UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended June 27, 1998
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 0-6217
------
INTEL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-1672743
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Mission College Boulevard, Santa Clara, California 95052-8119
- ------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(408) 765-8080
--------------
(Registrant's telephone number, including area code)
N/A
---------------
(Former name, former address, and former fiscal year, if changed since last
report.)
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 X No
----- -----
Shares outstanding of the Registrant's common stock:
Class Outstanding at June 27, 1998
Common Stock, $.001 par value 1,680 million
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Intel Corporation
Consolidated Condensed Statements of Income (unaudited)
(in millions, except per share amounts)
Three Months Ended Six Months Ended
------------------ ----------------
Jun. 27, Jun. 28, Jun. 27, Jun 28,
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $ 5,927 $ 5,960 $11,928 $12,408
Costs and expenses:
Cost of sales 3,027 2,343 5,776 4,650
Research and development 623 575 1,218 1,156
Marketing, general and administrative 671 704 1,382 1,397
Purchased in-process research and
development -- -- 165 --
------- ------- ------- -------
Operating costs and expenses 4,321 3,622 8,541 7,203
------- ------- ------- -------
Operating income 1,606 2,338 3,387 5,205
Interest expense (8) (7) (15) (14)
Interest income and other, net 152 219 359 434
------- ------- ------- -------
Income before taxes 1,750 2,550 3,731 5,625
Provision for taxes 578 905 1,286 1,997
------- ------- ------- -------
Net income $ 1,172 $ 1,645 $ 2,445 $ 3,628
======= ======= ======= =======
Basic earnings per common share $ 0.69 $ 1.01 $ 1.47 $ 2.22
======= ======= ======= =======
Diluted earnings per common share $ 0.66 $ 0.92 $ 1.38 $ 2.02
======= ======= ======= =======
Cash dividends declared per
common share $ 0.00 $ 0.03 $ 0.03 $ 0.055
======= ======= ======= =======
Weighted average common shares
outstanding 1,691 1,635 1,666 1,636
Dilutive effect of:
Employee stock options 78 106 83 106
1998 Step-Up Warrants -- 56 23 56
------- ------- ------- -------
Weighted average common shares
outstanding, assuming dilution 1,769 1,797 1,772 1,798
======= ======= ======= =======
See Notes to Consolidated Condensed Financial Statements.
3
Item 1. Financial Statements (continued)
Intel Corporation
Consolidated Condensed Balance Sheets Jun. 27, Dec. 27,
(in millions) 1998 1997
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,887 $ 4,102
Short-term investments 5,522 5,630
Trading assets 289 195
Accounts receivable, net 3,126 3,438
Inventories:
Raw materials 250 255
Work in process 988 928
Finished goods 465 514
------- -------
1,703 1,697
------- -------
Deferred tax assets 665 676
Other current assets 176 129
------- -------
Total current assets 13,368 15,867
------- -------
Property, plant and equipment 20,303 18,127
Less accumulated depreciation (8,300) (7,461)
------- -------
Property, plant and equipment, net 12,003 10,666
Long-term investments 2,040 1,839
Other assets 1,007 508
------- -------
TOTAL ASSETS $28,418 $28,880
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 132 $ 212
Long-term debt redeemable within one year 110 110
Accounts payable 1,092 1,407
Accrued compensation and benefits 883 1,268
Deferred income on shipments to distributors 391 516
Accrued advertising 362 500
Other accrued liabilities 1,108 842
Income taxes payable 176 1,165
------- -------
Total current liabilities 4,254 6,020
------- -------
Long-term debt 472 448
Deferred tax liabilities 1,248 1,076
Put warrants 711 2,041
Stockholders' equity:
Preferred stock -- --
Common stock and capital in excess
of par value 4,853 3,311
Retained earnings 16,664 15,926
Accumulated other comprehensive income 216 58
------- -------
Total stockholders' equity 21,733 19,295
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,418 $28,880
======= =======
Certain 1997 amounts have been reclassified to conform to the 1998 presentation.
See Notes to Consolidated Condensed Financial Statements.
4
Item 1. Financial Statements (continued)
Intel Corporation
Consolidated Condensed Statements of Cash Flows (unaudited)
(in millions)
Six Months Ended
----------------
Jun. 27, Jun. 28,
1998 1997
---- ----
Cash flows provided by (used for) operating
activities:
Net income $ 2,445 $ 3,628
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,304 1,050
Net loss on retirements of property, plant and
equipment 89 23
Deferred taxes 105 81
Purchased in-process research and development 165 --
Changes in assets and liabilities:
Accounts receivable 337 (227)
Inventories 46 (150)
Accounts payable (332) 53
Accrued compensation and benefits (385) (191)
Income taxes payable (993) (444)
Tax benefit from employee stock plans 181 117
Other assets and liabilities (489) 193
------- -------
Total adjustments 28 505
------- -------
Net cash provided by operating activities 2,473 4,133
------- -------
Cash flows provided by (used for) investing
activities:
Additions to property, plant and equipment (2,206) (1,758)
Purchase of Chips and Technologies, Inc.,
net of cash acquired (321) --
Purchase of Digital Equipment Corporation
semiconductor operations (625) --
Purchases of available-for-sale investments (4,528) (3,380)
Sales of available-for-sale investments 46 93
Maturities and other changes in available-for-sale
investments 4,717 3,047
------- -------
Net cash (used for) investing activities (2,917) (1,998)
------- -------
Cash flows provided by (used for) financing
activities:
(Decrease) in short-term debt, net (80) (208)
Additions to long-term debt 34 68
Retirement of long-term debt -- (300)
Proceeds from sales of shares through employee
stock plans and other 259 178
Proceeds from exercise of 1998 Step-Up Warrants 1,620 26
Proceeds from sales of put warrants 27 141
Repurchase and retirement of Common Stock (3,531) (2,121)
Payment of dividends to stockholders (100) (82)
------- -------
Net cash (used for) financing activities (1,771) (2,298)
------- -------
Net (decrease) in cash and cash equivalents $(2,215) $ (163)
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 18 $ 21
Income taxes $ 1,989 $ 2,243
Certain 1997 amounts have been reclassified to conform to the 1998 presentation.
See Notes to Consolidated Condensed Financial Statements.
5
Item 1. Financial Statements (continued)
Intel Corporation, Notes to Consolidated Condensed Financial Statements
1. The accompanying interim consolidated condensed financial statements of
Intel Corporation ("Intel," the "Company" or the "Registrant") have been
prepared in conformity with generally accepted accounting principles,
consistent in all material respects with those applied in the Annual
Report on Form 10-K for the year ended December 27, 1997. The interim
financial information is unaudited, but reflects all normal adjustments
which are, in the opinion of management, necessary to provide a fair
statement of results for the interim periods presented. The interim
financial statements should be read in connection with the financial
statements in the Company's Annual Report on Form 10-K for the year ended
December 27, 1997.
2. As of the second quarter of 1998, the Company adopted a new dividend
declaration schedule which will result in the Board of Directors
considering two dividend declarations in the first and third quarters of
the year and no declarations in the second and fourth quarters of the year.
The new declaration schedule does not change the Company's historical
quarterly dividend payment schedule. In keeping with this new schedule, no
dividend was declared in the second quarter of 1998, and on July 22, 1998
the Board of Directors declared a dividend of $.03 per share payable
September 1, 1998 to stockholders of record on August 7, 1998.
3. Interest and other income includes (in millions):
Three Months Ended Six Months Ended
------------------ ----------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
1998 1997 1998 1997
---- ---- ---- ----
Interest income $ 143 $ 142 $ 303 $ 269
Foreign currency gains 3 12 3 25
Other income (expense), net 6 65 53 140
------- ------- ------- -------
Total $ 152 $ 219 $ 359 $ 434
======= ======= ======= =======
Other income for the six months ended June 27, 1998 consists primarily of
gains on sales of equity investments.
4. The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," as of the first
quarter of 1998. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components, however it has no
impact on the Company's net income or total stockholders' equity.
The components of comprehensive income, net of tax, are as follows
(in millions):
Three Months Ended Six Months Ended
------------------ ----------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
1998 1997 1998 1997
---- ---- ---- ----
Net income $ 1,172 $ 1,645 $ 2,445 $ 3,628
Change in unrealized gain (loss) on
available-for-sale investments 61 33 158 (53)
------- ------- ------- -------
Total $ 1,233 $ 1,678 $ 2,603 $ 3,575
======= ======= ======= =======
Accumulated other comprehensive income presented on the accompanying
consolidated condensed balance sheets consists of the accumulated net
unrealized gain on available-for-sale investments.
6
Item 1. Financial Statements (continued)
Intel Corporation, Notes to Consolidated Condensed Financial Statements
(continued)
5. Between December 27, 1997 and March 14, 1998, approximately 78 million of
the Company's 1998 Step-Up Warrants to purchase shares of Common Stock
were exercised at a price of $20.875 per share. Approximately 78 million
shares of Common Stock were issued, and the Company received proceeds of
approximately $1.6 billion. The expiration date of these warrants was
March 14, 1998.
6. During the first half of 1998, the Company repurchased 44.3 million shares
of Common Stock under the Company's authorized repurchase program at a cost
of $3.5 billion, including $920 million to purchase 12 million shares upon
the exercise of outstanding put warrants. During the first quarter of 1998,
the Company's Board of Directors approved an increase in the repurchase
program of up to 100 million additional shares, bringing the total
authorization to 380 million shares. As of June 27, 1998, after allowing
for the outstanding put warrants, approximately 113.8 million shares
remained available under the repurchase program. (See Item 2. Management's
Discussion and Analysis for subsequent activity.)
7. In a series of private placements during the 1991-1998 period, the Company
sold put warrants that entitle the holder of each warrant to sell to the
Company, by physical delivery, one share of Common Stock at a specified
price. Activity during the first half of 1998 is summarized as follows:
Put Warrants Outstanding
------------------------
Cumulative Proceeds Number Potential
(in millions) Received Of Warrants Obligation
------------- -------- ----------- ----------
December 27, 1997 $ 623 26.3 $2,041
Exercises -- (1.7) (127)
Expirations -- (9.8) (729)
------- ------- -------
March 28, 1998 $ 623 14.8 $1,185
Sales 27 5.0 387
Exercises -- (10.3) (793)
Expirations -- (1.0) (68)
------- ------- -------
June 27, 1998 $ 650 8.5 $ 711
======= ======= =======
A total of 5 million put warrants were sold to commercial and investment
banks during May 1998. They expire on various dates between October and
November 1998 and have exercise prices ranging from $70 to $80 per share,
with an average exercise price of $77. The 8.5 million put warrants
outstanding on June 27, 1998 expire on various dates between August and
November 1998 and have exercise prices ranging from $70 to $95 per share,
with an average exercise price of $84. The amount related to the Company's
potential buyback obligation has been reclassified from Stockholders'
Equity and recorded as put warrants. There is no material dilutive effect
on earnings per share for the periods presented. (See Item 2. Management's
Discussion and Analysis for subsequent activity.)
7
Item 1. Financial Statements (continued)
Intel Corporation, Notes to Consolidated Condensed Financial Statements
(continued)
8. In January 1998, the Company acquired the outstanding shares of Chips and
Technologies, Inc., a supplier of graphics accelerator chips for mobile
computing products. The purchase price was approximately $430 million ($321
million in net cash). During the first quarter of 1998, the Company
recorded a nondeductible charge of $165 million for purchased in-process
research and development, representing the appraised value of products
still in the development stage that were not considered to have reached
technological feasibility and had no alternative future use.
In May 1998, the Company purchased the semiconductor operations of Digital
Equipment Corporation, including manufacturing facilities in Massachusetts
as well as development operations in Israel and Texas, for approximately
$625 million in cash, subject to certain adjustments. Assets acquired
consisted primarily of property, plant and equipment. Following the
completion of the purchase, all lawsuits between the companies were
dismissed with prejudice.
9. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued by the Financial Accounting Standards Board in
June 1998. The Standard will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change
in fair value of the hedged assets, liabilities, or firm commitments
through earnings, or recognized in other comprehensive income until the
hedged item is recognized in earnings. The change in a derivative's fair
value related to the ineffective portion of a hedge, if any, will be
immediately recognized in earnings. The Company expects to adopt this
Standard as of the beginning of its fiscal year 2000. The effect of
adopting the Standard is currently being evaluated, but is not expected
to have a material effect on the Company's financial position or results
of operations.
10. In November 1997, Intergraph Corporation ("Intergraph") filed suit in
U.S. District Court in Alabama generally alleging that Intel attempted
to coerce Intergraph into relinquishing certain patent rights and
alleging infringement on three Intergraph patents as well as violations
of antitrust laws and various state law claims. In April 1998, the Court
ordered Intel to continue to treat Intergraph as it does allegedly
similarly-situated customers. In June 1998, Intel answered the Amended
Complaint of Intergraph and filed counter claims against Intergraph for
infringement of seven patents covering various aspects of computer
system performance. Also in June, Intel filed a motion for summary
judgment on Intergraph's patent claims on the grounds that Intel is
licensed to use those patents. In July, the Company received a letter
stating that Intergraph believes that the patent damages will be
"several billion dollars by the time of trial." In addition, Intergraph
alleges that Intel's infringement is willful and that any damages awarded
should be trebled. The letter also stated that Intergraph believes that
antitrust, unfair competition and tort and contract damages will be
"hundreds of millions of dollars by the time of trial." The Company
disputes Intergraph's claims and intends to defend the lawsuit vigorously.
The Company is currently party to various legal proceedings, including
that noted above. While management, including internal counsel, currently
believes that the ultimate outcome of these proceedings will not have a
material adverse effect on the Company's financial position or overall
trends in results of operations, litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the net income of the period
in which it occurs.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations - Second Quarter of 1998 Compared to Second Quarter
of 1997
Revenues for Q2 1998 were essentially flat compared to Q2 1997. Processor unit
volumes increased compared to Q2 1997, offset by lower processor prices and
decreasing revenues from sales of related board-level products, as well as
lower revenues from sales of flash memory and embedded control products.
Revenues from networking and graphics products increased. Unit volumes of
processors based on the P6 micro-architecture** increased and were partially
offset by lower volumes of Pentium(R) family processors.
Cost of sales increased by 29% from Q2 1997 to Q2 1998 due to the shift in
product mix to the Pentium(R) II processor, reflecting the cost of purchased
components for the Single Edge Contact ("SEC") cartridge, higher unit volumes,
and higher fixed costs. In addition, in Q2 1998 reductions in product costs on
the highest volume processors caused inventories to be written-down to the new
lower costs. Gross margin decreased to 49% in Q2 1998 from 61% in Q2 1997
primarily due to the lower processor prices, the impact of the SEC cartridge,
the inventory write-downs and higher fixed costs.
For Q2 1998, sales of microprocessors based on the P6 micro-architecture
represented a majority of the Company's revenues and a substantial majority of
its gross margin. For Q2 1997, these products represented a significant and
growing portion of both revenues and gross margin. Sales of Pentium family
microprocessors represented a significant but declining portion of the
Company's revenues and gross margin in Q2 1998, and they constituted a majority
of revenues and a substantial majority of gross margin in Q2 1997. No other
product group represented a significant portion of the Company's revenues or
gross margin during Q2 1998 or Q2 1997.
Operating expenses were essentially flat between Q2 1997 and Q2 1998. Research
and development spending on process and product development programs increased
while Intel Inside(R) and profit dependent expenses decreased. Operating
expenses were 21.8% of revenues in Q2 of 1998 and 21.5% in Q2 1997.
Interest and other income for Q2 1998 decreased by $67 million over the prior
year. Net gains associated with the Company's equity investments and foreign
currency gains were lower than in Q2 1997.
The provision for taxes for Q2 1998 decreased by $327 million over the prior
year primarily due to a decrease in pretax income in Q2 1998. The effective
tax rate decreased from 35.5% for Q2 1997 to 33% for Q2 1998.
Results of Operations - First Half of 1998 Compared to First Half of 1997
Revenues for the first half of 1998 decreased by 4% compared to the first half
of 1997, primarily due to lower processor prices and decreasing revenues from
sales of related board-level products, as well as lower revenues from sales of
flash memory and embedded control products. Revenues from networking and
graphics products increased. Processor unit volumes increased in comparison to
the first half of 1997, with higher volumes of processors based on the P6
micro-architecture partially offset by lower volumes of Pentium family
processors.
Cost of sales rose by 24% from the first half of 1997 to the first half of 1998
due to the shift in product mix to the Pentium II processor, reflecting the
cost of purchased components for the SEC cartridge, higher unit volumes, the
inventory write-downs due to cost reductions, and higher fixed costs. Gross
margin decreased to 52% in the first half of 1998 from 63% in the first half
1997 primarily due to the lower processor prices, the impact of the SEC
cartridge, the inventory write-downs and higher fixed costs.
- -----------------
** The P6 micro-architecture products include the Pentium(R) II, Pentium(R) II
Xeon(TM), Pentium(R) Pro and Intel(R) Celeron(TM) processors.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations - First Half of 1998 Compared to First Half of 1997
(continued)
For the first half of 1998, sales of microprocessors based on the P6
micro-architecture represented a significant and growing portion of the
Company's revenues and a majority of its gross margin. For first half of 1997,
these products represented a significant and growing portion of both revenues
and gross margin. Sales of Pentium family microprocessors represented a
significant but declining portion of the Company's revenues and gross margin
in the first half of 1998, and they constituted a majority of revenues and a
substantial majority of gross margin in the first half of 1997. No other
product group represented a significant portion of the Company's revenues or
gross margin during the first half of 1998 or 1997.
Operating expenses rose by a total of $212 million from the first half of
1997 to the first half of 1998, and included a one-time charge of $165 million
for in-process research and development related to the acquisition of Chips
and Technologies, Inc. which was completed in the first quarter of 1998. The
remaining increase was primarily due to higher levels of spending on product
development programs. Excluding the one-time charge, operating expenses were
21.8% of revenues in the first half of 1998 versus 20.6% in the first half of
1997.
Interest and other income for the first half of 1998 decreased by $75 million
over the prior year. Net gains associated with the Company's equity investments
and foreign currency gains were lower than in the first half of 1997, partially
offset by interest on a higher average investment balance.
The provision for taxes for the first half of 1998 decreased by $711 million
over the prior year primarily due to a decrease in pretax income. The effective
tax rate decreased from 35.5% for the first half of 1997 to 33% for the first
half of 1998, excluding the impact of the nondeductible charge related to the
acquisition of Chips and Technologies, Inc.
Financial Condition
The Company's financial condition remains very strong. As of June 27, 1998,
cash, trading assets and short- and long-term investments totaled $9.7 billion,
down from $11.8 billion at December 27, 1997. The Company's other sources of
liquidity include authorized commercial paper borrowings of up to $700 million.
The Company also maintains the authority to issue an aggregate of approximately
$1.4 billion in debt, equity and other securities under Securities and Exchange
Commission shelf registration statements.
Major sources of cash during the first half of 1998 included cash generated
from operations, which totaled $2.5 billion, and approximately $1.6 billion
received upon the exercise of the 1998 Step-Up Warrants. Major uses of cash
during the first half of 1998 included capital spending of $2.2 billion for
property, plant and equipment, primarily for microprocessor manufacturing
capacity, $3.5 billion to buy back 44.3 million shares of Common Stock and $946
million in net cash paid for the purchases of Chips and Technologies, Inc. and
the semiconductor manufacturing operations of Digital Equipment Corporation
("Digital").
The Company's five largest customers accounted for approximately 41% of net
revenues for the six month period ended June 27, 1998. At June 27, 1998, these
customers accounted for approximately 40% of net accounts receivable.
Key financing activities in the first half of 1998 included the repurchase of
44.3 million shares of Common Stock for $3.5 billion as part of the Company's
authorized stock repurchase program, including $920 million for the purchase
of 12 million shares upon the exercise of outstanding put warrants. The Company
also sold 5 million put warrants, receiving proceeds of $27 million, while 10.8
million previously outstanding put warrants expired unexercised. From June 27,
1998 through August 5, 1998, the Company repurchased 4 million shares of its
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Financial Condition (continued)
Common Stock at a cost of $336 million and sold 0.5 million put warrants. As of
August 5, 1998, Intel had the potential obligation to repurchase 9 million
shares of Common Stock at an aggregate cost of $751 million under outstanding
put warrants. The exercise price of these outstanding warrants ranged from $70
to $95 per share, with an average exercise price of $83 per share. During the
first quarter of 1998, the Company's Board of Directors approved an increase of
up to 100 million additional shares in the Company's repurchase program. This
increase brings the total authorization to 380 million shares. As of August 5,
1998, 109.3 million shares remained available for repurchase under the
repurchase authorization, after allowing for the outstanding put warrants.
Management considers cash flow from operations and available sources of
liquidity to be adequate to meet business requirements in the foreseeable
future, including planned capital expenditure programs, working capital
requirements, the put warrant obligation and the dividend program.
Outlook
The outlook section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially.
These statements do not reflect the potential impact of any future mergers or
acquisitions.
The Company expects revenue for the third quarter of 1998 to be flat to
slightly up from the second quarter revenue of $5.9 billion. Consistent with
the Company's earlier expectations, revenue in the second half of 1998 is
expected to be greater than revenue in the first half. Revenue is partly a
function of the mix of microprocessor types and speeds, purchased components
and other products, all of which are difficult to forecast. Because of the
large price difference between types of microprocessors, this mix affects the
average price Intel will realize and has a large impact on Intel's revenues.
Revenue is also subject to the rate of growth of the computing industry and the
impact of economic conditions in various geographic regions.
Intel's strategy is to introduce ever-higher performance microprocessors
tailored for the different segments of the worldwide computer market, using a
tiered branding approach. To implement this strategy, the Company plans to
cultivate new businesses and continue to work with the software industry to
develop compelling applications that can take advantage of this higher
performance, thus driving demand toward the newer products in each computer
market segment. In line with this strategy, the Company is seeking to develop
higher performance microprocessors for each market segment, including servers,
workstations, high-end business PCs, the basic PC and other product lines.
During the second quarter, the Company introduced higher performance versions
of the Pentium II and Celeron(TM) brand processors and began shipping the
Pentium(R) II Xeon(TM) brand processor in support of its launch on June 29,
1998. The Company may continue to reduce microprocessor prices at such times as
it deems appropriate in order to bring its technology to market within each
relevant market segment.
The Company expects the gross margin percentage in the third quarter of 1998
to be up a couple of points from 49 percent in the second quarter. Intel's
gross margin expectation for the full year 1998 is unchanged at 52 percent,
plus or minus a few points. The Company's goal continues to be to grow gross
margin dollars, and the Company believes that over the long-term, the gross
margin percentage will be 50 percent plus or minus a few points. Intel's gross
margin percentage in any period varies depending on the level of revenues and
on the mix of types and speeds of microprocessors sold, as well as the mix of
microprocessors and purchased components. The Pentium II processor is packaged
with purchased components in the SEC cartridge, and the inclusion of purchased
components tends to increase unit costs. Accordingly, sales of the Pentium II
processor increase absolute dollar margins but tend to lower the gross margin
percentage. Various other factors (including unit volumes and costs, yield
issues associated with production at factories, ramp of new technologies,
excess or obsolete inventory, variations in inventory valuation and mix of
shipments of other semiconductors) will also continue to affect the amount of
cost of sales and the variability of gross margin percentages.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
The Company has expanded manufacturing capacity over the last few years and
continues to plan capacity based on the assumed continued success of its
strategy and the acceptance of its products in specific market segments. The
Company currently expects capital expenditures for 1998 to be approximately
$4.5 to $4.7 billion, flat to slightly up from $4.5 billion in 1997, but down
from previous guidance for the year of approximately $5.0 billion. The
acceleration of 0.18 micron manufacturing process technology in 1999 allows
the Company to reduce spending on current generation technology. The current
estimate includes the acquisition of the capital assets of Digital's
semiconductor manufacturing operations. This spending plan is dependent upon
expectations regarding manufacturing efficiencies, delivery times of various
machines and construction schedules for new facilities. Depreciation for 1998
is expected to be approximately $2.9 billion and depreciation in the third
quarter of 1998 is expected to be approximately $760 million.
Spending on research and development and marketing, general and administrative
expenses in the third quarter of 1998 is expected to be approximately 3 to 5
percent higher than the $1.3 billion in the second quarter of 1998. Expense
projections for the third quarter of 1998 incorporate expected higher spending
for research and development, merchandising and Intel Inside(R), and are subject
in part to changes in revenue and profit dependent expenses. Research and
development spending for 1998 is expected to be approximately $2.8 billion,
including the approximately $165 million for in-process research and
development associated with the acquisition of Chips and Technologies, Inc.
in the first quarter.
In an effort to control expenses, at the end of the first quarter of this year
the Company announced plans to reduce headcount by approximately 3,000 people
over a 6 month period. The timeframe to complete the reduction has been
extended by one quarter to the end of the year.
The Company expects interest and other income for the third quarter of 1998 to
be approximately $145 million, assuming no significant changes in interest
rates or expected cash balances, and no unanticipated items.
The tax rate for the remaining quarters of 1998 is expected to be 33%.
Intel has established a team to address the issues raised by the introduction
of the Single European Currency (Euro) for initial implementation as of
January 1, 1999 and during the transition period through to January 1, 2002.
Intel expects that its internal systems that will be affected by the initial
introduction of the Euro will be Euro capable by January 1, 1999, and does not
expect the costs of system modifications to be material. The Company does not
presently expect that introduction and use of the Euro will materially affect
the Company's foreign exchange and hedging activities, or the Company's use
of derivative instruments, or will result in any material increase in costs
to the Company. While Intel will continue to evaluate the impact of the Euro
introduction over time, based on currently available information, management
does not believe that the introduction of the Euro currency will have a
material adverse impact on the Company's financial condition or overall trends
in results of operations.
Like many other companies, the year 2000 computer issue creates risks for
Intel. If internal systems do not correctly recognize and process date
information beyond the year 1999, there could be an adverse impact on the
Company's operations. There are two other related issues which could also lead
to incorrect calculations or failures: i) some systems' programming assigns
special meaning to certain dates, such as 9/9/99, and ii) the year 2000 is a
leap year. To address these year 2000 issues with its internal systems, the
Company has initiated a comprehensive program which is designed to deal with
the most critical systems first. Assessment and remediation are proceeding in
tandem, and the Company currently plans to have changes to critical systems
completed and tested by mid-1999. These activities are intended to encompass
all major categories of systems in use by the Company, including manufacturing,
sales, finance and human resources. Intel is also actively working with
critical suppliers of products and services to determine that the suppliers'
operations and the products and services they provide are year 2000 capable
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
or to monitor their progress toward year 2000 capability. In addition, the
Company has commenced work on various types of contingency planning to
address potential problem areas with internal systems and with suppliers and
other third parties. It is expected that assessment, remediation and
contingency planning activities will be on-going throughout 1998 and 1999 with
the goal of appropriately resolving all material internal systems and third
party issues.
The Company also has a program to assess the capability of its products to
handle the year 2000. To assist customers in evaluating their year 2000 issues,
the Company has developed a list which indicates the capability of Intel's
current products, and certain products no longer being produced, to handle the
year 2000. Products are assigned to one of five categories as defined by the
Company: "Year 2000 Capable", "Year 2000 Capable" with update, not "Year 2000
Capable", under evaluation, or will not test. The list is located at the
Company's Year 2000 support website and is periodically updated as analysis on
additional products is completed. All Intel processors are "Year 2000 Capable."
However, the assessment of whether a complete system will operate correctly
depends on the BIOS capability and software design and integration, and for
many end-users this will include BIOS and software provided by companies other
than Intel. As described more fully at the support website, Intel offers a
"Year 2000 Capable" Limited Warranty on certain of its current products. Except
as specifically provided for in the Limited Warranty, the Company does not
believe it is legally responsible for costs incurred by customers related to
ensuring their year 2000 capability. Nevertheless, the Company is incurring
various costs to provide customer support and customer satisfaction services
regarding Year 2000 issues, and it is anticipated that these expenditures will
continue through 1999 and thereafter. As used by Intel, "Year 2000 Capable"
means that when used properly and in conformity with the product information
provided by Intel, the Intel product will accurately store, display, process,
provide, and/or receive data from, into, and between the twentieth and
twenty-first centuries, including leap year calculations, provided that all
other technology used in combination with the Intel product properly exchanges
date data with the Intel product.
The costs incurred to date related to these programs are less than $20 million.
The Company currently expects that the total cost of these programs, including
both incremental spending and redeployed resources, will not exceed $250
million. The total cost estimate does not include potential costs related to
any customer or other claims or the cost of internal software and hardware
replaced in the normal course of business. In some instances, the installation
schedule of new software and hardware in the normal course of business is being
accelerated to also afford a solution to year 2000 capability issues. The total
cost estimate is based on the current assessment of the projects and is subject
to change as the projects progress.
Based on currently available information, management does not believe that the
year 2000 matters discussed above related to internal systems or products sold
to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier or another third party would not have a material adverse effect on the
Company.
The Company is currently party to various legal proceedings. Although
litigation is subject to inherent uncertainties, management, including internal
counsel, does not believe that the ultimate outcome of these legal proceedings
will have a material adverse effect on the Company's financial position or
overall trends in results of operations. However, were an unfavorable ruling to
occur in any specific period, there exists the possibility of a material
adverse impact on the net income of that period. Management believes,
given the Company's current liquidity and cash and investments balances, that
even an adverse judgment would not have a material impact on cash and
investments or liquidity.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
The Company's future results of operations and the other forward-looking
statements contained in this outlook, in particular the statements regarding
revenues, pricing, new product development, gross margin, capital spending,
depreciation, research and development expenses, marketing and general and
administrative expenses, headcount reductions, net interest and other, tax
rate, conversion to the Euro, year 2000 issues and legal proceedings involve
a number of risks and uncertainties. In addition to the factors discussed
above, among the other factors that could cause actual results to differ
materially are the following: changes in customer order patterns, including
changes in customer and channel inventory levels; competitive factors, such as
rival chip architectures and manufacturing technologies, competing
software-compatible microprocessors and acceptance of new products in specific
market segments; pricing pressures; development and timing of introduction of
compelling software applications; continued success in technological advances,
including development and implementation of new processes and strategic
products for specific market segments; execution of the manufacturing ramp;
costs associated with excess manufacturing capacity; the ability to grow new
businesses and successfully integrate and operate any acquired businesses;
unanticipated costs or other adverse effects associated with processors and
other products containing errata (deviations from published specifications);
impact on the Company's business due to internal systems or systems of
suppliers and other third parties adversely affected by year 2000 problems;
claims due to year 2000 issues allegedly related to the Company's products
or year 2000 remediation efforts; and litigation involving antitrust,
intellectual property, consumer and other issues.
Intel believes that it has the product offerings, facilities, personnel, and
competitive and financial resources for continued business success, but future
revenues, costs, margins and profits are all influenced by a number of factors,
as discussed above, all of which are inherently difficult to forecast.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures
About Market Risk, in the Registrant's Annual Report on Form 10-K for the year
ended December 27, 1997 and to the subheading "Financial Market Risks" under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 23 of the Registrant's 1997 Annual Report to
Stockholders.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Digital Equipment Corporation v. Intel,
U.S. District Court, District of Mass. (97-40080)
-------------------------------------------------
Effective as of May 19, 1998, all lawsuits between the companies have been
dismissed with prejudice.
Intergraph Corporation v. Intel
U.S. District Court, Northern District of Alabama, Northeastern Division
(CV-97-N-3023-NE)
-----------------
In June of this year, Intel answered the Amended Complaint of Intergraph and
filed counter claims against Intergraph for infringement of seven patents
covering various aspects of computer system performance. Also in June, Intel
filed a motion for summary judgment on Intergraph's patent claims on the
grounds that Intel is licensed to use those patents. In July, the Company
received a letter stating that Intergraph believes that the patent damages
will be "several billion dollars by the time of trial." In addition, Intergraph
alleges that Intel's infringement is willful and that any damages awarded
should be trebled. The letter also stated that Intergraph believes that
antitrust, unfair competition and tort and contract damages will be "hundreds
of millions of dollars by the time of trial." The Company disputes
Intergraph's claims and intends to defend the lawsuit vigorously. Although
litigation is subject to inherent uncertainties and the ultimate outcome of
this lawsuit cannot be determined at this time, management, including internal
counsel, does not believe that the ultimate outcome will have a material
adverse effect on Intel's financial position or overall trends in results of
operations.
Item 2. Changes in Securities
(c) Unregistered sales of equity securities.
Reference is made to the information on sales of put warrants appearing in
Note 7 under the heading "Intel Corporation, Notes to Consolidated Condensed
Financial Statements" in Part I, Item 1 hereof. All such transactions are
exempt from registration under Section 4 (2) of the Securities Act of 1933.
Each transaction was privately negotiated and each offeree and purchaser was
an accredited investor/qualified institutional buyer. No public offering or
public solicitation was used by the registrant in the placement of these
securities.
15
Item 4. Submission of Matters to a Vote of Security Holders
At Intel Corporation's Annual Meeting of Stockholders held on May 20, 1998, the
following proposals were adopted or rejected by the margins indicated.
Number of Shares
Voted for Withheld
--------- --------
1. To elect a Board of Directors
to hold office until the next
Annual Meeting of Stockholders or
until their respective successors
have been elected or appointed.
C. Barrett 1,492,905,143 3,466,432
J. Browne 1,492,774,105 3,597,470
W. Chen 1,492,957,078 3,414,497
A. Grove 1,492,959,473 3,412,102
J. Guzy 1,492,834,624 3,536,951
G. Moore 1,492,921,584 3,449,991
A. Rock 1,492,797,748 3,573,827
J. Shaw 1,492,802,914 3,568,661
L. Vadasz 1,492,794,176 3,577,399
D. Yoffie 1,492,785,113 3,586,462
C. Young 1,492,836,998 3,534,577
Number of Shares
Voted For Voted Withheld No Vote
--------- ----- -------- -------
Against
-------
2. To ratify the appointment 1,492,221,795 2,062,984 2,086,386 411
of the accounting firm of
Ernst & Young LLP as
independent auditors for the
Company for the current year.
Number of Shares
Voted For Voted Withheld No Vote
--------- Against -------- -------
-------
3. To consider a stockholder 101,703,872 859,335,577 64,887,177 470,444,950
proposal to endorse the CERES
Principles.
Item 5. Other Information
(1) As announced in a press release dated May 29, 1998, the Company has
notified customers of a change in the production schedule for the
Merced(TM) processor. According to the newly communicated schedule,
sample volumes of the 64-bit processor are now expected in 1999, with
planned production volumes moving from 1999 to mid-2000. The Merced
processor will be the first processor in Intel's IA-64 product family.
Products based on the IA-64 architecture are expected to be initially
targeted at the high-performance server and workstation market segments.
(2) On July 22, 1998 the Board of Directors approved an amendment to the
Company's Bylaws to revise the "advance notice" bylaw governing the
requirement of prior notice for stockholder proposals being submitted
for Annual and Special meetings. This revision reflects recent amendments
to Rules 14a-4 and 14a-8 under the Securities Exchange Act of 1934. The
amended and restated Bylaws are attached hereto as Exhibit 3.1.
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Intel Corporation Bylaws as amended.
10.1 Intel Corporation 1984 Stock Option Plan as amended and restated,
effective July 16, 1997.
10.2 Intel Corporation 1988 Executive Long Term Stock Option Plan as amended
and restated, effective July 16, 1997.
12.1 Statement setting forth the computation of ratios of earnings to fixed
charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Intel filed a report on Form 8-K, dated April 14, 1998, relating to
financial information for Intel Corporation for the quarter ended
March 28, 1998 and forward-looking statements relating to 1998, the
2nd Quarter of 1998 and the 2nd Half of 1998, as presented in a press
release of April 14, 1998.
17
SIGNATURES
- ----------
Pursuant to the requirements 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.
INTEL CORPORATION
(Registrant)
Date: August 10, 1998 By: /s/ Andy D. Bryant
-----------------------
Andy D. Bryant
Vice President, Chief Financial
Officer and Principal Accounting
Officer