Texas Instruments 2008 Annual Report Download - page 49

TEXAS INSTRUMENTS 2008 ANNUAL REPORT [ 47 ]
Valuation of auction-rate securities
The fair value of our auction-rate securities is estimated using a discounted cash flow (DCF) model that requires inputs that are
supported by little or no market activity and reflect significant management judgment. Assumptions used in preparing the DCF model
include estimates for the amount and timing of future interest and principal payments and the rate of return required by investors to
own these securities in the current environment. In making these assumptions, we consider relevant factors including: the formula
for each security that defines the interest rate paid to investors in the event of a failed auction; forward projections of the interest
rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering
the guarantees by the U.S. Department of Education of the underlying student loans, guarantees by other third parties, and additional
credit enhancements provided through other means; and, publicly available pricing data for recently traded student loan asset-backed
securities that are not subject to auctions. Our estimate of the rate of return required by investors to own these securities also considers
the current reduced liquidity for auction-rate securities. See Note 10 to the Financial Statements for details of fair-value measurements.
Changes in accounting standards
See Note 10 to the Financial Statements for a discussion of the impact of adopting SFAS 157, Fair Value Measurements.
See Changes in Accounting Standards in Note 1 to the Financial Statements for a discussion of new accounting and reporting
standards that have not yet been adopted.
Off-balance sheet arrangements
As of December 31, 2008, 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 14 to the Financial Statements for a discussion of our commitments and contingencies.
Quantitative and qualitative disclosures about market risk
Foreign exchange risk
The U.S. dollar is the functional currency for financial reporting. We use forward currency exchange contracts to reduce the adverse
earnings impact exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. For example, at year-end
2008, we had forward currency exchange contracts outstanding with a notional value of $600 million to hedge net balance sheet
exposures (including $187 million to sell euros, $34 million to sell British pounds and $263 million to sell Japanese yen). Similar
hedging activities existed at year-end 2007.
Because most of the aggregate non-U.S. dollar balance sheet exposure is hedged by these forward currency exchange contracts,
based on year-end 2008 balances and rates, a hypothetical 10 percent plus or minus fluctuation in non-U.S. currency exchange rates
would result in a pre-tax currency exchange gain or loss of approximately $13 million.
Interest rate risk
As of December 31, 2008 and 2007, we have no debt. Therefore, our primary exposure to changes in interest rates is limited to
the effects on the fair values of our investments in cash equivalents and short-term investments. The effect of changes in interest
rates on the fair value of our cash equivalents and short-term investments has not been material during 2008 or 2007 due to the
primarily short-term duration of our investments. A hypothetical increase or decrease of 100 basis points in the applicable interest
rates associated with these investments as of year-end 2008 would have resulted in a decrease of approximately $17 million and an
increase of approximately $15 million in the fair value of these securities, respectively (in the instance of falling rates, the hypothetical
change in value assumes that no interest rate on any individual security could drop below zero). Because the coupon rates applicable
to our auction-rate securities reset every 7, 28 or 35 days to maximum rates indexed to short-term interest rate benchmarks defined
for each security, a change in the general level of interest rates is not expected to cause a significant change in the fair value of our
long-term investments in those securities. While an increase in interest rates reduces the fair value of the investment portfolio, we will
not recognize the losses in other income (expense) net unless the individual securities are sold prior to recovery or the impairment is
determined to be other-than-temporary.
Equity risk
Long-term investments at year-end 2008 include the following:
•฀Equity฀investments฀–฀includes฀non-marketable฀(non-publicly฀traded)฀equity฀securities.
•฀฀Investments฀in฀venture฀capital฀funds฀–฀includes฀investments฀in฀limited฀partnerships฀(accounted฀for฀under฀either฀the฀equity฀or฀cost฀
methods).
•฀฀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.