Exhibit 13
PAGE 1
CONSOLIDATED STATEMENTS OF INCOME
Three years ended December 31, 1994
(In millions--except per share amounts) 1994 1993 1992
- -----------------------------------------------------------------------------------------
Net revenues $11,521 $ 8,782 $ 5,844
-------- -------- --------
Cost of sales 5,576 3,252 2,557
Research and development 1,111 970 780
Marketing, general and administrative 1,447 1,168 1,017
-------- -------- --------
Operating costs and expenses 8,134 5,390 4,354
-------- -------- --------
Operating income 3,387 3,392 1,490
Interest expense (57) (50) (54)
Interest income and other, net 273 188 133
-------- -------- --------
Income before taxes 3,603 3,530 1,569
Provision for taxes 1,315 1,235 502
-------- -------- --------
Net income $ 2,288 $ 2,295 $ 1,067
======== ======== ========
Earnings per common and common equivalent share $ 5.24 $ 5.20 $ 2.49
======== ======== ========
Weighted average common and common equivalent
shares outstanding 437 441 429
======== ======== ========
See accompanying notes.
PAGE 2
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and December 25, 1993
(In millions--except per share amounts) 1994 1993
- -----------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,180 $ 1,659
Short-term investments 1,230 1,477
Accounts receivable, net of allowance for doubtful
accounts of $32 ($22 in 1993) 1,978 1,448
Inventories 1,169 838
Deferred tax assets 552 310
Other current assets 58 70
-------- --------
Total current assets 6,167 5,802
-------- --------
Property, plant and equipment:
Land and buildings 2,292 1,848
Machinery and equipment 5,374 4,148
Construction in progress 850 317
-------- --------
8,516 6,313
Less accumulated depreciation 3,149 2,317
-------- --------
Property, plant and equipment, net 5,367 3,996
-------- --------
Long-term investments 2,127 1,416
Other assets 155 130
-------- --------
Total assets $13,816 $11,344
======== ========
Liabilities and stockholders' equity
Current liabilities:
Short-term debt $ 517 $ 399
Long-term debt redeemable within one year -- 98
Accounts payable 575 427
Deferred income on shipments to distributors 269 200
Accrued compensation and benefits 588 544
Other accrued liabilities 646 374
Income taxes payable 429 391
-------- --------
Total current liabilities 3,024 2,433
-------- --------
Long-term debt 392 426
Deferred tax liabilities 389 297
Put warrants 744 688
Commitments and contingencies
Stockholders' equity:
- ---------------------
Preferred Stock, $.001 par value, 50 shares
authorized; none issued -- --
Common Stock, $.001 par value, 1,400 shares authorized;
413 issued and outstanding in 1994 (418 in 1993) and
capital in excess of par value 2,306 2,194
Retained earnings 6,961 5,306
-------- --------
Total stockholders' equity 9,267 7,500
-------- --------
Total liabilities and stockholders' equity $13,816 $11,344
======== ========
See accompanying notes.
PAGE 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three years ended December 31, 1994
-----------------------------------
(In millions) 1994 1993 1992
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year $ 1,659 $ 1,843 $ 1,519
-------- -------- --------
Cash flows provided by (used for) operating activities:
Net income 2,288 2,295 1,067
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 1,028 717 518
Net loss on retirements of property, plant
and equipment 42 36 57
Amortization of debt discount 19 17 16
Change in deferred tax assets and liabilities (150) 12 13
Changes in assets and liabilities:
(Increase) in accounts receivable (530) (379) (371)
(Increase) in inventories (331) (303) (113)
(Increase) in other assets (13) (68) (61)
Increase in accounts payable 148 146 112
Tax benefit from employee stock plans 61 68 55
Increase in income taxes payable 38 32 207
Increase in accrued compensation and benefits 44 109 66
Increase in other liabilities 337 119 70
-------- -------- --------
Total adjustments 693 506 569
-------- -------- --------
Net cash provided by operating activities 2,981 2,801 1,636
-------- -------- --------
Cash flows provided by (used for) investing activities:
Additions to property, plant and equipment (2,441) (1,933) (1,228)
Purchases of long-term, available-for-sale investments (975) (1,165) (293)
Sales of long-term, available-for-sale investments 10 5 13
Maturities and other changes in available-for-sale
investments, net 503 (244) 28
-------- -------- --------
Net cash (used for) investing activities (2,903) (3,337) (1,480)
-------- -------- --------
Cash flows provided by (used for) financing activities:
(Decrease) increase in short-term debt, net (63) 197 29
Additions to long-term debt 128 148 --
Retirement of long-term debt (98) -- (20)
Proceeds from sales of shares through employee
stock plans and other 150 133 138
Proceeds from sale of Step-Up Warrants, net -- 287 --
Proceeds from sales of put warrants, net of repurchases 76 62 42
Repurchase and retirement of Common Stock (658) (391) --
Payment of dividends to stockholders (92) (84) (21)
-------- -------- --------
Net cash provided by (used for) financing activities (557) 352 168
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (479) (184) 324
-------- -------- --------
Cash and cash equivalents, end of year $ 1,180 $ 1,659 $ 1,843
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 76 $ 39 $ 32
Income taxes $ 1,366 $ 1,123 $ 227
Certain amounts reported in previous years have been reclassified to conform to
the 1994 presentation. See accompanying notes.
PAGE 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three years ended December 31, 1994
Common Stock and
capital in excess of par value
------------------------------
Number Retained
(In millions) of shares Amount earnings Total
- --------------------------------------------------------------------------------------
Balance at December 28, 1991 408 $ 1,641 $ 2,777 $ 4,418
Proceeds from sales of shares
through employee stock plans,
tax benefit of $55 and other 11 193 -- 193
Proceeds from sales of put warrants,
net of repurchases -- 42 -- 42
Reclassification of put warrant
obligation, net (100) (133) (233)
Cash dividends declared ($.10 per share) -- -- (42) (42)
Net income -- -- 1,067 1,067
-------- -------- -------- --------
Balance at December 26, 1992 419 1,776 3,669 5,445
Proceeds from sales of shares through
employee stock plans, tax benefit
of $68 and other 6 201 -- 201
Proceeds from sales of put warrants -- 62 -- 62
Reclassification of put warrant
obligation, net -- (37) (278) (315)
Proceeds from sale of Step-Up Warrants -- 287 -- 287
Repurchase and retirement of Common Stock (7) (95) (296) (391)
Cash dividends declared ($.20 per share) -- -- (84) (84)
Net income -- -- 2,295 2,295
-------- -------- -------- --------
Balance at December 25, 1993 418 2,194 5,306 7,500
Proceeds from sales of shares through
employee stock plans, tax benefit of
$61 and other 6 215 -- 215
Proceeds from sales of put warrants -- 76 -- 76
Reclassification of put warrant
obligation, net -- (15) (106) (121)
Repurchase and retirement of Common Stock (11) (164) (429) (593)
Redemption of Common Stock Purchase Rights -- -- (2) (2)
Cash dividends declared ($.23 per share) -- -- (96) (96)
Net income -- -- 2,288 2,288
-------- -------- -------- --------
Balance at December 31, 1994 413 $ 2,306 $ 6,961 $ 9,267
======== ======== ======== ========
See accompanying notes.
PAGE 5
ACCOUNTING POLICIES
FISCAL YEAR. Intel Corporation ("Intel" or "the Company") has a fiscal year
that ends the last Saturday in December. Fiscal 1994 was a 53-week year and
ended on December 31, 1994. Fiscal 1993 and 1992, each 52-week years, ended on
December 25 and 26, respectively. The next 53-week year will end on December
30, 2000.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Intel and its wholly owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated. Accounts denominated in foreign
currencies have been remeasured into the functional currency in accordance
with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign
Currency Translation," using the U.S. dollar as the functional currency.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents are highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less.
INVESTMENTS. In 1994, the Company adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," effective as of the beginning of
fiscal 1994. This adoption had no material effect on the Company's financial
statements. All of the Company's short- and long-term investments are
classified as available-for-sale as of the balance sheet date and are reported
at fair value, with unrealized gains and losses recorded as a component of
stockholders' equity.
FAIR VALUES OF FINANCIAL INSTRUMENTS. Fair values of cash and cash equivalents,
short-term investments and short-term debt approximate cost due to the short
period of time to maturity. Fair values of long-term investments, long-term
debt, swaps, currency forward contracts and currency options are based on
quoted market prices or pricing models using current market rates.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
computed on a currently adjusted standard basis (which approximates actual cost
on a current average or first-in, first-out basis). Inventories at fiscal year-
ends are as follows:
(In millions) 1994 1993
- ----------------------------------------------------------
Materials and purchased parts $ 345 $ 216
Work in process 528 321
Finished goods 296 301
------ ------
Total $1,169 $ 838
====== ======
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Depreciation is computed for financial reporting purposes principally by
use of the straight-line method over the following estimated useful lives:
machinery and equipment, 2-4 years; land and buildings, 4-45 years.
DEFERRED INCOME ON SHIPMENTS TO DISTRIBUTORS. Certain of the Company's sales
are made to distributors under agreements allowing price protection and/or
right of return on merchandise unsold by the distributors. Because of frequent
sales price reductions and rapid technological obsolescence in the industry,
Intel defers recognition of such sales until the merchandise is sold by the
distributors.
INTEREST. Interest as well as gains and losses related to contractual
agreements to hedge certain investment positions and debt (see "Derivative
financial instruments") are recorded as net interest income or expense on a
monthly basis. Interest expense capitalized as a component of construction
costs was $27 million, $8 million and $11 million for 1994, 1993 and 1992,
respectively.
ACCOUNTING FOR INCOME TAXES. In 1993, the Company adopted SFAS No. 109,
"Accounting for Income Taxes," effective as of the beginning of fiscal 1993.
This adoption had no material effect on Intel's financial statements. Prior
years were accounted for under SFAS No. 96 and have not been restated.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE. Earnings per common and common
equivalent share are computed using the weighted average number of outstanding
common and dilutive common equivalent shares outstanding. Fully diluted
earnings per share have not been presented as part of the consolidated
statements of income because the differences are insignificant.
COMMON STOCK
COMMON STOCK PURCHASE RIGHTS. At the Company's Annual Meeting of Stockholders
in May 1994, stockholders approved a proposal to redeem the Common Stock
Purchase Rights (the "Rights") issued in 1989. A one-time payment of $.005 per
share was paid to stockholders in September 1994 to redeem the Rights.
1998 STEP-UP WARRANTS. In 1993, the Company issued 20 million 1998 Step-Up
Warrants to purchase 20 million shares of Common Stock. This transaction
resulted in an increase of $287 million in Common Stock and capital in excess
of par value, representing net proceeds from the offering. The Warrants became
exercisable in May 1993 at an effective price of $71.50 per share of Common
Stock, subject to annual increases to a maximum price of $83.50 per share
effective in March 1997. As of December 31, 1994, the Warrants are exercisable
at a price of $74.50 and expire on March 14, 1998 if not previously exercised.
At prevailing market prices for Intel's Common Stock, there is no dilutive
effect on earnings per share for the periods presented.
STOCK REPURCHASE PROGRAM. In 1990, the Board of Directors authorized the
repurchase of up to 40 million shares of Intel's Common Stock in open market
or negotiated transactions. The Board increased this authorization to a maximum
of 55 million shares in July 1994. During 1994, the Company repurchased and
retired 10.9 million shares (7.3 million shares in 1993) at a cost of $658
million ($391 million in 1993). The 1994 amounts include 1.0 million shares
repurchased for $65 million in connection with the exercise of put warrants
(see "Put warrants"). As of December 31, 1994, after reserving shares to cover
outstanding put warrants, 17.9 million shares remained available under the
repurchase authorization.
PAGE 6
PUT WARRANTS
In a series of private placements from 1991 through 1994, the Company sold put
warrants that entitle the holder of each warrant to sell one share of Common
Stock to the Company at a specified price. Activity during the past three years
is summarized as follows:
Put warrants outstanding
Cumulative -------------------------
premium Number Potential
(In millions) received (paid) of warrants obligation
- -------------------------------------------------------------------------------
December 28, 1991 $ 14 7.0 $ 140
Sales 43 14.0 373
Repurchases (1) (5.2) (104)
Expirations -- (1.8) (36)
------ ------ ------
December 26, 1992 56 14.0 373
Sales 62 10.8 561
Expirations -- (10.0) (246)
------ ------ ------
December 25, 1993 118 14.8 688
Sales 76 12.5 744
Exercises -- (1.0) (65)
Expirations -- (13.8) (623)
------ ------ ------
December 31, 1994 $ 194 12.5 $ 744
====== ====== ======
The amount related to Intel's potential repurchase obligation has been
reclassified from stockholders' equity to put warrants. The 12.5 million put
warrants outstanding at December 31, 1994 expire on various dates between
February 1995 and December 1995 and have exercise prices ranging from $55 to
$63 per share. There was no effect on earnings per share for the periods
presented. During 1994, in connection with the exercise of 1.0 million put
warrants, the Company repurchased and retired 1.0 million shares of Common
Stock at a cost of $65 million (see "Stock repurchase program").
BORROWINGS
SHORT-TERM DEBT. Short-term debt and weighted average interest rates at fiscal
year-ends are as follows:
1994 1993
------------------------ -------------------------
Weighted Weighted
average average
(In millions) Balance interest rate Balance interest rate
- ------------------------------------------------------------------------------
Borrowed under
lines of credit $ 68 3.2% $ 85 5.8%
Reverse repurchase
agreements 99 8.0% 197 7.9%
Notes payable 5 4.7% 2 3.4%
Short-term portion
of long-term debt 179 11.8% -- --
Drafts payable 166 N/A 115 N/A
------ ------ ------ ------
Total $ 517 $ 399
====== ====== ====== ======
At December 31, 1994, the Company had established foreign and domestic lines
of credit of approximately $1,040 million. The Company generally renegotiates
these lines annually. Compensating balance requirements are not material.
The Company also borrows under commercial paper programs. Maximum borrowings
reached $700 million during both 1994 and 1993. This debt is rated A1+ by
Standard and Poor's and P1 by Moody's. Proceeds are used to fund short-term
working capital needs.
LONG-TERM DEBT. Long-term debt at fiscal year-ends is as follows:
(In millions) 1994 1993
- -----------------------------------------------------------------------
Payable in U.S. dollars:
AFICA Bonds due 2013 at 4% $ 110 $ 110
Zero Coupon Notes due 1995 at 11.8%,
net of unamortized discount of $8
($27 in 1993) 179 160
8 1/8% Notes due 1997 -- 98
Other U.S. dollar debt 4 6
Payable in other currencies:
Irish punt due 2008-2024 at 6%-12% 228 146
Greek drachma due 2001 46 --
Other foreign currency debt 4 4
(Less short-term or redeemable portion) (179) (98)
------ ------
Total $ 392 $ 426
====== ======
The Company has guaranteed repayment of principal and interest on the AFICA
Bonds which were issued by the Puerto Rico Industrial, Medical and
Environmental Pollution Control Facilities Financing Authority (AFICA). The
bonds are adjustable and redeemable at the option of either the Company or the
bondholder every five years through 2013 and are next adjustable and redeemable
in 1998. The 8 1/8% notes were called and repurchased by the Company during
1994 for $98 million. The Irish punt borrowings were made in connection with
the financing of a factory in Ireland, and Intel has invested the proceeds in
Irish punt denominated instruments of similar maturity to hedge foreign
currency and interest rate exposures. The Greek drachma borrowings were made
under a tax incentive program in Ireland, and the proceeds and cash flows have
been swapped to U.S. dollars.
In 1993, the Company filed a shelf registration statement with the SEC. When
combined with previous registration statements, this filing gave Intel the
authority to issue up to $3.3 billion in the aggregate of Common Stock,
Preferred Stock, depositary shares, debt securities and warrants to purchase
the Company's Common Stock, Preferred Stock and debt securities, and, subject
to certain limits, stock index warrants and foreign currency exchange units. In
1993, Intel completed an offering of Step-Up Warrants (see "1998 Step-Up
Warrants") and may issue up to $1.4 billion in additional securities under open
registration statements.
As of December 31, 1994, aggregate debt maturities are as follows: 1995-$187
million; 1996-none; 1997-none; 1998-$110 million; and thereafter-$282 million.
PAGE 7
INVESTMENTS
The Company's policy is to protect the value of the investment portfolio by
minimizing principal risk and earning returns based on current interest rates.
All hedged equity and a majority of investments in long-term fixed rate debt
securities are swapped to U.S. dollar LIBOR-based returns. The currency risks
of investments denominated in foreign currencies are hedged with foreign
currency borrowings, currency forward contracts or currency interest rate swaps
(see "Derivative financial instruments"). Investments with maturities of
greater than one year are classified as long term. There were no material
proceeds, gross realized gains or gross realized losses from sales of
securities during the year.
Investments with maturities of greater than six months consist primarily of
A/A2 or better rated financial instruments and counterparties. Investments with
maturities of up to six months consist primarily of A1/P1 or better rated
financial instruments and counterparties. Foreign government regulations
imposed upon investment alternatives of foreign subsidiaries or the absence of
A/A2 rated counterparties in certain countries result in some minor exceptions.
Intel's practice is to obtain and secure collateral from counterparties against
obligations whenever deemed appropriate. At December 31, 1994, investments were
placed with approximately 100 different counterparties, and no individual
security, financial institution or issuer exceeded 10% of total investments.
Investments at December 31, 1994 are comprised of the following:
Gross Gross
unrealized unrealized Estimated
(In millions) Cost gains losses fair value
- ----------------------------------------------------------------------------
Securities of foreign
governments $ 518 $ 2 $ (7) $ 513
Floating rate notes 488 1 (1) 488
Corporate bonds 440 12 (14) 438
Loan participations 200 6 (2) 204
Collateralized mortgage
obligations 170 -- (4) 166
Fixed rate notes 167 1 (2) 166
Commercial paper 134 -- -- 134
Other debt securities 439 -- (5) 434
------- ------- ------- -------
Total debt securities 2,556 22 (35) 2,543
------- ------- ------- -------
Hedged equity 431 -- (58) 373
Preferred stock and
other equity 368 20 (16) 372
------- ------- ------- -------
Total equity securities 799 20 (74) 745
------- ------- ------- -------
Swaps hedging
debt securities -- 22 (14) 8
Swaps hedging
equity securities -- 60 -- 60
Currency forward
contracts hedging
debt securities -- 1 -- 1
------- ------- ------- -------
Total available-for-sale
securities $3,355 $ 125 $ (123) $3,357
======= ======= ======= =======
At December 31, 1994, the Company also holds $930 million of available-for-sale
investments in other debt securities that are classified as cash and
equivalents on the balance sheet.
The amortized cost and estimated fair value of investments in debt securities
at December 31, 1994, by contractual maturity, are as follows:
Estimated
(In millions) Cost fair value
- -------------------------------------------------------------
Due in 1 year or less $1,144 $1,144
Due in 1-2 years 515 512
Due in 2-5 years 642 635
Due after 5 years 255 252
------ ------
Total investments in debt securities $2,556 $2,543
====== ======
DERIVATIVE FINANCIAL INSTRUMENTS
As part of its ongoing asset and liability management activities, the Company
enters into derivative financial instruments to reduce financial market risks.
These instruments are used to hedge foreign currency, equity market and
interest rate exposures of underlying assets, liabilities and other
obligations. These instruments involve elements of market risk which offset the
market risk of the underlying assets and liabilities they hedge. The Company
does not enter into derivative financial instruments for trading purposes.
Notional amounts for derivatives at fiscal year-ends are as follows:
(In millions) 1994 1993
- ---------------------------------------------------------------------------
Swaps hedging investments in debt securities $1,080 $ 809
Swaps hedging investments in equity securities $ 567 $ 260
Swaps hedging debt $ 155 $ 110
Currency forward contracts $ 784 $ 620
Currency options $ 10 $ 28
While the contract or notional amounts provide one measure of the volume of
these transactions, they do not represent the amount of the Company's exposure
to credit risk. The amounts potentially subject to credit risk (arising from
the possible inability of counterparties to meet the terms of their contracts)
are generally limited to the amounts, if any, by which the counterparties'
obligations exceed the obligations of the Company. The Company controls credit
risk through credit approvals, limits and monitoring procedures. Credit rating
criteria for off-balance-sheet transactions are similar to those for
investments.
SWAP AGREEMENTS. The Company enters into swap agreements to exchange the
foreign currency, equity market, and fixed interest rate exposures of its
investment and debt portfolios for a floating interest rate. The floating rates
on swaps are based primarily on U.S. dollar LIBOR and reset on a monthly,
quarterly or semiannual basis.
PAGE 8
Weighted average pay and receive rates, average maturities, and range of
maturities on swaps at December 31, 1994 are as follows:
Weighted Weighted Weighted
average average average Range of
pay rate receive rate maturity maturities
- ----------------------------------------------------------------------------
Swaps hedging
investments in
U.S. dollar
debt securities 6.7% 6.0% 1.2 years 0-4 years
Swaps hedging
investments in
foreign currency
debt securities 10.8% 8.2% 1.8 years 0-3 years
Swaps hedging
investments in
equity securities N/A 5.5% 2.1 years 0-3 years
Swaps hedging debt 6.1% 5.2% 4.9 years 4-7 years
Pay rates on swaps hedging investments in debt securities generally match the
yields on the underlying investments they hedge. Payments on swaps hedging
investments in equity securities generally match the equity returns on the
underlying investments they hedge. Receive rates on swaps hedging debt
generally match the expense on the underlying debt they hedge. Maturity dates
of swaps generally match those of the underlying investment or the debt they
hedge. There is approximately a one-to-one matching of investments and debt to
swaps. Swap agreements generally remain in effect until expiration. Income or
expense on swaps is accrued as an adjustment to the yield of the related
investments or debt they hedge.
OTHER FOREIGN CURRENCY INSTRUMENTS. Intel transacts business in various foreign
currencies, primarily Japanese yen and certain European currencies. The Company
enters into currency forward and option contracts to hedge foreign exchange
risk. The Company also periodically enters into currency option contracts to
hedge certain anticipated revenue and purchases for which it does not have a
firm commitment. The maturities on most of these foreign currency instruments
are less than 12 months. Any gains or losses on these instruments are
recognized in accordance with SFAS Nos. 52 and 80. Deferred gains or losses
attributable to foreign currency instruments are not material.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments at fiscal year-ends are
as follows:
1994 1993
---------------------- ----------------------
Carrying Estimated Carrying Estimated
(In millions) amount fair value amount fair value
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 1,180 $ 1,180 $ 1,659 $ 1,659
Short-term investments 1,230 1,230 1,477 1,477
Long-term investments 2,058 2,058 1,416 1,412
Swaps hedging investments in
debt securities 8 8 -- --
Swaps hedging investments in
equity securities 60 60 -- --
Short-term debt (517) (517) (399) (399)
Long-term debt (392) (384) (426) (436)
Swaps hedging debt -- (12) -- --
Currency forward contracts 1 5 -- 9
Currency options -- -- -- --
------- ------- ------- -------
Total $3,628 $3,628 $3,727 $3,722
======= ======= ======= =======
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of investments and trade receivables. Intel
places its investments with high-credit-quality counterparties and, by policy,
limits the amount of credit exposure to any one counterparty. A majority of the
Company's trade receivables are derived from sales to manufacturers of
microcomputer systems, with the remainder spread across various other
industries. The Company keeps pace with the evolving computer industry and has
adopted credit policies and standards to accommodate the industry's growth and
inherent risk. Management believes that any risk of accounting loss is
significantly reduced due to the diversity of its products, end customers and
geographic sales areas. Intel performs ongoing credit evaluations of its
customers' financial condition and requires collateral, such as letters of
credit and bank guarantees, whenever deemed necessary.
INTEREST INCOME AND OTHER
(In millions) 1994 1993 1992
- -------------------------------------------------------------------
Interest income $235 $155 $141
Foreign currency gains (losses) 15 -- (1)
Other income (loss) 23 33 (7)
----- ----- -----
Total $273 $188 $133
===== ===== =====
Other income for 1994 included non-recurring gains from the settlement of
various insurance claims. Other income for 1993 included non-recurring gains
from the sale of certain foreign benefits related to the Company's Irish
expansion and dividend income earned on equity investments. Other loss for 1992
included a provision to cover the Company's liability for damages payable under
an arbitration decision, partially offset by income from incentive credits.
PAGE 9
PROVISION FOR TAXES
Income before taxes and the provision for taxes consisted of the following:
(In millions) 1994 1993 1992
- ------------------------------------------------------------------
Income before taxes:
U.S. $2,460 $2,587 $ 924
Foreign 1,143 943 645
------ ------ ------
Total income before taxes: $3,603 $3,530 $1,569
====== ====== ======
Provision for taxes:
Federal:
Current $1,169 $ 946 $ 339
Deferred (178) 35 6
------ ------ ------
991 981 345
------ ------ ------
State:
Current 162 150 71
Foreign:
Current 134 127 79
Deferred 28 (23) 7
------ ------ ------
162 104 86
------ ------ ------
Total provision for taxes $1,315 $1,235 $ 502
====== ====== ======
Effective tax rate 36.5% 35.0% 32.0%
====== ====== ======
The tax benefit associated with dispositions from employee stock plans reduced
taxes currently payable for 1994 by $61 million and for 1993 by $68 million.
Such benefits are credited to Common Stock and capital in excess of par value
when realized.
The provision for taxes reconciles to the amount computed by applying the
statutory U.S. federal rate of 35% for 1994 (35% for 1993 and 34% for 1992) to
income before taxes as follows:
(In millions) 1994 1993 1992
- -------------------------------------------------------------------
Computed expected tax $1,261 $1,235 $ 533
State taxes, net of federal benefits 105 98 47
Research and experimental credit (11) (23) (7)
Foreign sales corporation benefit (50) (46) (36)
Provision for combined
foreign and U.S. taxes on
certain foreign income at
rates (less) greater
than U.S. rate (37) 1 (17)
Other 47 (30) (18)
------- ------- -------
Provision for taxes $1,315 $1,235 $ 502
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities at fiscal year-ends are as
follows:
(In millions) 1994 1993
- ----------------------------------------------------------------------------
Deferred tax assets:
Accrued compensation and other benefits $ 49 $ 44
Accrued advertising 17 18
Deferred income 127 76
Inventory valuation and related reserves 255 77
Interest and taxes 54 72
Other, net 50 23
------- -------
552 310
Deferred tax liabilities:
Depreciation (338) (245)
Unremitted earnings of certain subsidiaries (51) (52)
------- -------
(389) (297)
------- -------
Net deferred tax asset $ 163 $ 13
======= =======
During 1992, in accordance with SFAS No. 96, deferred income taxes were
provided for significant temporary differences. The principal items making up
the 1992 deferred tax expense included $42 million for depreciation reduced by
$18 million for inventory valuation and other reserves, and $12 million of
other items.
The Company's U.S. income tax returns for the years 1978 through 1987 have been
examined by the Internal Revenue Service (IRS). In 1989, the Company received a
notice of proposed deficiencies from the IRS totaling $36 million, exclusive of
penalties and interest, for the years 1978 through 1982. These proposed
deficiencies relate primarily to operations in Puerto Rico. In 1989, the
Company filed a petition in the U.S. Tax Court contesting these proposed
deficiencies and subsequently reached settlement of certain issues with the
IRS. In 1993, the U.S. Tax Court ruled in favor of the Company on the export
source issue and for the IRS on another, smaller issue. The IRS has appealed
the decision to the United States Court of Appeals for the Ninth Circuit, and
the Company has filed a cross-appeal of the decision.
The Company has also received an examination report for the years 1983 through
1987. Intel has lodged a protest, which relates solely to the export source
issue referenced above, to the IRS Appeals Office, but no decisions have been
reached.
The Company's U.S. income tax returns for the years 1988 through 1990 are
presently under examination by the IRS. Final proposed adjustments have not yet
been received for these years. Management believes that adequate amounts of
tax and related interest and penalties, if any, have been provided for any
adjustments that may result from unsettled portions of the 1978-1987 cases or
the years now under examination.
EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS. Intel has stock option plans (hereafter referred to as the
EOP Plans) under which officers, key employees and non-employee directors may
be granted options to purchase shares of the Company's authorized but unissued
Common Stock. The Company also has an Executive Long-Term Stock Option Plan
(ELTSOP) under which certain key executive officers may be granted options to
purchase shares of the Company's authorized but unissued Common Stock. Under
all plans, the option purchase price is not less than fair market value at the
date of grant.
PAGE 10
Options currently expire no later than ten years from the grant date. Proceeds
received by the Company from exercises are credited to Common Stock and capital
in excess of par value. Additional information on EOP Plan activity is as
follows:
Outstanding options
Shares ---------------------------
available Number Aggregate
(In millions) for options of shares price
- ------------------------------------------------------------------------------
December 28, 1991 38.1 39.0 $ 585
Grants (7.3) 7.3 195
Exercises -- (7.6) (78)
Cancellations 1.9 (1.9) (33)
------- ------- -------
December 26, 1992 32.7 36.8 669
Grants (7.6) 7.6 357
Exercises -- (4.5) (56)
Cancellations 0.9 (0.9) (24)
------- ------- -------
December 25, 1993 26.0 39.0 946
Grants (6.0) 6.0 397
Exercises -- (4.1) (54)
Cancellations 0.8 (0.8) (33)
------- ------- -------
December 31, 1994 20.8 40.1 $1,256
======= ======= =======
Options exercisable at:
December 26, 1992 9.8 $ 109
December 25, 1993 10.2 $ 135
December 31, 1994 13.1 $ 198
The range of exercise prices for options outstanding at December 31, 1994 was
$6.08 to $72.25. These options expire if not exercised at specific dates
ranging from January 1995 to December 2004. Prices for options exercised during
the three-year period ended December 31, 1994 ranged from $3.52 to $58.78.
Activity for the ELTSOP Plan is summarized below:
Outstanding options
Shares -------------------------
available Number Aggregate
(In millions) for options of shares price
- ----------------------------------------------------------------------------
December 28, 1991 6.4 3.5 $ 51
Exercises -- (0.3) (4)
Cancellations 0.2 (0.2) (3)
------- ------- -------
December 26, 1992 6.6 3.0 44
Grants (0.2) 0.2 11
Exercises -- (0.4) (6)
------- ------- -------
December 25, 1993 6.4 2.8 49
Exercises -- (0.3) (4)
------- ------- -------
December 31, 1994 6.4 2.5 $ 45
======= ======= =======
Options exercisable at:
December 26, 1992 0.5 $ 7
December 25, 1993 0.7 $ 11
December 31, 1994 1.3 $ 19
The exercise prices of options outstanding at December 31, 1994 ranged from
$14.63 to $54.63. These options expire if not exercised at specific dates
ranging from April 1999 to July 2003. The price range for options exercised
during the three-year period ended December 31, 1994 was $14.63 to $14.69.
STOCK PARTICIPATION PLAN. Under this plan, qualified employees may purchase
shares of Intel's Common Stock at 85% of fair market value at specific,
predetermined dates. Of the 59.0 million shares authorized to be issued under
the plan, 15.4 million shares are available for issuance at December 31, 1994.
Employees purchased 2.0 million shares in 1994 (2.2 million and 2.6 million in
1993 and 1992, respectively) for $94 million ($71 million and $57 million in
1993 and 1992, respectively).
RETIREMENT PLANS. The Company provides profit-sharing retirement plans (the
"Profit-Sharing Plans") for the benefit of qualified employees in the U.S. and
Puerto Rico. The plans are designed to provide employees with an accumulation
of funds at retirement and provide for annual discretionary contributions to
trust funds.
The Company also provides a non-qualified profit-sharing retirement plan (the
"Non-Qualified Plan") for the benefit of qualified employees in the U.S. This
plan is designed to permit certain discretionary employer contributions in
excess of the tax limits applicable to the profit-sharing retirement plans
discussed above and to permit certain employee deferrals in excess of certain
tax limits. This plan is intended to be an unfunded plan.
The Company accrued $152 million for the Profit-Sharing Plans and the Non-
Qualified Plan in 1994 ($103 million in 1993 and $93 million in 1992). Of the
$152 million accrued in 1994, the Company expects to fund approximately $126
million for the 1994 contribution to the Profit-Sharing Plans and to allocate
approximately $5 million for the Non-Qualified Plan. The remainder, plus
approximately $120 million carried forward from prior years, is expected to be
contributed to these plans when allowable under IRS regulations and plan rules.
Contributions made by the Company vest based on the employee's years of
service. Vesting begins after three years of service in 20% annual increments
until the employee is 100% vested after seven years.
The Company provides qualified defined benefit pension plans for the benefit of
qualified employees in the U.S. and Puerto Rico. Each plan provides for minimum
pension benefits, which are determined by a participant's years of service,
final average compensation (taking into account the participant's social
security wage base), and the value of the Company's contributions, plus
earnings, in the Profit-Sharing Plan. If the balance in the participant's
Profit-Sharing Plan exceeds the pension guarantee, the participant will receive
benefits from the Profit-Sharing Plan only. Intel's funding policy is
consistent with the funding requirements of federal laws and regulations.
PAGE 11
Pension expense for 1994, 1993 and 1992 for the U.S. and Puerto Rico plans was
less than $1 million per year, and no component of expense exceeded $1 million.
The funded status of these plans as of December 31, 1994 and December 25, 1993
is as follows:
(In millions) 1994 1993
- -------------------------------------------------------------------------
Vested benefit obligation $ (3) $ (2)
===== =====
Accumulated benefit obligation $ (3) $ (2)
===== =====
Projected benefit obligation $ (5) $ (8)
Fair market value of plan assets 6 6
----- -----
Projected benefit obligation less than
(in excess of) plan assets 1 (2)
Unrecognized net (gain) (12) (10)
Unrecognized prior service cost 4 5
----- -----
Accrued pension costs $ (7) $ (7)
===== =====
At fiscal year-ends, the weighted average discount rates and long-term rates
for compensation increases used for estimating the benefit obligations and the
expected return on plan assets are as follows:
1994 1993 1992
- ------------------------------------------------------------------------
Discount rate 8.5% 7.0% 8.5%
Rate of increase in compensation levels 5.5% 5.0% 5.5%
Expected long-term return on assets 8.5% 8.5% 8.5%
Plan assets of the U.S. and Puerto Rico plans consist primarily of listed
stocks and bonds, repurchase agreements, money market securities, U.S.
government securities and stock index derivatives.
The Company provides defined-benefit pension plans in certain foreign countries
where required by statute. The Company's funding policy for foreign defined-
benefit plans is consistent with the local requirements in each country.
Pension expense for 1994, 1993 and 1992 for the foreign plans included the
following:
(In millions) 1994 1993 1992
- -------------------------------------------------------------------------
Service cost-benefits earned
during the year $ 5 $ 5 $ 5
Interest cost of projected
benefit obligation 5 6 5
Actual investment (return)
on plan assets (8) (7) --
Net amortization and deferral 3 2 (5)
----- ----- -----
Net pension expense $ 5 $ 6 $ 5
===== ===== =====
The funded status of the foreign defined-benefit plans as of December 31, 1994
and December 25, 1993 is summarized below:
Assets
exceed Accumulated
1994 accumulated benefits
(In millions) benefits exceed assets
- -------------------------------------------------------------------------------
Vested benefit obligation $ (32) $ (4)
======= =======
Accumulated benefit obligation $ (34) $ (9)
======= =======
Projected benefit obligation $ (49) $ (16)
Fair market value of plan assets 51 3
------- -------
Projected benefit obligation less than
(in excess of) plan assets 2 (13)
Unrecognized net loss 2 2
Unrecognized net transition obligation -- 1
------- -------
Prepaid (accrued) pension costs $ 4 $ (10)
======= =======
Assets exceed Accumulated
1993 accumulated benefits
(In millions) benefits exceed assets
- -------------------------------------------------------------------------------
Vested benefit obligation $ (27) $ (3)
======= =======
Accumulated benefit obligation $ (28) $ (7)
======= =======
Projected benefit obligation $ (39) $ (12)
Fair market value of plan assets 41 2
------- -------
Projected benefit obligation
less than (in excess of) plan assets 2 (10)
Unrecognized net transition obligation -- 1
------- -------
Prepaid (accrued) pension costs $ 2 $ (9)
======= =======
At fiscal year-ends, the weighted average discount rates and long-term rates
for compensation increases used for estimating the benefit obligations and the
expected return on plan assets are as follows:
1994 1993 1992
- -------------------------------------------------------------------------
Discount rate 5.5%-14% 5.5%-14% 5.5%-24%
Rate of increase in
compensation levels 4.5%-11% 4.5%-11% 4.5%-18%
Expected long-term
return on assets 5.5%-14% 5.5%-14% 5.5%-24%
Plan assets of the foreign plans consist primarily of listed stocks, bonds and
cash surrender value life insurance policies.
OTHER POSTEMPLOYMENT BENEFITS. As of December 31, 1994, Intel does not offer
the types of benefits covered by SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and thus is not affected by this
statement. SFAS No. 112, "Employers' Accounting for Postemployment Benefits,"
does not materially impact the Company.
PAGE 12
COMMITMENTS
The Company leases a portion of its capital equipment and certain of its
facilities under leases which expire at various dates through 2003. Rental
expense was $38 million in 1994, $35 million in 1993 and $39 million in 1992.
Minimum rental commitments under all non-cancelable leases with an initial term
in excess of one year are payable as follows: 1995-$16 million; 1996-$14
million; 1997-$11 million; 1998-$8 million; 1999-$5 million; 2000 and beyond-
$8 million. Commitments for construction or purchase of property, plant and
equipment approximate $1,406 million at December 31, 1994. In connection with
certain contract manufacturing arrangements, Intel has minimum purchase
commitments of approximately $150 million at December 31, 1994 for flash
memories intended for sale.
CONTINGENCIES
In 1991, the Company was sued by Advanced Micro Devices, Inc. (AMD) in the U.S.
District Court for the Northern District of California, alleging violations of
U.S. antitrust laws and claiming $2 billion damages and requesting treble
damages under the antitrust laws. On January 11, 1995, in connection with the
settlement of various legal matters between the two companies, the parties
agreed to dismiss all claims, counterclaims and defenses raised in this action.
During late 1994, numerous civil lawsuits were filed in the U.S. District Court
for the Northern District of California alleging that Intel failed to disclose
material information relating to the divide problem in the floating point unit
in the Pentium(R) processor, thereby committing violations of various
securities laws. In addition, certain officers and directors who sold stock
were alleged to have committed acts of insider trading. All cases were dismissed
on February 9, 1995.
During the period from November 29, 1994 through December 19, 1994, numerous
civil consumer lawsuits were filed in state courts in various states against
the Company. Although the complaints differ, these actions generally allege
that Intel breached express and implied warranties, engaged in deceptive
advertising and otherwise committed consumer fraud by shipping Pentium
processors that contained a divide problem in the floating point unit, and by
failing to disclose it. The suits seek compensatory and punitive damages of
unspecified amounts. In two of the pending cases, plaintiffs have filed a
motion for a preliminary injunction, seeking to modify and more widely
publicize Intel's replacement policy and other related relief. The Company
believes the suits to be without merit and will defend the cases vigorously.
Although the ultimate outcome of these suits cannot be determined at this time,
management, including internal counsel, does not believe that the outcome of
this litigation will have a material adverse effect on the Company's financial
position or overall trends in results of operations.
The Company has been named to the California and U.S. federal Superfund lists
for three of its sites and has completed, along with two other companies, a
Remedial Investigation/Feasibility Study with the U.S. Environmental Protection
Agency (EPA) to evaluate the groundwater in a certain area related to one of
its sites. The EPA has issued a Record of Decision with respect to a
groundwater cleanup plan at that site, including expected costs to complete.
Under the California and U.S. federal Superfund statutes, liability for cleanup
of this site is joint and several. The Company, however, has reached agreement
in principle with those same two companies that significantly limits the
Company's liabilities under the proposed cleanup plan. In addition, the Company
has done extensive cleanup and studies of its sites. In the opinion of
management, including internal counsel, the potential losses to the Company in
excess of amounts already accrued arising out of these matters will not have a
material adverse effect on the Company's financial position, even if joint and
several liability were to be assessed.
The Company is party to various other legal proceedings. In the opinion of
management, including internal counsel, these proceedings will not have a
material adverse effect on the financial position or overall trends in results
of operations of the Company.
INDUSTRY SEGMENT REPORTING
Intel operates in one dominant industry segment: the design, development,
manufacture and sale of microcomputer components and related products at
various levels of integration. No customer exceeded 10% of revenues in 1994.
One significant customer accounted for 10% of revenues in 1993; none did so in
1992. Major operations outside the United States include manufacturing
facilities in Ireland, Israel, Malaysia, and the Philippines, and sales
subsidiaries in Japan, Asia-Pacific, and throughout Europe and other parts of
the world. Summary balance sheet information for operations outside the United
States at fiscal year-ends is as follows:
(In millions) 1994 1993
- ----------------------------------------------------------
Total assets $2,940 $2,192
Total liabilities $ 962 $ 637
Net property, plant and equipment $1,238 $1,042
PAGE 13
Geographic information for the three years ended December 31, 1994 is presented
in the following table. Transfers between geographic areas are accounted for at
amounts that are generally above cost and consistent with the rules and
regulations of governing tax authorities. Such transfers are eliminated in the
consolidated financial statements. Operating income by geographic segment does
not include an allocation of general corporate expenses. Identifiable assets
are those that can be directly associated with a particular geographic area.
Corporate assets include cash and cash equivalents, short-term investments,
deferred tax assets, other current assets, long-term investments and certain
other assets.
Sales to Transfers
(In millions) unaffiliated between geo- Net Operating Identifiable
1994 customers graphic areas revenues income assets
- -------------------------------------------------------------------------------------
United States $ 5,826 $ 4,561 $10,387 $ 2,742 $ 7,771
Europe 3,158 380 3,538 418 1,733
Japan 944 61 1,005 125 343
Asia-Pacific 1,593 1,021 2,614 154 540
Other -- 639 639 378 324
Eliminations -- (6,662) (6,662) 179 (1,878)
Corporate -- -- -- (609) 4,983
------- ------- ------- ------- -------
Consolidated $11,521 $ -- $11,521 $ 3,387 $13,816
======= ======= ======= ======= =======
1993
- -------------------------------------------------------------------------------------
United States $ 4,416 $ 3,406 $ 7,822 $ 2,896 $ 5,379
Europe 2,476 51 2,527 309 1,214
Japan 678 119 797 108 351
Asia-Pacific 1,212 745 1,957 132 420
Other -- 566 566 348 207
Eliminations -- (4,887) (4,887) 85 (1,123)
Corporate -- -- -- (486) 4,896
------- ------- ------- ------- -------
Consolidated $ 8,782 $ -- $ 8,782 $ 3,392 $11,344
======= ======= ======= ======= =======
1992
- -------------------------------------------------------------------------------------
United States $ 3,018 $ 2,339 $ 5,357 $ 1,313 $ 3,761
Europe 1,435 47 1,482 160 937
Japan 452 71 523 54 282
Asia-Pacific 939 595 1,534 127 321
Other -- 444 444 269 175
Eliminations -- (3,496) (3,496) 28 (751)
Corporate -- -- -- (461) 3,364
------- ------- ------- ------- -------
Consolidated $ 5,844 $ -- $ 5,844 $ 1,490 $ 8,089
======= ======= ======= ======= =======
Supplemental information (unaudited)
Quarterly information for the two years ended December 31, 1994 is presented on
page 31.
PAGE 14
REPORT OF ERNST & YOUNG LLP
Independent auditors
The Board of Directors and Stockholders, Intel Corporation
We have audited the accompanying consolidated balance sheets of Intel
Corporation as of December 31, 1994 and December 25, 1993, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intel Corporation
at December 31, 1994 and December 25, 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
San Jose, California
January 16, 1995
PAGE 15
FINANCIAL SUMMARY
Ten years ended December 31, 1994
Additions to
Net investment Long-term Stock property,
in property, Total debt & put holders plant
(In millions) plant & equip. assets warrants equity equipment
- ----------------------------------------------------------------------------------------
1994 $ 5,367 $13,816 $ 1,136 $ 9,267 $ 2,441
1993 $ 3,996 $11,344 $ 1,114 $ 7,500 $ 1,933
1992 $ 2,816 $ 8,089 $ 622 $ 5,445 $ 1,228
1991 $ 2,163 $ 6,292 $ 503 $ 4,418 $ 948
1990 $ 1,658 $ 5,376 $ 345 $ 3,592 $ 680
1989 $ 1,284 $ 3,994 $ 412 $ 2,549 $ 422
1988 $ 1,122 $ 3,550 $ 479 $ 2,080 $ 477
1987 $ 891 $ 2,499 $ 298 $ 1,276 $ 302
1986 $ 779 $ 1,977 $ 287 $ 1,245 $ 155
1985 $ 848 $ 2,153 $ 271 $ 1,421 $ 236
Cost Operating Net Earnings Dividends
Net of Research & income income (loss) declared
revenues sales development (loss) (loss) per share per share
- ---------------------------------------------------------------------------------------
(In millions-- except per share amounts
1994 $11,521 $ 5,576 $ 1,111 $ 3,387 $ 2,288 $ 5.24 $ 0.23
1993 $ 8,782 $ 3,252 $ 970 $ 3,392 $ 2,295 $ 5.20 $ 0.20
1992 $ 5,844 $ 2,557 $ 780 $ 1,490 $ 1,067 $ 2.49 $ 0.10
1991 $ 4,779 $ 2,316 $ 618 $ 1,080 $ 819 $ 1.96 --
1990 $ 3,921 $ 1,930 $ 517 $ 858 $ 650 $ 1.60 --
1989 $ 3,127 $ 1,721 $ 365 $ 557 $ 391 $ 1.04 --
1988 $ 2,875 $ 1,506 $ 318 $ 594 $ 453 $ 1.26 --
1987 $ 1,907 $ 1,044 $ 260 $ 246 $ 248 $ 0.69 --
1986 $ 1,265 $ 861 $ 228 $ (195) $ (203) $ (0.58) --
1985 $ 1,365 $ 943 $ 195 $ (60) $ 2 $ 0.00 --
PAGE 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
of financial condition and results of operations
RESULTS OF OPERATIONS
Intel's net revenues reached a new high in 1994, rising by 31% from 1993 to
1994 and by 50% from 1992 to 1993, driven by a robust PC market and an ongoing
shift in demand toward more powerful microprocessors. Higher volumes of
increasingly faster, more advanced microprocessors, partially offset by lower
average selling prices, were responsible for most of the growth in revenues
from 1992 through 1994. The Pentium(R) processor, introduced in 1993, ramped
into high volume in 1994 and was the major factor in Intel's overall revenue
growth from 1993 to 1994. Increased sales of newer members of the Intel486(TM)
microprocessor family, such as the IntelDX2(TM) processor, drove the revenue
growth from 1992 to 1993.
Higher volumes of motherboard and chipset products also contributed
significantly to the increase in revenues from 1993 to 1994 and helped enable
the successful Pentium processor ramp. Flash memory revenues increased
throughout the 1992-1994 period, although not at rates previously expected.
Sales of system platforms, networking and communications products, and embedded
control products also grew, especially from 1992 to 1993. Growing demand and
production for the Intel486 microprocessor family resulted in a sharp decline
in sales of the mature Intel386(TM) CPU family from 1992 to 1993 (graph
omitted).
Gross margin for the fourth quarter of 1994 included the impact of a $475
million charge, primarily to cost of sales, to cover replacement costs,
replacement material and inventory writedown related to a divide problem in
the floating point unit of the Pentium processor. Cost of sales increased by
71% from 1993 to 1994 and by 27% from 1992 to 1993. Cost of sales grew at a
faster rate than revenues during 1993 and 1994, although gross margin dollar
contribution generally continued to rise. In addition to the one-time charge
for the Pentium processor floating point problem, growth in cost of sales was
driven by higher unit volumes, shifts in product mix and costs associated with
initiating production at new factories. As a result of these factors and the
revenue trends described above, gross margin percentage declined to 52% in 1994
(37% in the fourth quarter of 1994), compared to 63% in 1993.
Sales of the Intel486 microprocessor family comprised a majority of the
Company's revenues and a substantial majority of its gross margin during 1992,
1993 and 1994. While Intel reached its goal of shipping 6-7 million Pentium
processors later than anticipated, a significant and growing portion of the
Company's revenues and margins were derived from sales of the Pentium processor
family in 1994. The Pentium processor family comprised 23% of Intel's
microprocessor unit shipments to the desktop computer market segment in the
fourth quarter of 1994. If current trends continue, quarterly volumes of the
Pentium processor family could surpass those of the Intel486 microprocessor
family during 1995.
Research and development spending grew by 15% from 1993 to 1994, as the Company
continued to invest in internal programs, particularly for microprocessor
technology development. Increased spending for strategic marketing programs,
including media merchandising and the Company's Intel Inside(R) cooperative
advertising program, drove the 24% increase in marketing, general and
administrative expenses from 1993 to 1994. Spending in the fourth quarter of
1994 included the greater part of an $80 million Pentium processor
merchandising program (graph omitted).
Interest expense increased by $7 million from 1993 to 1994, primarily due to
higher average interest rates on borrowings, partially offset by higher
interest capitalization resulting from increased facility construction
programs. The decrease in interest expense from 1992 to 1993 was mainly due to
lower average interest rates on borrowings.
Interest and other income increased by $85 million from 1993 to 1994, mainly
due to higher average rates on investments in 1994, gains related to the
settlement of various insurance claims in 1994, and higher foreign exchange
gains and investment balances in 1994. Interest and other income in 1993
includes gains of $27 million from the sale of certain foreign benefits related
to an expansion in Ireland. Interest and other income in 1992 was reduced by a
$15 million charge to income to cover damages payable to Advanced Micro
Devices, Inc. (AMD) as part of an arbitration decision (graph omitted).
It is the general practice of the Company to enter into investments and
corresponding interest rate swaps to enhance the yield on its investment
portfolio without increasing risk. The Company enters into forward contracts,
options and swaps to hedge currency, market and interest rate exposures (see
"Notes to Consolidated Financial Statements"). Gains and losses on these
instruments are offset by those on the underlying hedged transactions; as a
result, there was no material net impact on the Company's financial results
during 1992-1994.
PAGE 17
The effective income tax rate rose to 36.5% in 1994 compared to 35.0% and 32.0%
in 1993 and 1992, respectively. The rate increases from 1993 to 1994 resulted
from the fact that tax credits have not grown as rapidly as overall pretax
income. This factor, together with an increase in the federal statutory rate,
also led to an increase in the effective tax rate from 1992 to 1993. The
adoption of SFAS No. 109, "Accounting for Income Taxes," effective at the
beginning of 1993, had no material impact on Intel's financial statements.
FINANCIAL CONDITION
The Company's financial condition remains very strong. As of December 31, 1994,
total cash and short- and long-term investments totaled $4.54 billion,
essentially unchanged from December 25, 1993. Cash generated from operating
activities rose to $2.98 billion in 1994 compared to $2.80 billion and $1.64
billion in 1993 and 1992, respectively.
Investing activities consumed $2.90 billion in cash during 1994, compared to
$3.34 billion during 1993 and $1.48 billion during 1992. Capital expenditures
increased substantially in both 1993 and 1994, as the Company continued to
invest in the property, plant and equipment needed for future business
requirements, including manufacturing capacity. The Company expects to expend
approximately $2.9 billion for capital additions in 1995 and had committed
approximately $1.41 billion for the construction or purchase of property, plant
and equipment as of December 31, 1994 (graph omitted).
The Company used $557 million for financing activities in 1994, while $352
million and $168 million were provided in 1993 and 1992, respectively. Major
financing applications of cash in 1994 included stock repurchases of $658
million, including $65 million for put warrant exercises, and the early
retirement of the Company's 8 1/8% debt. Sources of financing in 1993 included
the Company's public offering of the 1998 Step-Up Warrants, which resulted in
proceeds of $287 million.
As part of its authorized stock repurchase program, the Company had the
potential obligation at the end of 1994 to buy back 12.5 million shares of its
Common Stock at an aggregate price of $744 million under outstanding put
warrants.
Other sources of liquidity include combined credit lines and authorized
commercial paper borrowings of $1.74 billion, only $68 million of which was
outstanding at December 31, 1994. The Company also maintains the ability to
issue an aggregate of approximately $1.4 billion in debt, equity and other
securities under SEC shelf registration statements. The Company believes that
it has the financial resources needed to meet business requirements in the
foreseeable future, including capital expenditures, strategic operating
expenses, the dividend program and the Pentium processor replacement program.
OUTLOOK
Future trends for revenue and profitability continue to be difficult to
predict. The Company faces a number of risks and uncertainties, including
business conditions and growth in the personal computer industry and general
economy; competitive factors, including rival chip architectures, imitators of
the Company's key microprocessors, and price pressures; manufacturing capacity;
and ongoing litigation involving Intel intellectual property.
Intel believes that the $475 million pretax charge taken in the fourth quarter
to cover the divide problem in the floating point unit of the Pentium processor
will be sufficient to cover all associated replacement and inventory costs. The
Company has completed a full manufacturing transition to the updated Pentium
processor.
Based on the current case law, Intel's competitors can design microprocessors
that are compatible with Intel microprocessors and avoid Intel patent rights
through the use of foundry services that have licenses with Intel. Furthermore,
as part of a recent agreement between Intel and AMD to settle all outstanding
legal disputes between the two companies, Intel licensed AMD to copy the
microcode in the Intel386 and Intel486 microprocessors. However, AMD agreed
that it has no right to copy the microcode in the Pentium processor and future
microprocessors. The net effect of this situation (i.e., case law and the AMD
settlement) is that while it is possible for competitors to imitate the
functionality of Intel processors, future imitations are not expected to be as
close an imitation as were the Am386* and Am486* products from AMD.
Competitors' products may add features and increase performance.
Management, including internal counsel, does not believe that the outcome of
lawsuits currently facing Intel will have a material adverse effect on the
Company's financial position or overall trends in results of operations (see
"Contingencies" in "Notes to Consolidated Financial Statements"). However, were
an unfavorable ruling to occur in any quarterly period, there exists the
possibility of a material 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 judgement would not have a material impact on
cash and investments or liquidity.
As part of its strategic goal to double performance at major system price
points, the Company cut microprocessor prices aggressively and systematically
in 1994, and this trend may continue in 1995. Future distortion of price
maturity curves could occur as imitation products enter the market in
significant volume or alternative architectures gain market acceptance. The
outlook for Pentium processor shipments in 1995 remains dependent on several
business factors, including continued success in the manufacturing ramp and
market demand, including microprocessor product mix.
PAGE 18
Gross margin percentage trended downward during 1993 and 1994, although gross
margin dollar contribution has generally continued to increase on a quarterly
basis. Except for the one-time charge for the Pentium processor divide problem,
the factors impacting cost of sales growth (discussed above) are expected to
continue. Research and development and marketing spending is expected to
continue to grow, as the Company regards these expenditures as critical to
future business success. The Company expects its tax rate to increase to 37%
for 1995.
Intel's stock price is subject to significant volatility. If revenues or
earnings fail to meet expectations of the investment community, there could be
an immediate and significant impact on the trading price for the Company's
stock. Because of stock market forces beyond Intel's control and the nature of
Intel's business, such shortfalls can be sudden.
The Company believes it has the product portfolio and financial and
technological resources necessary for continued success, but revenue and
profitability trends cannot be precisely determined at this time.
FINANCIAL INFORMATION BY QUARTER
(unaudited)
(in millions--except per share and price data)
1994 for quarter ended December 31 October 1 July 2 April 2
- ------------------------------------------------------------------------------------------------
Net revenues $ 3,228 $ 2,863 $ 2,770 $ 2,660
Cost of sales $ 2,023 $ 1,273 $ 1,156 $ 1,124
Net income $ 372(A) $ 659 $ 640 $ 617
Earnings per share $ .86 $ 1.52 $ 1.46 $ 1.40
Dividends per share(B) Declared $ .06 $ .06 $ .06 $ .05
Paid $ .06 $ .06 $ .05 $ .05
Market price range Common Stock(C) High $ 66.13 $ 67.25 $ 70.63 $ 72.25
Low $ 57.81 $ 56.50 $ 57.50 $ 61.25
Market price range Step-Up Warrants(C) High $ 15.00 $ 16.00 $ 18.44 $ 19.50
Low $ 12.31 $ 13.00 $ 13.00 $ 15.13
(in millions--except per share and price data)
1993 for quarter ended December 25 September 25 June 26 March 27
- ------------------------------------------------------------------------------------------------
Net revenues $ 2,389 $ 2,240 $ 2,130 $ 2,023
Cost of sales $ 935 $ 833 $ 766 $ 718
Net income $ 594(D) $ 584 $ 569 $ 548
Earnings per share $ 1.35 $ 1.33 $ 1.30 $ 1.24
Dividends per share(B) Declared $ .05 $ .05 $ .05 $ .05
Paid $ .05 $ .05 $ .05 $ .05
Market price range Common Stock(C) High $ 73.25 $ 68.75 $ 58.75 $ 59.94
Low $ 56.25 $ 50.00 $ 43.69 $ 43.25
Market price range Step-Up Warrants(C) High $ 19.94 $ 17.63 $ 14.31 $ 14.69
Low $ 13.75 $ 11.25 $ 9.44 $ 13.13
(A) Net income for the fourth quarter of 1994 was impacted by a $475
million pretax charge to revenue and cost of sales to cover replacement
and other costs associated with a divide problem in the floating point
unit of the Company's Pentium processor.
(B) Intel plans to continue its dividend program. However, dividends are
dependent on future earnings, capital requirements and financial
condition.
(C) Intel's Common Stock (symbol INTC) and 1998 Step-Up Warrants
(symbol INTCW) are traded on Nasdaq and quoted in the Wall Street
Journal and other newspapers. Intel's Common Stock also trades on the
Zurich, Basel and Geneva, Switzerland exchanges. At December 31, 1994,
there were approximately 39,900 holders of Common Stock. All stock and
warrant prices are closing prices per the Nasdaq National Market
System.
(D) Interest and other income for the fourth quarter of 1993 included gains
of $27 million from the sale of certain foreign benefits related to the
Company's Ireland expansion.
PAGE 19
GRAPHICS APPENDIX LIST*
* In this Appendix, the following descriptions of graphs on pages 29 and 30 of
the Company's 1994 Annual Report to Stockholders that are omitted from the
EDGAR text are more specific with respect to the actual amounts and percentages
than can be determined from the graphs themselves.
The Company submits such more specific descriptions only for the purpose of
complying with EDGAR requirements for transmitting this Annual Report on Form
10-K; such more specific descriptions are not intended in any way to provide
information that is additional to that otherwise provided in the 1994 Annual
Report to Stockholders.
REVENUES AND INCOME
(Dollars in millions) 1992 1993 1994
------ ------ ------
Net revenues 5,844 8,782 11,521
Net income 1,067 2,295 2,288
COSTS AND EXPENSES
(Percent of revenues) 1992 1993 1994
------ ------ ------
Cost of sales 44% 37% 48%
R&D 13% 11% 10%
Marketing and G&A 17% 13% 13%
OTHER INCOME AND EXPENSE
(Dollars in millions) 1992 1993 1994
------ ------ ------
Interest and other income 133 188 273
Interest expense 54 50 57
CASH AND INVESTMENTS
(Dollars in billions) 1993 1994
------ ------
Cash and cash equivalents 1.659 1.180
Short-term investments 1.477 1.230
Long-term investments 1.416 2.127