Consolidated statements of income
Three years ended December 28, 1996
(In millions
-except per share amounts) 1996 1995 1994
- - --------------------------------------------------------------------------
Net revenues $20,847 $16,202 $11,521
------- ------- -------
Cost of sales 9,164 7,811 5,576
Research and development 1,808 1,296 1,111
Marketing, general and
administrative 2,322 1,843 1,447
------- ------- -------
Operating costs and expenses 13,294 10,950 8,134
------- ------- -------
Operating income 7,553 5,252 3,387
Interest expense (25) (29) (57)
Interest income and other, net 406 415 273
------- ------- -------
Income before taxes 7,934 5,638 3,603
Provision for taxes 2,777 2,072 1,315
------- ------- -------
Net income $5,157 $3,566 $2,288
======= ======= =======
Earnings per common and common
equivalent share $ 5.81 $ 4.03 $ 2.62
======= ======= =======
Weighted average common and
common equivalent shares
outstanding 888 884 874
======= ======= =======
See accompanying notes.
Consolidated balance sheets
December 28, 1996 and December 30, 1995
(In millions-
except per share amounts) 1996 1995
- - -------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 4,165 $ 1,463
Short-term investments 3,742 995
Trading assets 87 --
Accounts receivable, net of allowance for doubtful
accounts of $68 ($57 in 1995) 3,723 3,116
Inventories 1,293 2,004
Deferred tax assets 570 408
Other current assets 104 111
------ -------
Total current assets 13,684 8,097
------ -------
Property, plant and equipment:
Land and buildings 4,372 3,145
Machinery and equipment 8,729 7,099
Construction in progress 1,161 1,548
------ -------
14,262 11,792
Less accumulated depreciation 5,775 4,321
------ -------
Property, plant and equipment, net 8,487 7,471
------ -------
Long-term investments 1,353 1,653
Other assets 211 283
------ -------
Total assets $23,735 $17,504
======= =======
Liabilities and stockholders' equity
Current liabilities:
Short-term debt $ 389 $ 346
Accounts payable 969 864
Deferred income on shipments to distributors 474 304
Accrued compensation and benefits 1,128 758
Accrued advertising 410 218
Other accrued liabilities 507 328
Income taxes payable 986 801
------ -------
Total current liabilities 4,863 3,619
------ -------
Long-term debt 728 400
Deferred tax liabilities 997 620
Put warrants 275 725
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.001 par value, 50 shares authorized;
none issued -- --
Common Stock, $.001 par value, 1,400 shares authorized;
821 issued and outstanding in 1996 and 1995,
and capital in excess of par value 2,897 2,583
Retained earnings 13,975 9,557
------- -------
Total stockholders' equity 16,872 12,140
------- -------
Total liabilities and stockholders' equity $23,735 $17,504
======= =======
See accompanying notes.
Consolidated statements of cash flows
Three years ended December 28, 1996
(In millions) 1996 1995 1994
- - ----------------------------------------------------------------------------
Cash and cash equivalents,
beginning of year $ 1,463 $ 1,180 $ 1,659
------- ------- -------
Cash flows provided by (used for)
operating activities:
Net income 5,157 3,566 2,288
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation 1,888 1,371 1,028
Net loss on retirements of property,
plant and equipment 120 75 42
Amortization of debt discount -- 8 19
Change in deferred tax assets and
liabilities 179 346 (150)
Changes in assets and liabilities:
(Increase) in accounts receivable (607) (1,138) (530)
Decrease (increase) in inventories 711 (835) (331)
(Increase) in other assets (7) (251) (57)
Increase in accounts payable 105 289 148
Tax benefit from employee stock plans 196 116 61
Purchase of trading assets (75) - -
(Gain) on trading assets (12) - -
Increase in income taxes payable 185 372 38
Increase in accrued compensation
and benefits 370 170 44
Increase (decrease) in other liabilities 533 (73) 337
------- ------- -------
Total adjustments 3,586 450 649
------- ------- -------
Net cash provided by operating activities 8,743 4,016 2,937
------- ------- -------
Cash flows provided by (used for) investing
activities:
Additions to property, plant and
equipment (3,024) (3,550) (2,441)
Purchases of available-for-sale
investments (4,683) (685) (3,168)
Sales of available-for-sale investments 225 114 10
Maturities and other changes in
available-for-sale investments 2,214 1,444 2,740
------- ------- -------
Net cash (used for) investing activities (5,268) (2,677) (2,859)
------- ------- -------
Cash flows provided by (used for) financing
activities:
Increase (decrease) in short-term debt,
net 43 (179) (63)
Additions to long-term debt 317 - 128
Retirement of long-term debt - (4) (98)
Proceeds from sales of shares
through employee stock plans and other 261 192 150
Proceeds from sales of put warrants 56 85 76
Repurchase and retirement of
Common Stock (1,302) (1,034) (658)
Payment of dividends to stockholders (148) (116) (92)
------- ------- -------
Net cash (used for) financing activities (773) (1,056) (557)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 2,702 283 (479)
------- ------- -------
Cash and cash equivalents, end of year $ 4,165 $ 1,463 $ 1,180
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 51 $ 182 $ 76
Income taxes $ 2,217 $ 1,209 $ 1,366
Cash paid for interest in 1995 includes approximately $108 million of
accumulated interest on Zero Coupon Notes that matured in 1995.
Certain 1995 and 1994 amounts have been reclassified to conform to
the 1996 presentation.
See accompanying notes.
Consolidated statements of stockholders' equity
Common Stock
Three years ended December 28, 1996 and capital in excess
of par value
---------------------
Number Retained
(In millions) of shares Amount earnings Total
- - ----------------------------------------------------------------------------
Balance at December 25, 1993 837 $2,194 $ 5,306 $ 7,500
Proceeds from sales of shares through
employee stock plans, tax benefit
of $61 and other 12 215 -- 215
Proceeds from sales of put warrants -- 76 -- 76
Reclassification of put warrant
obligation, net -- (15) (106) (121)
Repurchase and retirement of Common Stock (22) (164) (429) (593)
Redemption of Common Stock Purchase Rights -- -- (2) (2)
Cash dividends declared ($.115 per share) -- -- (96) (96)
Net income -- -- 2,288 2,288
------ ------ ------ -------
Balance at December 31, 1994 827 2,306 6,961 9,267
Proceeds from sales of shares through
employee stock plans, tax benefit
of $116 and other 13 310 -- 310
Proceeds from sales of put warrants -- 85 -- 85
Reclassification of put warrant
obligation, net -- 61 (42) 19
Repurchase and retirement of Common Stock (19) (179) (855) (1,034)
Cash dividends declared ($.15 per share) -- -- (124) (124)
Unrealized gain on available-for-sale
investments, net -- -- 51 51
Net income -- -- 3,566 3,566
------ ------ ------ -------
Balance at December 30, 1995 821 2,583 9,557 12,140
Proceeds from sales of shares through
employee stock plans, tax benefit
of $196 and other 17 457 -- 457
Proceeds from sales of put warrants -- 56 -- 56
Reclassification of put warrant
obligation, net -- 70 272 342
Repurchase and retirement of Common Stock (17) (269) (925) (1,194)
Cash dividends declared ($.19 per share) -- -- (156) (156)
Unrealized gain on available-for-sale
investments, net -- -- 70 70
Net income -- -- 5,157 5,157
------ ------ ------- -------
Balance at December 28, 1996 821 $2,897 $13,975 $16,872
====== ====== ======= =======
See accompanying notes.
Notes to consolidated financial statements
Accounting policies
Fiscal year. Intel Corporation ("Intel" or "the Company") has a fiscal year
that ends the last Saturday in December. Fiscal years 1996 and 1995, each
52-week years, ended on December 28 and 30, respectively. Fiscal 1994 was
a 53-week year and ended on December 31, 1994. 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Investments. Highly liquid investments with insignificant interest rate risk
and with original maturities of three months or less are classified as cash
and cash equivalents. Investments with maturities greater than three months
and less than one year are classified as short-term investments. Investments
with maturities greater than one year are classified as long-term investments.
The Company accounts for investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's policy is to protect the value of its investment portfolio and to
minimize principal risk by earning returns based on current interest rates.
A substantial majority of the Company's marketable investments are classified
as available-for-sale as of the balance sheet date and are reported at fair
value, with unrealized gains and losses, net of tax, recorded in
stockholders' equity. The cost of securities sold is based on the specific
identification method. Realized gains or losses and declines in value, if
any, judged to be other than temporary on available-for-sale securities are
reported in other income or expense. Investments in non-marketable
instruments are recorded at the lower of cost or market and included in other
assets.
Trading assets. During 1996, the Company purchased securities classified as
trading assets. The Company maintains its trading asset portfolio to
generate returns that offset changes in certain liabilities related to
deferred compensation arrangements. The trading assets consist of marketable
equity securities and are stated at fair value. Both realized and unrealized
gains and losses are included in other income or expense and generally
offset the change in the deferred compensation liability, which is also
included in other income or expense.
Fair values of financial instruments. Fair values of cash and cash
equivalents approximate cost due to the short period of time to maturity.
Fair values of long-term investments, long-term debt, short-term investments,
short-term debt, trading assets, non-marketable instruments, swaps, currency
forward contracts, currency options, options hedging marketable instruments
and options hedging non-marketable instruments are based on quoted market
prices or pricing models using current market rates. No consideration is
given to liquidity issues in valuing debt.
Derivative financial instruments. The Company utilizes derivative financial
instruments to reduce financial market risks. These instruments are used to
hedge foreign currency, equity and interest rate market exposures of
underlying assets, liabilities and other obligations. The Company does not
use derivative financial instruments for speculative or trading purposes. The
Company's accounting policies for these instruments are 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
the instrument's effectiveness in risk reduction and one-to-one matching of
derivative instruments to underlying transactions. Gains and losses on
currency forward contracts, and options that are designated and effective as
hedges of anticipated transactions, for which a firm commitment has been
attained, are deferred and recognized in income in the same period that the
underlying transactions are settled. Gains and losses on currency forward
contracts, options and swaps that are designated and effective as hedges of
existing transactions are recognized in income in the same period as losses
and gains on the underlying transactions are recognized and generally offset.
Gains and losses on any instruments not meeting the above criteria would be
recognized in income in the current period. Income or expense on swaps is
accrued as an adjustment to the yield of the related investments or debt they
hedge.
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 were as follows:
(In millions) 1996 1995
- - ------------------------------------------------------------------------
Materials and purchased parts $ 280 $ 674
Work in process 672 707
Finished goods 341 623
------- -------
Total $1,293 $2,004
======= =======
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.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective as
of the beginning of fiscal 1995. This adoption had no material effect on the
Company's financial statements.
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.
Advertising. Cooperative advertising obligations are accrued and the costs
expensed at the same time the related revenue is recognized. All other
advertising costs are expensed as incurred. The Company does not incur any
direct-response advertising costs. Advertising expense was $974 million,
$654 million and $459 million in 1996, 1995 and 1994, respectively.
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 $33 million, $46 million and $27 million for 1996,
1995 and 1994, respectively.
Earnings per common and common equivalent share. Earnings per common and
common equivalent share are computed using the weighted average number of
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.
Stock distributions. On June 16, 1995, the Company effected a two-for-one
stock split in the form of a special stock distribution to stockholders of
record as of May 19, 1995. Share, per share, Common Stock, capital in excess
of par value, stock option and warrant amounts herein have been restated to
reflect the effect of this split.
On January 13, 1997, the Board of Directors of the Company approved a
two-for-one stock split (the "1997 stock split") to be effected as a special
stock distribution of one share of Common Stock for each share of the
Company's Common Stock outstanding, subject to stockholder approval of an
increase in authorized shares at the Company's Annual Meeting on May 21,
1997. Because the 1997 stock split cannot be effected until there is an
increase in authorized shares, none of the share, per share, Common Stock,
capital in excess of par value, stock option or warrant amounts herein has
been restated to reflect the effect of the 1997 stock split.
Common Stock
1998 Step-Up Warrants. In 1993, the Company issued 40 million 1998 Step-Up
Warrants to purchase 40 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 $35.75 per share of
Common Stock, subject to annual increases to a maximum price of $41.75 per
share effective in March 1997. As of December 28, 1996, approximately 40
million Warrants were exercisable at a price of $40.25 and expire on March
14, 1998 if not previously exercised. For 1996 and 1995, the Warrants had a
dilutive effect on earnings per share and represented approximately 19
million and 11 million common equivalent shares, respectively. The Warrants
did not have a dilutive effect on earnings per share in 1994.
Stock repurchase program. The Company has an authorization from the Board of
Directors to repurchase up to 110 million shares of Intel's Common Stock in
open market or negotiated transactions. During 1996 the company repurchased
16.8 million shares at a cost of $1.3 billion, including $108 million for
exercised put warrants. As of December 28, 1996, the Company had repurchased
and retired approximately 84.9 million shares at a cost of $3.5 billion since
the program began in 1990. As of December 28, 1996, after reserving 4.5
million shares to cover outstanding put warrants, 20.6 million shares
remained available under the repurchase authorization.
Put warrants
In a series of private placements from 1991 through 1996, 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 of Potential
(In millions) received warrants obligation
- - ------------------------------------------------------------------------
December 25, 1993 $ 118 29.6 $ 688
Sales 76 25.0 744
Exercises -- (2.0) (65)
Expirations -- (27.6) (623)
--------- --------- ---------
December 31, 1994 194 25.0 744
Sales 85 17.5 925
Repurchases -- (5.5) (201)
Expirations -- (25.0) (743)
--------- --------- ---------
December 30, 1995 279 12.0 725
Sales 56 9.0 603
Exercises -- (1.8) (108)
Expirations -- (14.7) (945)
--------- --------- ---------
December 28, 1996 $ 335 4.5 $ 275
========= ========= =========
The amount related to Intel's potential repurchase obligation has been
reclassified from stockholders' equity to put warrants. The 4.5 million put
warrants outstanding at December 28, 1996 expire on various dates between
February 1997 and April 1997 and have exercise prices ranging from $56 to $69
per share, with an average exercise price of $61 per share. There is no
significant dilutive effect on earnings per share for the periods presented.
Borrowings
Short-term debt. Short-term debt and weighted average interest rates at
fiscal year-ends were as follows:
1996 1995
--------------------- ---------------------
Weighted Weighted
average average
(In millions) Balance interest rate Balance interest rate
- - ------------------------------------------------------------------------
Borrowed under
lines of credit $ 30 N/A $ 57 3.2%
Reverse repurchase
agreements payable
in non-U.S. currencies 263 6.4% 124 9.2%
Notes payable 3 0.7% 2 4.7%
Drafts payable 93 N/A 163 N/A
------- -------
Total $ 389 $ 346
======= =======
At December 28, 1996, the Company had established foreign and domestic lines
of credit of approximately $1.1 billion, a portion of which is uncommitted.
The Company generally renegotiates these lines annually. Compensating balance
requirements are not material.
The Company also borrows under commercial paper programs. Maximum borrowings
reached $306 million during 1996 and $700 million during 1995. 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 was as follows:
(In millions) 1996 1995
- - ------------------------------------------------------------------------
Payable in U.S. dollars:
AFICA Bonds due 2013 at 4% $ 110 $ 110
Reverse repurchase arrangement due 2001 300 --
Other U.S. dollar debt 4 4
Payable in other currencies:
Irish punt due 2008-2024 at 6%-12% 268 240
Greek drachma due 2001 46 46
------ ------
Total $ 728 $ 400
====== ======
The Company has guaranteed repayment of principal and interest on the AFICA
Bonds 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 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. The $300 million reverse repurchase
arrangement payable in 2001 has a current borrowing rate of 5.9%. The funds
received under this arrangement are available for general corporate purposes.
This debt may be redeemed or repaid under certain circumstances at the option
of either the lender or Intel.
Under shelf registration statements filed with the Securities and Exchange
Commission (SEC), Intel has 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 or other issuers' 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"). The
Company may issue up to $1.4 billion in additional securities under effective
registration statements.
As of December 28, 1996, aggregate debt maturities were as follows:
1997-none; 1998-$110 million; 1999-none; 2000-none; 2001-$346 million; and
thereafter-$272 million.
Investments
The stated returns on a majority of the Company's marketable investments in
long-term fixed rate debt and equity 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" under "Accounting policies").
Investments with maturities of greater than six months consist primarily of
A and A2 or better rated financial instruments and counterparties.
Investments with maturities of up to six months consist primarily of A1 and
P1 or better rated financial instruments and counterparties. Foreign
government regulations imposed upon investment alternatives of foreign
subsidiaries, or the absence of A and A2 rated counterparties in certain
countries, result in some minor exceptions. Intel's practice is to obtain and
secure available collateral from counterparties against obligations whenever
Intel deems appropriate. At December 28, 1996, investments were placed with
approximately 200 different counterparties.
Investments at December 28, 1996 were as follows:
Gross Gross Estimated
unrealized unrealized fair
(In millions) Cost gains losses value
- - ------------------------------------------------------------------------
Commercial paper $2,386 $ -- $ (1) $2,385
Bank deposits 1,846 -- (2) 1,844
Repurchase agreements 931 -- (1) 930
Loan participations 691 -- -- 691
Corporate bonds 657 10 (6) 661
Floating rate notes 366 -- -- 366
Securities of foreign
governments 265 14 (2) 277
Fixed rate notes 262 -- -- 262
Other debt securities 284 -- (2) 282
-------- -------- -------- --------
Total debt securities 7,688 24 (14) 7,698
-------- -------- -------- --------
Hedged equity 891 71 (15) 947
Preferred stock and
other equity 270 174 (3) 441
-------- -------- -------- --------
Total equity securities 1,161 245 (18) 1,388
-------- -------- -------- --------
Swaps hedging
investments in
debt securities -- 5 (17) (12)
Swaps hedging
investments in
equity securities -- 15 (42) (27)
Options hedging
investments in
equity securities (9) -- (16) (25)
Currency forward
contracts hedging
investments in
debt securities -- 5 -- 5
-------- -------- -------- --------
Total available-for-sale
securities 8,840 294 (107) 9,027
Less amounts classified
as cash equivalents (3,932) -- -- (3,932)
-------- -------- -------- --------
Total investments $4,908 $ 294 $ 107) $5,095
======== ======== ======== ========
Investments at December 30, 1995 were as follows:
Gross Gross Estimated
Unrealized unrealized fair
(In millions) Cost gains losses value
- - -----------------------------------------------------------------------
Commercial paper $ 576 $ -- $ -- $ 576
Repurchase agreements 474 -- -- 474
Securities of foreign
governments 456 1 (1) 456
Corporate bonds 375 5 -- 380
Bank time deposits 360 -- -- 360
Loan participations 278 -- -- 278
Floating rate notes 224 -- -- 224
Fixed rate notes 159 1 (1) 159
Collateralized mortgage
obligations 129 -- (1) 128
Other debt securities 119 -- (1) 118
-------- -------- -------- --------
Total debt securities 3,150 7 (4) 3,153
-------- -------- -------- --------
Hedged equity 431 45 -- 476
Preferred stock and
other equity 309 91 (11) 389
------- ------- -------- --------
Total equity securities 740 136 (11) 865
-------- -------- -------- --------
Swaps hedging investments
in debt securities -- 2 (9) (7)
Swaps hedging investments
in equity securities -- 5 (47) (42)
Currency forward contracts
hedging investments
in debt securities -- 3 -- 3
-------- -------- -------- --------
Total available-for-sale
securities 3,890 153 (71) 3,972
Less amounts classified
as cash equivalents (1,324) -- -- (1,324)
-------- -------- -------- --------
Total investments $2,566 $ 153 $ (71) $2,648
======== ======== ======== ========
In 1996 and 1995, debt and marketable securities with a fair value at the
date of sale of $225 million and $114 million, respectively, were sold. The
gross realized gains on such sales totaled $7 million and $60 million,
respectively. There were no material proceeds, gross realized gains or gross
realized losses from sales of securities in 1994.
The amortized cost and estimated fair value of investments in debt securities
at December 28, 1996, by contractual maturity, were as follows:
Estimated
fair
(In millions) Cost value
- - ----------------------------------------------------------------------
Due in 1 year or less $7,005 $7,007
Due in 1-2 years 320 327
Due in 2-5 years 86 88
Due after 5 years 277 276
-------- --------
Total investments in debt securities $7,688 $7,698
======== ========
Derivative financial instruments
Outstanding notional amounts for derivative financial instruments
at fiscal year-ends were as follows:
(In millions) 1996 1995
- - -----------------------------------------------------------------------
Swaps hedging investments in debt securities $ 900 $ 824
Swaps hedging investments in equity securities $ 918 $ 567
Swaps hedging debt $ 456 $ 156
Currency forward contracts $1,499 $1,310
Currency options $ 94 $ 28
Options hedging investments
in marketable equity securities $ 82 $ --
Options hedging investments in
non-marketable instruments $ -- $ 82
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 utilizes swap agreements to exchange the
foreign currency, equity and interest rate returns of its investment and
debt portfolios for a floating U.S. dollar interest rate based return. The
floating rates on swaps are based primarily on U.S. dollar LIBOR and reset
on a monthly, quarterly or semiannual basis. Income or expense on swaps is
accrued as an adjustment to the yield of the related investments or debt they
hedge.
Pay rates on swaps hedging investments in debt securities match the yields
on the underlying investments they hedge. Payments on swaps hedging
investments in equity securities match the equity returns on the underlying
investments they hedge. Receive rates on swaps hedging debt match the expense
on the underlying debt they hedge. Maturity dates of swaps match those of the
underlying investment or the debt they hedge. There is approximately a one-to
- - -one matching of swaps to investments and debt. Swap agreements remain in
effect until expiration. If a contract remains outstanding after the
termination of a hedged relationship, subsequent changes in the market value
of the contract would be recognized in earnings.
Weighted average pay and receive rates, average maturities and range of
maturities on swaps at December 28, 1996 were as follows:
Weighted
Weighted average Weighted
average receive average Range of
pay rate rate maturity maturities
- - -----------------------------------------------------------------------
Swaps hedging
investments
in U.S. dollar
debt securities 6.3% 5.7% .7 years 0-2 years
Swaps hedging
investments
in foreign currency
debt securities 8.7% 7.4% .8 years 0-3 years
Swaps hedging
investments in
equity securities N/A 5.6% .4 years 0-1 years
Swaps hedging debt 5.6% 6.9% 3.9 years 2-5 years
Note: Pay and receive rates are based on the reset rates that were in effect
at December 28, 1996.
Other foreign currency instruments. Intel transacts business in various
foreign currencies, primarily Japanese yen and certain European currencies.
The Company has established revenue and balance sheet hedging programs to
protect against reductions in value and volatility of future cash flows
caused by changes in foreign exchange rates. The Company utilizes currency
forward contracts and currency options in these hedging programs. The
maturities on these instruments are less than 12 months. Deferred gains or
losses attributable to foreign currency instruments are not material.
Fair values of financial instruments
The estimated fair values of financial instruments outstanding at fiscal
year-ends were as follows:
1996 1995
--------------------- --------------------
Estimated Estimated
Carrying fair Carrying fair
(In millions) amount value amount value
- - ------------------------------------------------------------------------
Cash and
cash equivalents $4,165 $4,165 $1,463 $1,463
Short-term investments $3,736 $3,736 $ 995 $ 995
Trading assets $ 87 $ 87 $ -- $ --
Long-term investments $1,418 $1,418 $1,699 $1,699
Non-marketable
instruments $ 119 $ 194 $ 239 $ 259
Swaps hedging
investments in
debt securities $ (12) $ (12) $ (7) $ (7)
Swaps hedging
investments in
equity securities $ (27) $ (27) $ (42) $ (42)
Options hedging
investments in
marketable
equity securities $ (25) $ (25) $ -- $ --
Options hedging
investments in non-
marketable instruments $ -- $ -- $ (9) $ (13)
Short-term debt $ (389) $ (389) $ (346) $ (346)
Long-term debt $ (728) $ (731) $ (400) $ (399)
Swaps hedging debt $ -- $ 13 $ -- $ (1)
Currency forward
contracts $ 5 $ 18 $ 3 $ 4
Currency options $ -- $ -- $ -- $ --
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
substantial majority of the Company's trade receivables are derived from
sales to manufacturers of microcomputer systems, with the remainder spread
across various other industries.
During 1995, the Company experienced an increase in its concentration of
credit risk due to increasing trade receivables from sales to manufacturers
of microcomputer systems. Although the financial exposure to individual
customers increased in 1996, the concentration of credit among the largest
customers decreased slightly during the year. The Company's five largest
customers accounted for approximately 30% of net revenues for 1996. At
December 28, 1996, these customers accounted for approximately 25% of net
accounts receivable.
The Company endeavors to keep pace with the evolving computer industry and
has adopted credit policies and standards intended to accommodate industry
growth and inherent risk. Management believes that credit risks are moderated
by the diversity of its end customers and geographic sales areas. Intel
performs ongoing credit evaluations of its customers' financial condition and
requires collateral as deemed necessary.
Interest income and other
(In millions) 1996 1995 1994
- - ------------------------------------------------------------------------
Interest income $ 364 $ 272 $ 235
Foreign currency gains 26 29 15
Other income 16 114 23
----- ----- -----
Total $ 406 $ 415 $ 273
===== ===== =====
Other income for 1995 included approximately $58 million from the settlement
of ongoing litigation and $60 million from sales of a portion of the
Company's investment in marketable equity securities. Other income for 1994
included non-recurring gains from the settlement of various insurance claims.
Provision for taxes
The provision for taxes consisted of the following:
(In millions) 1996 1995 1994
- - ------------------------------------------------------------------------
Income before taxes:
U.S. $5,515 $3,427 $2,460
Foreign 2,419 2,211 1,143
------ ------ ------
Total income before taxes $7,934 $5,638 $3,603
====== ====== ======
Provision for taxes:
Federal:
Current $2,046 $1,169 $1,169
Deferred 8 307 (178)
------ ------ ------
2,054 1,476 991
------ ------ ------
State:
Current 286 203 162
Foreign:
Current 266 354 134
Deferred 171 39 28
------ ------ ------
437 393 162
------ ------ ------
Total provision for taxes $2,777 $2,072 $1,315
====== ====== ======
Effective tax rate 35.0% 36.8% 36.5%
====== ====== ======
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable for 1996 by $196 million ($116 million and
$61 million for 1995 and 1994, respectively).
The provision for taxes reconciles to the amount computed by applying the
statutory federal rate of 35% to income before taxes as follows:
(In millions) 1996 1995 1994
- - -----------------------------------------------------------------------
Computed expected tax $2,777 $1,973 $1,261
State taxes, net of federal benefits 186 132 105
Other (186) (33) (51)
------ ------ ------
Provision for taxes $2,777 $2,072 $1,315
====== ====== ======
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 were as follows:
(In millions) 1996 1995
- - -----------------------------------------------------------------------
Deferred tax assets:
Accrued compensation and benefits $ 71 $ 61
Deferred income 147 127
Inventory valuation and related reserves 187 104
Interest and taxes 54 61
Other, net 111 55
------ ------
570 408
Deferred tax liabilities:
Depreciation (573) (475)
Unremitted earnings of certain subsidiaries (359) (116)
Other, net (65) (29)
------ ------
(997) (620)
------ ------
Net deferred tax (liability) $ (427) $ (212)
====== ======
U.S. income taxes were not provided for on a cumulative total of
approximately $992 million of undistributed earnings for certain non-U.S.
subsidiaries. The Company intends to reinvest these earnings indefinitely in
operations outside the United States.
During 1996, Intel reached resolution on all outstanding issues related to
income tax returns for the years 1978-1987. Final adjustments were also
received from the Internal Revenue Service (IRS) for the years 1988-1990.
Neither event had a material effect on the Company's 1996 financial
statements.
The Company's U.S. income tax returns for the years 1991-1993 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 for the years under examination.
Employee benefit plans
Stock option plans. Intel has a stock option plan (hereafter referred to as
the EOP Plan) 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 employees, including officers, may
be granted options to purchase shares of the Company's authorized but
unissued Common Stock. In January 1997 the Board of Directors approved the
1997 Stock Option Plan, which made an additional 65 million shares available
for employees other than officers and directors. Under all plans, the option
purchase price is equal to fair market value at the date of grant.
Options currently expire no later than ten years from the grant date and
generally vest after five years. Proceeds received by the Company from
exercises are credited to Common Stock and capital in excess of par value.
Additional information with respect to the EOP and the ELTSOP activity was as
follows:
Outstanding options
----------------------
Weighted
Shares average
available Number exercise
(In millions) for options of shares price
- - ------------------------------------------------------------------------
December 25, 1993 64.8 83.6 $11.90
Grants (12.0) 12.0 $33.08
Exercises -- (8.8) $ 6.59
Cancellations 1.6 (1.6) $20.63
------ ------
December 31, 1994 54.4 85.2 $15.28
Grants (14.0) 14.0 $48.22
Exercises -- (10.7) $ 8.14
Cancellations 3.0 (3.0) $25.66
------ ------
December 30, 1995 43.4 85.5 $21.20
Grants (13.3) 13.3 $69.12
Exercises -- (11.9) $ 9.86
Cancellations 2.5 (2.5) $34.10
------ ------
December 28, 1996 32.6 84.4 $29.96
====== ======
Options exercisable at:
December 31, 1994 28.8 $ 7.54
December 30, 1995 29.1 $ 9.10
December 28, 1996 28.6 $11.44
The range of exercise prices for options outstanding at December 28, 1996
was $4.79 to $131.19. The range of exercise prices for options is wide due
primarily to the increasing price of the Company's stock over the period of
the grants.
The following tables summarize information about options outstanding at
December 28, 1996:
Outstanding options
------------------------------------
Weighted
average Weighted
Number of contract- average
shares ual life exercise
Range of exercise prices (in millions) (in years) price
- - ------------------------------------------------------------------------
$4.79-$13.41 34.0 3.7 $10.26
$13.63-$36.13 25.3 6.7 $27.29
$38.91-$131.19 25.1 8.9 $59.12
------
Total 84.4 6.1 $29.96
======
Exercisable options
--------------------------
Weighted
Number of average
shares exercise
Range of exercise prices (in millions) price
- - ------------------------------------------------------------------------
$4.79-$13.41 25.6 $ 9.34
$13.63-$36.13 2.6 $24.92
$38.91-$131.19 .4 $55.21
------
Total 28.6 $11.44
======
These options will expire if not exercised at specific dates ranging from
January 1997 to December 2006. Prices for options exercised during the
three-year period ended December 28, 1996 ranged from $3.04 to $69.43.
Stock Participation Plan. Under this plan, eligible employees may purchase
shares of Intel's Common Stock at 85% of fair market value at specific,
predetermined dates. Of the 118 million shares authorized to be issued under
the plan, 23.8 million shares were available for issuance at December 28,
1996. Employees purchased 3.5 million shares in 1996 (3.5 million and 4.0
million in 1995 and 1994, respectively) for $140 million ($110 million and
$94 million in 1995 and 1994, respectively).
Pro forma information. The Company has elected to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its employee
stock options because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized in the Company's financial statements.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123. This information is required to be determined as if the
Company had accounted for its employee stock options (including shares issued
under the Stock Participation Plan, collectively called "options") granted
subsequent to December 31, 1994 under the fair value method of that
statement. The fair value of options granted in 1995 and 1996 reported below
has been estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
Employee Stock Participation
stock options Plan shares
-------------------- --------------------
1996 1995 1996 1995
- - ------------------------------------------------------------------------
Expected life (in years) 6.5 6.5 .5 .5
Risk-free interest rate 6.5% 6.8% 5.3% 6.0%
Volatility .36 .36 .36 .36
Dividend yield .2% .3% .2% .3%
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options. The weighted average estimated fair
value of employee stock options granted during 1996 and 1995 was $32.69 and
$23.26 per share, respectively. The weighted average estimated fair value of
shares granted under the Stock Participation Plan during 1996 and 1995 was
$16.22 and $12.25, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in millions except for earnings per
share information):
1996 1995
- - ------------------------------------------------------------------------
Pro forma net income $5,046 $3,506
Pro forma earnings per share $ 5.68 $ 3.96
The effects on pro forma disclosures of applying SFAS No. 123 are not likely
to be representative of the effects on pro forma disclosures of future years.
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, the pro forma effect will not be fully reflected until
1999.
Retirement plans. The Company provides tax-qualified profit-sharing
retirement plans (the "Qualified Plans") for the benefit of eligible
employees in the U.S. and Puerto Rico and certain foreign countries. The
plans are designed to provide employees with an accumulation of funds for
retirement on a tax-deferred basis 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 eligible employees in the U.S.
This plan is designed to permit certain discretionary employer contributions
in excess of the tax limits applicable to the Qualified Plans and to permit
employee deferrals in excess of certain tax limits. This plan is unfunded.
The Company accrued $209 million for the Qualified Plans and the
Non-Qualified Plan in 1996 ($188 million in 1995 and $152 million in 1994).
Of the $209 million accrued in 1996, the Company expects to fund
approximately $181 million for the 1996 contribution to the Qualified Plans
and to allocate approximately $10 million for the Non-Qualified Plan. The
remainder, plus approximately $177 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 tax-qualified defined-benefit pension plans for the
benefit of eligible employees in the U.S. and Puerto Rico. Each plan provides
for minimum pension benefits that 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
Qualified Plan. If the participant's balance in the Qualified Plan exceeds
the pension guarantee, the participant will receive benefits from the
Qualified Plan only. Intel's funding policy is consistent with the funding
requirements of federal laws and regulations.
Pension expense for 1996, 1995 and 1994 for the U.S. and Puerto Rico plans
was less than $1 million per year, and no component of expense exceeded $3
million.
The funded status of these plans as of December 28, 1996 and December 30,
1995 was as follows:
(In millions) 1996 1995
- - -----------------------------------------------------------------------
Vested benefit obligation $ (3) $ (3)
====== ======
Accumulated benefit obligation $ (4) $ (4)
====== ======
Projected benefit obligation $ (5) $ (6)
Fair market value of plan assets 11 8
------ ------
Projected benefit obligation less than plan assets 6 2
Unrecognized net (gain) (15) (12)
Unrecognized prior service cost 3 3
------ ------
Accrued pension costs $ (6) $ (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 were as follows:
1996 1995 1994
- - ------------------------------------------------------------------------
Discount rate 7.0% 7.0% 8.5%
Rate of increase in
compensation levels 5.0% 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 1996, 1995 and 1994 for the foreign plans included the
following:
(In millions) 1996 1995 1994
- - ------------------------------------------------------------------------
Service cost-benefits earned
during the year $ 10 $ 9 $ 5
Interest cost of projected
benefit obligation 7 6 5
Actual investment (return)
on plan assets (14) (4) (8)
Net amortization and deferral 14 (2) 3
------ ------ ------
Net pension expense $ 17 $ 9 $ 5
====== ====== ======
The funded status of the foreign defined-benefit plans as of December 28,
1996 and December 30, 1995 is summarized below:
Assets Accu-
exceed mulated
accu- benefits
1996 mulated exceed
(In millions) benefits assets
- - ------------------------------------------------------------------------
Vested benefit obligation $ (43) $ (9)
====== ======
Accumulated benefit obligation $ (46) $ (15)
====== ======
Projected benefit obligation $ (62) $ (23)
Fair market value of plan assets 68 3
------ ------
Projected benefit obligation less than
(in excess of) plan assets 6 (20)
Unrecognized net loss 3 3
Unrecognized net transition obligation 2 1
------ ------
Prepaid (accrued) pension costs $ 11 $ (16)
====== ======
Assets Accu-
exceed mulated
accu- benefits
1995 mulated exceed
(In millions) benefits assets
- - ------------------------------------------------------------------------
Vested benefit obligation $ (44) $ (8)
------ ------
Accumulated benefit obligation $ (46) $ (14)
====== ======
Projected benefit obligation $ (62) $ (22)
Fair market value of plan assets 67 4
------ ------
Projected benefit obligation
less than (in excess of) pan assets 5 (18)
Unrecognized net loss 4 5
Unrecognized net transition obligation 2 --
------ ------
Prepaid (accrued) pension costs $ 11 $ (13)
====== ======
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 were as follows:
1996 1995 1994
- - ------------------------------------------------------------------------
Discount rate 5.5%-14% 5.5%-14% 5.5%-14%
Rate of increase in
compensation levels 4.5%-11% 4.5%-11% 4.5%-11%
Expected long-term
return on assets 5.5%-14% 5.5%-14% 5.5%-14%
Plan assets of the foreign plans consist primarily of listed stocks, bonds
and cash surrender value life insurance policies.
Other postemployment benefits. The Company has adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and SFAS No. 112, "Employers' Accounting for Postemployment Benefits." There
was no material impact on the Company's financial statements for the periods
presented.
Commitments
The Company leases a portion of its capital equipment and certain of its
facilities under operating leases that expire at various dates through 2011.
Rental expense was $57 million in 1996, $38 million in 1995 and $38 million
in 1994. Minimum rental commitments under all non-cancelable leases with an
initial term in excess of one year are payable as follows: 1997-$23 million;
1998-$18 million; 1999-$14 million; 2000-$11 million; 2001-$9 million; 2002
and beyond-$25 million. Commitments for construction or purchase of property,
plant and equipment approximated $1.6 billion at December 28, 1996. In
connection with certain manufacturing arrangements, Intel had minimum
purchase commitments of approximately $333 million at December 28, 1996 for
flash memories and other memory components and for production capacity of
board-level products.
Contingencies
In March 1995, EMI Group, N.A. (formerly known as Thorn EMI North America
Inc.) brought suit in Federal Court in Delaware against Intel, alleging that
certain Intel manufacturing processes infringe a U.S. patent. In May 1996,
the Court granted Intel's motion for summary judgment on some of the
processes in issue. In November 1996, the Court granted Intel's motion for
summary judgment on the remaining processes in issue and entered judgment in
favor of Intel and against EMI on the claims in EMI's complaint. EMI has
filed a Notice of Appeal with respect to the Court's decision. Although the
ultimate outcome of this lawsuit 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.
Intel has been named to the California and U.S. 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 areas adjacent to one of its former
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. Superfund statutes, liability for cleanup of this site
and the adjacent area is joint and several. The Company, however, has reached
agreement with those same two companies which significantly limits the
Company's liabilities under the proposed cleanup plan. Also, the Company has
completed extensive studies at its other sites and is engaged in cleanup at
several of these 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 or overall trends in results of
operations, 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.
The estimate of the potential impact on the Company's financial position or
overall results of operations for the above legal proceedings could change
in the future.
Industry segment reporting
Intel operates predominantly in one industry segment. The Company designs,
develops, manufactures and markets microcomputer components and related
products at various levels of integration. The Company sells its products
directly to original equipment manufacturers (OEMs) and also to a network of
industrial and retail distributors throughout the world. The Company's
principal markets are in the United States, Europe, Asia-Pacific and Japan,
with the U.S. and Europe being the largest based on revenues. The Company's
major products include microprocessors and related board-level products,
chipsets, embedded processors and microcontrollers, flash memory chips, and
network and communications products. Microprocessors and related board-level
products account for a substantial majority of the Company's net revenues.
No customer exceeded 10% of revenues in 1996, 1995 or 1994. Summary balance
sheet information for operations outside the United States at fiscal
year-ends is as follows:
(In millions) 1996 1995
- - ------------------------------------------------------------------------
Assets $4,784 $4,404
Total liabilities $1,694 $1,661
Net property, plant and equipment $1,615 $1,414
Geographic information for the three years ended December 28, 1996 is
presented in the following tables. Transfers between geographic areas are
accounted for at amounts that are generally above cost and consistent with
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, trading assets, deferred tax assets,
long-term investments and certain other assets.
Transfers
Sales to between Indenti-
(In millions) unaffiliated geographic Net Operating fiable
1996 customers areas revenues income assets
- - -----------------------------------------------------------------------
United States $ 8,668 $ 9,846 $18,514 $ 5,255 $12,982
Europe 5,876 917 6,793 1,118 2,405
Japan 2,459 20 2,479 340 659
Asia-Pacific 3,844 2,004 5,848 509 1,361
Other -- 865 865 529 359
Eliminations -- (13,652) (13,652) 453 (3,439)
Corporate -- -- -- (651) 9,408
------- ------- ------- ------- -------
Consolidated $20,847 $ -- $20,847 $ 7,553 $23,735
======= ======= ======= ======= =======
1995
- - ------------------------------------------------------------------------
United States $ 7,922 $ 6,339 $14,261 $ 3,315 $12,603
Europe 4,560 1,190 5,750 1,383 2,517
Japan 1,737 28 1,765 353 665
Asia-Pacific 1,983 1,566 3,549 271 893
Other -- 684 684 410 329
Eliminations -- (9,807) (9,807) 124 (3,651)
Corporate -- -- -- (604) 4,148
------- ------- ------- ------- -------
Consolidated $16,202 $ -- $16,202 $ 5,252 $17,504
======= ======= ======= ======= =======
1994
- - ------------------------------------------------------------------------
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
======= ======= ======= ======= =======
Supplemental information (unaudited)
Quarterly information for the two years ended December 28, 1996 is presented
on page 37 of the printed annual report (page 20 of this exhibit).
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 28, 1996 and December 30, 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 28, 1996. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Intel Corporation at December 28, 1996 and December 30, 1995,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 28, 1996, in conformity with
generally accepted accounting principles.
/s/Ernst & Young LLP
San Jose, California
January 13, 1997
Financial summary
Ten Years Ended December 28, 1996
Net investment Additions
in property, Long-term Stock- to property,
plant & Total debt & put holders' plant &
(In millions) equipment assets warrants equity equipment
- - -----------------------------------------------------------------------------
1996 $ 8,487 $23,735 $ 1,003 $16,872 $ 3,024
1995 $ 7,471 $17,504 $ 1,125 $12,140 $ 3,550
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
Research Dividends
Net Cost of & devel- Operating Net Earnings declared
revenues sales opment income income per share per share
- - -----------------------------------------------------------------------------
(In millions -- except per share amounts)
1996 $20,847 $9,164 $1,808 $7,553 $5,157 $5.81 $ .19
1995 $16,202 $7,811 $1,296 $5,252 $3,566 $4.03 $ .15
1994 $11,521 $5,576 $1,111 $3,387 $2,288 $2.62 $ .115
1993 $ 8,782 $3,252 $ 970 $3,392 $2,295 $2.60 $ .10
1992 $ 5,844 $2,557 $ 780 $1,490 $1,067 $1.24 $ .05
1991 $ 4,779 $2,316 $ 618 $1,080 $ 819 $ .98 --
1990 $ 3,921 $1,930 $ 517 $ 858 $ 650 $ .80 --
1989 $ 3,127 $1,721 $ 365 $ 557 $ 391 $ .52 --
1988 $ 2,875 $1,506 $ 318 $ 594 $ 453 $ .63 --
1987 $ 1,907 $1,044 $ 260 $ 246 $ 248 $ .34 --
Management's discussion and analysis of financial condition and results of
operations
Results of operations
Intel posted record net revenues in 1996, for the tenth consecutive year,
rising by 29% from 1995 to 1996 and by 41% from 1994 to 1995. Higher volumes
of the rapidly ramping Pentium(R) microprocessor family, partially offset by
lower processor prices and decreased revenues from sales of related
board-level products, were responsible for most of the growth in revenues
from 1995 to 1996. The Pentium(R) Pro microprocessor family, introduced in
late 1995, also contributed to the growth in revenues from 1995 to 1996. The
growth in revenues from 1994 to 1995 was driven primarily by higher volumes
of the Pentium processor family and related board-level products, which
surpassed sales of the Intel486(TM) microprocessor family in the third
quarter of 1995. Revenues from the Intel486 microprocessor family declined
substantially in 1995 and 1996, primarily due to this shift in market demand
toward the Company's more advanced microprocessors.
Higher volumes of flash memory and chipset products also contributed toward
the increase in revenues from 1994 to 1996 and also helped enable the
successful Pentium and Pentium Pro microprocessor ramps. Revenues from
embedded control products and networking and communications products also
grew over this period.
Cost of sales increased by 17% from 1995 to 1996 and by 40% from 1994 to
1995. The overall growth in cost of sales from 1994 to 1996 was driven by
unit volume growth in Pentium microprocessor and related board-level
products, new factories commencing production, manufacturing process
conversions and shifts in product mix. While revenues increased substantially
from 1995 to 1996, growth in cost of sales was significantly less. Cost of
sales in the first half of 1996 and the fourth quarter of 1995 were
negatively impacted by unusually high reserves related to inventories of
certain purchased components. The second half of 1996 was favorably impacted
by factory efficiencies from higher volumes, as well as relatively lower new
factory startup costs. In addition, in the second half of 1996 the Company
sold significantly more processor products than in the second half of 1995.
The gross margin percentage was 56% in 1996, compared to 52% in 1995 and
1994. However, as a result of all of the revenue and cost factors discussed
above, the gross margin percentage in the second half of 1996 was 60% (63%
in the fourth quarter), compared to 50% in the second half of 1995 (48% in
the fourth quarter). Gross margin for the fourth quarter of 1994 included
the impact of a $475 million charge, primarily to cost of sales, related to
a divide problem in the floating point unit of the Pentium microprocessor.
See "Outlook" for a discussion of gross margin expectations.
Sales of Pentium microprocessors and related board-level products comprised
a majority of the Company's revenues and a substantial majority of its gross
margin during 1995 and 1996. During 1996 Pentium Pro microprocessors and
related board-level products became an increasing portion of the Company's
revenues and gross margin. The Intel486 microprocessor family contributed
negligible revenues and gross margin during 1996. During 1995, the Intel486
microprocessor family represented a significant but rapidly declining portion
of the Company's revenues and gross margin, while it comprised a majority of
the Company's revenues and a substantial majority of its gross margin during
1994.
Research and development spending grew by 40% from 1995 to 1996 and 17% from
1994 to 1995, as the Company substantially increased its investments over
this time period in strategic programs, particularly for the internal
development of microprocessor products and related manufacturing technology.
Increased spending for marketing programs, including media merchandising and
the Company's Intel Inside(R) cooperative advertising program, and other
revenue-dependent expenses drove the 26% and 27% increases in marketing,
general and administrative expenses from 1995 to 1996 and from 1994 to 1995,
respectively.
The $4 million decrease in interest expense from 1995 to 1996 was mainly due
to lower average borrowing balances and interest rates in 1996, partially
offset by lower interest capitalization. The decrease in interest expense
from 1994 to 1995 was primarily due to lower average borrowing balances in
1995 in addition to higher interest capitalization resulting from increased
facility construction programs.
Although the Company had higher average investment balances in 1996, interest
and other income decreased by $9 million from 1995 to 1996, primarily due to
the offsetting effect of $118 million in unusual gains in 1995. Interest and
other income increased by $142 million from 1994 to 1995, mainly due to the
previously noted gains in 1995, in addition to higher average interest rates
on investments in 1995.
The Company utilizes investments and corresponding interest rate swaps to
preserve principal while enhancing the yield on its investment portfolio
without significantly increasing risk, and uses forward contracts, options
and swaps to hedge foreign currency, equity and interest rate market
exposures of underlying assets, liabilities and other obligations. Gains and
losses on these instruments are generally offset by those on the underlying
hedged transactions; as a result, there was no material net impact on the
Company's financial results during the 1994 to 1996 period.
The Company's effective income tax rate decreased to 35.0% in 1996 compared
to 36.8% and 36.5% in 1995 and 1994, respectively.
Financial condition
The Company's financial condition remains very strong. As of December 28,
1996, total cash and short- and long-term investments totaled $9.3 billion,
up from $4.1 billion at December 30, 1995. Cash generated from operating
activities rose to $8.7 billion in 1996, compared to $4.0 billion and $2.9
billion in 1995 and 1994, respectively.
Investing activities consumed $5.3 billion in cash during 1996, compared to
$2.7 billion during 1995 and $2.9 billion during 1994, as operating
activities generated significantly more cash during 1996. Capital
expenditures totaled $3.0 billion in 1996, as the Company continued to
invest in property, plant and equipment, primarily for microprocessor
manufacturing capacity. The Company had committed approximately $1.6 billion
for the construction or purchase of property, plant and equipment as of
December 28, 1996. See "Outlook" for a discussion of capital expenditure
expectations in 1997.
Inventory levels, particularly raw materials and finished goods, decreased
significantly in 1996. This decrease was primarily attributable to the
sell-through of purchased parts inventory and lower costs of manufacturing.
The increase in accounts receivable in 1996 was mainly due to revenue growth,
offset somewhat by improved receivable collections. During 1995, the Company
experienced an increase in its concentration of credit risk due to
increasing trade receivables from sales to manufacturers of microcomputer
systems. Although the financial exposure to individual customers has
increased with the growth in revenues, the concentration of credit among the
largest customers has decreased slightly in 1996. The Company's five largest
customers accounted for approximately 30% of net revenues for 1996. At
December 28, 1996, these customers accounted for approximately 25% of net
accounts receivable.
The Company used $773 million for financing activities in 1996, compared to
$1.1 billion and $557 million in 1995 and 1994, respectively. The major
financing applications of cash in 1996 and 1995 were for stock repurchases
totaling $1.3 billion for 16.8 million shares (including $108 million for
exercised put warrants) and $1.0 billion for 18.9 million shares,
respectively. Financing applications of cash in 1994 included stock
repurchases of $658 million and the early retirement of the Company's 8 1/8%
debt. Financing sources of cash during 1996 included $300 million under a
private reverse repurchase arrangement and $261 million in proceeds from the
sale of shares primarily pursuant to employee stock plans ($192 million in
1995 and $150 million in 1994).
As part of its authorized stock repurchase program, the Company had
outstanding put warrants at the end of 1996, with the potential obligation
to buy back 4.5 million shares of its Common Stock at an aggregate price of
$275 million. The exercise price of these warrants ranged from $56 to $69
per share, with an average exercise price of $61 per share as of December 28,
1996.
Other sources of liquidity include combined credit lines and authorized
commercial paper borrowings of $1.8 billion, $30 million of which was
outstanding at December 28, 1996. The Company also maintains the ability to
issue an aggregate of approximately $1.4 billion in debt, equity and other
securities under Securities and Exchange Commission (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 for the expansion of worldwide manufacturing
capacity, working capital requirements, the potential put warrant obligation
and the dividend program.
Outlook
The outlook section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially.
Intel expects that the total number of personal computers using Intel's
Pentium and Pentium Pro microprocessors and other semiconductor components
sold worldwide will continue to grow in 1997. Intel has expanded
manufacturing capacity over the last few years and continues to expand
capacity. Intel's financial results are substantially dependent on this
market segment. Revenue is also a function of the mix of microprocessors and
related motherboards and the mix of microprocessor types and speed, all of
which are difficult to forecast. Because of the large price difference
between types of microprocessors, this mix affects the average price Intel
will realize and has a large impact on Intel's revenues.
Intel's strategy has been, and continues to be, to introduce ever higher
performance microprocessors. To implement this strategy, the Company plans
to cultivate new businesses and continue to work with the software industry
to develop compelling applications that can take advantage of this higher
performance, thus driving demand toward the newer products. In line with this
strategy, the Company has recently announced higher performance members of
the Pentium microprocessor family, including the Pentium processor with
MMX(TM) technology. Capacity has been planned based on the assumed continued
success of the Company's strategy. If the market demand does not continue to
grow and move rapidly toward higher performance products, revenues and gross
margin may be impacted, the manufacturing capacity installed might be
under-utilized and capital spending may be slowed. The Company may continue
to reduce microprocessor prices aggressively and systematically to bring its
technology to market.
The Company's gross margin percentage is a sensitive function of the product
mixes sold in any period. Because the percentage of motherboards that Intel's
customers purchase changes with the maturity of the product cycle, and
motherboards generally have lower gross margin percentages than
microprocessors, Intel's gross margin percentage varies depending on the mix
of microprocessors and related motherboards within a product family and the
mix of types of microprocessors. Various other factors, including unit
volumes and costs, and yield issues associated with production at factories,
processor speed mix and mix of shipments of other semiconductors, will also
continue to affect the amount of cost of sales and the variability of gross
margin percentages in future quarters. The Company's goal continues to be to
grow gross margin dollars. Intel's current gross margin expectation for 1997
is 60% plus or minus a few points. However, the Company believes that over
the long-term the gross margin percentage will be 50% plus or minus a few
points, as the Company introduces higher performance products and costs
continue to increase. In addition, from time to time the Company may forecast
a range of gross margin percentages for the coming quarter. Actual results
may differ from these estimates.
To implement its strategy, Intel continues to build capacity to produce
high-performance microprocessors and other products. The Company expects
that capital spending will increase to approximately $4.5 billion in 1997 to
support significant expansion of worldwide manufacturing capacity. This
spending plan is dependent upon changes in manufacturing efficiencies,
delivery times of various machines and construction schedules for new
facilities. Depreciation for 1997 is expected to be approximately $2.5
billion, an increase of approximately $600 million from 1996. Most of this
increased depreciation would be included in cost of sales and research and
development spending.
The industry in which Intel operates is characterized by very short product
life cycles. Intel considers it imperative to maintain a strong research and
development program to continue to succeed. The Company will also continue
spending to promote its products and to increase the value of its product
brands. Based on current forecasts, spending for marketing and general and
administrative expenses is expected to increase in 1997.
The Company currently expects its tax rate to increase to 35.5% for 1997.
This estimate is based on current tax law and current estimate of earnings,
and is subject to change.
The Company's future results of operations and the other forward-looking
statements contained in this outlook, in particular the statements regarding
growth in the personal computer industry, gross margin, capital spending,
depreciation, research and development, and marketing and general and
administrative expenses, involve a number of risks and uncertainties. In
addition to the factors discussed above, among the other factors that could
cause actual results to differ materially are the following: business
conditions and growth in the computing industry and in the general economy;
changes in customer order patterns, including timing of delivery and changes
in seasonal fluctuations in PC buying patterns; competitive factors, such as
rival chip architectures, competing software-compatible microprocessors,
acceptance of new products and price pressures; risk of inventory
obsolescence due to shifts in market demand; variations in inventory
valuation; timing of software industry product introductions; continued
success in technological advances and their implementation, including the
manufacturing ramp; shortage of manufacturing capacity; risks associated with
foreign operations; changes in product mixes; and litigation involving
intellectual property and consumer issues.
Intel believes that it has the product offerings, facilities, personnel, and
competitive and financial resources for continued business success, but
future revenues, costs, margins and profits are all influenced by a number of
factors, including those discussed above, all of which are inherently
difficult to forecast.
Financial information by quarter (unaudited)
(In millions-except per share data)
1996 for quarter ended December 28 September 28 June 29 March 30
- - -----------------------------------------------------------------------
Net revenues $ 6,440 $ 5,142 $ 4,621 $ 4,644
Cost of sales $ 2,392 $ 2,201 $ 2,150 $ 2,421
Net income $ 1,910 $ 1,312 $ 1,041 $ 894
Earnings per share $ 2.13 $ 1.48 $ 1.17 $ 1.02
Dividends per share (A)
Declared $ .05 $ .05 $ .05 $ .04
Paid $ .05 $ .05 $ .04 $ .04
Market price range Common
Stock (B)
High $ 137.50 $ 97.38 $ 76.88 $ 61.00
Low $ 95.44 $ 69.00 $ 56.88 $ 50.00
Market price range Step-Up
Warrants (B)
High $ 98.38 $ 58.88 $ 39.31 $ 28.50
Low $ 56.75 $ 31.75 $ 24.00 $ 21.63
(In millions-except per share data)
1995 for quarter ended December 30 September 30 July 1 April 1
- - -----------------------------------------------------------------------
Net revenues $ 4,580 $ 4,171 $ 3,894 $ 3,557
Cost of sales $ 2,389 $ 2,008 $ 1,805 $ 1,609
Net income $ 867 $ 931 $ 879 $ 889
Earnings per share $ .98 $ 1.05 $ .99 $ 1.02
Dividends per share (A)
Declared $ .04 $ .04 $ .04 $ .03
Paid $ .04 $ .04 $ .03 $ .03
Market price range Common
Stock (B)
High $ 72.88 $ 76.44 $ 65.63 $ 44.25
Low $ 56.75 $ 58.63 $ 42.75 $ 31.81
Market price range Step-Up
Warrants (B)
High $ 39.00 $ 43.63 $ 31.88 $ 11.91
Low $ 26.75 $ 30.44 $ 11.31 $ 6.97
(A) Intel plans to continue its dividend program. However, dividends are
dependent on future earnings, capital requirements and financial condition.
(B) Intel's Common Stock (symbol INTC) and 1998 Step-Up Warrants (symbol
INTCW) trade on The Nasdaq Stock Market* and are 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 28, 1996, there were
approximately 105,000 registered holders of Common Stock. All stock and
warrant prices are closing prices per The Nasdaq Stock Market.