2012: Grant stays in effect and pays out shares 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 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 2016 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 2016 non-qualified deferred compensation table. 2016 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 2016 and the value of any RSUs that vested in 2016. 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 K. P. March B. T. Crutcher K. J. Ritchie S. A. Anderson Option Awards Number of Shares Acquired on Exercise (#) Value Realized on Exercise ($) Stock Awards Number of Shares Acquired on Vesting (#) Value Realized on Vesting ($) 934,461 $ 36,091,027 245,000 $ 10,069,525 158,334 50,000 $ 8,095,617 $ 2,556,500 253,998 $ 6,512,588 162,500 $ 10,218,625 216,748 $ 4,732,924 240,625 $ 6,694,176 58,334 45,834 $ 2,982,617 $ 2,343,492 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 35 PROXY STATEMENT#1082016 pension benefits The following table shows the present value as of December 31, 2016, 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, 2016. Payments Present Value During Number of Years Credited Name (1) R. K. Templeton (2) Plan Name Service (#) of Accumulated Benefit ($) (6) Last Fiscal Year ($) TI Employees Pension Plan 16 (3) $ 724,431 TI Employees Non-Qualified Pension Plan TI Employees Non-Qualified Pension Plan II 16 (3) $ 299,404 16 (5) $ 234,474 K. P. March TI Employees Pension Plan 31 (3) $ 1,086,561 TI Employees Non-Qualified Pension Plan 19 (4) $ 185,528 TI Employees Non-Qualified Pension Plan II 31 (5) $ 6,489,098 B. T. Crutcher (2) K. J. Ritchie TI Employees Pension Plan 0.9 (3) $ 4,636 TI Employees Pension Plan 37 (3) $1,558,907 TI Employees Non-Qualified Pension Plan TI Employees Non-Qualified Pension Plan II 25 (4) $ 554,872 37 (5) $ 8,723,722 (1) Mr. Anderson 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. (2) 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 2016 summary compensation table. (3) 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. (4) 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. (5) 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. (6) 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, 2016, 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, 2016, is determined using either (i) the Pension Benefit Guaranty Corporation (PBGC) interest assumption of 1.25 percent or (ii) the Pension Protection Act of 2006 (PPA) corporate bond yield interest assumption of 4.29 percent for the TI Employees Pension Plan and 4.33 percent for the TI Employees Non-Qualified Pension Plans, whichever rate produces the higher lump-sum amount. A discount rate assumption of 4.29 percent for the TI Employees Pension Plan and 4.33 percent for the non-qualified pension plans was used to determine the present value of each lump sum. PROXY STATEMENT 36 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#109TI Employees Pension Plan The TI Employees Pension Plan is a qualified defined benefit pension plan. Please 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, 2016, Mr. Templeton, Mr. March 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 7012 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. 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. Please 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. Please 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 (please 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. TEXAS INSTRUMENTS 2017 PROXY STATEMENT 37 PROXY STATEMENT#110PROXY STATEMENT 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 (please see the discussion following the Outstanding equity awards at fiscal year-end 2016 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, please 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 Messers. Templeton, March and Ritchie were eligible for early retirement in 2016, their beneficiaries would be eligible for benefits under the survivor benefit plan if they were to die. 2016 non-qualified deferred compensation The following table shows contributions to each named executive officer's deferred compensation account in 2016 and the aggregate amount of his deferred compensation as of December 31, 2016. Name R. K. Templeton K. P. March B. T. Crutcher K. J. Ritchie S. A. Anderson Executive Contributions in Last FY ($) (1) $172,923 $113,229 $ 200,000 Registrant Contributions in Last FY ($) (2) $260,020 Aggregate Balance at Last FYE ($) (5) $ 10,185,016 (6) Aggregate Earnings in Last FY ($) Aggregate Withdrawals/ Distributions ($) $ 2,465,527 (3) $ 312,071 (4) $128,461 $ 121,515 $ 1,442,751 $ 77,863 $ 65,446 $ 116,322 $ 901,660 (1) Amount shown for Mr. Templeton includes a portion of his salary and bonus paid in 2016; for Mr. Crutcher includes a portion of his salary and bonus paid in 2016; and for Mr. Anderson includes a portion of his bonus paid in 2016. (2) Company matching contributions pursuant to the defined contribution plan. These amounts are included in the All Other Compensation column of the 2016 summary compensation table. (3) Consists of: (a) $196,800 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 $2,179,200 increase in the value of the RSU award (calculated by subtracting the value of the award at year-end 2015 from the value of the award at year-end 2016 (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 $89,527 gain in Mr. Templeton's deferred compensation account in 2016. Dividend equivalents are paid at the same rate as dividends on TI common stock. (4) Consists of dividend equivalents paid on the RSU award discussed in note 3 and a scheduled distribution of a portion of Mr. Templeton's deferred compensation balance. 88 38 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#111(5) Includes amounts reported in the summary compensation table in the current or prior-year proxy statements as follows: Mr. Templeton, $1,428,616; Mr. Crutcher, $1,442,751; and Mr. Anderson $395,554. The remainder of the amount for Mr. Anderson relates to amounts earned in years for which he was not a named executive officer. (6) Of this amount, $8,756,400 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. Please 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 2016, 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, 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. 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 2016, please see "Analysis of compensation determinations for 2016 - Total compensation" and "Compensation following employment termination or change in control." TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 39 PROXY STATEMENT#112Termination 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 "2016 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 "2016 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 "2016 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. 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 2016 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. 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 the earlier of age 55 with at least 20 years of employment or age 60 with at least five years of service (bridge to retirement). The bridge to retirement will be credited to years of service 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, 2016, would have accelerated payment of the balance under that plan. Please see "2016 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. PROXY STATEMENT 40 TEXAS INSTRUMENTS 2017 PROXY STATEMENT#113Upon 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. Please see the discussion following the Outstanding equity awards at fiscal year-end 2016 table for further information concerning change in control provisions relating to stock options and RSUs. The table below shows the potential payments upon termination or change in control for each of the named executive officers. Form of Compensation Disability Death Involuntary Termination for Cause Resignation; Involuntary Termination (not for Cause) Retirement Change in Control R.K. Templeton (1) Qualified Defined Benefit Pension Plan $ 969,593 (2) $ 511,601 (3) $ 1,009,367 (4) $ 1,009,367 (4) $ 1,009,367 (4) Non-Qual. Defined Benefit Pension Plan $ 609,677 (5) $ 209,693 (3) $ 413,575 (4) $ 413,575 (4) $ 413,575 (4) $ 413,575 (4) Non-Qual. Defined Benefit Pension Plan II. $ 223,766 (5) $ 164,092 (3) $ 323,886 (4) $ 323,886 (4) $ 323,886 (4) Survivor Benefit Plan $ 861,442 (6) Deferred Compensation RSUS Stock Options R.K. Templeton Total K.P. March (1) $ 1,428,616 (7) $ 43,019,828 (8) $ 121,633,120 (11) $166,455,984 $ 43,019,828 (8) $121,633,120 (11) $167,828,392 $ 8,756,400 (9) $ 10,503,228 $ 43,019,828 (10) $121,633,120 (11) $166,399,776 $ 43,019,828 (10) $121,633,120 (11) $ 166,399,776 $ 8,756,400 (9) $9,169,975 Qualified Defined Benefit Pension Plan $ 1,717,833 (2) $ 780,816 (3) $ 1,489,136 (4) $ 1,489,136 (4) $ 1,489,136 (4) Non-Qual. Defined Benefit Pension Plan $ 349,792 (5) $ 131,344 (3) $ 248,669 (4) $ 248,669 (4) $ 248,669 (4) $ 248,669 (4) Non-Qual. Defined Benefit Pension Plan II $ 8,788,904 (5) $ 4,559,507 (3) $ 8,697,508 (4) $ 8,697,508 (4) $ 8,697,508 (4) Survivor Benefit Plan $ 4,963,646 (6) Deferred Compensation RSUS Stock Options $ 9,570,307 (8) $ 9,570,307 (8) $ 9,570,307 (10) $ 9,570,307 (10) $ 22,323,105 (11) $ 22,323,105 (11) $ 22,323,105 (11) $ 22,323,105 (11) K.P. March Total $ 42,749,941 $ 42,328,725 $ 10,435,313 $ 42,328,725 $ 42,328,725 $ 248,669 B.T. Crutcher Qualified Defined Benefit Pension Plan $ 11,029 (2) $ 2,192 (3) $ 4,352 (4) $ 4,352 (4) Non-Qual. Defined Benefit Pension Plan Non-Qual. Defined Benefit Pension Plan II Survivor Benefit Plan Deferred Compensation RSUs Stock Options $ 1,442,751 (7) $ 16,708,014 (8) $ 16,708,014 (8) $ 17,277,450 (11) B.T. Crutcher Total $ 33,996,493 $ 17,277,450 (11) $ 35,430,407 $ $ 4,352 $ 1,378,895 (12) 1,383,247 ││ │ │││ K.J. Ritchie (1) Qualified Defined Benefit Pension Plan $ 2,131,015 (2) $ 1,030,370 (3) $ 2,025,110 (4) $ 2,025,110 (4) $ 2,025,110 (4) Non-Qual. Defined Benefit Pension Plan $ 926,549 (5) $ 362,423 (3) $ 709,436 (4) $ 709,436 (4) $ 709,436 (4) $ 709,436 (4) Non-Qual. Defined Benefit Pension Plan II. $ 11,085,929 (5) $ Survivor Benefit Plan Deferred Compensation RSUs Stock Options. K.J. Ritchie Total S.A. Anderson (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. S.A. Anderson Total $ $ 13,814,753 (8) 901,660 (7) $ 13,814,753 (8) $ 13,791,259 (11) $ 13,791,259 (11) $ 27,606,012 $ 28,507,672 $ 5,677,964 (3) 6,826,246 (6) $ 11,162,457 (4) $ 11,162,457 (4) $ 11,162,457 (4) $ 13,637,655 (8) $ 13,576,456 (11) $ 41,357,604 $ 13,637,655 (8) $ 13,576,456 (11) $ 41,111,114 $ 13,897,003 $ 13,637,655 (10) $ 13,637,655 (10) $ 13,576,456 (11) $ 13,576,456 (11) $ 41,111,114 $ 41,111,114 $ 709,436 $ 13,814,753 (10) $ 13,814,753 (10) $ 13,791,259 (11) $ 13,791,259 (11) $ 27,606,012 $ 27,606,012 | | | | | | TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 41 PROXY STATEMENT#114(1) Messrs. Templeton, March 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, 2016. Mr. Anderson was retirement eligible under the terms of his equity compensation awards as of December 31, 2016. (2) 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, 2016, 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 2016 and are described in note 6 to the 2016 pension benefits table. (3) 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. (4) Lump-sum value of the accrued benefit as of December 31, 2016, calculated as required by the terms of the plans assuming the earliest possible payment date. (5) 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. (6) Calculated as required by the terms of the plan assuming the earliest possible payment date. (7) Balance as of December 31, 2016, under the non-qualified deferred compensation plan. For all other termination events, balances are distributed in accordance with the participant's distribution election. (8) Calculated by multiplying the number of outstanding RSUs by the closing price of TI common stock as of December 30, 2016 ($72.97). In the event of termination due to disability or death, all outstanding awards will continue to vest according to their terms. Please see the first table under "Outstanding equity awards at fiscal year-end 2016" for the number of unvested RSUs as of December 31, 2016, 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 30, 2016 ($72.97). (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 30, 2016 ($72.97). 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 30, 2016 ($72.97), multiplied by the number of shares under such options as of December 31, 2016. (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 30, 2016 ($72.97), multiplied by the number of shares under such options as of December 31, 2016. 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. 42 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT PROXY STATEMENT#115The 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 2016 for filing with the SEC. Ralph W. Babb, Jr., Chair Mark A. Blinn Janet F. Clark Jean M. Hobby 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 independent registered public accounting firm for 2017. 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 to be 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 2016 2015 $ 9,664,000 $ 9,096,000 $ 795,000 $ 789,000 $ 3,238,000 $ $ 2,827,000 28,000 $ 29,000 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. 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. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 43 PROXY STATEMENT#116Annually 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. The Audit Committee or its Chair pre-approved all services provided by Ernst & Young during 2016. 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 2017. PROXY STATEMENT 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 21, 2017, may vote at the meeting or any adjournment of the meeting. As of February 21, 2017, 999,639,733 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 The Vanguard Group 100 Vanguard Blvd. Malvern, PA 19355 Capital Research Global Investors (2) 333 South Hope Street Los Angeles, CA 90071 BlackRock, Inc. 55 East 52nd Street New York, NY 10055 Shares Owned at December 31, 2016 Percent of Class 76,095,137 (1) 7.64% 64,081,361 (3) 6.43% 62,941,800 (4) 6.32% Capital World Investors (2) 333 South Hope Street Los Angeles, CA 90071 53,007,241 (5) 5.32% (1) According to its Form 13G filing, The Vanguard Group has sole voting power for 1,566,804, shared voting power for 188,609, sole dispositive power for 74,355,091 and shared dispositive power for 1,740,046 of these shares. (2) A division of Capital Research and Management Company (CRMC). 44 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#117(3) According to its Form 13G filing, Capital Research Global Investors is deemed to be the beneficial owner of these shares as a result of CRMC acting as an investment advisor to various investment companies. Capital Research Global Investors has sole dispositive power and sole voting power for these shares. (4) According to its Form 13G filing, BlackRock, Inc. has sole voting power for 51,697,857 shares, shared voting power for 15,738 shares, sole dispositive power for 62,926,062 shares and shared dispositive power for 15,738 shares. (5) According to its Form 13G filing, Capital World Investors is deemed to be the beneficial owner of these shares as a result of CRMC acting as an investment advisor to various investment companies. Capital World Investors has sole voting power and sole dispositive power for these shares. 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 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 (1) R. W. Babb, Jr. M. A. Blinn D. A. Carp J. F. Clark C. S. Cox J. M. Hobby R. Kirk P. H. Patsley R. E. Sanchez W. R. Sanders R. K. Templeton C. T. Whitman Management (2) K. P. March B. T. Crutcher K. J. Ritchie S. A. Anderson All executive officers and directors as a group (3) * less than 1 percent. Shares Owned at December 31, 2016 Percent of Class 92,179 32,296 149,634 * * 8,552 * * 106,700 2,000 25,000 145,008 64,268 91,150 3,788,950 124,121 863,074 * 648,381 * 455,075 * 495,815 * 9,619,542 (1) Mr. Bluedorn was elected to the board effective March 1, 2017. On that date, he was granted 2,000 restricted stock units pursuant to the terms of the 2009 Director Compensation Plan. TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 45 45 PROXY STATEMENT#118PROXY STATEMENT Included in the shares owned shown above are: Directors R. W. Babb, Jr. M. A. Blinn D. A. Carp J. F. Clark. C. S. Cox J. M. Hobby R. Kirk P. H. Patsley R. E. Sanchez W. R. Sanders R. K. Templeton C. T. Whitman Shares Obtainable within 60 Days Shares Credited to 401(k) Account RSUS (in Shares) (a) Shares Credited to Deferred Compensation Accounts (b) 53,897 17,035 20,247 16,990 8,010 7,296 74,897 33,699 41,038 2,497 3,889 2,166 74,897 27,035 1,629 2,000 16,990 8,010 74,897 11,058 43,076 43,895 9,058 6,225 53,897 18,658 1,618 2,822,716 13,154 589,555 74,897 24,535 9,697 (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. (2) Included in the shares owned shown above are: Executive Officer K. P. March B. T. Crutcher K. J. Ritchie S. A. Anderson (3) Includes: (a) 6,685,805 shares obtainable within 60 days; Shares Obtainable Shares Credited to 401(k) RSUs within 60 Days Account (in Shares) 529,485 2,120 131,154 339,131 228,971 266,937 186,894 306,494 189,321 (b) 34,572 shares credited to 401(k) accounts; (c) 2,024,572 shares subject to RSU awards; for the terms of these RSUs, please see pages 15 and 35; and (d) 132,991 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. TI or any TI subsidiary is or will be a participant; 2. The amount involved exceeds or is expected to exceed $120,000 in a fiscal year; and 3. Any of the following (a "related person") has or will have a direct or indirect interest: 46 (a) A TI director or executive officer, or an Immediate Family Member of a director or executive officer; TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#119(b) 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 Tl 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. 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 G&SR 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: G&SR Committee G&SR Committee Chief Compliance Officer in consultation with the Chair of the G&SR Committee G&SR Committee No member of the G&SR 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; TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 47 PROXY STATEMENT#120• . • • Interests of a related person arising only from: о the direct or indirect ownership in another party to the transaction and that ownership, when combined with the о о ownership of all the other individuals specified in 3(a)-(c) above, is less than 5 percent of the outstanding equity of such party; 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; their position as a director of another corporation or organization; 。 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; 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 2016, 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 2016, 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 e-mail, 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 2018 The table below shows the deadlines for stockholders to submit proposals or director nominations for next year's annual meeting. 48 When proposal must be received by Texas Instruments Proposals for Inclusion in 2018 Proxy Materials On or before November 6, 2017 TEXAS INSTRUMENTS Director Nominees for Inclusion in 2018 Proxy Materials (Proxy Access) No earlier than October 7, 2017, and no later than November 6, 2017 • 2017 PROXY STATEMENT Other Proposals/Nominees to be Presented at 2018 Annual Meeting (and Not for Inclusion in our Proxy Materials) No earlier than December 21, 2017, and no later than January 20, 2018 PROXY STATEMENT#121Proposals 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 G&SR 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. Please see "Communications with the board" for information on contacting the board. 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 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 17, 2017, 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 17, 2017, 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. The company believes that all reports during 2016 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. Tl 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. TEXAS INSTRUMENTS 2017 PROXY STATEMENT 49 PROXY STATEMENT#122Electronic 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, please 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, please 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, please call TI Investor Relations for more information. Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on April 20, 2017. This 2017 proxy statement and the company's 2016 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, 2016, 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, 2016, 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. PROXY STATEMENT March 6, 2017 Dallas, Texas Sincerely, Cynthia Hoff Trochu Senior Vice President, Secretary and General Counsel 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, 2016. 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. 50 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#123Directions 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 Please 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 please see the discussion under "Attendance requirements." TEXAS INSTRUMENTS • 2017 PROXY STATEMENT 51 PROXY STATEMENT#124Appendix 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 For Years Ended December 31, Free Cash Flow as a Percentage of Revenue (Millions of dollars) For Years Ended December 31, 2016 2015 2014 Total 2016 2015 2014 Total Revenue $ 13,370 $13,000 $ 13,045 $ 39,415 Cash flow from operations (GAAP) Capital expenditures. $ 4,614 $ 4,397 (531) $ 4,054 $ 13,065 34.5% 33.8% 31.1% 33.1% (551) (385) Free cash flow (non-GAAP) $ 4,083 $ 3,846 $ 3,669 (1,467) $ 11,598 30.5% 29.6% 28.1% 29.4% PROXY STATEMENT A-1 TEXAS INSTRUMENTS • 2017 PROXY STATEMENT#125OTHER 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, 2011, and ending December 31, 2016. 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. $350 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among Texas Instruments Incorporated, the S&P 500 Index and the S&P Information Technology Index $300 $250 $200 $150- $100 $50 Texas Instruments Incorporated - A- S&P 500 --- S&P Information Technology $0 12/11 12/12 12/13 12/14 12/15 12/16 Texas Instruments Incorporated S&P 500 S&P Information Technology 12/11 12/12 12/13 12/14 100.00 108.69 158.98 198.88 100.00 116.00 153.58 174.60 100.00 114.82 147.47 177.13 12/15 12/16 209.18 286.00 177.01 198.18 187.63 213.61 Notice regarding forward-looking statements 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 Tl 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. TEXAS INSTRUMENTS 1#126(This page intentionally left blank.) TEXAS INSTRUMENTS#127Board of directors, executive officers* Directors Richard K. Templeton Chairman of the Board, President and Chief Executive Officer, Texas Instruments Incorporated Ralph W. Babb, Jr. Chairman of the Board and Chief Executive Officer, Comerica Incorporated and Comerica Bank Mark A. Blinn President and Chief Executive Officer, Flowserve Corporation Todd M. Bluedorn Chairman of the Board and Chief Executive Officer, Lennox International Inc. Daniel A. Carp Retired Chairman of the Board and Chief Executive Officer, Eastman Kodak Company Janet F. Clark Retired Executive Vice President and Chief Financial Officer, Marathon Oil Corporation Carrie S. Cox Chairman of the Board and Chief Executive Officer, Humacyte, Inc. Jean M. Hobby Retired Partner PricewaterhouseCoopers LLP Ronald Kirk Senior Of Counsel, Gibson, Dunn & Crutcher LLP Pamela H. Patsley Executive Chairman, MoneyGram International, Inc. Robert E. Sanchez Chairman of the Board and Chief Executive Officer, Ryder System, Inc. Wayne R. Sanders Retired Chairman of the Board and Chief Executive Officer, Kimberly-Clark Corporation Christine Todd Whitman President, The Whitman Strategy Group Executive officers Richard K. Templeton Chairman of the Board, President and Chief Executive Officer Brian T. Crutcher Executive Vice President and Chief Operating Officer Niels Anderskouv Senior Vice President Stephen A. Anderson Senior Vice President Ellen L. Barker Senior Vice President and Chief Information Officer R. Gregory Delagi Senior Vice President Haviv llan Senior Vice President Rafael R. Lizardi Senior Vice President and Chief Financial Officer Kevin P. March Senior Vice President Kevin J. Ritchie Senior Vice President Cynthia Hoff Trochu Senior Vice President, Secretary and General Counsel Julie M. Van Haren Senior Vice President Darla H. Whitaker Senior Vice President Bing Xie Senior Vice President * Effective March 1, 2017 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. TI Fellows announced in 2016: • Erich Bayer • Jerry Doorenbos • Sameer Prakash Pendharkar ⚫ Kevin Scoones • Bob Todd Stockholder and other information Stockholder records information Stockholder correspondence: Computershare P. O. Box 30170 College Station, TX 77842-3170 Toll free: 800-981-8676 Phone: 312-360-5151 Website: www.computershare.com/investor Overnight correspondence: Computershare 211 Quality Circle, Suite 210 College Station, TX 77845 For 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.#128TEXAS INSTRUMENTS Texas Instruments Incorporated P.O. Box 660199 Dallas, TX 75266-0199 Tl.com FSC www.fsc.org MIX Paper from responsible sources FSC® C132107 An equal opportunity employer 2017 Texas Instruments Incorporated TI-30005