Texas Instruments 2010 Annual Report Download - page 45

TEXAS INSTRUMENTS 2010 ANNUAL REPORT
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Long-term contractual obligations
Payments฀Due฀by฀Period
Contractual obligations 2011 2012/2013 2014/2015 Thereafter Total
Operating lease obligations (a) . . . . . . . . . . . . . . . . . . . . . . . $ 80 $ 115 $ 84 $ 80 $ 359
Software license obligations (b) . . . . . . . . . . . . . . . . . . . . . . 67 61 6 — 134
Purchase obligations (c) . . . . . . . . . . . . . . . . . . . . . . . . . . 221 143 10 1 375
Deferred compensation plan (d) . . . . . . . . . . . . . . . . . . . . . . 17 46 22 74 159
Total (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 385 $ 365 $ 122 $ 155 $1,027
(a) Includes minimum payments for leased facilities and equipment, as well as purchases of industrial gases under contracts accounted
for as an operating lease.
(b) Includes payments under license agreements for electronic design automation software.
(c) Includes 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 $7 million of cancellation penalties may be required to be paid, which are
not reflected in the table.
(d) Includes an estimate of payments under this plan for the liability that existed at December 31, 2010.
(e) The table excludes $103 million of uncertain tax liabilities under ASC 740 because of the difficulty in making reasonably reliable
estimates of the timing of cash settlements with the respective taxing authorities. In addition, the table excludes planned funding
contributions to our retirement plans of $117 million in 2011; funding projections beyond 2011 are not practical to estimate due to
the rules affecting tax-deductible contributions and the impact of the plans’ asset performance, interest rates and potential U.S. and
international 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 both 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.
Revenue recognition
Revenue from sales of our products, including sales to our distributors, is recognized upon shipment or delivery, depending upon the
terms of the sales order, provided that persuasive evidence of a sales arrangement exists, title and risk of loss have transferred to the
customer, the sales amount is fixed or determinable and collection of the revenue is reasonably assured. Revenue from sales of our
products that are subject to inventory consignment agreements is recognized when the customer or distributor pulls product from
consignment inventory that we store at designated locations. In 2010, about 35 percent of our revenue was generated from sales of our
products subject to inventory consignment agreements.
We reduce revenue based on estimates of future credits to be granted to customers. Credits include volume-based incentives,
other special pricing arrangements and product returns due to quality issues. We also grant discounts to some distributors for
prompt payments. Our estimates of future credits are based on historical experience, analysis of product shipments and contractual
arrangements with customers and distributors.
In 2010, about 37 percent of our revenue was generated from sales of our products to distributors. We recognize distributor revenue
net of allowances, which are management’s estimates based on analysis of historical data, current economic conditions and contractual
terms. These allowances recognize the impact of credits granted to distributors under certain programs common in the semiconductor
industry whereby distributors receive certain price adjustments to meet individual competitive opportunities, or are allowed to return
or scrap a limited amount of product in accordance with contractual terms agreed upon with the distributor, or receive price protection
credits when our standard published prices are lowered from the price the distributor paid for product still in its inventory. Historical
claims data are maintained for each of the programs, with differences among geographic regions taken into consideration. We
continually monitor the actual claimed allowances against our estimates, and we adjust our estimates as appropriate to reflect trends
in distributor revenue and inventory levels. Allowances are also adjusted when recent historical data do not represent anticipated future
activity. About 30 percent of our distributor revenue is generated from sales of consigned inventory, and we expect this proportion to
grow over time. The allowances we record against this revenue are not material.