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 April 1, 2000
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
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INTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-1672743
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Mission College Boulevard, Santa Clara, California 95052-8119
- ------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(408) 765-8080
--------------
(Registrant's telephone number, including area code)
N/A
--------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Shares outstanding of the Registrant's common stock:
Class Outstanding at April 1, 2000
Common stock, $0.001 par value 3,349 million
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
------------------
April 1, March 27,
2000 1999
---- ----
Net revenues $ 7,993 $ 7,103
Costs and expenses: ------- -------
Cost of sales 2,989 2,894
Research and development 951 663
Marketing, general and administrative 1,124 891
Amortization of goodwill and other acquisition-related
intangibles 313 18
Purchased in-process research and development 62 -
------- -------
Operating costs and expenses 5,439 4,466
------- -------
Operating income 2,554 2,637
Interest expense (12) (9)
Interest income and other, net 652 356
------- -------
Income before taxes 3,194 2,984
Provision for taxes 498 985
------- -------
Net income $ 2,696 $ 1,999
======= =======
Basic earnings per common share $ 0.81 $ 0.60
======= =======
Diluted earnings per common share $ 0.77 $ 0.57
======= =======
Cash dividends declared per
common share $ 0.060 $ 0.050
======= =======
Weighted average common shares outstanding 3,341 3,324
======= =======
Weighted average common shares outstanding, assuming dilution 3,497 3,478
======= =======
See Notes to Consolidated Condensed Financial Statements.
2
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions)
April 1, Dec. 25,
2000 1999
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,204 $ 3,695
Short-term investments 4,555 7,705
Trading assets 457 388
Accounts receivable, net 3,678 3,700
Inventories:
Raw materials 224 183
Work in process 796 755
Finished goods 517 540
-------- --------
1,537 1,478
-------- --------
Deferred tax assets 709 673
Other current assets 268 180
-------- --------
Total current assets 17,408 17,819
-------- --------
Property, plant and equipment 24,119 23,557
Less accumulated depreciation 12,240 11,842
-------- --------
Property, plant and equipment, net 11,879 11,715
Marketable strategic equity securities 9,809 7,121
Other long-term investments 1,163 790
Goodwill and other acquisition-related intangibles 5,978 4,934
Other assets 1,574 1,470
-------- --------
TOTAL ASSETS $ 47,811 $ 43,849
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 373 $ 230
Accounts payable 1,760 1,370
Accrued compensation and benefits 774 1,454
Deferred income on shipments to distributors 548 609
Accrued advertising 570 582
Other accrued liabilities 1,534 1,159
Income taxes payable 1,531 1,695
-------- --------
Total current liabilities 7,090 7,099
-------- --------
Long-term debt 868 955
Deferred tax liabilities 3,750 3,130
Put warrants - 130
Stockholders' equity:
Preferred stock - -
Common stock and capital in excess
of par value 7,748 7,316
Retained earnings 23,271 21,428
Accumulated other comprehensive income 5,084 3,791
-------- --------
Total stockholders' equity 36,103 32,535
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,811 $ 43,849
======== ========
See Notes to Consolidated Condensed Financial Statements.
3
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
Three Months Ended
------------------
April 1, March 27,
2000 1999
---- ----
Cash flows provided by (used for) operating activities:
Net income $ 2,696 $ 1,999
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 897 774
Amortization of goodwill and other acquisition-related
intangibles 313 18
Purchased in-process research and development 62 -
Gains on investments (449) (202)
Net loss on retirements of property, plant and equipment 15 17
Deferred taxes (115) (81)
Changes in assets and liabilities:
Accounts receivable 40 247
Inventories (44) (115)
Accounts payable 370 202
Accrued compensation and benefits (681) (498)
Income taxes payable (164) 464
Tax benefit from employee stock plans 302 138
Other assets and liabilities 39 (62)
------- -------
Total adjustments 585 902
------- -------
Net cash provided by operating activities 3,281 2,901
------- -------
Cash flows provided by (used for) investing activities:
Additions to property, plant and equipment (1,074) (675)
Acquisitions, net of cash acquired (1,406) (132)
Purchases of available-for-sale investments (2,227) (2,056)
Sales of available-for-sale investments 304 194
Maturities and other changes in available-for-sale
investments 4,596 1,508
Other investing activities (293) (168)
------- -------
Net cash used for investing activities (100) (1,329)
------- -------
Cash flows provided by (used for) financing activities:
Increase in short-term debt, net 143 23
Additions to long-term debt - 27
Retirements of long-term debt (46) -
Proceeds from sales of shares through employee stock plans and other 331 207
Repurchase and retirement of common stock (1,000) (1,297)
Payment of dividends to stockholders (100) (67)
------- -------
Net cash used for financing activities (672) (1,107)
------- -------
Net increase in cash and cash equivalents $ 2,509 $ 465
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 14 $ 10
Income taxes $ 475 $ 461
See Notes to Consolidated Condensed Financial Statements.
4
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED
1. The accompanying interim consolidated condensed financial statements of
Intel Corporation have been prepared in conformity with generally
accepted accounting principles, consistent in all material respects
with those applied in the company's Annual Report on Form 10-K for the
year ended December 25, 1999. 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 25,
1999. Certain amounts for prior periods have been reclassified to
conform to the current presentation.
2. In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101), providing the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues.
For companies such as Intel with fiscal years that begin between
December 16, 1999 and March 15, 2000, the effective date for portions
of SAB 101 was subsequently deferred until the second quarter of 2000.
The company is currently evaluating the effect that adopting these
portions of SAB 101 may have on the company's financial position and
overall trends in results of operations.
3. A reconciliation of the shares used in the computation of the company's
basic and diluted earnings per common share is as follows (in
millions):
Three Months Ended
------------------
April 1, March 27,
2000 1999
---- ----
Weighted average common shares
outstanding 3,341 3,324
Dilutive effect of:
Employee stock options 152 154
Convertible notes 4 -
------ ------
Weighted average common shares
outstanding, assuming dilution 3,497 3,478
====== ======
Weighted average common shares outstanding, assuming dilution,
includes the incremental shares that would be issued upon the
assumed exercise of stock options and the assumed conversion of the
convertible notes. Net income for the purpose of computing diluted
earnings per common share is not materially affected by the assumed
conversion of the convertible notes.
4. Interest income and other, net included (in millions):
Three Months Ended
------------------
April 1, March 27,
2000 1999
----- -----
Interest income $ 206 $ 156
Gains on investments 449 202
Foreign currency gains - 2
Other, net (3) (4)
----- -----
Total $ 652 $ 356
===== =====
5
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
5. In March of 2000, the Internal Revenue Service closed its examination
of the company's tax returns for years up to and including 1998.
Resolution was reached on a number of issues including adjustments
related to intercompany allocation of profits. As part of this closure,
the company reversed previously accrued taxes reducing the first
quarter of 2000 tax provision by $600 million, or approximately $0.17
per share.
6. The components of comprehensive income, net of tax, were as follows (in
millions):
Three Months Ended
------------------
April 1, March 27,
2000 1999
---- ----
Net income $2,696 $ 1,999
Change in net unrealized gain on
available-for-sale investments 1,293 267
------ -------
Total comprehensive income $3,989 $ 2,266
====== =======
Accumulated other comprehensive income presented in the accompanying
consolidated condensed balance sheets consisted of the accumulated net
unrealized gain on available-for-sale investments.
7. During the first quarter of 2000, the company repurchased 9.8 million
shares of common stock under the company's authorized repurchase
program at a cost of $1 billion. As of April 1, 2000, approximately
90.3 million shares remained available for repurchase under the
program.
8. In a series of private placements during the 1991-1999 period, the
company sold put warrants that entitled the holder of each warrant to
sell to the company, by physical delivery, one share of common stock at
a specified price. The two million put warrants that were outstanding
at December 25, 1999 expired unexercised in the first quarter of 2000.
9. Intel is organized into five product-line operating segments, the Intel
Architecture Group, the Wireless Communications and Computing Group,
the Network Communications Group, the Communications Products Group,
and the New Business Group.
Although the company has five operating segments, only the Intel
Architecture Group is a reportable segment. The Intel Architecture
Group's products include microprocessors, motherboards and other
related board-level products and chipsets.
The "all other" category includes revenues and earnings or losses for
all operating segments other than the Intel Architecture Group. In
addition, "all other" includes certain corporate-level operating
expenses (primarily the amount by which total profit-dependent bonus
expenses differ from a targeted level allocated to all of the operating
segments) and the impact of reserves for deferred income on shipments
to distributors not allocated to operating segments.
6
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
Segment information is summarized as follows (in millions):
Three Months Ended
------------------
April 1, March 27,
2000 1999
---- ----
INTEL ARCHITECTURE GROUP:
-------------------------
Revenues $ 6,581 $ 6,429
Operating profit $ 3,012 $ 2,944
ALL OTHER:
----------
Revenues $ 1,412 $ 674
Operating loss $ (458) $ (307)
TOTAL:
------
Revenues $ 7,993 $ 7,103
Operating profit $ 2,554 $ 2,637
10. During the first quarter of 2000, the company completed a number of
acquisitions that have been accounted for using the purchase method of
accounting.
In March 2000, the company acquired Ambient Technologies, Inc. in a
cash transaction. Ambient develops integrated digital subscriber line
silicon solutions and analog modems designed to bring high-speed
Internet access to home users and small businesses.
Also in March 2000, the company acquired GIGA A/S in a cash
transaction. GIGA specializes in the design of advanced high-speed
communications chips used in optical networking and communications
products that direct traffic across the Internet and corporate
networks.
For the first quarter of 2000, $62 million was allocated to purchased
in-process research and development and expensed upon acquisition of
the above companies, because the technological feasibility of products
under development had not been established and no future alternative
uses existed.
These purchase transactions are further described below (in millions):
Purchased Goodwill
Entity In-Process Research and Identified
Name Consideration and Development Intangibles Form of Consideration
---- ------------- --------------- ----------- ---------------------
Ambient $ 148 $ 10 $ 135 Cash and options assumed
GIGA $1,247 $ 52 $ 1,184 Cash
Consideration includes the cash paid, less any cash acquired,
together with the value of any stock issued and options
assumed, but excludes any debt assumed.
In addition to the transactions described above, Intel also purchased
other businesses in smaller transactions. The charge for purchased
in-process research and development related to the other acquisitions
was not significant. The total amount allocated to goodwill and
identified intangibles for these transactions was $38 million, which
represents a substantial majority of the consideration for these
transactions.
7
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
The consolidated condensed financial statements include the operating
results of acquired businesses from the dates of acquisition. The
operating results of Ambient and GIGA since their acquisition have been
included in the operating results of the Network Communications Group
operating segment. This group has been included in the "all other"
category for segment reporting purposes.
The pro forma information below assumes that companies acquired in 2000
and 1999 had been acquired at the beginning of 1999 and includes the
effect of amortization of goodwill and other identified intangibles
from that date. The impact of charges for purchased in-process research
and development has been excluded. This is presented for informational
purposes only and is not necessarily indicative of the results of
future operations or results that would have been achieved had the
acquisitions taken place at the beginning of 1999.
Three Months Ended
------------------
April 1, March 27,
(in millions, except per share amounts) 2000 1999
---- ----
Net revenues $ 8,010 $ 7,322
Net income $ 2,707 $ 1,706
Basic earnings per common share $0.81 $0.51
Diluted earnings per common share $0.77 $0.48
11. Goodwill is recorded when the consideration paid for acquisitions
exceeds the fair value of net tangible and intangible assets acquired.
Goodwill and other acquisition-related intangibles are amortized on a
straight-line basis over the periods indicated below. Reviews are
regularly performed to determine whether facts or circumstances exist
which indicate that the carrying values of assets are impaired. The
company assesses the recoverability of its assets by comparing the
projected undiscounted net cash flows associated with those assets
against their respective carrying amounts. Impairment, if any, is based
on the excess of the carrying amount over the fair value of those
assets. No impairment has been indicated to date.
Net goodwill and other acquisition-related intangibles at the end of
each period consisted of the following (in millions):
April 1, Dec. 25,
Life in Years 2000 1999
------------- ---- ----
Goodwill 2-6 $ 5,084 $ 4,124
Developed technology 3-6 695 612
Other intangibles 2-6 199 198
-------- -------
$ 5,978 $ 4,934
======== =======
Other intangibles include items such as trademarks, workforce-in-place
and customer lists. The total balances presented above are net of total
accumulated amortization of $771 million and $471 million at April 1,
2000 and December 25, 1999, respectively.
Amortization of goodwill and other acquisition-related intangibles of
$313 million for the first three months of 2000 consisted of $260
million of amortization of goodwill and $53 million of amortization of
other acquisition-related intangibles, a majority of which was related
to developed technology.
12. During March 2000, the company announced that it had entered into a
definitive agreement to acquire privately held Basis Communications
Corporation in a transaction valued at approximately $450 million in
cash and assumed options. Basis designs and markets advanced
semiconductors and other products used in equipment that
8
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-
UNAUDITED (CONTINUED)
directs traffic across the Internet and corporate networks. The
completion of this transaction is subject to regulatory review and
customary closing conditions. This acquisition is expected to be
accounted for using the purchase method of accounting.
During May 2000, the company announced that it had entered into an
agreement to form a new company with Excalibur Technologies
Corporation. Intel expects to contribute its Interactive Media Services
division to the new company and invest approximately $150 million. The
new company is intended to enable owners of branded content, such as
sports and entertainment, to produce and securely sell their audio and
video content over the Internet. The completion of this transaction is
subject to regulatory review, Excalibur stockholder approval and other
normal closing conditions.
13. On May 10, 2000, the company announced that it would replace
motherboards that have a defective memory translator hub (MTH)
component that enables SDRAM memory to work with the
Intel-Registered Trademark- 820 Chipset. The MTH began shipping in
November 1999, with a substantial majority of Intel's shipments to
date occurring in the first quarter of 2000. The company estimates
that fewer than one million boards or systems with the MTH component
have been shipped to end users. Chipsets and motherboards with the
MTH component that remain in raw materials inventories at Intel's
customers may be returned to Intel for credit. The previously
announced results for the first quarter of 2000 have been revised to
reflect a revenue reserve for products sold prior to the end of the
first quarter that may be returned from customers. The company also
recorded additional inventory reserves related to such products that
may be returned and the company's inventory of these products as of
the end of the first quarter. The revisions to the previously
announced results for the first quarter had a net impact on earnings
per share of $0.01. The costs associated with the motherboard
replacement program cannot be estimated because the number of
motherboards that will be replaced (the user replacement rate) and
the actual cost to replace are dependent on several variables that
cannot be estimated at this time. The company expects to record a
liability for these costs in a future period when the replacement
rate and the cost to replace are known or can be estimated, and this
liability could have a material adverse impact on the results of
operations of the period in which it is recorded.
14. In November 1997, Intergraph Corporation filed suit in Federal District
Court in Alabama for patent infringement and generally alleging that
Intel attempted to coerce Intergraph into relinquishing certain patent
rights. The suit alleges that Intel infringes five Intergraph
microprocessor-related patents, and includes alleged violations of
antitrust laws and various state law claims. The suit seeks injunctive
relief, damages and prejudgment interest, and further alleges that
Intel's infringement is willful and that any damages awarded should be
trebled. Intergraph's expert witness has claimed that Intergraph is
entitled to damages of approximately $2.2 billion for Intel's alleged
patent infringement, $500 million for the alleged antitrust violations
and an undetermined amount for alleged state law violations. Intel has
counterclaimed that the Intergraph patents are invalid and further
alleges infringement of seven Intel patents, breach of contract and
misappropriation of trade secrets. In October 1999, the court
reconsidered an earlier adverse ruling and granted Intel's motion for
summary judgment that the Intergraph patents are licensed to Intel, and
dismissed all of Intergraph's patent infringement claims with
prejudice. Intergraph has appealed this ruling. In November 1999, the
Court of Appeals for the Federal Circuit reversed the District Court's
April 1998 order requiring Intel to continue to deal with Intergraph on
the same terms as it treats allegedly similarly situated customers with
respect to confidential information and products supply. In March 2000,
the District Court issued an order granting Intel summary judgment on
Intergraph's antitrust claims. Intergraph has appealed this ruling. The
company disputes Intergraph's remaining state law claims, and intends
to defend the lawsuit vigorously.
The company is currently party to various legal proceedings, including
that noted above. While management, including internal counsel,
currently believes that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse
effect on the company's financial position or overall trends in
results of operations, litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the net income of the
period in which the ruling occurs.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - FIRST QUARTER OF 2000 COMPARED TO FIRST QUARTER OF 1999
Intel's net revenues for Q1 2000 increased by 13% compared to Q1 1999. Net
revenues for the Intel Architecture Group operating segment increased 2% in Q1
2000 compared to Q1 1999. This increase is after taking into account the revenue
reserve related to sales of chipsets and motherboards with the defective memory
translator hub (MTH) that may be returned from customers. The increase in net
revenues for the Intel Architecture Group was primarily due to higher unit
volumes of microprocessors, partially offset by lower prices. Within the "all
other" category for operating segment reporting, revenues from sales of flash
memory grew significantly between these periods. Revenues from networking and
communications products also grew, primarily due to the impact of acquisitions
made during the second half of 1999.
For Q1 2000, sales of microprocessors and related board-level products based on
the P6 microarchitecture, which are included in the Intel Architecture Group's
operations, comprised a majority of Intel's consolidated net revenues and a
substantial majority of gross margin. For Q1 1999, these products represented a
substantial majority of the company's consolidated net revenues and gross
margin.
Cost of sales increased 3% in Q1 2000 compared to Q1 1999. Within the Intel
Architecture Group operating segment, increased costs due to higher unit sales
volume of microprocessors were largely offset by lower unit costs in Q1 2000.
The lower unit costs in Q1 2000 were achieved primarily through redesigned
microprocessor products with lower-cost packaging, including packaging using
fewer purchased components, as well as factory efficiencies and lower purchase
prices on the purchased components. The cost of sales recorded for Q1 2000
includes the impact of inventory reserves related to chipsets and motherboards
with the defective MTH component, but does not include the impact of the
motherboard replacement program announced in May 2000 because the cost of this
program cannot be estimated at this time. The company's gross margin percentage
increased to 63% in Q1 2000, up from 59% in Q1 1999. The improvement in gross
margin was primarily a result of lower unit costs of microprocessors in the
Intel Architecture Group operating segment partially offset by the impact of
lower prices for microprocessors. In addition, improved demand and higher prices
for flash memory in Q1 2000 also contributed to the improvement in gross margin.
See "Outlook" for a discussion of gross margin expectations.
Excluding charges of $62 million for purchased in-process research and
development (IPR&D) related to the acquisitions completed in Q1 2000,
research and development spending increased $288 million, or 43%, in Q1 2000
compared to Q1 1999. This increase was primarily due to increased spending on
product and process development programs including product development of
companies acquired in the second half of 1999. Marketing, general and
administrative expenses increased $233 million, or 26%, in Q1 2000 compared
to Q1 1999, primarily due to increases for the Intel Inside-Registered
Trademark- cooperative advertising program, profit-dependent bonus expenses,
and marketing, general and administrative expenses from companies acquired in
the second half of 1999. Excluding the charges for IPR&D and the amortization
of goodwill and other acquisition-related intangibles, operating expenses
were 26% of net revenues in Q1 2000 and 22% of net revenues in Q1 1999.
The fair value of the IPR&D for each of the acquisitions was determined using
the income approach, which discounts expected future cash flows from projects
under development to their net present value. Each project was analyzed to
determine the technological innovations included; the utilization of core
technology; the complexity, cost and time to complete the remaining development
efforts; any alternative future use or current technological feasibility; and
the stage of completion in development. Future cash flows were estimated based
on forecasted revenues and costs, taking into account the expected life cycles
of the products and the underlying technology, relevant market sizes and
industry trends.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS - FIRST QUARTER OF 2000 COMPARED TO FIRST QUARTER OF 1999
(CONTINUED)
Discount rates were derived from weighted average cost of capital analysis,
adjusted to reflect the relative risks inherent in each entity's development
process, including the probability of achieving technological success and market
acceptance. The IPR&D charge includes the fair value of IPR&D completed. The
fair value assigned to developed technology is included in identifiable
intangible assets, and no value is assigned to IPR&D to be completed or to
future development. Intel believes the amounts determined for IPR&D, as well as
developed technology, are representative of fair value and do not exceed the
amounts an independent party would pay for these projects. Failure to deliver
new products to the market on a timely basis, or to achieve expected market
acceptance or revenue and expense forecasts, could have a significant impact on
the financial results and operations of the acquired businesses.
In March 2000 Intel completed the acquisition of GIGA A/S. GIGA specializes in
the design of advanced high-speed communications chips used in optical
networking and communications products that direct traffic across the Internet
and corporate networks. The total charge for IPR&D for GIGA was approximately
$52 million. One project, in the 10 gigabits-per-second (Gbps) product group,
accounted for 73% of the value, with four remaining projects each contributing
from 5% to 9% of the total IPR&D value. The in-process projects include the
development of next generation integrated circuit devices featuring improved
speed, efficiency and functionality for communications equipment. These projects
ranged from 7% to 78% complete, with the 10 Gbps project approximately 61%
complete. Expected completion dates for the projects range from Q2 2000 to Q2
2001, with total remaining costs to complete of approximately $12 million. The
average discount rates used for GIGA were 20% for IPR&D projects, and 11% for
developed technology. GIGA's weighted average cost of capital was 15%.
The estimated completion dates of certain IPR&D projects from companies acquired
in 1999 were revised in Q1 2000. For the Dialogic Corporation acquisition, the
CT Server project, accounting for 35% of the value assigned to IPR&D, is now
expected to be completed in Q4 2000. This project was originally scheduled to be
completed in Q1 2000 and had been subsequently revised to Q2 2000. For the Level
One Communications, Inc. acquisition, one project related to high-end switches
and accounting for 17% of the value assigned to IPR&D is now expected to be
completed in Q3 2000, revised from a previous estimate of Q1 2000.
Amortization of goodwill and other acquisition-related intangibles increased to
$313 million in Q1 2000 compared to $18 million in Q1 1999, primarily due to the
impact of the acquisitions made in second half of 1999.
Interest and other income increased to $652 million in Q1 2000 compared to $356
million in Q1 1999, primarily due to higher realized gains on equity
investments.
The Q1 2000 tax provision reflects a one-time benefit for the reversal of
previously accrued taxes of $600 million. In March 2000, the Internal Revenue
Service closed its examination of the company's tax returns for years up to and
including 1998 and resolution was reached on a number of issues including
adjustments related to intercompany allocation of profits. The company's
effective income tax rate was approximately 15.6% in Q1 2000. Excluding the
one-time tax benefit and the impact of non-deductible charges for IPR&D and
amortization of goodwill, the company's effective income tax rate was
approximately 31.7% for Q1 2000 compared to 33% in Q1 1999. This decrease takes
into consideration the impact of the resolution of issues noted above.
FINANCIAL CONDITION
The company's financial condition remains very strong. At April 1, 2000, total
cash, trading assets, and short-and long-term investments, excluding marketable
strategic equity securities, totaled $12.4 billion, down slightly from $12.6
billion at December 25, 1999.
The major source of cash during the first quarter of 2000 was cash provided by
operating activities of $3.3 billion. Major uses of cash during the period
included $1 billion to repurchase 9.8 million shares of common stock and capital
spending of $1.1 billion for property, plant and equipment, primarily for
microprocessor manufacturing capacity. The
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
company also paid $1.4 billion in net cash for acquisitions, including the
purchases of Ambient Technologies, Inc. and GIGA. See "Outlook" for a discussion
of capital expenditure expectations in 2000.
The company's five largest customers accounted for approximately 37% of net
revenues for the first quarter of 2000. At April 1, 2000, the five largest
customers accounted for approximately 31% of net accounts receivable.
At April 1, 2000, marketable strategic equity securities totaled $9.8 billion
with approximately $7.8 billion in unrealized appreciation, an increase in total
value of $2.7 billion compared to December 25, 1999 and an increase in
unrealized appreciation of approximately $2.0 billion.
Subsequent to the end of the first quarter of 2000, the company announced that
it had entered into a definitive agreement to acquire privately held Basis
Communications Corporation in a transaction valued at approximately $450 million
in cash and assumed options. Basis designs and markets advanced semiconductors
and other products used in equipment that directs traffic across the Internet
and corporate networks. The completion of this transaction is subject to
regulatory review and customary closing conditions.
During May 2000, the company announced that it had entered into an agreement to
form a new company with Excalibur Technologies Corporation. Intel expects to
contribute its Interactive Media Services division to the new company and invest
approximately $150 million. The new company is intended to enable owners of
branded content, such as sports and entertainment, to produce and securely sell
their audio and video content over the Internet. The completion of this
transaction is subject to regulatory review, Excalibur stockholder approval and
other normal closing conditions.
The company believes that it has the financial resources needed to meet business
requirements for the next twelve months, including potential future acquisitions
or strategic investments, capital expenditures for the expansion or upgrading of
worldwide manufacturing capacity, working capital requirements and the dividend
program.
OUTLOOK
This outlook section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially.
These statements do not reflect the potential impact of any mergers or
acquisitions that had not closed as of the end of the first quarter of 2000.
Intel's goal is to be the preeminent building block supplier to the worldwide
Internet economy. The company's primary focus areas are the client platform,
server platform, networking and communications, and solutions and services.
The company's five product-line operating segments support these initiatives.
Intel's strategy for client and server platforms is to introduce ever higher
performance microprocessors and chipsets, tailored for the different market
segments of the worldwide computing market, using a tiered branding approach.
In line with this strategy, during the first quarter of 2000, the company
introduced higher performance microprocessors based on the P6
microarchitecture specifically for each computing segment: the
Intel-Registered Trademark- Celeron-TM- processor for the value segment; the
Pentium-Registered Trademark- III processor for home and business
applications, and for entry level servers and workstations; and
Pentium-Registered Trademark- III Xeon-TM- processors for mid-range and
high-end servers and workstations. Later in 2000, the company expects to
introduce processors for high-end servers based on the IA-64 architecture,
under the Itanium-TM- brand. For the client platform, the company expects to
introduce the next generation of 32-bit processors, code named Timna and
Willamette. In addition, the client platform strategy includes providing
low-power processors and flash memory for handheld wireless devices. The
Intel Architecture Group operating segment supports the client and server
initiatives. The Wireless Communications and Computing Group supports the
handheld wireless device initiatives for the client platform.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
Intel plans to cultivate new businesses as well as continue to work with the
computing industry to expand Internet capabilities and product offerings, and
develop compelling software applications that can take advantage of higher
performance microprocessors and chipsets, thus driving demand toward Intel's
newer products in each computing market segment. The company may continue to
take various steps, including reducing microprocessor prices at such times as it
deems appropriate, in order to increase acceptance of its latest technology and
to remain competitive within each relevant market segment.
In the network and communications infrastructure area, Intel's strategy is to
deliver both the system-level communications products and component-level
silicon building blocks for networking and communications systems for the home
and small- and medium-sized businesses. Intel has made acquisitions and expects
to make additional acquisitions to grow new networking and communications areas.
Initiatives in these areas are supported by the Communications Products Group
operating segment, focusing on system-level products, and the Network
Communications Group, focusing on component-level products.
Intel also intends to build new service businesses around the Internet.
Intel-Registered Trademark- Online Services, which provides Web hosting and
e-Commerce services for customers, is part of this initiative. Intel intends
to deliver a consistent worldwide platform for developing and delivering
e-Business solutions. The New Business Group operating segment supports the
service business initiatives.
Intel expects to grow revenues in the networking, communications and wireless
businesses by 50% or more in 2000. Intel's expectations for growth in these
areas, as well as in new service businesses, are subject to the company's
ability to acquire businesses as well as integrate and operate them
successfully, and to grow new businesses internally.
The company expects revenue for the second quarter of 2000 to be approximately
flat with first quarter revenue of $8.0 billion. The company's financial results
are substantially dependent on sales of microprocessors and related components
by the Intel Architecture Group. Revenue is partly a function of the mix of
microprocessor types and speeds sold as well as the mix of related motherboards,
purchased components and other semiconductor products, all of which are
difficult to forecast. Because of the wide price difference among types of
microprocessors, this mix affects the average price Intel will realize and has a
large impact on Intel's revenues. Revenue is also subject to the impact of
economic conditions in various geographic regions.
In May 2000, the company announced that it would replace motherboards that
have a defective MTH component related to the Intel-Registered Trademark- 820
Chipset. The costs associated with the motherboard replacement program cannot
be estimated because the number of motherboards that will be replaced (the
user replacement rate) and the actual cost to replace are dependent on
several variables that cannot be estimated at this time. The company expects
to record a liability for these costs in a future period when the replacement
rate and the cost to replace are known or can be estimated, and this
liability could have a material adverse impact on the results of operations
of the period in which it is recorded.
Excluding the impact of the motherboard replacement program described above,
the company expects the gross margin percentage in the second quarter of 2000
to be flat to down a point with the first quarter gross margin percentage of
63%, primarily due to startup and ramp costs associated with 0.18-micron
fabrication facilities. Intel's gross margin expectation for 2000 is 61%,
plus or minus a few points, again excluding the impact of the motherboard
replacement program. Based on current expectations, the gross margin
percentage is expected to be at the mid to high part of that range. The
company's gross margin percentage in any period varies depending on the mix
of types and speeds of processors sold as well as the mix of microprocessors
and related motherboards and purchased components. The company has been
implementing new packaging formats that have reduced costs on certain
microprocessor products and this is expected to continue to have a positive
impact on product unit costs as the transition continues. Over the course of
2000, the company also expects to have reduced costs due to continued
productivity improvement on its existing manufacturing processes, including
the 0.18-micron manufacturing process. Various other factors (including unit
volumes, yield issues associated with production at
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
factories, ramp of new technologies, the reusability of factory equipment,
warranty costs including costs related to replacing motherboards with the
defective MTH component, insufficient or excess inventory, inventory
obsolescence, variations in inventory valuation and mix of shipments of other
semiconductor and non-semiconductor products) will also continue to affect the
amount of cost of sales and the variability of gross margin percentages.
Intel's primary goal is to get its advanced technology to the marketplace, and
at the same time increase gross margin dollars. The company's plans to grow in
non-microprocessor areas, particularly those areas that have the potential to
expand networking and communications capabilities, are intended to increase
gross margin dollars but may lower the gross margin percentage.
The company has expanded its semiconductor manufacturing and assembly and test
capacity over the last few years, and continues to plan capacity based on the
assumed continued success of its strategy and the acceptance of its products in
specific market segments. The company currently expects that capital spending
will be approximately $6.0 billion in 2000. This capital spending includes
expected spending related to the next-generation 0.13-micron process technology,
spending on new fabrication facility construction and equipment purchases to add
0.18-micron process capacity. The increase from the prior guidance of $5.0
billion reflects an upward revision of the company's anticipated capacity
requirements. This spending plan is dependent upon expectations regarding
production efficiencies and delivery times of various machinery and equipment,
and construction schedules for new facilities. Depreciation for the second
quarter of 2000 is expected to be approximately $790 million and $3.5 billion
for the full year 2000, up from previous guidance of $3.4 billion. Amortization
of goodwill and other acquisition-related intangibles is expected to be
approximately $370 million in the second quarter and $1.4 billion for the full
year 2000.
Spending on research and development, excluding IPR&D, and marketing, general
and administrative expenses in the second quarter of 2000 is expected to be
approximately two to four percent higher than first quarter expenses of $2.1
billion. Expense projections for the second quarter incorporate expected higher
research and development spending. Expenses are dependent in part on the level
of revenue.
Research and development spending, excluding IPR&D, for all of 2000 is expected
to be approximately $3.9 billion, up slightly from previous guidance of $3.8
billion.
The company expects interest and other income for the second quarter of 2000 to
be approximately $725 million depending on interest rates, cash balances, equity
market levels and volatility, the realization of expected gains on investments,
including gains on investments acquired by third parties, and assuming no
unanticipated items.
The company currently expects the tax rate for 2000 to be approximately 31.7%,
excluding the one-time tax benefit related to the closure of the Internal
Revenue Service audit of tax returns for years up to and including 1998, and the
impact of any IPR&D and amortization of goodwill from both prior and potential
future mergers or acquisitions. This estimate is based on current tax law, the
current estimate of earnings and the expected distribution of income among
various tax jurisdictions.
The company is currently party to various legal proceedings. Although litigation
is subject to inherent uncertainties, management, including internal counsel,
does not believe that the ultimate outcome of these legal proceedings will have
a material adverse effect on the company's financial position or overall trends
in results of operations. However, were an unfavorable ruling to occur in any
specific period, there exists the possibility of a material adverse impact on
the results of operations of that period. Management believes, given the
company's current liquidity and cash and investments balances, that even an
adverse judgment would not have a material impact on cash and investments or
liquidity.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
The company's future results of operations and the other forward-looking
statements contained in this outlook--in particular the statements regarding
Intel's goals and strategies, statements regarding expected product
introductions, expectations regarding additional acquisitions, intentions
regarding building new service businesses around the Internet, revenues,
pricing, gross margin, costs and continued productivity improvements,
expectations for recording a liability for the cost of replacing motherboards
with the MTH component, capital spending, depreciation and amortization,
research and development expenses, marketing and general and administrative
expenses, interest and other income, the tax rate, and pending legal
proceedings--involve a number of risks and uncertainties. In addition to the
factors discussed above, among the other factors that could cause actual results
to differ materially are the following: business and economic conditions and
growth in the computing industry in various geographic regions; changes in
customer order patterns; competitive factors such as rival chip architectures
and manufacturing technologies, competing software-compatible microprocessors
and acceptance of new products in specific market segments; development and
timing of the introduction of compelling software applications; pricing
pressures; continued success in technological advances, including development
and implementation of new processes and strategic products for specific market
segments; execution of the manufacturing ramp, including the transition to the
0.18-micron process technology; shortage of manufacturing capacity;
unanticipated costs or other adverse effects associated with processors and
other products containing errata (deviations from published specifications); and
litigation involving antitrust, intellectual property, consumer and other
issues.
Intel believes that it has the product offerings, facilities, personnel, and
competitive and financial resources for continued business success, but future
net 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.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For financial market risks related to changes in interest rates and foreign
currency exchange rates, reference is made to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Registrant's Annual Report on
Form 10-K for the year ended December 25, 1999 and to the subheading "Financial
Market Risks" under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 33 of the Registrant's
1999 Annual Report to Stockholders.
The company is exposed to equity price risk on the marketable portion of its
portfolio of strategic equity securities. The company typically does not attempt
to reduce or eliminate its market exposure on these securities. These
investments are generally in companies in the high-technology industry, and a
substantial majority of the market value of the portfolio is in three sectors:
Internet, semiconductor and networking. As of April 1, 2000, five equity
positions constituted approximately 41% of the market value of the portfolio, of
which approximately $2.0 billion, or 20% of the market value of the portfolio,
consisted of an investment in Micron Technology, Inc.
The company analyzed the historical movements over the past several years of
high-technology stock indices that the company considered appropriate. Based on
the analysis, the company estimated that it was reasonably possible that the
prices of the stocks in the company's portfolio could experience a 30% adverse
change in the near term. Assuming a 30% adverse change, the company's marketable
strategic equity securities would decrease in value by approximately $2.9
billion, based on the value of the portfolio as of April 1, 2000. During the
month of April 2000, many high-technology stocks experienced increased
volatility and a significant decrease in value. If the company's marketable
strategic equity security positions as of April 1, 2000 had been valued using
prices as of April 28, 2000, the value of these securities would have decreased
by approximately $2.0 billion, or 21%. The portfolio's concentrations in
specific companies or sectors may vary over time and may be different from the
compositions of the indices analyzed, and these factors may affect the
portfolio's price volatility. This estimate is not necessarily indicative of
future performance and actual results may differ materially.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, Legal Proceedings in the Registrant's Annual Report
on Form 10-K for the year ended December 25, 1999 for descriptions of the
following and other legal proceedings.
Intergraph Corporation v. Intel
U.S. District Court, Northern District of Alabama, Northeastern Division
------------------------------------------------------------------------
(CV-97-N-3023-NE)
-----------------
In March 2000, the District Court issued an order granting Intel summary
judgment on Intergraph's antitrust claims. Intergraph has appealed this ruling.
The company disputes Intergraph's remaining state law claims, and intends to
defend the lawsuit vigorously.
The company is currently party to various legal proceedings, including that
noted above. While management, including internal counsel, currently believes
that the ultimate outcome of these proceedings, individually and in the
aggregate, will not have a material adverse effect on the company's financial
position or overall trends in results of operations, litigation is subject to
inherent uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the net income of the period in
which the ruling occurs. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Statement setting forth the computation of ratios of earnings
to fixed charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K
1) On January 14, 2000, Intel filed a report on Form 8-K relating
to financial information for Intel Corporation for the quarter
and the year ended December 25, 1999 and forward-looking
statements relating to 2000 and the first quarter of 2000 as
presented in a press release of January 13, 2000.
2) On March 31, 2000, Intel filed a report on Form 8-K relating
to a press release of March 30, 2000 relating to final
agreement with the Internal Revenue Service on a tax
examination for years up to and including 1998.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEL CORPORATION
(REGISTRANT)
Date: May 16, 2000 By: /s/ ANDY D. BRYANT
-----------------------
Andy D. Bryant
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
18