UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 for the quarterly period ended September 27, 1997
OR
- ----- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition
period from to
------------ ------------
Commission File Number 0-6217
------
INTEL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-1672743
-------- ----------
(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
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(Former name, former address, and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Shares outstanding of the Registrant's common stock:
Class Outstanding at September 27, 1997
Common Stock, $.001 par value 1,636 million
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Intel Corporation
Consolidated Condensed Statements of Income (unaudited)
(in millions, except per share amounts)
<TABLE>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. Sept. Sept. Sept
27, 28, 27, 28,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 6,155 $ 5,142 $18,563 $ 14,407
Costs and expenses:
Cost of sales 2,604 2,201 7,254 6,772
Research and
development 586 449 1,742 1,288
Marketing, general and
administrative 676 565 2,073 1,600
------- ------- ------- -------
Operating costs and
expenses 3,866 3,215 11,069 9,660
------- ------- ------- -------
Operating income 2,289 1,927 7,494 4,747
Interest expense (6) (6) (20) (14)
Interest income and
other, net 157 97 591 262
------- ------- ------- -------
Income before taxes 2,440 2,018 8,065 4,995
Provision for taxes 866 706 2,863 1,748
------- ------- ------- -------
Net income $ 1,574 $ 1,312 $ 5,202 $ 3,247
======= ======= ======= =======
Earnings per common and
common equivalent share $ 0.88 $ 0.74 $ 2.89 $ 1.84
======= ======= ======= =======
Cash dividends declared
per common share $ 0.030 $ 0.025 $ 0.085 $ 0.070
======= ======= ======= =======
Weighted average common
and common equivalent
shares outstanding 1,797 1,770 1,798 1,769
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
<PAGE> 3
Item 1. Financial Statements (continued)
Intel Corporation
Consolidated Condensed Balance Sheets Sept. 27, Dec. 28,
(in millions) 1997 1996
---- ----
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,985 $ 4,165
Short-term investments 3,789 3,742
Trading assets 186 87
Accounts receivable, net 3,921 3,723
Inventories:
Raw materials 257 280
Work in process 849 672
Finished goods 401 341
------- -------
1,507 1,293
------- -------
Deferred tax assets 606 570
Other current assets 146 104
------- -------
Total current assets 15,140 13,684
------- -------
Property, plant and equipment 16,812 14,262
Less accumulated depreciation 7,067 5,775
------- -------
Property, plant and equipment, net 9,745 8,487
Long-term investments 1,815 1,353
Other assets 501 211
------- -------
TOTAL ASSETS $27,201 $23,735
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 297 $ 389
Accounts payable 1,197 969
Deferred income on shipments to distributors 517 474
Accrued compensation and benefits 1,020 1,128
Accrued advertising 481 410
Other accrued liabilities 841 507
Income taxes payable 811 986
------- -------
Total current liabilities 5,164 4,863
------- -------
Long-term debt 386 728
Deferred tax liabilities 1,123 997
Put warrants 582 275
Stockholders' equity:
Preferred stock -- --
Common stock and capital in excess
of par value 3,389 2,897
Retained earnings 16,557 13,975
------- -------
Total stockholders' equity 19,946 16,872
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,201 $23,735
======= =======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
<PAGE> 4
Item 1. Financial Statements (continued)
Intel Corporation
Consolidated Condensed Statements of Cash Flows (unaudited)
(in millions)
<TABLE>
Nine Months Ended
-----------------
Sept. 27, Sept. 28,
1997 1996
---- ----
<S> <C> <C>
Cash flows provided by (used for) operating
activities:
Net income $ 5,202 $ 3,247
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,609 1,369
Net loss on retirements of property,
plant and equipment 50 78
Deferred taxes 88 158
Changes in assets and liabilities:
Accounts receivable (198) (372)
Inventories (214) 634
Trading assets (99) (80)
Accounts payable 228 (74)
Accrued compensation and benefits (108) 67
Income taxes payable (175) 2
Tax benefit from employee stock plans 171 98
Other assets and liabilities (21) 359
------- -------
Total adjustments 1,331 2,239
------- -------
Net cash provided by operating activities 6,533 5,486
------- -------
Cash flows provided by (used for) investing
activities:
Additions to property, plant and equipment (2,917) (2,234)
Purchases of available-for-sale investments (5,565) (2,021)
Sales of available-for-sale investments 95 --
Maturities and other changes in
available-for-sale investments 5,062 1,249
------- -------
Net cash (used for) investing activities (3,325) (3,006)
------- -------
Cash flows provided by (used for) financing
activities:
Increase (decrease) in short-term debt, net (172) 63
Additions to long-term debt 68 300
Retirement of long-term debt (300) --
Proceeds from sales of shares through employee
stock plans and other 294 223
Proceeds from exercise of 1998 Step-Up Warrants 35 2
Proceeds from sales of put warrants 190 56
Repurchase and retirement of common stock (2,372) (967)
Payment of dividends to stockholders (131) (107)
------- -------
Net cash (used for) financing activities (2,388) (430)
------- -------
Net increase in cash and cash equivalents $ 820 $ 2,050
======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 29 $ 35
Income taxes $ 2,779 $ 1,384
</TABLE>
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
See Notes to Consolidated Condensed Financial Statements.
<PAGE> 5
Item 1. Financial Statements (continued)
Intel Corporation, Notes to Consolidated Condensed Financial Statements
1. The accompanying interim consolidated condensed financial statements of
Intel Corporation ("Intel," the "Company" or the "Registrant") have been
prepared in conformity with generally accepted accounting principles,
consistent in all material respects with those applied in the Annual Report
on Form 10-K for the year ended December 28, 1996. 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 28, 1996.
2. In May 1997, the stockholders approved an increase in the Company's
authorized shares of Common Stock to 4.5 billion. On July 13, 1997,
the Company effected a two-for-one stock split in the form of a special
stock distribution to stockholders of record as of June 10, 1997. All
share, per share, Common Stock and warrant amounts herein have been
restated to reflect the effect of this split.
3. Interest income and other includes (in millions):
<TABLE>
Three Months Ended Nine Months Ended
------------------ -----------------
<S> <C> <C> <C> <C>
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
---- ---- ---- ----
Interest income $ 134 $ 91 $ 403 $ 249
Foreign currency 19 2 44 16
gains
Other income
(expense), net 4 4 144 (3)
------ ------ ------ ------
Total $ 157 $ 97 $ 591 $ 262
====== ====== ====== ======
</TABLE>
Other income for the nine months ended September 27, 1997 consists primarily of
gains on sales of equity investments.
4. Earnings per common and common equivalent share as presented on the face of
the statements of income represent primary earnings per share. Dual presentation
of primary and fully diluted earnings per share has not been made because the
differences are insignificant.
Effective December 27, 1997, the Company will adopt Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." At that time, the
Company will be required to change the method currently used to calculate
earnings per share and to restate all prior periods. The new requirements will
include a calculation of basic earnings per share, from which the dilutive
effect of stock options and warrants will be excluded. The basic earnings
per share are expected to reflect an increase of $.08 and $.06 per share for
the quarters ended September 27, 1997 and September 28, 1996, respectively, over
the primary earnings per share reported for these quarters. For the nine month
periods then ended, the increases are expected to be $.29 and $.13 per share,
respectively. A calculation of diluted earnings per share will also be required;
however, this is not expected to differ materially from the Company's
reported primary earnings per share.
<PAGE> 6
Item 1. Financial Statements (continued)
Intel Corporation, Notes to Consolidated Condensed Financial Statements
(continued)
5. As more fully described in the Company's Annual Report, Intel enters into
derivative financial instruments to reduce financial market risks. These
instruments are used to hedge foreign currency, equity 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. If an underlying hedged transaction is
terminated earlier than initially anticipated, the offsetting gain or loss on
the related derivative instrument is recognized in income in the same period.
Subsequent gains or losses on the related derivative instrument are recognized
in income in each period until the instrument matures, is terminated or is
sold. Income or expense on swaps is accrued as an adjustment to the yield of
the related investments or debt they hedge. Cash flows associated with
derivative transactions are reported as arising from operating activities in
the consolidated statement of cash flows.
6. A $300 million reverse repurchase arrangement originally payable in 2001 was
reclassified from long-term debt to short-term during the first quarter of 1997.
During the second quarter of 1997 the debt was repaid by the Company. During the
first quarter of 1997, the Company borrowed a total of 44 million Irish punts
(approximate U.S. dollar equivalent of $68 million) due 2000-2017 at interest
rates ranging from 5% to 7%. The 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.
7. During the first nine months of 1997, the Company repurchased 30.9 million
shares of Common Stock under the Company's authorized repurchase program at a
cost of $2.4 billion. During the first quarter of 1997, the Company's Board of
Directors approved an increase in the repurchase program of up to 60 million
additional shares, bringing the total authorization to 280 million shares. As
of September 27, 1997, after allowing for the outstanding put warrants,
approximately 72.8 million shares remained available under the repurchase
program. (See Item 2. Management's Discussion and Analysis for subsequent
activity.)
<PAGE> 7
Item 1. Financial Statements (Continued)
Intel Corporation, Notes to Consolidated Condensed Financial Statements
(continued)
8. In a series of private placements during the 1991-1997 period, the Company
sold put warrants that entitle the holder of each warrant to sell to the
Company, by physical delivery, one share of Common Stock at a specified price.
On certain of these warrants, the Company simultaneously entered into additional
contractual arrangements which cause the warrants to terminate if the Company's
stock price reaches specified levels. Activity during the first nine months of
1997 is summarized as follows:
<TABLE>
Put Warrants Outstanding
------------------------
Cumulative Net Number Potential
(in millions) Proceeds Received Of Warrants Obligation
------------- ----------------- ----------- ----------
<S> <C> <C> <C>
December 28, 1996 $335 9.0 $ 275
Sales 88 12.0 916
Expirations -- (6.0) (174)
---- ------ ------
March 29, 1997 $423 15.0 $1,017
Sales 53 9.0 649
Expirations -- (3.0) (100)
---- ------ ------
June 28, 1997 $476 21.0 $1,566
Sales 49 5.5 501
Expirations -- (20.0) (1,485)
---- ------ ------
September 27, 1997 $525 6.5 $ 582
==== ====== ======
</TABLE>
A total of 5.5 million warrants were sold to banks and investment banks during
August of 1997. They expire on various dates between May and August 1998 and
have exercise prices ranging from $88 to $95 per share, with an average exercise
price of $91. The 6.5 million put warrants outstanding on September 27, 1997
expire on various dates between February and August 1998 and have exercise
prices ranging from $81 to $95 per share, with an average exercise price of
$90. The amount related to the Company's potential buyback obligation has been
reclassified from stockholders' equity and recorded as put warrants. There is no
material dilutive effect on earnings per share for the periods presented. (See
Item 2. Management's Discussion and Analysis for subsequent activity.)
9. The Company intends to adopt SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in fiscal 1998. Both Standards will require additional
disclosure, but will not have a material effect on the Company's financial
position or results of operations. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and is expected to first be
reflected in the Company's first quarter of 1998 interim financial statements.
Components of comprehensive income include items such as net income and changes
in value of available-for-sale securities. SFAS No. 131 changes the way
companies report segment information and requires segments to be determined
based on how management measures performance and makes decisions about
allocating resources. SFAS No. 131 will first be reflected in the Company's
1998 Annual Report.
10. Digital Equipment Corporation ("Digital") brought suit in Federal District
Court in Massachusetts on May 12, 1997, alleging that Intel is infringing ten
patents in making, using, selling and offering to sell microprocessor products,
including Pentium(R) and Pentium(R) Pro (including Pentium(R) II) microprocessor
families. Digital is seeking both an injunction and monetary damages, including
triple damages for Intel's alleged willful infringement of the patents. The
injunction, if granted, would prohibit Intel from using Digital's patented
technology in its microprocessor products. The Company believes that its
products do not infringe the Digital patents. The Company has filed a
counterclaim against Digital for infringement of nine microprocessor-related
(including manufacturing process) patents, and, in a separate action in District
Court in Oregon, the Company has claimed that Digital infringes on six video and
computer system patents.
<PAGE> 8
Item 1. Financial Statements (Continued)
Intel Corporation, Notes to Consolidated Condensed Financial Statements
(continued)
On October 27, 1997, Intel and Digital announced that they have agreed to
establish a broad-based business relationship as described below in Note 12.
Among other matters, the two companies agreed to request a stay of all lawsuits
until government approval of the agreement is obtained, following which the
lawsuits would be dismissed with prejudice.
Cyrix Corporation brought suit in Federal District Court in Texas on May 13,
1997, alleging that Intel has infringed two patents relating to Pentium, Pentium
Pro and Pentium II microprocessors. The suit seeks preliminary and permanent
injunctive relief along with unspecified damages. The Company believes that its
products do not infringe the Cyrix patents and intends to continue to defend the
lawsuit vigorously. 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.
A former employee of the Company filed an action on September 9, 1996, alleging
that Intel's products infringe a patent issued to the plaintiff and that Intel
wrongfully terminated his employment with Intel. The suit seeks both monetary
damages and injunctive relief. Expert witness discovery closed on July 1, 1997.
The Company believes that its products do not infringe the plaintiff's patent
and intends to continue to defend this lawsuit vigorously. The plaintiff's
expert witness has opined that the plaintiff is entitled to $1.2 billion in
damages for Intel's alleged patent infringement for the period through
December 31, 1996. Intel's expert witnesses have opined that, should the
plaintiff prevail in the case, he would be entitled to nominal damages only.
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.
11. On July 27, 1997, the Company announced it had entered into a definitive
agreement to acquire Chips and Technologies, Inc. ("Chips and Technologies") and
on August 1, 1997, the Company commenced a tender offer for all outstanding
shares of Chips and Technologies at a price of $17.50 per share. The tender
offer is currently scheduled to expire on November 21, 1997. The Company
expects that the funds required to complete the transaction will be
approximately $416 million, before consideration of any cash to be acquired.
This acquisition is subject to the successful completion of the tender offer
and the receipt of U.S. government approval. Subsequent to the Company's
announcement, certain shareholders of Chips and Technologies filed several
separate lawsuits, each claiming class action status, in state and federal
courts against Chips and Technologies, its board of directors and Intel. The
suits challenge and seek to enjoin the pending tender offer by the Company.
A preliminary settlement has been reached in these matters and currently
awaits court approval.
12. On October 27, 1997, the Company and Digital announced that they have
agreed to establish a broad-based business relationship. The agreement
includes sale of Digital's semiconductor manufacturing operations to Intel
for approximately $700 million, a ten-year patent cross-license, supply of
both Intel and Alpha microprocessors by Intel to Digital, development by
Digital of future systems based on Intel's 64-bit microprocessors and
termination of litigation between the companies as described above in Note
10. This agreement is subject to U.S. government approval. The transactions
provided for in the agreement are not expected to have a material adverse
effect on the Company's financial condition or ongoing results of operations
in any reporting period.
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Third Quarter of 1997 Compared to Third Quarter of 1996
Revenues for Q3 1997 increased by 20% compared to Q3 1996. Higher volumes of
Pentium(R) processors, including processors with MMX(TM) media enhancement
technology (collectively the "Pentium processor family"), and Pentium(R) Pro
and Pentium(R) II processors, as well as a shift in mix toward higher
performance processors, drove the overall growth in revenues. Chipsets
revenues also grew between these periods while flash memory revenues declined.
Cost of sales rose by 18% from Q3 1996 to Q3 1997 due to increased volumes,
additional costs associated with purchased components for the Single Edge
Contact ("SEC") cartridge in the Pentium II processor and costs related to the
continuing ramp of the .25 micron microprocessor manufacturing process in
1997. These cost increases were partially offset by factory efficiencies
due to the increased volumes. Gross margin increased to 58% in Q3 1997 from
57% in Q3 1996 due to a more favorable product mix partially offset by
weakness in the flash memory market segment and the impact of the SEC
cartridge.
For Q3 1997, a majority of the Company's revenues and gross margin were derived
from sales of Pentium processor family products, including related board-level
products. For Q3 1996, a majority of the Company's revenues and a substantial
majority of its gross margin were derived from these products. Sales of Pentium
Pro and Pentium II processors and related board-level products represented a
significant portion of the Company's revenues and gross margin for the third
quarter of 1997.
Research and development expenses and marketing, general and administrative
expenses rose by a total of $248 million, or 24%, from Q3 1996 to Q3 1997,
primarily due to higher levels of research and development spending on process
and product technology, as well as higher merchandising and profit dependent
expenses. Expenses were 20.5% of revenues in Q3 of 1997, versus 19.7% in Q3
1996.
Interest income and other for Q3 1997 increased by $60 million over the prior
year due primarily to higher average investment balances in Q3 1997.
The provision for taxes for Q3 1997 increased by $160 million over the prior
year primarily as a result of higher pretax earnings. The effective tax rate
increased slightly from 35% for Q3 1996 to 35.5% for Q3 1997.
Results of Operations - First Nine Months of 1997 Compared to First Nine Months
of 1996
Revenues for the first nine months of 1997 increased by 29% compared to the
first nine months of 1996. Higher volumes of Pentium family processors, and
Pentium Pro and Pentium II processors, as well as a shift in mix toward
higher performance processors, drove the overall growth in revenues. Chipsets
revenues also grew between these periods while flash memory revenues declined.
Cost of sales rose by 7% from the first nine months of 1996 to the first nine
months of 1997 due to increased volumes and costs related to the ramp of the
.25 micron microprocessor manufacturing process in 1997, partially offset by
factory efficiencies due to the increased volumes. Gross margin increased to
61% in the first nine months of 1997 from 53% in the first nine months of 1996
primarily due to the more favorable product mix and to a lesser extent due to
the volume efficiencies, partially offset by the weakness in the flash memory
market segment.
For the first nine months of 1997 and 1996, a majority of the Company's
revenues, and a substantial majority of its gross margin, were derived from
sales of Pentium processor family products, including related board-level
products. Sales of Pentium Pro and Pentium II processors and related board-level
products represented a significant portion of the Company's revenues and gross
margin for the first nine months of 1997.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations - First Nine Months of 1997 Compared to First Nine
Months of 1996 (continued)
Research and development expenses and marketing, general and administrative
expenses rose by a total of $927 million, or 32%, from the first nine months of
1996 to the first nine months of 1997, primarily due to higher levels of
research and development spending on process and product technology, and higher
merchandising, Intel Inside(R) program and profit dependent expenses. Expenses
were 20.6% of revenues in the first nine months of 1997 versus 20.0% in the
first nine months of 1996.
Interest income and other for the first nine months of 1997 increased by $329
million over the prior year due primarily to higher average investment balances
in the first nine months of 1997 and gains on sales of equity investments.
The provision for taxes for the first nine months of 1997 increased by $1.1
billion over the prior year primarily as a result of higher pretax earnings.
The effective tax rate increased slightly from 35% for the first nine months of
1996 to 35.5% for the first nine months of 1997.
Financial Condition
The Company's financial condition remains very strong. As of September 27, 1997,
cash, trading assets and short- and long-term investments totaled $10.8 billion,
up from $9.3 billion at December 28, 1996. The Company's other sources of
liquidity include credit lines, which are generally uncommitted, and authorized
commercial paper borrowings together totaling approximately $1.8 billion. The
Company also maintains the authority to issue an aggregate of approximately $1.4
billion in debt, equity and other securities under Securities and Exchange
Commission shelf registration statements.
The Company funded most of its investment needs during the first nine months of
1997 with cash generated from operations, which totaled $6.5 billion. Major uses
of cash during the first nine months of 1997 included capital spending of $2.9
billion for property, plant and equipment, primarily for microprocessor
manufacturing capacity, and $2.4 billion to buy back 30.9 million shares of
Common Stock. In addition, $300 million of long-term debt was repaid in the
first nine months of 1997.
The Company's five largest customers accounted for approximately 38% of net
revenues for the nine month period ended September 27, 1997. At September 27,
1997, these customers accounted for approximately 35% of net accounts
receivable.
Key financing activities in the first nine months of 1997 included the
repurchase of 30.9 million shares of Common Stock for $2.4 billion as part of
the Company's authorized stock repurchase program. The Company also sold 26.5
million put warrants, receiving proceeds of $190 million, while 29 million put
warrants expired unexercised. Of the expired warrants, 20 million had been
issued during the current nine month period and 16 million of these expired
upon the Company's stock price reaching specified levels. From September 27,
1997 through November 6, 1997, the Company repurchased 5.1 million shares of
its Common Stock at a cost of $402 million and sold 8.3 million put warrants.
As of November 6, 1997, Intel had the potential obligation to repurchase 14.8
million shares of Common Stock at an aggregate cost of $1.2 billion under
outstanding put warrants. The exercise price of these outstanding warrants
ranged from $69 to $95 per share, with an average exercise price of $80 per
share. During the first quarter of 1997, the Company's Board of Directors
approved an increase of up to 60 million additional shares in the Company's
repurchase program. This increase brought the total authorization to 280
million shares. As of November 6, 1997, 59.4 million shares remained
available for repurchase under the repurchase authorization, after allowing for
the outstanding put warrants.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Financial Condition (continued)
On July 27, 1997, the Company announced it had entered into a definitive
agreement to acquire Chips and Technologies, Inc. ("Chips and Technologies")
and on August 1, 1997, the Company commenced a tender offer for all outstanding
shares of Chips and Technologies at a price of $17.50 per share. The tender
offer is currently scheduled to expire on November 21, 1997. The Company expects
that the funds required to complete the transaction will be approximately
$416 million, before consideration of any cash to be acquired. This acquisition
is subject to the successful completion of the tender offer and the receipt of
U.S. government approval.
On October 27, 1997, the Company and Digital Equipment Corporation ("Digital")
announced that they have agreed to establish a broad-based business
relationship. Under the agreement, Intel will purchase Digital's
semiconductor operations, including facilities in Hudson, Massachusetts as
well as development operations in Jerusalem, Israel and Austin, Texas for
approximately $700 million. The agreement is subject to U.S. government
approval.
Management considers cash flow from operations and available sources of
liquidity to be adequate to meet business requirements in the foreseeable
future, including the acquisitions described above and planned capital
expenditure programs, working capital requirements, the put warrant
obligation and the dividend program.
Outlook
The outlook section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ
materially. These statements do not take into account the potential effects of
future mergers or acquisitions.
The Company expects revenue for the fourth quarter of 1997 to be slightly up
from third quarter revenue of $6.2 billion. Revenue is partly a function of
the mix of microprocessors and related motherboards and the mix of
microprocessor types and speeds, 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. In addition, the Company expects to continue to reduce microprocessor
prices systematically, focused on moving higher performance products into the
mainstream.
Intel's primary 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 introduced 200- and 233-MHz. mobile versions of the
Pentium processor with MMX technology during the third quarter of 1997.
Subsequent to the end of the quarter, the Company announced that the first
member of its new family of 64-bit microprocessors, code named Merced(TM), is
scheduled for production in 1999. The processor will be produced on Intel's
0.18 micron process technology, which is currently under development.
The Company expects the gross margin percentage in the fourth quarter of 1997 to
be flat to slightly up from 58% in the third quarter. In the short-term, Intel's
gross margin percentage varies primarily with revenue levels and product mix.
The Company's goal continues to be to grow gross margin dollars, and the Company
still believes that over the long-term, the gross margin percentage will be 50
percent plus or minus a few points. Intel's long-term gross margin percentage
will vary depending on product mix.
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
The gross margin percentage varies depending on the mix of types and speeds of
processors sold and the mix of microprocessors and related motherboards within
a product family. The Company's most advanced product, the Pentium II, is
packaged with purchased components in a Single Edge Contact cartridge, and the
inclusion of purchased components tends to increase absolute dollar margins but
to lower the gross margin percentage. Various other factors, including unit
volumes and costs, yield issues associated with production at factories, and
mix of shipments of other semiconductors, will also continue to affect the
amount of cost of sales and the variability of gross margin percentages.
The Company has expanded manufacturing capacity over the last few years and
continues to expand capacity based on the assumed continued success of its
strategy. The Company currently expects capital expenditures for 1997 to be
approximately $4.5 billion. This spending plan is dependent upon expectations
regarding manufacturing efficiencies, delivery times of various machines and
construction schedules for new facilities. Depreciation for 1997 is expected to
be approximately $2.2 billion.
Spending on research and development and marketing, general and administrative
expenses in the fourth quarter of 1997 is expected to be approximately 10 to 15
percent higher than the $1.3 billion in the third quarter of 1997. Expense
projections for the fourth quarter of 1997 incorporate expected seasonally
higher spending on advertising and marketing. Expenses are dependent in part
on the level of revenue.
The Company expects net interest and other (including interest expense) for the
fourth quarter of 1997 to be approximately $160 million, assuming no significant
changes in cash balances or interest rates and no unanticipated items.
In September 1997, the Federal Trade Commission staff notified Intel that the
Commission has begun an investigation of the Company's business practices. To
date, no allegations have been made nor have any charges been filed. The Company
has an aggressive program in place to make sure its business practices are in
full compliance with federal laws in this area. In 1993, after a similar
investigation, the FTC concluded that no further action was warranted and the
investigation was closed. Although neither the extent nor the outcome of the
investigation can be determined at this time, the Company expects that the
current investigation will come to a similar conclusion.
The Company's future results of operations and the other forward-looking
statements contained in this outlook, in particular the statements regarding
revenues, pricing, new product development, gross margin, capital spending,
depreciation, research and development expenses, marketing and general and
administrative expenses, and net interest and other involve a number of risks
and uncertainties. These statements do not take into account the potential
financial and other effects of future mergers or acquisitions, including any
one time charges, and related operational risks such as the Company's ability
to successfully integrate any acquired businesses, enter new market segments
and manage the growth of such businesses.
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, including timing of delivery and
changes in seasonal fluctuations in PC buying patterns; competitive factors,
such as rival chip architectures and manufacturing technologies, competing
software-compatible microprocessors, acceptance of new products and response
to price pressures; risk of inventory obsolescence due to shifts in market
demand; variations in inventory valuation; excess
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Outlook (continued)
or shortage of purchased components; timing of software industry product
introductions; continued success in technological advances and their
implementation, including the manufacturing ramp; development, implementation
and initial production of new strategic products and processes; excess or
shortage of manufacturing capacity; unanticipated costs or other adverse effects
associated with processors and other products containing errata (deviations
from published specifications); risks associated with foreign operations;
litigation involving intellectual property and consumer issues; and level of
stock repurchases.
Intel believes that it has the product offerings, facilities, personnel, and
competitive and financial resources for continued business success, but future
revenues, costs, margins and profits are all influenced by a number of factors,
as discussed above, all of which are inherently difficult to forecast.
<PAGE> 14
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
A. Litigation
Reference is made to Item 3. Legal Proceedings, in the Registrant's Annual
Report on Form 10-K for the year ended December 28, 1996 and to Part II,
Item 1. Legal Proceedings, in the Registrant's Quarterly Report on Form 10-Q
for the quarterly periods ended March 29, 1997 and June 28, 1997 for
descriptions of the following and other legal proceedings.
Digital Equipment Corporation ("Digital") vs. Intel,
U.S. District Court, District of Mass. (97-40080)
The Company has filed a counterclaim against Digital for infringement of nine
microprocessor-related (including manufacturing process) patents, and, in a
separate action in District Court in Oregon, the Company has claimed that
Digital infringes on six video and computer system patents.
On October 27, 1997, Intel and Digital announced that they have agreed to
establish a broad-based business relationship as described in Note 12 under
the heading "Intel Corporation, Notes to Consolidated Condensed Financial
Statements" in Part I, Item 1 hereof. Among other matters, the two companies
agreed to request a stay of all lawsuits until government approval of the
agreement is obtained, following which the lawsuits would be dismissed with
prejudice.
Item 2. Changes in Securities
(c) Unregistered sales of equity securities.
Reference is made to the information on sales of put warrants appearing in
Note 8 under the heading "Intel Corporation, Notes to Consolidated Condensed
Financial Statements" in Part I, Item 1 hereof. All such transactions are
exempt from registration under Section 4 (2) of the Securities Act of 1933.
Each transaction was privately negotiated and each offeree and purchaser was
an accredited investor/qualified institutional buyer. No public offering or
public solicitation was used by the registrant in the placement of these
securities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement re: computation of earnings per share.
12.1 Statement setting forth the computation of ratios of earnings to fixed
charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 27, 1997.
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEL CORPORATION
(Registrant)
Date: November 10, 1997 By: /s/ Andy D. Bryant
---------------------------------
Andy D. Bryant
Vice President, Chief Financial
Officer and Principal Accounting
Officer
Exhibit 11.1
INTEL CORPORATION
COMPUTATION OF EARNINGS PER SHARE (2)
(In millions, except per share amounts)
<TABLE>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
------------------ -----------------
<S> <C> <C> <C> <C>
PRIMARY SHARES CALCULATION:
Reconciliation of weighted
average number of shares
outstanding to amount used in
primary earnings
per share computation:
Weighted average number of
shares outstanding 1,635 1,644 1,636 1,645
Add shares issuable from
assumed exercise
of options and warrants 162 126 162 124
------ ------ ------ ------
Weighted average number
of shares outstanding
as adjusted 1,797 1,770 1,798 1,769
====== ====== ====== ======
FULLY DILUTED SHARES CALCULATION:
Reconciliation of weighted
average number of
shares outstanding to amount
used in fully diluted
earnings per share
computation:
Weighted average number of shares
outstanding 1,635 1,644 1,636 1,645
Add shares issuable from
assumed exercise of
options and warrants 164 142 164 142
------ ------ ------ ------
Weighted average number of
shares outstanding as
adjusted 1,799 1,786 1,800 1,787
====== ====== ====== ======
NET INCOME $1,574 $1,312 $5,202 $3,247
====== ====== ====== ======
PRIMARY EARNINGS PER SHARE $ 0.88 $ 0.74 $ 2.89 $ 1.84
====== ====== ====== ======
(1) FULLY DILUTED
EARNINGS PER SHARE $ 0.87 $ 0.73 $ 2.89 $ 1.82
====== ====== ====== ======
<FN>
<F1>
(1) Earnings per common equivalent share presented on the face of the
statements of income represent primary earnings per share. Dual presentation
of primary and fully diluted earnings per share has not been made on the
statement of income because the differences are insignificant.
<F2>
(2) A two-for-one stock split effected as a special stock distribution was paid
on July 13, 1997 to stockholders of record as of June 10, 1997. All share and
per share amounts reported herein have been adjusted to reflect the effects
of this split.
</FN>
</TABLE>
Exhibit 12.1
INTEL CORPORATION
STATEMENT SETTING FORTH THE COMPUTATION
OF RATIOS OF EARNINGS TO FIXED CHARGES
(in millions)
<TABLE>
Nine Months Ended
-----------------------
Sept. 27, Sept. 28,
1997 1996
-----------------------
<S> <C> <C>
Income before taxes $ 8,065 $ 4,995
Add fixed charges net of
capitalized interest 33 23
-------- --------
Income before taxes and fixed
charges (net of capitalized
interest) $ 8,098 $ 5,018
======== ========
Fixed charges:
Interest $ 20 $ 14
Capitalized interest 7 23
Estimated interest component
of rental expense 13 9
-------- --------
Total $ 40 $ 46
======== ========
Ratio of earnings before taxes and
fixed charges, to fixed charges 202 109
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Intel Corporation's
CONSOLIDATED CONDENSED STATEMENTS OF INCOME and CONSOLIDATED CONDENSED BALANCE
SHEETS and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> SEP-27-1997
<CASH> 4985
<SECURITIES> 3975
<RECEIVABLES> 3921<F3>
<ALLOWANCES> 0
<INVENTORY> 1507
<CURRENT-ASSETS> 15140
<PP&E> 16812
<DEPRECIATION> 7067
<TOTAL-ASSETS> 27201
<CURRENT-LIABILITIES> 5164
<BONDS> 386
582<F1>
0
<COMMON> 3389
<OTHER-SE> 16557
<TOTAL-LIABILITY-AND-EQUITY> 27201
<SALES> 18563
<TOTAL-REVENUES> 18563
<CGS> 7254
<TOTAL-COSTS> 7254
<OTHER-EXPENSES> 1742<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 8065
<INCOME-TAX> 2863
<INCOME-CONTINUING> 5202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5202
<EPS-PRIMARY> 2.89
<EPS-DILUTED> 0<F4>
<FN>
<F1> Item consists of put warrants.
<F2> Item consists of research and development.
<F3> Item shown net of allowance, consistent with the balance sheet
presentation.
<F4> Item not reported because immaterially different from primary
EPS.
</FN>
</TABLE>
