<PAGE>
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 March 27, 1999
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
For the transition period from to
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Commission file number 0-6217
INTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-1672743
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Mission College Boulevard, Santa Clara, California 95052-8119
- ------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(408) 765-8080
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(Registrant's telephone number, including area code)
N/A
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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 April 24, 1999
Common Stock, $.001 par value 3,318 million
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 27, March 28,
1999 1998
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<S> <C> <C>
Net revenues $ 7,103 $ 6,001
Costs and expenses:
Cost of sales 2,912 2,749
Research and development 663 595
Marketing, general and administrative 891 711
Purchased in-process research and development -- 165
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Operating costs and expenses 4,466 4,220
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Operating income 2,637 1,781
Interest expense (9) (7)
Interest income and other, net 356 207
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Income before taxes 2,984 1,981
Provision for taxes 985 708
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Net income $ 1,999 $ 1,273
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Basic earnings per common share $ 0.60 $ 0.39
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Diluted earnings per common share $ 0.57 $ 0.36
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Cash dividends declared per
common share $ 0.050 $ 0.015
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Weighted average common shares outstanding 3,324 3,281
Dilutive effect of:
Employee stock options 154 178
1998 Step-Up Warrants -- 90
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Weighted average common shares outstanding, assuming dilution 3,478 3,549
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</TABLE>
See Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
March 27, Dec. 26,
1999 1998
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,503 $ 2,038
Short-term investments 7,731 5,272
Trading assets 355 316
Accounts receivable, net 3,319 3,527
Inventories:
Raw materials 232 206
Work in process 797 795
Finished goods 679 581
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1,708 1,582
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Deferred tax assets 646 618
Other current assets 187 122
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Total current assets 16,449 13,475
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Property, plant and equipment 21,520 21,068
Less accumulated depreciation 10,028 9,459
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Property, plant and equipment, net 11,492 11,609
Long-term investments 3,867 5,365
Other assets 1,285 1,022
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TOTAL ASSETS $33,093 $31,471
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 182 $ 159
Accounts payable 1,449 1,244
Accrued compensation and benefits 798 1,285
Deferred income on shipments to distributors 690 606
Accrued advertising 473 458
Other accrued liabilities 1,201 1,094
Income taxes payable 1,423 958
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Total current liabilities 6,216 5,804
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Long-term debt 699 702
Deferred tax liabilities 1,452 1,387
Put warrants -- 201
Stockholders' equity:
Preferred stock -- --
Common stock and capital in excess
of par value 5,025 4,822
Retained earnings 18,831 17,952
Accumulated other comprehensive income 870 603
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Total stockholders' equity 24,726 23,377
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,093 $31,471
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</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 27, March 28,
1999 1998
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<S> <C> <C>
Cash flows provided by (used for) operating activities:
Net income $ 1,999 $ 1,273
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 792 630
Net loss on retirements of property, plant and equipment 17 28
Deferred taxes (81) 36
Purchased in-process research and development -- 165
Changes in assets and liabilities:
Accounts receivable 247 364
Inventories (115) (111)
Accounts payable 202 (100)
Accrued compensation and benefits (498) (529)
Income taxes payable 464 350
Tax benefit from employee stock plans 138 88
Other assets and liabilities (432) (125)
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Total adjustments 734 796
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Net cash provided by operating activities 2,733 2,069
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Cash flows provided by (used for) investing activities:
Additions to property, plant and equipment (675) (1,129)
Purchase of Chips and Technologies, Inc., net of cash acquired -- (321)
Purchase of Shiva Corporation, net of cash acquired (132) --
Purchases of available-for-sale investments (2,056) (2,143)
Sales of available-for-sale investments 194 21
Maturities and other changes in available-for-sale
investments 1,508 2,440
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Net cash used for investing activities (1,161) (1,132)
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Cash flows provided by (used for) financing activities:
Increase in short-term debt, net 23 43
Additions to long-term debt 27 13
Proceeds from sales of shares through employee stock plans and other 207 199
Proceeds from exercise of 1998 Step-Up Warrants -- 1,620
Repurchase and retirement of common stock (1,297) (1,792)
Payment of dividends to stockholders (67) (49)
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Net cash provided by (used for) financing activities (1,107) 34
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Net increase in cash and cash equivalents $ 465 $ 971
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 10 $ 8
Income taxes $ 461 $ 230
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
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 ("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 26, 1998. 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 26, 1998. All share, per
share and warrant amounts have been restated to reflect the effect of the
two-for-one stock split paid on April 11, 1999.
2. As of the second quarter of 1998, the Company adopted a new dividend
declaration schedule which results in the Board of Directors considering
two dividend declarations in the first and third quarters of the year and
no declarations in each of the second and fourth quarters of the year. The
new declaration schedule does not change the Company's historical quarterly
dividend payment schedule. In keeping with this new schedule, in January
1999 the Board of Directors declared a dividend of $0.02 per share which
was paid on March 1, 1999, to stockholders of record on February 7, 1999,
and a dividend of $0.03 per share payable on June 1, 1999, to stockholders
of record on May 7, 1999. During the first quarter of 1998, before the new
dividend declaration schedule, the Board of Directors made only one
dividend declaration.
3. Interest income and other, net includes (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 27, March 28,
1999 1998
------ ------
<S> <C> <C>
Interest income $156 $160
Foreign currency gains 2 --
Other income, net 198 47
---- ----
Total $356 $207
---- ----
---- ----
</TABLE>
Other income for both periods presented consists primarily of gains on
sales of equity investments.
4. The components of comprehensive income, net of tax, are as follows (in
millions):
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 27, March 28,
1999 1998
------ ------
<S> <C> <C>
Net income $1,999 $1,273
Change in net unrealized gain
on available-for-sale investments 267 97
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Total $2,266 $1,370
------ ------
------ ------
</TABLE>
Accumulated other comprehensive income presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net
unrealized gain on available-for-sale investments.
5. During the first quarter of 1999, the Company repurchased 21 million shares
of Common Stock under the Company's authorized repurchase program at a cost
of $1.3 billion. As of March 27, 1999 approximately 150.4 million shares
remained available for repurchase under the program.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
6. In a series of private placements during the 1991-1998 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. The remaining 5 million put warrants that were outstanding at
December 26, 1998 expired unexercised in the first quarter of 1999.
7. Intel has two reportable segments under the criteria of Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information": the Intel Architecture
Business Group and the Computing Enhancement Group. The Intel Architecture
Business Group includes microprocessors, motherboards, and other related
board-level products focused on mobile and desktop products, servers and
workstations. Board-level products include certain server chipsets and
chipsets sold on motherboards. The Computing Enhancement Group's products
include chipsets, embedded products, including processors based on the
StrongARM-Registered Trademark-* architecture, microcontrollers, flash
memory products and graphics chips.
The remaining operating segments are the Network Communications Group and
the New Business Group; neither of which qualifies as a reportable segment
under SFAS No. 131. These segments, as well as certain corporate-level
operating expenses (primarily the amount by which profit-dependent bonus
expenses differ from a targeted level recorded by the segments) and
reserves for deferred income on shipments to distributors, are grouped in
"all other" below.
Information on reportable segments is as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 27, March 28,
1999 1998
------ ------
<S> <C> <C>
INTEL ARCHITECTURE BUSINESS GROUP:
Revenues $ 5,879 $ 4,931
Operating profit $ 2,830 $ 1,938
COMPUTING ENHANCEMENT GROUP:
Revenues $ 1,026 $ 946
Operating profit $ 111 $ (54)
ALL OTHER:
Revenues $ 198 $ 124
Operating profit $ (304) $ (103)
TOTAL:
Revenues $ 7,103 $ 6,001
Operating profit $ 2,637 $ 1,781
</TABLE>
8. In February 1999, the Company acquired the outstanding shares of Shiva
Corporation, whose products include remote access and virtual private
networking solutions for the small to medium enterprise market segment and
the remote access needs of campuses and branch offices. The acquisition was
accounted for as a purchase with a price of approximately $185 million
($132 million in net cash). The operating results subsequent to the
acquisition have been included in the "all other" category for segment
reporting purposes as part of the Network Communications Group.
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
9. In March 1999, the Company announced that it had entered into a definitive
agreement to acquire Level One Communications, Inc. ("Level One"), in a
stock-for-stock merger agreement valued at approximately $2.2 billion.
Level One provides silicon connectivity solutions for high-speed telecom
and networking applications. Under the terms of the agreement, each share
of Level One stock would be exchanged for 0.86 shares of Intel stock.
Approximately 37.2 million shares of Intel stock would be issued, assuming
the conversion in full of Level One's outstanding convertible subordinated
notes into Level One Common Stock. The completion of this transaction is
subject to compliance with regulatory requirements, Level One stockholder
approval, and other conditions customary in a transaction of this type.
This transaction is expected to be accounted for using the purchase method
of accounting.
*StrongARM is a registered trademark of ARM Ltd.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS-FIRST QUARTER OF 1999 COMPARED TO FIRST QUARTER OF 1998
Net revenues for Q1 1999 increased by 18% compared to Q1 1998. The increase in
net revenues was primarily due to increased volume of sales of microprocessors
by the Intel Architecture Business Group.
Cost of sales increased by 6% in Q1 1999 compared to Q1 1998 due to
microprocessor unit volume growth, partially offset by lower unit costs. The
gross margin percentage increased to 59% in Q1 1999, up from 54% in Q1 1998. The
improvement in gross margin was primarily a result of a shift in the mix of
microprocessors and lower unit costs in the Intel Architecture Business Group
segment. See "Outlook" for a discussion of gross margin expectations.
Research and development spending decreased by 13% in Q1 1999 compared to Q1
1998, primarily due to the $165 million charge for in-process research and
development related to the acquisition of Chips and Technologies, Inc.
included in Q1 1998. Marketing, general and administrative spending grew 25%
in Q1 1999 compared to Q1 1998, primarily due to the Intel Inside-Registered
Trademark- cooperative advertising program, merchandising spending relating
to new product launches and profit-dependent bonus expenses. Operating
expenses were 21.9% of net revenues in Q1 1999 and 24.5% of net revenues in
Q1 1998.
Interest and other income increased to $356 million in Q1 1999 compared to $207
million in Q1 1998, primarily due to higher gains on sales of equity
investments.
The Company's effective income tax rate was 33% in Q1 1999 and Q1 1998,
excluding the impact of the charge in Q1 1998 for purchased in-process research
and development related to the acquisition of Chips and Technologies, Inc.
INTEL ARCHITECTURE BUSINESS GROUP SEGMENT. Net revenues increased 19% in Q1
1999 compared to Q1 1998. The increase was primarily due to higher unit
volumes of microprocessors and a shift in mix toward processors based on the
P6 microarchitecture (including the Intel-Registered Trademark- Celeron-TM-,
Pentium-Registered Trademark- II, Pentium-Registered Trademark-II Xeon-TM-,
Pentium-Registered Trademark- III and Pentium-Registered Trademark- III
Xeon-TM- processors). Sales of microprocessors and related board-level
products based on the P6 microarchitecture comprised a substantial majority
of Intel's consolidated net revenues and gross margin in Q1 1999. In Q1 1998,
sales of these processors comprised a significant portion of Intel's net
revenues and a majority of its gross margin. Sales of Pentium-Registered
Trademark- family microprocessors were not significant in Q1 1999, but
represented a significant although declining portion of Intel's net revenues
and gross margins in Q1 1998.
Operating profit for the Intel Architecture Business Group increased 46% in Q1
1999 compared to Q1 1998. The increase in operating profit was primarily due to
increased unit shipments of processors, a more favorable mix of processors and
lower unit costs. For Q1 1999 in comparison to Q1 1998, the gross margin
percentage and operating income were still being impacted by the increased cost
of purchased components in the Single Edge Contact ("SEC") cartridge of the
Pentium II processor. However, the impact of more units sold with the SEC
cartridge was more than offset by decreased unit costs overall due to the
Company's manufacturing cost reduction program. The increased gross margin was
partially offset by higher expenses related to the cooperative advertising
program and new product launches.
COMPUTING ENHANCEMENT GROUP SEGMENT. Net revenues increased 8% in Q1 1999
compared to Q1 1998, primarily due to higher unit sales of chipsets and flash
memory, partially offset by lower prices. Revenues for embedded processors were
lower due to lower unit sales.
Operating profit for the Computing Enhancement Group operating segment increased
to $111 million in Q1 1999 from an operating loss of $54 million in Q1 1998. In
Q1 1998, operating results were negatively affected by the purchase of Chips and
Technologies, Inc., including the related charge for purchased in-process
research and development.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION
The Company's financial condition remains very strong. At March 27, 1999, total
cash, trading assets, and short- and long-term investments totaled $14.5
billion, up from $13 billion at December 26, 1998.
The major source of cash during the first quarter of 1999 was cash provided by
operating activities of $2.7 billion. Major uses of cash during the same quarter
included $1.3 billion to buy back 21 million shares of common stock, capital
spending of $675 million for property, plant and equipment, primarily for
microprocessor manufacturing capacity and $132 million in net cash paid for the
acquisition of Shiva Corporation. See "Outlook" for a discussion of capital
expenditure expectations in 1999.
The Company's five largest customers accounted for approximately 43% of net
revenues for the first quarter of 1999. At March 27, 1999, the five largest
customers accounted for approximately 36% of net accounts receivable.
In March 1999, Intel announced that it had entered into a definitive agreement
to acquire Level One Communications, Inc. ("Level One"), in a stock-for-stock
merger agreement valued at approximately $2.2 billion. Under the terms of the
agreement, each share of Level One stock would be exchanged for 0.86 shares of
Intel stock. Approximately 37.2 million shares of Intel stock would be issued,
assuming the conversion in full of Level One's outstanding convertible
subordinated notes into Level One Common Stock. The completion of this
transaction is subject to compliance with regulatory requirements, Level One
stockholder approval, and other conditions customary in a transaction of this
type.
The Company believes that it has the financial resources needed to meet business
requirements in the foreseeable future, 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 1999.
The Company expects revenue for the second quarter of 1999 to be flat to
slightly down from first quarter revenue of $7.1 billion. Revenue is partly a
function of the mix of microprocessor types and speeds, motherboards and
purchased components, and other semiconductor products sold, 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 net revenues. Revenue is also subject to the impact of
economic conditions in various geographic regions, including the ongoing
financial difficulties in the Asian markets and certain emerging markets in
other regions.
Intel's strategy is to introduce ever-higher performance microprocessors
tailored for the different segments of the worldwide computing market, using a
tiered branding approach. In line with this strategy, in the first quarter of
1999 the Company introduced the Pentium III processor, for the performance
desktop and entry-level servers and workstations, and the Pentium III Xeon
processor, for mid-range and high-end servers and workstations. The Company also
introduced a faster version of the Celeron processor for entry-level PC buyers
interested in a value PC, as well as new mobile Pentium II and Celeron
processors.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
Intel's goal is to be the leading supplier of building blocks to the
connected computing industry worldwide. Intel plans to cultivate new
businesses in connected computing, and to continue to work with the computing
industry to expand Internet capabilities and product offerings and to develop
compelling software applications that can take advantage of higher
performance, thus driving demand toward the 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.
The Company expects the gross margin percentage in the second quarter to be
approximately flat with 59% in the first quarter. Intel's gross margin
expectation for the full year 1999 is 57% plus or minus a few points. Intel'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's Pentium II processor is
packaged with purchased components in the SEC cartridge, and the inclusion of
purchased components has tended to increase absolute margin dollars but to lower
the gross margin percentage. However, the Company has also been developing new
packaging formats that use fewer purchased components. These new packaging
formats are expected to reduce costs on certain microprocessor products. Intel
also expects to see the benefits of continued productivity improvements on its
existing manufacturing processes during 1999. Various other factors (including
unit volumes, yield issues associated with production at factories, ramp of new
technologies, excess or obsolete inventory, variations in inventory valuation
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 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 decrease to approximately $3 billion in 1999, primarily as a result of
reduced investment for new facilities and improved utilization of equipment.
This spending plan is dependent upon expectations regarding production
efficiencies and delivery times of various machinery and equipment. Depreciation
and amortization is expected to be approximately $3.3 billion for 1999.
Depreciation and amortization for the second quarter of 1999 is expected to be
approximately $800 million.
Spending on research and development and marketing, general and administrative
expenses in the second quarter is expected to be approximately six to ten
percent higher than first quarter expenses of $1.6 billion. Expense projections
for the second quarter incorporate expected higher spending associated with
merchandising and research and development, as well as salary increases due to
Intel's annual compensation adjustment effective at the beginning of the second
quarter.
The Company expects interest and other income to be approximately $300 million
in the second quarter depending on cash balances, interest rates, the Company's
ability to realize expected gains on investments and assuming no unanticipated
items.
The Company currently expects the tax rate to be 33% for 1999. This estimate is
based on current tax law and the current estimate of earnings, and is subject to
change.
Like many other companies, Intel is subject to risks from the year 2000 computer
issue. If internal systems do not correctly recognize and process date
information beyond the year 1999, there could be an adverse impact on the
Company's operations. Two other related issues could also lead to incorrect
calculations or failures: i) some systems' programming assigns special meaning
to certain dates, such as 9/9/99 and ii) the fact that the year 2000 is a leap
year.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
The Company has established a comprehensive program with dedicated program
management and executive-level sponsorship to deal with year 2000 issues. The
Company has been addressing its most essential internal systems first and has
categorized as "critical" or "priority" those systems whose failure would cause
an extended shutdown of all or part of a factory, could cause personal injury or
would have a sustained and significant detrimental financial impact. Intel has
also been working with customers and suppliers to test systems that interface
with the Company's internal systems. These activities are intended to encompass
all major categories of systems in use by the Company, including network and
communications infrastructure, manufacturing, facilities management, sales,
finance and human resources. The Company's approach prioritizes functions and
systems worldwide, and all divisions and facilities are working toward the same
global milestones.
The Company's semiconductor manufacturing and assembly and test
("manufacturing") equipment and systems are highly automated, incorporating PCs,
embedded processors and related software to control scheduling, inventory
tracking, statistical analysis and automated manufacturing. A significant
portion of the Company's year 2000 efforts on internal systems is intended to
prevent disruption to manufacturing operations.
At the end of the first quarter of 1999, 99.9% of the Company's critical and
priority manufacturing systems were determined to be already year 2000
capable, or necessary remediation (replacements, changes, upgrades or
workarounds) had been determined and unit testing and deployment had been
completed. Remediation and deployment had been completed for approximately
93% of non-manufacturing systems as of the end of the quarter. Remediation
and deployment had not been completed for some non-manufacturing systems
where a vendor upgrade was pending, testing was not completed or a system was
scheduled for replacement in the second quarter. All remediation and
deployment for critical and priority internal systems is expected to be
completed by the end of the second quarter of 1999.
The Company began a comprehensive program of integration testing of internal
systems in the third quarter of 1998. Integration testing is expected to be
substantially complete by mid-1999; however, testing will continue through 1999
to ensure continued year 2000 capability as other changes are made to internal
systems and as Intel integrates any acquisitions.
The following table indicates the phases of the year 2000 project related to the
Company's critical and priority internal systems and the expected time frames.
<TABLE>
<CAPTION>
PHASES OF THE PROJECT START DATE END DATE
<S> <C> <C>
High-level assessment of systems 1996 Q3 1998 (actual)
Manufacturing systems: Detailed assessment, 1997 Q1 1999 (actual)
remediation, unit testing and deployment
Non-manufacturing systems: Detailed assessment, 1996 Q2 1999 (expected)
remediation, unit testing and deployment
Integration testing Q3 1998 Mid-1999 (expected)
</TABLE>
Intel is also actively working with suppliers of products and services to
determine the extent to which the suppliers' operations and the products and
services they provide are year 2000 capable, and to monitor their progress
toward year 2000 capability. Highest priority is being placed on working with
critical suppliers, defined by Intel as those whose failure would shut down
manufacturing or other critical operations within a short period of time. The
Company has made inquiries of its major suppliers and has received responses to
its initial inquiries from 100% of critical suppliers.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
Follow-up activities seek to determine whether the supplier is taking all
appropriate steps to fix year 2000 problems and to be prepared to continue
functioning effectively as a supplier in accordance with Intel's standards and
requirements. Contingency plans are being developed to address issues related to
suppliers that are not considered to be making sufficient progress in becoming
year 2000 capable.
The Company is also developing contingency plans to address possible changes in
customer order patterns due to year 2000 issues. As with suppliers, the
readiness of customers to deal with year 2000 issues may affect their operations
and their ability to order and pay for products. Intel has surveyed its major
direct customers about their year 2000 readiness in critical areas of their
operations. The results identified certain key areas to be addressed by the
customers. Intel is also communicating information about its own readiness to
customers and is conducting seminars to help communicate the methodologies and
processes used in Intel's year 2000 programs.
Intel believes that its most reasonably likely worst-case year 2000 scenarios
would relate to problems with the systems of third parties rather than with the
Company's internal systems or its products. Because the Company has less control
over assessing and remediating the year 2000 problems of third parties, the
Company believes the risks are greatest with infrastructure (e.g., electricity
supply and water and sewer service), telecommunications, transportation supply
channels and critical suppliers of materials and services.
The Company's microprocessor production is conducted in a network of domestic
and foreign facilities. Each location relies on local private and governmental
suppliers for electricity, water, sewer and other needed supplies. Failure of an
electricity grid or an uneven supply of power, for example, would be a
worst-case scenario that would completely shut down the affected facilities.
Electrical failure could also shut down airports and other transportation
facilities.
Although most sites have some back-up electrical power, the Company does not
generally maintain its own facilities that would generate sufficient electrical
or water supply for full operations. To the extent possible, the Company is
working with infrastructure suppliers for its manufacturing sites, major
subcontractor sites and relevant transportation hubs to seek to better ensure
continuity of services. Contingency planning regarding major infrastructure
failure generally includes considering increases in inventory levels of specific
products above normal reserve stocks and evaluating the need to locate inventory
geographically. In addition, multiple plants engage in similar tasks in the
Intel system, and although overall capacity would be reduced, it is not expected
that the entire production system would halt due to the unavailability of one or
two facilities.
A worst-case scenario involving a critical supplier of materials would be the
partial or complete shutdown of the supplier and its resulting inability to
provide critical supplies to the Company on a timely basis. The Company does not
maintain the capability to replace most third-party supplies with internal
production. Where efforts to work with critical suppliers to ensure year 2000
capability have not been successful, contingency planning generally emphasizes
the identification of substitute and second-source suppliers, and in certain
situations may include a planned increase in the level of inventory carried. In
an industry characterized by rapid technological change, higher levels of raw
materials and finished goods inventories would involve increased risk of
inventory obsolescence and the potential for write-downs in the value of
inventory.
The Company is not in a position to identify or to avoid all possible scenarios;
however, the Company is currently assessing scenarios and taking steps to
mitigate the impacts of various scenarios if they were to occur. Preliminary
contingency plans for critical business operations are expected to be in place
by the end of the second quarter of
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
1999. In the third quarter it is expected that these plans will be tested and
validated and training will take place. However, contingency plans will
continue to be refined through 1999 as the Company learns more about the
preparations and vulnerabilities of third parties regarding year 2000 issues.
Due to the large number of variables involved, the Company cannot provide an
estimate of the damage it might suffer if any of these scenarios, or a
combination of scenarios, were to occur.
The Company also has a program to assess the capability of its products to
handle the year 2000. To assist customers in evaluating their year 2000 issues,
the Company has developed a web-enabled database that indicates the capability
of Intel's current products, and certain products no longer being produced, to
handle the year 2000. Products are assigned to one of five categories as defined
by the Company: "Year 2000 Capable," "Year 2000 Capable" with update, not "Year
2000 Capable," under evaluation and will not test. The database is located on
the Company's year 2000 support Web site and is periodically updated as new
products are added to the Company's inventory.
An Intel product, when used in accordance with its associated documentation, is
"Year 2000 Capable" when, upon installation, it accurately stores, displays,
processes, provides and/or receives data from, into and between 1999 and 2000,
and the 20th and 21st centuries, including leap-year calculations, provided that
all other technology used in combination with the Intel product properly
exchanges date data with it.
All Intel processors are "Year 2000 Capable." All Intel micro-controllers
(embedded processors) are also "Year 2000 Capable," with the exception of two
custom microcontroller products sold to a limited number of customers. However,
the assessment of whether a complete system will operate correctly depends on
firmware (BIOS) capability and software design and integration, and for many end
users this will include firmware and software provided by companies other than
Intel.
As described more fully at the support Web site, Intel offers a "Year 2000
Capable" Limited Warranty on certain of its current products. Except as
specifically provided for in the Limited Warranty, the Company does not believe
it is legally or otherwise responsible for costs incurred by customers related
to ensuring their year 2000 capability. Nevertheless, the Company is incurring
various costs to provide customer support and customer satisfaction services
regarding year 2000 issues, and it is anticipated that these expenditures will
continue through 1999 and thereafter.
Various of the Company's disclosures and announcements concerning its products
and year 2000 programs are intended to constitute "Year 2000 Readiness
Disclosures" as defined in the recently enacted Year 2000 Information and
Readiness Disclosure Act. This Act provides added protection from liability for
certain public and private statements concerning an entity's year 2000 readiness
and the year 2000 readiness of its products and services. It also potentially
provides added protection from liability for certain types of year 2000
disclosures made after January 1, 1996 and before the date of enactment of the
Act.
The Company's year 2000 efforts have been undertaken largely with its existing
personnel. In some instances, consultants have been engaged to provide specific
assessment, remediation or other services. Activities with suppliers and
customers have also involved their staffs and consultants. The Company engaged a
third-party firm to assist with planning and taking the inventory of internal
systems, and engaged another firm to perform an assessment of the overall scope
and schedule of Intel's year 2000 efforts.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
The Company currently expects that the total cost of these programs, including
both incremental spending and redeployed resources, will not exceed $175
million. Approximately $57 million has been spent to date, of which
approximately $15 million was incurred in the first quarter of 1999. These costs
are not incurred in a linear pattern. Spending is expected to peak in mid-1999
and to continue, at a declining rate, well into the year 2000. The remaining
costs are expected to be incurred for remediation of internal systems not
categorized as critical or priority, integration testing, contingency planning,
customer service, supplier monitoring and program office management. A majority
of the costs are expected to be included in cost of sales and in the calculation
of gross margin. Year 2000 costs for manufacturing and non-manufacturing
internal systems are expected to be less than 10% of the total information
technology budget for 1999.
No significant internal systems projects are being deferred due to the year 2000
program efforts. In some instances, the installation schedule of new software
and hardware in the normal course of business is being accelerated to also
afford a solution to year 2000 capability issues. The Company expects that costs
related to accelerated systems replacements will be approximately $15 million in
addition to the total costs noted above. In addition, the estimated costs do not
include any potential costs related to customer or other claims, or potential
amounts related to executing contingency plans, such as costs incurred as a
result of an infrastructure or supplier failure. The Company has adequate
general corporate funds with which to pay for the programs' expected costs. All
expected costs are based on the current assessment of the programs and are
subject to change as the programs progress.
Based on currently available information, management does not believe that the
year 2000 matters discussed above related to internal systems or products sold
to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier, customer or another third party would not have a material adverse
effect on the Company's financial condition or overall trends in results of
operations.
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.
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, costs, gross margin, capital
spending, depreciation and amortization, research and development expenses,
marketing and general and administrative expenses, net interest and other, the
tax rate, the year 2000 issue 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: changes in end user demand due to usage of the Internet; changes in
customer order patterns, including changes in customer and channel inventory
levels and changes due to year 2000 issues; competitive factors such as rival
chip architectures and manufacturing technologies, competing software-compatible
microprocessors and acceptance of new products in specific market segments;
pricing pressures; continued success in technological advances, including
development and implementation of new processes and strategic products for
specific market segments; development and timing of the introduction of
compelling software applications; execution of the manufacturing ramp, including
the transitions to the Pentium III processor and to the 0.18-micron process
technology; effects of excess or shortage of
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
manufacturing capacity; the ability to grow new businesses and successfully
integrate and operate any acquired businesses; unanticipated costs or other
adverse effects associated with processors and other products containing errata
(deviations from published specifications); impact on the Company's business due
to internal systems or systems of suppliers, infrastructure providers and other
third parties adversely affected by year 2000 problems; claims due to year 2000
issues allegedly related to the Company's products or year 2000 remediation
efforts; and litigation involving anti-trust, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 26, 1998 and to the subheading "Financial Market Risks" under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on page 32 of the Registrant's 1998 Annual Report to
Stockholders.
15
<PAGE>
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 26, 1998 for descriptions of
legal proceedings.
ITEM 5. OTHER INFORMATION
Intel recently outlined an expanded charter for the Company's New Business Group
("NBG"). The group has a three-part charter: to expand Intel revenues beyond
microprocessors and networking; to utilize the strengths and assets of Intel;
and to take advantage of opportunities presented by the Internet.
To accomplish its charter, NGB has four areas of focus: Internet Data Services,
to provide managed hosting, storage and delivery of Web content and services
such as e-commerce; Internet Content Services, an outgrowth of the Content
Group, to build content-rich Web sites for select organizations; the Internal
Investment Fund, to provide venture capital-style funding for ventures inside
Intel; and Connected Product Initiatives, to develop various products, either
alone or with other companies, that fall outside the scope of microprocessors
and networking equipment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Agreement and Plan of Merger, dated as of March 4, 1999, by and
among Intel Corporation, Intel RSW Corporation and Level One
Communications, Incorporated, with all Exhibits thereto
(incorporated by reference to Exhibit 2 of Form SC 13D, in
relation to Level One Communications, Incorporated, as filed on
March 15, 1999).
10.2 Stock Option Agreement, dated as of March 4, 1999, between Intel
Corporation and Level One Communications, Incorporated
(incorporated by reference to Exhibit 1 of Form SC 13D, in
relation to Level One Communications, Incorporated, as filed on
March 15, 1999).
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, 1999, Intel filed a report on Form 8-K relating to
financial information for Intel Corporation for the quarter and year
ended December 26, 1998 and forward-looking statements relating to
1999 and the first quarter of 1999, as presented in a press release
of January 12, 1999.
2) On March 12, 1999, Intel filed a report on Form 8-K relating to a
stock-for-stock merger agreement to acquire Level One Communications,
Incorporated valued at approximately $2.2 billion.
16
<PAGE>
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 7, 1999 BY: /S/ Andy D. Bryant
-----------------------------
Andy D. Bryant
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
17
<PAGE>
Exhibit 12.1
INTEL CORPORATION
STATEMENT SETTING FORTH THE COMPUTATION
OF RATIOS OF EARNINGS TO FIXED CHARGES
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 27, March 28,
1999 1998
----------------------
<S> <C> <C>
Income before taxes $ 2,984 $ 1,981
Add fixed charges net of
capitalized interest 15 12
-------- --------
Income before taxes and fixed
charges (net of capitalized
interest) $ 2,999 $ 1,993
-------- --------
-------- --------
Fixed charges:
Interest $ 9 $ 7
Capitalized interest 1 2
Estimated interest component
of rental expense 6 5
-------- --------
Total $ 16 $ 14
-------- --------
-------- --------
Ratio of earnings before taxes and
fixed charges, to fixed charges 187 142
</TABLE>
<TABLE> <S> <C>
<PAGE>
<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> 3-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> MAR-27-1999
<CASH> 2503
<SECURITIES> 8086
<RECEIVABLES> 3319<F2>
<ALLOWANCES> 0
<INVENTORY> 1708
<CURRENT-ASSETS> 16449
<PP&E> 21520
<DEPRECIATION> 10028
<TOTAL-ASSETS> 33093
<CURRENT-LIABILITIES> 6216
<BONDS> 699
0
0
<COMMON> 5025
<OTHER-SE> 19701
<TOTAL-LIABILITY-AND-EQUITY> 33093
<SALES> 7103
<TOTAL-REVENUES> 7103
<CGS> 2912
<TOTAL-COSTS> 2912
<OTHER-EXPENSES> 663<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 2984
<INCOME-TAX> 985
<INCOME-CONTINUING> 1999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1999
<EPS-PRIMARY> .60<F3>
<EPS-DILUTED> .57
<FN>
<F1>Item consists of reasearch and development.
<F2>Item shown net of allowance, consistent with the balance sheet presentation.
<F3>Item consists of basic earnings per share.
</FN>
</TABLE>
