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 30, 1995
OR
_____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _____ to _____
Commission File Number 0-6217
INTEL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-1672743
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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 30, 1995
Common Stock, $.001 par value 821.2 million
PAGE 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. 30, Oct. 1, Sept. 30, Oct. 1,
1995 1994 1995 1994
-------- -------- -------- --------
Net revenues $ 4,171 $ 2,863 $11,622 $ 8,293
Costs and expenses:
Cost of sales 2,008 1,273 5,422 3,553
Research and development 334 282 944 826
Marketing, general and
administrative 440 338 1,274 1,045
------- ------- ------- -------
Operating costs and expenses 2,782 1,893 7,640 5,424
------- ------- ------- -------
Operating income 1,389 970 3,982 2,869
Interest expense (7) (16) (24) (36)
Interest and other income, net 101 84 340 185
------- ------- ------- -------
Income before provision for taxes 1,483 1,038 4,298 3,018
Provision for taxes 552 379 1,599 1,102
------- ------- ------- -------
Net income $ 931 $ 659 $ 2,699 $ 1,916
======= ======= ======= =======
Earnings per common and
common equivalent share $ 1.05 $ .76 $ 3.06 $ 2.19
======= ======= ======= =======
Cash dividends declared per
common share $ 0.04 $ 0.03 $ 0.11 $ 0.085
======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding 889 868 883 876
======= ======= ======= =======
(See Notes to Consolidated Condensed Financial Statements.)
PAGE 3
PART I - (continued)
Item 1. Financial Statements (Continued)
Intel Corporation
Consolidated Condensed Balance Sheets Sept. 30, Dec. 31,
(in millions) 1995 1994
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(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,327 $ 1,180
Short-term investments 627 1,230
Accounts receivable, net 3,361 1,978
Inventories:
Raw materials 808 345
Work in process 653 528
Finished goods 649 296
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2,110 1,169
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Deferred tax assets 437 552
Other current assets 162 58
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Total current assets 8,024 6,167
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Property, plant and equipment, at cost 10,881 8,516
Less: Accumulated depreciation (3,980) (3,149)
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Property, plant and equipment, net 6,901 5,367
Long-term investments 1,827 2,127
Other assets 250 155
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TOTAL ASSETS $17,002 $13,816
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 927 $ 517
Accounts payable 941 575
Accrued compensation and benefits 630 588
Other accrued liabilities 513 646
Deferred income on shipments to distributors 265 269
Income taxes payable 886 429
-------- --------
Total current liabilities 4,162 3,024
Long-term debt 401 392
Deferred tax liabilities 459 389
Put warrants 854 744
Stockholders' equity:
Preferred stock -- --
Common stock and capital in excess
of par value 2,449 2,306
Retained earnings 8,677 6,961
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Total stockholders' equity 11,126 9,267
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,002 $13,816
======== ========
(See Notes to Consolidated Condensed Financial Statements.)
PAGE 4
PART I - (continued)
Item 1. Financial Statements (Continued)
Intel Corporation
Consolidated Condensed Statements of Cash Flows (unaudited, in millions)
Nine Months Ended
Sept. 30, Oct. 1,
1995 1994
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Cash flows provided by (used for) operating activities:
Net income $ 2,699 $ 1,916
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 985 746
Net loss on retirements of property, plant and equipment 51 26
Amortization of debt discount 9 16
Change in deferred tax assets and liabilities 185 3
Changes in assets and liabilities:
(Increase) in accounts receivable (1,383) (461)
(Increase) in inventories (941) (540)
(Increase) in other assets (199) (121)
Increase in accounts payable 366 73
Increase (decrease) in accrued compensation and benefits 42 (35)
Increase in income taxes payable 457 2
Tax benefit from employee stock plans 94 50
Increase (decrease) in other liabilities (145) 176
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Total adjustments (479) (65)
Net cash provided by operating activities 2,220 1,851
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Cash flows provided by (used for) investment activities:
Additions to property, plant and equipment (2,570) (1,681)
Purchases of long-term, available-for-sale investments (98) (868)
Sales of long-term, available-for-sale investments 44 9
Maturities and other changes in available-for-sale
investments, net 961 534
------- -------
Net cash (used for) investment activities (1,663) (2,006)
Cash flows provided by (used for) financing activities:
Increase in short-term debt, net 397 64
Additions to long-term debt -- 127
Retirement of long-term debt -- (98)
Proceeds from sales of shares through employee
stock plans and other 183 139
Proceeds from sales of put warrants 64 65
Repurchase and retirement of common stock (971) (546)
Redemption of common stock purchase rights -- (2)
Payment of dividends to stockholders (83) (67)
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Net cash (used for) financing activities (410) (318)
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Net increase (decrease) in cash and cash equivalents $ 147 $ (473)
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 67 $ 45
Income taxes $ 863 $ 1,047
(See Notes to Consolidated Condensed Financial Statements.)
PAGE 5
PART I - (continued)
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 31, 1994. 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 31, 1994.
2. Interest and other income includes (in millions):
Three Months Ended Nine Months Ended
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
1995 1994 1995 1994
-------- -------- -------- --------
Interest income $ 61 $ 59 $210 $155
Foreign currency gains 8 3 18 10
Other income, net 32 22 112 20
---- ---- ---- ----
Total $101 $ 84 $340 $185
==== ==== ==== ====
Other income for the nine months ended September 30, 1995 includes
approximately $58 million from the settlement of all ongoing litigation with
Advanced Micro Devices, Inc. and $23 million from the sale of a portion of the
Company's interest in VLSI Technologies, Inc., both occurring in the first
quarter of 1995, and $37 million from the sale of a portion of the Company's
interest in Altera Corporation, in the third quarter of 1995.
3. Earnings per common and common equivalent share as presented on the face
of the statements of income represent primary earnings per share. Dual
presentation of primary and fully diluted earnings per share has not been made
because the differences are insignificant.
4. As more fully described in the Company's Annual Report, Intel 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. The
Company follows accounting policies for these instruments based on the
Company's designation of such instruments as hedging transactions. The criteria
the Company uses for designating an instrument as a hedge include effectiveness
in risk reduction and one-to-one matching to underlying transactions. Gains and
losses on foreign currency forwards and options that are designated and
effective as hedges of anticipated transactions are recorded on the balance
sheet and recognized in income in the same period as the underlying
transactions are settled. Gains and losses on foreign currency forwards,
options, and swaps that are designated and effective as hedges of existing
transactions are recorded on the balance sheet and recognized in income in the
same period as the underlying transactions are settled. Income or expense on
swaps is accrued as an adjustment to the yield of the related investments or
debt they hedge. Gains and losses on any instruments not meeting the above
criteria are recognized in income in the current period.
PAGE 6
PART I - (continued)
Item 1. Financial Statements (Continued)
Intel Corporation, Notes to Consolidated Condensed Financial Statements
5. During the third quarter of 1995, the Company repurchased and retired
4.9 million shares of Common Stock at an aggregate cost of $321 million. As of
September 30, 1995, after reserving shares to cover outstanding put warrants,
approximately 24.4 million shares of Common Stock remained available under the
repurchase program (total authorization of 110 million shares) authorized by
the Board of Directors.
6. In a series of private placements during the 1991-1995 period, 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, if the holder
exercises the warrant. Activity during the first three quarters of 1995 is
summarized as follows:
Put Warrants Outstanding
------------------------
Cumulative Proceeds Number Potential
(In millions) Received Of Warrants Obligation
- -------------------------------------------------------------------------
December 31, 1994 $ 194 25 $ 744
Sales 16 7 258
Expirations -- (6) (181)
----- ----- -----
April 1, 1995 210 26 821
Expirations -- (8) (221)
----- ----- -----
July 1, 1995 210 18 600
Sales 48 7 475
Expirations -- (7) (221)
----- ----- -----
September 30, 1995 $ 258 18 $ 854
===== ===== =====
The amount related to the Company's potential buyback obligation has been
reclassified from Stockholders' Equity and recorded as put warrants. The 18
million put warrants outstanding at September 30, 1995 expire on various dates
between October 1995 and August 1996 and have exercise prices ranging from
$30.00 to $68.38 per share. There is no material dilutive effect on earnings
per share for the periods presented.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS - THIRD QUARTER OF 1995 COMPARED TO THIRD QUARTER OF 1994
Revenues for Q3 1995 increased by 46% compared to Q3 1994. Higher volumes of
the rapidly ramping Pentium(R) processor family, partially offset by lower
prices, and increased sales of related board level products drove the overall
growth in revenues. Revenues from the Intel486(TM) microprocessor family
declined substantially, primarily due to a major shift in market demand toward
the Company's more advanced microprocessors. Chipsets and flash memory also
showed significant revenue growth between these periods.
Cost of sales rose by 58% from Q3 1994 to Q3 1995, primarily due to increased
unit volumes, including higher proportions of Pentium processor board level
products. Gross margin declined from 56% in Q3 1994 to 52% in Q3 1995 due
primarily to an increase in the ratio of board level product shipments to
microprocessor shipments. The increase in the ratio was driven by the decline
in unit shipments of the Intel486 microprocessor family from Q3 1994 to Q3
1995, as a very low percentage of the Intel486 microprocessors were shipped
on boards.
PAGE 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
A majority and growing portion of the Company's revenues, and a substantial
majority of its gross margin, are derived from sales of the Pentium processor
family including related mother board products. During Q3 1995, revenues and
units shipped from sales of the Pentium processor family exceeded revenues and
units shipped from sales of the Intel486 family of microprocessors. Sales of
the Intel486 microprocessor family represented a rapidly declining portion of
the Company's revenues and margins for Q3 1995.
Research and development expenses and marketing, general and administrative
expenses rose by a total of $154 million, or 25%, from Q3 1994 to Q3 1995.
Spending for internal product and process development programs, personnel
related spending, Intel Inside(R), advertising and marketing expenses accounted
for most of the increase.
Interest and other income for Q3 1995 increased by $17 million over the prior
year due primarily to the pre-tax gain of $37 million from the sale of Altera
Corporation stock in Q3 1995 compared to the Q3 1994 insurance settlement of
$18 million.
The $9 million decrease in interest expense between Q3 1994 and Q3 1995 is
primarily the result of lower weighted average borrowing balances and higher
construction related interest capitalization.
The Company enters into investments and corresponding interest rate swaps to
preserve principal while enhancing the yield on its investment portfolio
without significantly increasing risk, and enters into forward contracts,
options and swaps to hedge currency, market and interest rate exposures. Gains
and losses on these instruments are generally offset by those on the
underlying hedged transactions; as a result, there was no net impact on the
Company's financial results in either Q3 1994 or Q3 1995 from hedging
activities.
The provision for taxes grew by $173 million, or 46%, primarily due to
increased pretax income and, to a lesser extent, an increase in the effective
tax rate from 36.5% for Q3 1994 to 37.2% for Q3 1995. The higher rate for
1995 reflects primarily the diminishing impact of certain tax benefits due to
increased profitability.
RESULTS OF OPERATIONS - FIRST NINE MONTHS OF 1995 COMPARED TO FIRST NINE
MONTHS OF 1994
Revenues for the first nine months of 1995 increased by 40% compared to the
first nine months of 1994. Higher volumes of the rapidly ramping Pentium
processor family, partially offset by lower prices, and increased sales of
associated board level products drove the overall growth in revenues. Revenues
from the Intel486 microprocessor family declined due a significant shift in
market demand toward the Company's Pentium microprocessors and lower Intel486
prices. Chipsets and flash memory also showed significant revenue growth
between these periods.
Cost of sales rose by 53% from the first nine months of 1994 to the first nine
months of 1995, primarily due to increased unit volumes, including higher
proportions of board level products. Lower prices for certain microprocessor
products, as well as the higher proportion of board products sold, contributed
to the decline in gross margin percentage from 57% for the first nine months
of 1994 to 53% for the first nine months of 1995.
PAGE 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
RESULTS OF OPERATIONS - FIRST NINE MONTHS OF 1995 COMPARED TO FIRST NINE
MONTHS OF 1994 (CONTINUED)
A majority of the Company's revenues and gross margin were derived from sales
of the Pentium processor family including related mother board products.
During the first nine months of 1995, revenues from sales of the Pentium
processor family exceeded revenues from sales of the Intel486 microprocessor
family. Sales of the Intel486 microprocessor family represented a significant
but rapidly declining portion of the Company's revenues and margins for the
nine month period ended September 30, 1995.
Research and development expenses and marketing, general and administrative
expenses rose by a total of $347 million, or 19%, from the first nine months of
1994 to the first nine months of 1995. Spending for internal product and
process development programs, personnel related spending, Intel Inside,
advertising and marketing expenses accounted for most of the increase.
Interest and other income increased by $155 million or 84%. Other income for
the first nine months of 1995 included $58 million related to the settlement
of litigation with Advanced Micro Devices, Inc., and $23 million and $37
million from the sale of a portion of Intel's equity interest in both VLSI
Technology, Inc. and Altera Corporation, respectively.
The decrease in interest expense from the first nine months of 1994 to the
first nine months of 1995 is the result of higher construction-related
interest capitalization and lower weighted average borrowing balances.
The Company enters into investments and corresponding interest rate swaps to
preserve principal while enhancing the yield on its investment portfolio
without significantly increasing risk, and enters into forward contracts,
options and swaps to hedge currency, market and interest rate exposures. Gains
and losses on these instruments are generally offset by those on the
underlying hedged transactions; as a result, there was no net impact on the
Company's financial results in either the first nine months of 1994 or the
first nine months of 1995.
The provision for taxes grew by $497 million, or 45%, primarily due to
increased pretax income and, to a lesser extent, an increase in the effective
tax rate from 36.5% for the first nine months of 1994 to 37.2% for the first
nine months of 1995. The higher rate for 1995 reflects primarily the
diminishing impact of certain tax benefits due to increased profitability.
Financial Condition
The Company's financial condition remains strong. As of September 30, 1995,
Intel's portfolio of cash and investments totaled $3.8 billion, down from $4.5
billion at December 31, 1994, as the Company has continued to pursue its stock
buyback and capital investment programs. The Company's other sources of
liquidity include credit lines and commercial paper borrowing arrangements that
exceed $1.7 billion in the aggregate. The Company also retains the authority to
issue an aggregate of approximately $1.4 billion in debt, equity and other
securities under SEC shelf registration statements.
The Company funded most of its investment needs during the first nine months of
1995 with cash generated from operations, which totaled $2.22 billion. Major
uses of cash during the first nine months of 1995 included capital spending of
$2.57 billion for property, plant and equipment, primarily for microprocessor
manufacturing capacity.
PAGE 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Financial Condition (continued)
Inventory levels, particularly raw material and finished goods, increased
significantly during the first nine months of 1995, primarily attributable
to the ramping of production in Q3 1995 to meet expected Q4 1995 demand and
to a lesser extent, the write down of inventories in Q4 1994 in connection
with the floating point divide problem in the Pentium processor. The increase
in accounts receivable over this period is due primarily to strong September
billings. During the period from January 1 to September 30, 1995, the Company
experienced an increase in its concentration of credit risk due to increasing
trade receivables from sales to manufacturers of micro-computer systems. One
customer accounted for 10 percent of net revenues during the three month
period ended September 30, 1995. No single customer accounted for 10 percent
or more of net revenues during the nine month period ended September 30, 1995.
The Company's five largest customers accounted for approximately 35% and 34% of
net revenues for the three and nine month periods ended September 30, 1995,
respectively. At September 30, 1995, these customers accounted for
approximately 38% of net accounts receivable.
Key financing activities in the first nine months of 1995 included the
repurchase of 18 million shares of Common Stock for $971 million as part of the
Company's authorized stock repurchase program (4.9 million shares in Q3 1995
for $321 million). Early in Q4 1995, the Company issued 2 million put warrants,
repurchased 5.5 million put warrants at a slight premium and 2 million put
warrants expired unexercised. As of November 10, 1995, Intel had the potential
obligation to repurchase 13 million shares of Common Stock at an aggregate cost
of $724 million under outstanding put warrants. As of November 10, 1995, 29.9
million shares remained available for repurchase under the repurchase
authorization, after reserving shares to cover outstanding put warrants.
Management considers cash flow from operations and available sources of
liquidity to be adequate for planned capital expenditure programs including the
recently announced expansion of three international manufacturing sites,
working capital requirements and quarterly cash dividend payouts.
Outlook
Future trends for revenue and profitability remain difficult to predict,
despite the strong financial results described above. The Company continues to
face many risks and uncertainties, including: business conditions and growth
in the personal computer industry and general economy; competitive factors,
such as rival chip architectures, software compatible microprocessors, and
price pressures; availability of third party component products at reasonable
prices; risk of nonpayment of accounts receivable or customer loans;
manufacturing capacity; risk of inventory obsolescence due to shifts in market
demand; timing of software industry product introductions; and litigation
involving intellectual property.
Management continues to monitor orders and the substantial and growing accounts
receivable balances with its largest customers. In particular, the Company is
closely monitoring the accounts receivable balance of one of its five
largest customers, due to a significant increase in the days outstanding of its
receivable balance, and has converted part of this customer's receivable
balance to a loan. This customer accounted for less than 10% of the Company's
net revenues for the three and nine month periods ended September 30, 1995 and
the amount receivable from this customer represented approximately 14% of
accounts receivable, net at September 30, 1995.
Intel's strategy continues to be to develop the highest performance
microprocessors and bring them to market in volume. The microprocessor
industry has always been and remains competitive. The Company may continue to
cut microprocessor prices aggressively and systematically to bring its
technology to market, depending in part on whether software compatible
microprocessors 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, availability of other components
to build personal computers and market demand.
PAGE 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
Microprocessor margins have been relatively stable over the last few years and
the current business model supports a gross margin remaining in the low 50's.
However, an increase in board demand could cause gross margins to drop to the
high 40's. Various factors, including changes in product mix, higher unit
volumes, and costs and yield issues associated with initiating production at
new factories will continue to affect the amount of cost of sales and
variability of gross margin in future quarters.
The Company plans to invest a total of $3.5 billion for property, plant and
equipment in 1995. In response to existing and anticipated demand for
microprocessor and related products, capital spending for increased
manufacturing capacity is expected to remain high for the foreseeable future.
The Company recently announced expansion of three international manufacturing
sites for an advanced logic wafer fabrication plant, flash memory wafer
fabrication plant, and a computer board factory at a total cost of over $3
billion over the next three years. Spending on strategic marketing and
technology development programs is also expected to grow from Q3 1995 to Q4
1995.
Intel believes that it has the product offerings and competitive resources
needed for continued success, but future revenue, costs, margins, product mix
and profits are all influenced by a number of factors, which are inherently
uncertain and therefore remain difficult to predict.
PAGE 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A. Litigation
Reference is made to Item 3. Legal Proceedings, in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994, and Item 1. Legal
Proceedings, in the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended July 1, 1995 for a description of legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement re: computation of earnings per share.
12.1 Statement setting forth the computation of ratios of earnings to fixed
charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30, 1995.
PAGE 12
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 14, 1995 By:/s/ Andy D. Bryant
------------------
Andy D. Bryant
Vice President and
Chief Financial and
Principal Accounting Officer