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 September 26, 1998
OR
----- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-6217
------
INTEL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-1672743
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(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
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(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 September 26, 1998
Common Stock, $.001 par value 1,667 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 Nine Months Ended
------------------ -----------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $ 6,731 $ 6,155 $18,659 $18,563
Costs and expenses:
Cost of sales 3,192 2,604 8,968 7,254
Research and development 617 586 1,835 1,742
Marketing, general and administrative 766 676 2,148 2,073
Purchased in-process research and
development - - 165 -
------- ------- ------- -------
Operating costs and expenses 4,575 3,866 13,116 11,069
------- ------- ------- -------
Operating income 2,156 2,289 5,543 7,494
Interest expense (8) (6) (23) (20)
Interest income and other, net 178 157 537 591
------- ------- ------- -------
Income before taxes 2,326 2,440 6,057 8,065
Provision for taxes 767 866 2,053 2,863
------- ------- ------- -------
Net income $ 1,559 $ 1,574 $ 4,004 $ 5,202
======= ======= ======= =======
Basic earnings per common share $ 0.93 $ 0.96 $ 2.40 $ 3.18
======= ======= ======= =======
Diluted earnings per common share $ 0.89 $ 0.88 $ 2.27 $ 2.89
======= ======= ======= =======
Cash dividends declared per
common share $ 0.070 $ 0.030 $ 0.100 $ 0.085
======= ======= ======= =======
Weighted average common shares
outstanding 1,678 1,635 1,670 1,636
Dilutive effect of:
Employee stock options 75 102 80 105
1998 Step-Up Warrants - 60 15 57
------- ------- ------- -------
Weighted average common shares
outstanding, assuming dilution 1,753 1,797 1,765 1,798
======= ======= ======= =======
See Notes to Consolidated Condensed Financial Statements.
3
Item 1. Financial Statements (continued)
Intel Corporation
Consolidated Condensed Balance Sheets Sept. 26, Dec. 27,
(in millions) 1998 1997
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,900 $ 4,102
Short-term investments 5,519 5,630
Trading assets 268 195
Accounts receivable, net 3,636 3,438
Inventories:
Raw materials 258 255
Work in process 879 928
Finished goods 441 514
-------- --------
1,578 1,697
-------- --------
Deferred tax assets 629 676
Other current assets 183 129
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Total current assets 14,713 15,867
-------- --------
Property, plant and equipment 20,748 18,127
Less accumulated depreciation 8,885 7,461
-------- --------
Property, plant and equipment, net 11,863 10,666
Long-term investments 1,789 1,839
Other assets 1,023 508
-------- --------
TOTAL ASSETS $29,388 $28,880
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 162 $ 212
Long-term debt redeemable within one year 30 110
Accounts payable 1,205 1,407
Accrued compensation and benefits 1,034 1,268
Deferred income on shipments to distributors 471 516
Accrued advertising 411 500
Other accrued liabilities 1,145 842
Income taxes payable 798 1,165
-------- --------
Total current liabilities 5,256 6,020
-------- --------
Long-term debt 583 448
Deferred tax liabilities 1,162 1,076
Put warrants 588 2,041
Stockholders' equity:
Preferred stock - -
Common stock and capital in excess
of par value 4,775 3,311
Retained earnings 16,842 15,926
Accumulated other comprehensive income 182 58
-------- --------
Total stockholders' equity 21,799 19,295
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,388 $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)
Nine Months Ended
-----------------
Sept. 26, Sept. 27,
1998 1997
---- ----
Cash flows provided by (used for) operating activities:
Net income $ 4,004 $ 5,202
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 2,038 1,609
Net loss on retirements of property, plant and equipment 183 50
Deferred taxes 67 88
Purchased in-process research and development 165 -
Changes in assets and liabilities:
Accounts receivable (173) (198)
Inventories 171 (214)
Accounts payable (219) 228
Accrued compensation and benefits (234) (108)
Income taxes payable (371) (175)
Tax benefit from employee stock plans 258 171
Other assets and liabilities (428) (120)
-------- --------
Total adjustments 1,457 1,331
-------- --------
Net cash provided by operating activities 5,461 6,533
-------- --------
Cash flows provided by (used for) investing activities:
Additions to property, plant and equipment (2,928) (2,917)
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 (6,347) (5,565)
Sales of available-for-sale investments 109 95
Maturities and other changes in available-for-sale
investments 6,774 5,062
-------- --------
Net cash (used for) investing activities (3,338) (3,325)
-------- --------
Cash flows provided by (used for) financing activities:
(Decrease) in short-term debt, net (71) (172)
Additions to long-term debt 63 68
Retirement of long-term debt - (300)
Proceeds from sales of shares through employee stock plans and other 421 294
Proceeds from exercise of 1998 Step-Up Warrants 1,620 35
Proceeds from sales of put warrants 40 190
Repurchase and retirement of common stock (5,248) (2,372)
Payment of dividends to stockholders (150) (131)
-------- --------
Net cash (used for) financing activities (3,325) (2,388)
-------- --------
Net (decrease) increase in cash and cash equivalents $ (1,202) $ 820
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 28 $ 29
Income taxes $ 2,095 $ 2,779
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 each of 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 on September 1, 1998 to stockholders of record on August 7,
On September 16, 1998, the Board of Directors declared a quarterly
dividend of $.04 per share payable on December 1, 1998 to stockholders of
record on November 7, 1998.
3. Interest income and other includes (in millions):
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
---- ---- ---- ----
Interest income $ 141 $ 134 $ 444 $ 403
Foreign currency gains 5 19 8 44
Other income (expense), net 32 4 85 144
------ ------ ------ ------
Total $ 178 $ 157 $ 537 $ 591
====== ====== ====== ======
Other income for the three and nine months ended September 26, 1998 and the
nine months ended September 27, 1997 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 Nine Months Ended
------------------ -----------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
---- ---- ---- ----
Net income $ 1,559 $ 1,574 $ 4,004 $ 5,202
Change in unrealized gain (loss) on
available-for-sale investments (34) 54 124 1
------- ------- ------- -------
Total $ 1,525 $ 1,628 $ 4,128 $ 5,203
======= ======= ======= =======
Accumulated other comprehensive income presented in 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 nine months of 1998, the Company repurchased 64.4 million
shares of Common Stock under the Company's authorized repurchase program at
a cost of $5.2 billion, including $1.2 billion to purchase 15 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 September 26, 1998, after
allowing for the outstanding put warrants, approximately 94.7 million shares
remained available for repurchase under the 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 nine months 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
Sales 13 2.5 201
Exercises -- (3.0) (279)
Expirations -- (0.5) (45)
------- ------- -------
September 26, 1998 $ 663 7.5 $ 588
======= ======= =======
A total of 2.5 million put warrants were sold to commercial and investment
banks during August 1998. They expire on various dates between January and
February 1999 and have exercise prices ranging from $79.50 to $82 per share,
with an average exercise price of $80. The 7.5 million put warrants
outstanding on September 26, 1998 expire on various dates between October
1998 and February 1999 and have exercise prices ranging from $70 to $82 per
share, with an average exercise price of $78. 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 September 1998, the Company repriced $80 million of the 1983 Series A
Adjustable Rate Industrial Revenue Bonds ("Series A Bonds") issued by the
Puerto Rico Industrial, Tourist, Educational, Medical and Environmental
Control Facilities Financing Authority. The Series A Bonds will bear
interest at the rate of 4.25% through August 2003. Bondholders of
approximately $59 million agreed to retain the bonds at the adjusted
interest rate. The balance of approximately $21 million was remarketed.
The bonds, which were included in current liabilities at December 27, 1997
due to the redemption option, have been reclassified to long-term debt as a
result of the refinancing.
9. 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, lawsuits between the companies that had been
pending since 1997 were dismissed with prejudice.
10. 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.
11. 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.
In March 1995, EMI Group, NA ("EMI") brought suit in U.S. District Court in
Delaware alleging infringement of a U.S. patent relating to processes for
manufacturing semiconductors. In May 1996, the Court granted Intel's motion
for summary judgment on some of the processes in issue. In November 1996,
the Court granted Intel's motion for summary judgment on the remaining
processes in issue and entered judgment in favor of Intel and against EMI
on the claims of the complaint. A unanimous decision by the Court of Appeals
affirmed this decision in September 1998.
8
Item 1. Financial Statements (Continued)
Intel Corporation, Notes to Consolidated Condensed Financial Statements
(continued)
The Company is currently party to various legal proceedings, including
those 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 results of operations of
the period in which it occurs.
12. In October 1998, the Company announced that it had entered into a
definitive agreement to acquire Shiva Corporation, whose products include
remote access and virtual private networking (VPN) solutions for the small
to medium enterprise market segment and the remote access needs of campuses
and branch offices. Intel expects that the total cash required to complete
the transaction will be approximately $185 million, before consideration of
any cash to be acquired. This transaction is subject to approval by Shiva
stockholders and is also subject to regulatory review.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations - Third Quarter of 1998 Compared to Third Quarter of 1997
Revenues for Q3 1998 increased by 9% compared to Q3 1997. Higher processor
volumes and a shift in mix toward processors based on the P6
micro-architecture** drove the overall growth in revenues. Revenues from sales
of chipsets and networking products also grew between these periods.
Cost of sales rose by 23% from Q3 1997 to Q3 1998 due to increased volumes and
additional costs associated with purchased components for the Single Edge
Contact ("SEC") cartridge in the Pentium(R) II processor. These cost increases
were partially offset by the impact of cost reduction efforts. Gross margin
decreased to 53% in Q3 1998 from 58% in Q3 1997 due to the impact of the SEC
cartridge, partially offset by the impact of cost reductions and a more
favorable product mix.
For Q3 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 Q3 1997, these products represented a significant and
growing portion of both revenues and gross margin. Sales of Pentium(R) family
microprocessors did not represent a significant portion of the Company's
revenues and gross margin in Q3 1998, but they constituted a majority of
revenues and gross margin in Q3 1997. No other product group represented a
significant portion of the Company's revenues or gross margin during Q3 1998
or Q3 1997.
Research and development expenses and marketing, general and administrative
expenses rose by a total of $121 million, or 10%, from Q3 1997 to Q3 1998,
primarily due to increased spending on product development programs and higher
merchandising and Intel Inside(R) expenses. Operating expenses were 20.5% of
revenues in both Q3 of 1998 and Q3 1997.
Interest income and other for Q3 1998 increased by $21 million over the prior
year due primarily to higher gains on sales of equity investments, partially
offset by lower foreign currency gains.
The provision for taxes for Q3 1998 decreased by $99 million over the prior
year as a result of lower pretax earnings and a lower effective tax rate.
The effective tax rate decreased from 35.5% for Q3 1997 to 33% for Q3 1998.
Results of Operations - First Nine Months of 1998 Compared to First Nine
Months of 1997
Revenues for the first nine months of 1998 were essentially flat compared to
the first nine months of 1997. Higher processor unit volumes compared to the
first nine months of 1997 were offset by lower processor prices and lower
revenues from sales of flash memory and embedded control products. Revenues
from sales of chipsets and networking products increased.
Cost of sales rose by 24% from the first nine months of 1997 to the first nine
months of 1998 due to increased volumes and the shift in product mix to the P6
micro-architecture, reflecting the cost of purchased components for the SEC
cartridge. Gross margin decreased to 52% in the first nine months of 1998 from
61% in the first nine months of 1997 primarily due to the impact of the SEC
cartridge and lower processor prices.
For the first nine months of 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 the first nine months 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
________________
** The P6 micro-architecture products include the Pentium(R) II, Pentium(R) II
Xeon(TM), Pentium(R) Pro and Intel(R) Celeron(TM) processors.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations - First Nine Months of 1998 Compared to First Nine
Months of 1997 (continued)
gross margin in the first nine months of 1998, and they constituted a
majority of revenues and a substantial majority of gross margin in the first
nine months of 1997. No other product group represented a significant portion
of the Company's revenues or gross margin during the first nine months of 1998
or 1997.
Research and development expenses and marketing, general and administrative
expenses rose by a total of $333 million, or 9%, from the first nine months
of 1997 to the first nine months 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
research and development spending on product development programs. Operating
expenses were 22.2% of revenues in the first nine months of 1998 versus 20.6%
in the first nine months of 1997.
Interest income and other for the first nine months of 1998 decreased by $54
million over the prior year. Net gains associated with the Company's equity
investments and foreign currency gains were lower than in the first nine months
of 1997, partially offset by interest on a higher average investment balance.
The provision for taxes for the first nine months of 1998 decreased by $810
million over the prior year primarily as a result of a decrease in pretax
earnings. The effective tax rate decreased from 35.5% for the first nine months
of 1997 to 33% for the first nine months 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 September 26,
1998, cash, trading assets and short- and long-term investments totaled $10.5
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 nine months of 1998 included cash
generated from operations, which totaled $5.5 billion, and approximately $1.6
billion received upon the exercise of the 1998 Step-Up Warrants. Major uses
of cash during the first nine months of 1998 included capital spending of $2.9
billion for property, plant and equipment, primarily for microprocessor
manufacturing capacity, $5.2 billion to buy back 64.4 million shares of Common
Stock and $946 million in net cash paid for the purchase 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 nine month period ended September 26, 1998. At September 26,
1998, these customers accounted for approximately 38% of net accounts
receivable.
Key financing activities in the first nine months of 1998 included the
repurchase of 64.4 million shares of Common Stock for $5.2 billion as part of
the Company's authorized stock repurchase program, including $1.2 billion for
the purchase of 15 million shares upon the exercise of outstanding put
warrants. The Company also sold 7.5 million put warrants, receiving proceeds
of $40 million, while 11.3 million put warrants expired unexercised. From
September 26, 1998 through November 3, 1998, the Company repurchased 10.6
million shares of its Common Stock at a cost of $932 million and 5 million put
warrants expired unexercised. As of November 3, 1998, Intel had the potential
obligation to repurchase 2.5 million shares of Common Stock at an aggregate
cost of $201 million under outstanding put warrants. The exercise price of
these outstanding warrants ranged from $80 to $82 per share, with an average
exercise price of $80 per share. During the first quarter of 1998, the
Company's Board of
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Financial Condition (continued)
Directors approved an increase of up to 100 million additional shares in the
Company's repurchase program. This increase brought the total authorization to
380 million shares. As of November 3, 1998, 89.1 million shares remained
available for repurchase under the authorization, after allowing for the
outstanding put warrants.
In October 1998, the Company announced that it had entered into a definitive
agreement to acquire Shiva Corporation. Intel expects that the total cash
required to complete the transaction will be approximately $185 million, before
consideration of any cash to be acquired. This transaction is subject to
approval by Shiva stockholders and is also subject to regulatory review. In
addition, during October 1998, the Company made a $500 million investment to
acquire a minority nonvoting equity interest in Micron Technology, Inc,.
Management considers cash flow from operations and available sources of
liquidity to be adequate to meet business requirements in the foreseeable
future, including the acquisition and the investment described above, 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 mergers or
acquisitions that have not closed as of the end of the third quarter of 1998.
The Company expects revenue for the fourth quarter of 1998 to be up
approximately 8 to 10 percent from the third quarter revenue of $6.7 billion.
This represents a change from the previous guidance that fourth quarter revenue
would be up slightly from the third quarter. 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 business and economic conditions, such as the current global
financial difficulties.
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 third quarter, the Company launched the Pentium(R) II Xeon(TM)
processor (for mid- and high-range servers and workstations), and introduced
higher performance versions of the Pentium II processor (for desktops and
entry-level servers and workstations), the Celeron(TM) brand processor
(for basic PC users) and the Pentium II processor for mobile PCs. 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 now expects the gross margin percentage in the fourth quarter of
1998 to be up a couple of points from 53 percent in the third quarter. Previous
guidance was that margin would be flat to slightly up in the fourth quarter.
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
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
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.
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
$4.2 billion, down from $4.5 billion in 1997. This is less than the guidance
for the year of $4.5 to $4.7 billion given in the Form 10-Q for the second
quarter, primarily as a result of a facilities realignment and the Company's
continued efforts to control costs. 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 the fourth quarter of 1998 is
expected to be approximately $780 million.
Spending on research and development and marketing, general and administrative
expenses in the fourth quarter of 1998 is expected to be approximately 8 to 10
percent higher than the $1.4 billion in the third quarter of 1998, up from
earlier guidance of 3 to 5 percent higher than third quarter expenses. Expense
projections for the fourth quarter of 1998 incorporate expected higher
merchandising, Intel Inside(R) and profit dependent expenses. Total spending
is subject in part to changes in revenue and profit dependent expenses. Research
and development spending for the fourth quarter of 1998 is expected to be
approximately $650 million.
Intel is still making progress on reducing headcount and the Company expects to
be within a few hundred people of its previously announced headcount reduction
target of approximately 3,000 employees by the end of the year. In 1999, the
Company expects to complete other previously announced headcount reduction plans
at manufacturing locations in Massachusetts and Puerto Rico.
The Company expects interest and other income for the fourth quarter of 1998 to
be approximately $200 million, up from earlier guidance of $160 million,
assuming no significant changes in expected interest rates or cash balances,
and no unanticipated items.
The tax rate for the fourth quarter 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 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 fact that 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 (the Company has categorized as
"critical" or "priority" those systems whose failure would cause an extended
shut down of all or part
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
of a factory, could cause personal injury or would have a sustained and
significant detrimental financial impact). These activities are intended to
encompass all major categories of systems in use by the Company, including
network and communications infrastructure, manufacturing, facilities
management, sales, finance and human resources. The Company is also testing
customer and supplier interfaces as appropriate. The Company's manufacturing
equipment and systems are highly automated, incorporating PC's, embedded
processors and related software to control activity scheduling, inventory
tracking, statistical analysis and automated manufacturing. A significant
portion of the Company's year 2000 efforts on internal systems is intended
to prevent disruption to manufacturing operations. As of October 1998,
approximately 85% of the Company's critical and priority manufacturing systems
and 61% of critical and priority non-manufacturing systems were determined to
be already year 2000 capable, or replacements, changes, upgrades or workarounds
have been determined and tested. These replacements, changes and upgrades may
not yet have been deployed. The Company is in the process of planning a
comprehensive program of integration testing of internal systems. The
integration testing began in the third quarter of 1998 and will continue into
1999 as necessary.
The table below indicates the phases of the year 2000 project related to the
Company's critical and priority internal systems and the expected time frames.
Phases of the Project Start Date End Date
- --------------------- ---------- --------
High level assessment of systems 1996 Q3 1998 (actual)
Detailed assessment, remediation and
unit testing 1996 Q1 1999 (expected)
Deployment 1997 Mid-1999 (expected)
Integration testing Q3 1998 Mid-1999 (expected)
Intel is also actively working with suppliers of products and services to
determine the extent to which the suppliers' operations and the products and
services they provide are year 2000 capable and to monitor their progress
toward year 2000 capability. Highest priority is being placed on working with
suppliers that are critical to the business, defined by Intel as those whose
failure would shut down manufacturing or other critical operations within a
short period of time. The Company has made inquiry of its major suppliers and
to date has received responses to its initial inquiries from 100% of critical
suppliers. Follow-up activities seek to determine whether the supplier is
taking all appropriate steps to fix year 2000 problems and to be prepared to
continue functioning effectively as a supplier in accord with Intel's
standards and requirements. Contingency plans are being developed to address
issues related to suppliers that are not considered to be making sufficient
progress in becoming year 2000 capable in a timely manner. The Company is also
developing contingency plans to address possible changes in customer order
patterns due to year 2000 issues. As with suppliers, the readiness of customers
to deal with year 2000 issues may affect their operations and their ability to
order and pay for products.
Intel believes that its most reasonably likely worst case year 2000 scenarios
would relate to problems with the systems of third parties rather than with
the Company's internal systems or its products. It is clear that the Company
has the least ability to assess and remediate the year 2000 problems of third
parties and the Company believes the risks are greatest with infrastructure
(e.g. electricity supply, water and sewer service), telecommunications,
transportation supply chains and critical suppliers of materials.
The Company's microprocessor production is conducted in a network of domestic
and foreign facilities. Each location relies on local private and governmental
suppliers for electricity, water, sewer and other needed supplies. Failure of
an electricity grid or an uneven supply of power, as an example, would be a
worst case scenario that would completely shut down the affected facilities.
Electrical failure could also shut down airports and other transportation
facilities. The Company does not currently maintain facilities which would
allow it to generate its
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
own electrical or water supply in lieu of that supplied by utilities. To the
extent possible, the Company is working with the infrastructure suppliers for
its manufacturing sites, major subcontractor sites and relevant transportation
hubs to seek to better ensure continuity of infrastructure services.
Contingency planning regarding major infrastructure failure generally
emphasizes the shift of production to other, unaffected sites or planned
increases in inventory levels of specific products. Multiple plants engage in
similar tasks in the Intel system and production can be expanded in some sites
to partially make up for capacity unavailable elsewhere. Although overall
capacity would be reduced, it is not expected that the entire production system
would halt due to the unavailability of one or two facilities.
A worst case scenario involving a critical supplier of materials would be the
partial or complete shutdown of the supplier and its resulting inability to
provide critical supplies to the Company on a timely basis. The Company does
not maintain the capability to replace most third party supplies with internal
production. Where efforts to work with critical suppliers to ensure year 2000
capability have not been successful, contingency planning generally emphasizes
the identification of substitute and second-source suppliers, and in certain
limited situations includes a planned increase in the level of inventory
carried.
The Company is not in a position to identify or to avoid all possible
scenarios; however, the Company is currently assessing scenarios and taking
steps to mitigate the impacts of various scenarios if they were to occur.
This contingency planning will continue through 1999 as the Company learns
more about the preparations and vulnerabilities of third parties regarding
year 2000 issues. Due to the large number of variables involved, the Company
cannot provide an estimate of the damage it might suffer if any of these
scenarios were to occur.
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." All Intel microcontrollers (embedded processors) are also "Year 2000
Capable," with the exception of two custom microcontroller products which were
sold to a limited number of customers. However, the assessment of whether a
complete system will operate correctly depends on the firmware (BIOS)
capability and software design and integration, and for many end-users this
will include firmware 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. An Intel product, when used in accordance with its
associated documentation, is "Year 2000 Capable" when, upon installation, it
accurately stores, displays, processes, provides, and/or receives data from,
into, and between 1999 and 2000, and 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 it.
Various of the Company's disclosures and announcements concerning its products
and year 2000 programs are intended to constitute "Year 2000 Readiness
Disclosures" as defined in the recently-enacted Year 2000 Information and
Readiness Disclosure Act. The Act provides added protection from liability for
certain public and private statements concerning an entity's year 2000
readiness and the year 2000 readiness of its products and services. The Act
also potentially provides added protection from liability for certain types
of year 2000 disclosures made after January 1, 1996, and before the date of
enactment of the Act.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
The Company's year 2000 efforts have been undertaken largely with its existing
personnel. In some instances, consultants have been engaged to provide specific
assessment, remediation or other services. Activities with suppliers and
customers have also involved their staffs and consultants. The Company engaged a
third party firm to assist with planning and taking the inventory of internal
systems and engaged another firm to perform an assessment of the overall scope
and schedule of Intel's year 2000 efforts.
The Company currently expects that the total cost of these programs, including
both incremental spending and redeployed resources, will not exceed $250
million. Approximately $35 million has been spent on the programs to date, of
which approximately $30 million was incurred in the first three quarters of
1998. Costs in the fourth quarter of 1998 are expected to be approximately $30
million. A majority of the total estimated costs are expected to be incurred in
assessing and remediating issues with manufacturing systems, and as a result, a
majority of the total costs are expected to be included in cost of sales and in
the calculation of gross margin. Expected year 2000 costs for manufacturing and
non-manufacturing internal systems in 1998 represent less than 10% of the total
information technology budget for 1998. No significant internal systems
projects are being deferred due to the year 2000 program efforts. 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 Company expects that costs related to accelerated
systems replacements will be approximately $15 million in addition to the total
costs noted above. In addition, the estimated costs do not include any
potential costs related to customer or other claims, or potential amounts
related to executing contingency plans, such as costs incurred on account of
an infrastructure or supplier failure. The Company has adequate general
corporate funds with which to pay for the programs' expected costs. All
expected costs are based on the current assessment of the programs and are
subject to change as the programs 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, customer or another third party would not have a
material adverse effect on the Company's financial condition or overall trends
in results of operations.
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 results of operations 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.
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; continued success in technological
advances, including development and implementation of new processes and
strategic products for specific market segments; execution of the
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
manufacturing ramp; effects of excess or shortage of manufacturing capacity;
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;
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
For financial market risks related to changes in interest rates and foreign
currency exchange rates, 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.
The Company is exposed to equity price risks on the marketable portion of
equity securities included in its portfolio of investments entered into for the
promotion of business and strategic objectives. These investments are generally
in companies in the high-technology industry sector, many of which are small
capitalization stocks. The Company typically does not attempt to reduce or
eliminate its market exposure on these securities. A 20% adverse change in
equity prices, based on a sensitivity analysis of the Company's investment
portfolio as of September 26, 1998, would result in an approximate $120
million decrease in the fair value of the Company's available-for-sale
securities. This represents an update to the equity risk disclosure contained
in the 1997 Annual Report to Stockholders based an increase in the dollar
value of the marketable portion of the portfolio of equity investments. Actual
results may differ materially.
17
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
Reference is made to Item 3. Legal Proceedings, in the Registrant's Annual
Report on Form 10-K for the year ended December 27, 1997 and to Part II,
Item 1. Legal Proceedings, in the Registrant's Quarterly Report on Form 10-Q
for the quarterly periods ended March 28, 1998 and June 27, 1998 for
descriptions of the following and other legal proceedings.
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 filed a motion for summary judgment on Intergraph's
patent claims on the grounds that Intel is licensed to those patents. In
September, Intergraph filed their opposition to that motion and filed its own
motion which seeks summary judgment in its favor on the same issue. 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.
EMI Group, NA v. Intel, DEL (C95-199)
-------------------------------------
In March 1995, the plaintiff brought suit in U.S. District Court in Delaware
alleging infringement of a U.S. patent relating to processes for manufacturing
semiconductors. In May 1996, the Court granted Intel's motion for summary
judgment on some of the processes in issue. In November 1996, the Court granted
Intel's motion for summary judgment on the remaining processes in issue and
entered judgment in favor of Intel and against the plaintiff on the claims of
the complaint. A unanimous decision by the Court of Appeals affirmed this
decision in September 1998.
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.
Item 5. Other Information
On September 16, 1998 the Board of Directors approved an amendment to the
Company's Bylaws to temporarily increase the number of authorized members of
the Board of Directors from 11 to 12. The number of authorized members will
automatically revert to 11 following the 1999 Annual Meeting of Stockholders.
The amended and restated Bylaws are attached hereto as Exhibit 3.1.
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Intel Corporation Bylaws as amended.
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 July 14, 1998, relating to
financial information for Intel Corporation for the quarter ended June
27, 1998 and forward-looking statements relating to 1998, the 3rd Quarter
of 1998 and the 2nd Half of 1998, as presented in a press release of July
14, 1998.
19
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: November 10, 1998 By: /s/ Andy D. Bryant
----------------------
Andy D. Bryant
Vice President, Chief Financial
Officer and Principal Accounting
Officer