Texas Instruments 2010 Annual Report Download - page 47

TEXAS INSTRUMENTS 2010 ANNUAL REPORT
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Off-balance sheet arrangements
As of December 31, 2010, 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.
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 earnings
impact exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. For example, at year-end 2010, we
had forward currency exchange contracts outstanding with a notional value of $439 million to hedge net balance sheet exposures
(including฀$236฀million฀to฀sell฀Japanese฀yen,฀$69฀million฀to฀sell฀euros฀and฀$33฀million฀to฀sell฀British฀pound฀sterling).฀Similar฀hedging฀
activities existed at year-end 2009.
Because most of the aggregate non-U.S. dollar balance sheet exposure is hedged by these forward currency exchange contracts,
based on year-end 2010 balances and currency exchange 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 $1 million.
Interest rate risk
As of December 31, 2010 and 2009, we had no debt. Therefore, our primary exposure to changes in interest rates is limited to
the effect 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 2010 or 2009 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 2010 would have resulted in a decrease of approximately $16 million and an
increase of approximately $4 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 2010 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 7 to the Financial Statements for details of equity and other long-term investments.