Competition
The computing industry continuously evolves with new and enhanced technologies and products from existing and new providers. The marketplace can change quickly in response to the introduction of such technologies and products and other factors such as changes in customer and end-user requirements, expectations, and preferences. As technologies evolve and new market segments emerge, the boundaries between the market segments that we compete in are also subject to change.
Intel faces significant competition in the development and market acceptance of our products in this environment. Our platforms, based on Intel architecture, are positioned to compete across the compute continuum, from the lowest power and mobile devices to the most powerful data center servers. Our platforms, which have integrated hardware and software, offer customers benefits such as ease of use, savings in total cost of ownership, and the ability to scale systems to accommodate increased usage.Competitors
We compete against other companies that make and sell platforms, other silicon components, and software to businesses that build and sell computing and communications devices to end users. Our competitors also include companies that sell goods and services to businesses that use them for their internal and/or customer-facing processes (e.g., businesses running large data centers). In addition, we face competition from OEMs, ODMs, and other industrial and communications equipment manufacturers that, to some degree, choose to vertically integrate their own proprietary semiconductor and software assets. By doing so, these competitors may be attempting to offer greater differentiation in their products and to increase their share of the profits for each finished product they sell. Continuing changes in industry participants through, for example, acquisitions or business collaborations could also have a significant impact on our competitive position.
In the PC market segment, we are a leading provider of platforms for traditional desktops and notebooks. We face existing and emerging competition in these product areas. Tablets, phones, and other mobile devices offered by numerous vendors are significant competitors to traditional PCs for many usages. We are relatively recent providers of platforms for tablets and phones, and face strong competition from vendors that use applications processors based on the ARM* architecture; feature low-power, long battery-life operation; and are built in SoC formats that integrate numerous functions on one chip.
In the data center market segment, we are a leading provider of data center platforms and face competition from companies using ARM architecture or other technologies. Internet cloud computing, storage, and networking are areas of significant targeted growth for us in the data center segment, and we face strong competition in these market segments.
In the Internet of Things market segment, we have a long-standing position as a supplier of components and software for embedded products. This marketplace continues to significantly expand with increasing types and numbers of smart and connected devices for industrial, commercial, and consumer uses such as wearables. As this market segment evolves, we face numerous large and small incumbent competitors as well as new entrants that use ARM architecture and other operating systems and software.
Our security business operates in highly competitive, fragmented, and rapidly changing market segments. We are a major provider of cybersecurity products and services to both businesses and consumers. For businesses, we compete with companies selling individual point security products and companies selling multiple security products. We offer to businesses a portfolio of products that are integrated into a comprehensive security solution. For consumers, we primarily compete against other major security companies and providers of free security products. Our consumer offerings are designed to protect user data, identity, and devices across the compute continuum.
In the memory market segment, we compete against other providers of NAND flash memory products. We focus our efforts primarily on incorporating NAND flash memory into solution products, such as solid-state drives supporting consumer and enterprise applications. We believe that our memory offerings, including innovative developments such as 3D XPoint technology, will complement our other product offerings in our other segments.
Our products primarily compete based on performance, energy efficiency, integration, innovative design, features, price, quality, reliability, brand recognition, technical support, and availability. The importance of these factors varies by the type of end system for the products. For example, performance might be among the most important factors for our products for data center servers, while price and integration might be among the most important factors for our products for tablets, phones, and other mobile devices.
11
|
| | |
 MD&A | Segment Trends and Results | 31 |
Competitive Advantages
Our key competitive advantages include:
Transitions to next-generation technologies. We have a market lead in transitioning to the next-generation process technology and bringing products to market using such technology. Our products utilizing our 14nm process technology are in the market and we are continuing to work on the development of our next-generation 10nm process technology. We believe that these advancements will offer significant improvements in one or more of the following areas: performance, new features, energy efficiency, and cost. |
| |
| OVERVIEW | |
NSG's core offerings include Intel® Optane™ and Intel® 3D NAND technologies, driving innovation in SSDs and next-generation memory and storage products. Our customers include enterprise and cloud-based data centers, users of business and consumer desktops and laptops, and a variety of Internet of Things application providers. We are ramping 64-layer (64L) triple-level cell (TLC) and quad-level cell (QLC) NAND technologies, and Intel Optane technology in innovative new form factors and densities to address the challenges our customers face in a rapidly evolving technological landscape. | |
|
| | | | |
| HIGHLIGHTS AND SEGMENT IMPERATIVES | | | |
| | | | |
| ● | Achieved more than 20% revenue growth in 2018 and drove improvements in operating margins by approximately $250 million to approximately break even for 2018.
| | | “Our Optane™ technology products are critical to helping our customers analyze valuable data in ways that allow real time business impact and our Intel QLC 3D NAND products enable them to store more data for cost effective analysis.”
—Rob Crooke, NSG General Manager |
| ● | Introduced the industry's first PCIe*-based QLC SSD and grew our Intel® Optane™ and NAND product lines with a focus on new densities and innovative form factors in 2018, resulting in 64L QLC products making up more than half of our sales volume.
| | |
| ● | Announced the release of Intel® Optane™ DC Persistent memory, available on next-generation Intel® Xeon® processors for datacenters—which is redefining the memory/storage hierarchy and bringing persistent, large-scale, memory closer to the processor.
| | |
| ● | During 2018, Intel and Micron announced they will independently develop future generations of 3D NAND and 3D XPoint technology and in January 2019, Micron called our interest in IMFT. The IMFT agreement provides for supply for up to one year after the close of the transaction. | | |
Combination of our network of manufacturing and assembly and test facilities with our global architecture design teams. We have made significant capital and R&D investments into our integrated manufacturing network, which enables us to have more direct control over our design, development, and manufacturing processes; quality control; product cost; production timing; performance; power consumption; and manufacturing yield. The increased cost of constructing new fabrication facilities to support smaller transistor geometries and larger wafers has led to a reduced number of companies that can build and equip leading-edge manufacturing facilities. Most of our competitors rely on third-party foundries and subcontractors for manufacturing and assembly and test needs. We provide foundry services as an alternative to such foundries.
Products optimized to operate on multiple operating systems. Through our collaboration with our customers and other third parties, many of our products can operate on multiple operating systems in end-user products and platforms.
Manufacturing and Assembly and TestAs of December 26, 2015, 55% of our wafer fabrication, including microprocessors and chipsets, was conducted within the U.S. at our facilities in Arizona, Oregon, and New Mexico. Our Massachusetts fabrication facility was our last manufacturing facility on 200 millimeter (mm) wafers and ceased production in Q1 2015. The remaining 45% of our wafer fabrication was conducted outside the U.S. at our facilities in Ireland, Israel, and China. Our fabrication facility in Ireland has transitioned to our 14nm process technology, with manufacturing continuing to ramp in 2016. Wafer fabrication conducted within and outside the U.S. may be impacted by the timing of a facility’s transition to a newer process technology, as well as a facility’s capacity utilization.
As of December 26, 2015, we manufactured our products in wafer fabrication facilities at the following locations:
|
| | | | | | |
Products | ■ Revenue $B | — Year over Year Growth | | Wafer Size■ Op Income $B | | Process Technology |
|
| | |
MD&A | Segment Trends and Results | 32 |
MARKET AND BUSINESS OVERVIEW
Market trends and strategy
As technology penetration continues to grow worldwide, the amount of data that is produced has grown exponentially. Audio, video, and sensory data is produced and collected by a vast array of devices that require a significant increase in storage and memory technology. This has resulted in the storage and memory TAM growing to approximately $180 billion in 2018, a 25% increase from 20171. Our focus continues to be within the high-performance compute, financial services, cloud service provider, and Internet usage markets. NSG delivered over 20% annual revenue growth and improved profitability to break even for 2018.
With data growth expanding, our customers face the challenge of ensuring that critical, or "hot," data is close to the CPU for rapid access. Our innovations in technology address the need for various storage tiers, based on different usages, while keeping a focus on performance and cost. As customers look to improve the performance of their storage and memory devices, NSG is seeing and leading a transition to the PCIe* interface with Non-Volatile Memory Express* for SSDs, as well as efficiency and game-changing form factors like the "ruler" based on EDSFF.
Products and competitiveness
The acceleration in data growth across our customer base requires significant innovation in storage and memory technology. Our storage and memory roadmap has led the way in reimagining usages and architecting innovative solutions that have disrupted the industry with 64L 3D NAND TLC and QLC solutions, as well as Intel® Optane™ technology. We have launched over 15 new products in 2018 to keep up with the evolving business needs of our customers. These new products have driven our 64L products to be more than half of 2018 NSG volume and a meaningful ramp in the Optane business.
A key highlight in 2018 was the announcement of Intel® Optane™ DC Persistent Memory, available on next-generation Intel® Xeon® processor platforms for data center usages. This technology redefines the memory storage hierarchy and offers the performance of memory with the large capacities and persistence characteristics of storage. We are also leading the way in the NAND industry with the announcement of the first PCIe* QLC 3D NAND SSD for the Data Center and Client markets. This new technology will enable innovative new form factors and higher capacity drives. With the addition of these new NAND and Optane product lines, we have strengthened our commitment to driving customer value through platform-connected features and solutions.
|
| | |
INTEL® OPTANE™ TECHNOLOGY | | LocationsINTEL® 3D NAND TECHNOLOGY |
Microprocessors and other products | | 300mm |
| | 14nm |
| |
1 | Source: Gartner, Inc., Forecast: DRAM Market Statistics, Worldwide, 2014-2021, 3Q18 Update, Gartner, Inc., Forecast: Hard-Disk Drives, Worldwide, 2014-2022, 2Q18 Update, Gartner, Inc., Forecast: NAND Flash Supply and Demand, Worldwide, 1Q16-4Q18, 2Q18 Update. |
|
| | |
MD&A | Segment Trends and Results | 33 |
FINANCIAL PERFORMANCE
|
| | | | |
| NSG REVENUE $B | | Arizona, Oregon, IrelandNSG OPERATING INCOME $B | |
|
Microprocessors |
| REVENUE SUMMARY |
2018 – 2017
Net revenue increased $787 million, driven by $2.6 billion increase in unit sales due to strong demand in data center and client SSD and the ramp of Intel Optane technology products, partially offset by $1.8 billion lower ASP due to NAND market pricing weakness and mix of products sold.
2017 – 2016
Net revenue increased $944 million, driven by $1.6 billion from higher unit sales due to strong demand in data center, partially offset by $655 million lower ASP due to market conditions and the ramp of our new TLC 3D NAND product line, which has a lower cost and ASP compared to our primary multi-level cell 3D NAND.
2018 – 2017
Operating income improved $255 million as our sales mix shifted to our latest 64L NAND and we continued to see the cost ramp at Fab 68. The improved unit costs and higher unit sales more than offset the decline in ASP. In addition, we had a total of $160 million earned government grants benefiting 2018.
2017 – 2016
Operating income increased $284 million, driven primarily by $725 million unit cost reductions due to the cost improvements associated with Fab 68 and lower costs from the ramp of the Intel® 3D NAND product line compared to prior generation NAND products. The lower unit cost impact was offset by $380 million lower gross margin from NSG revenue.
|
| | |
MD&A | Segment Trends and Results | 34 |
|
| |
| OVERVIEW | |
PSG offers programmable semiconductors, primarily FPGAs and related products for a broad range of market segments, including communications, data center, industrial, and military. PSG collaborates with the other productsIntel businesses to deliver FPGA acceleration in tandem with Intel microprocessors. This "better together" integration broadens the use of FPGAs and combines the benefits of both technologies to allow more flexibility for systems to operate with increased efficiency and higher performance. | |
|
| | | | |
| HIGHLIGHTS AND SEGMENT IMPERATIVES | | 300mm | |
| | 22nm | | Israel, Arizona, Oregon |
Microprocessors● | PSG achieved a record design win year in 2018, driven by Intel® Arria® 10 and chipsetsIntel® Stratix® 10 device families. | | 300mm | "The increased adoption of FPGA and eASIC solutions across data center, networking, and IoT is driving value to our data-centric businesses."
—Dan McNamara, PSG General Manager |
| ● | In 2018 we announced the Intel® Programmable Acceleration Card (Intel® PAC) with Intel® Stratix®10 SX FPGA, which operates seamlessly with Intel Xeon processors and an acceleration software stack, extending our portfolio of FPGA acceleration platforms. | | 32nm |
| ● | In 2018, we acquired eASIC, a leading provider of structured application-specific integrated circuits (ASICs). These products expand PSG’s chip portfolio to better meet customers’ needs to further optimize cost and power. Customers have more choices and can achieve faster time-to-market and lower development costs—including a low-cost conversion process from FPGA to structured ASICs. | | New Mexico |
Microprocessors● | In 2019, PSG will continue to focus on becoming the multi-function acceleration solution of choice for continuously evolving technologies from the edge to the cloud. | | 300mm |
|
| | | | | | |
| ■ Revenue $B | — Year over Year Growth | | 45nm■ Op Income $B | | New Mexico |
|
Microprocessors | | |
MD&A | Segment Trends and chipsetsResults | 35 |
MARKET AND BUSINESS OVERVIEW
Market trends and strategy
PSG delivers solutions in the programmable logic device (PLD) market, primarily FPGAs, to accelerate applications that help secure, power, and connect billions of devices and the infrastructure of the smart, connected, data-centric world. PSG enables a broad range of solutions targeting the data center, wireless, networking, military, medical, and industrial markets. The configurability and efficiency of FPGAs provide advantages to enable transformative applications such as 5G wireless, network function virtualization offload, and edge acceleration for video analytics and Industry 4.0. PSG has expanded its product portfolio by providing Intel® PAC, complete with an acceleration software stack, enabling new customers to plug cards directly into an Intel® Xeon® processor-based server for application accelerations in markets such as finance, genomics, video transcoding, and database acceleration.
Products and competitiveness
With the rise of pervasive connectivity and autonomous transactions, vast networks of devices and systems are linked from the edge through infrastructure to the cloud. The Intel® FPGA portfolio enables this transformation with discrete FPGAs and software-defined, hardware-based, multi-function acceleration cards that allow faster development times, high performance, and power efficiency with lower overall total cost of ownership. In the cloud, where workloads shift dynamically and algorithms change, Intel FPGAs are the ideal solution for adapting to new demands through reconfigurability.
|
| | |
MD&A | Segment Trends and Results | 36 |
FINANCIAL PERFORMANCE
|
| | | | |
| PSG REVENUE $B | | 300mmPSG OPERATING INCOME $B | | 65nm | | China |
2018 – 2017
Revenue increased$221 million, driven by growth in the data center market segment and our advanced products (28nm, 20nm, and 14nm process technologies), which grew approximately 60% from 2017.
2017 – 2016
Revenue increased $233 million, driven by growth in industrial, military, and automotive market segments, as well as in our advanced products and last-time buys of our legacy products. Also, a one-time $99 million deferred revenue write-down due to the acquisition of Altera negatively impacted 2016 PSG revenue.
2018 – 2017
Operating income was flat year over year, at$466 million. Revenue increased from the growth in the data center and advanced products, but was offset by higher costs from an unfavorable product mix and increased investments.
2017 – 2016
Operating income increased $562 million. Higher revenue and operational synergies contributed $111 million of the year over year increase. The remainder was due to one-time acquisition-related charges, including a $99 million deferred revenue write-down with a $64 million operating income impact and an inventory valuation adjustment of approximately $387 million.
|
| | |
MD&A | Segment Trends and Results | 37 |
RESTRUCTURING AND OTHER CHARGES
|
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| 2016 Restructuring Program | | $ | (72 | ) | | $ | 135 |
| | $ | 1,681 |
|
| ISecG separation costs and other charges | | — |
| | 249 |
| | 63 |
|
| Total restructuring and other charges | | $ | (72 | ) | | $ | 384 |
| | $ | 1,744 |
|
We commenced the 2016 Restructuring Program in the second quarter of 2016 and the program was completed in 2017. Other charges consist primarily of expenses associated with the divestiture of ISecG that was completed in Q2 2017. For further information, see "Note 8: Restructuring and Other Charges" within the Consolidated Financial Statements.
GAINS (LOSSES) ON EQUITY INVESTMENTS AND INTEREST AND OTHER, NET
|
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Gains (losses) on equity investments, net | | $ | (125 | ) | | $ | 2,651 |
| | $ | 506 |
|
| Interest and other, net | | $ | 126 |
| | $ | (349 | ) | | $ | (703 | ) |
GAINS (LOSSES) ON EQUITY INVESTMENTS, NET
We recognized ongoing mark-to-market net losses on our marketable equity securities of $129 million in 2018, primarily related to changes in value of our interests in ASML Holding N.V. (ASML) and Cloudera, Inc. In addition to the mark-to-market losses, we also recognized impairment charges, including a $290 million impairment charge to our equity method investment in IMFT. These losses were partially offset by $202 million of upward observable price adjustments.
We recognized $3.5 billion of net realized gains on sales in 2017, primarily related to sales of a portion of our interest in ASML. The higher net realized gains were partially offset by $833 million of impairment charges and our share of equity method investee losses in 2017. We recognized higher reported gains in 2017 compared to 2016, primarily related to sales of a portion of our interest in ASML.
INTEREST AND OTHER, NET
We recognized a net gain in interest and other in 2018 compared to a net loss in 2017, primarily due to lower losses on debt conversions, higher assets under construction resulting in more capitalized interest, and larger divestiture gains in 2018 compared to 2017.
We recognized a lower net loss in interest and other in 2017 compared to 2016, primarily due to higher interest income in 2017.
PROVISION FOR TAXES
|
| | | | | | | | | | | | |
Years Ended
(Dollars in Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Income before taxes | | $ | 23,317 |
| | $ | 20,352 |
| | $ | 12,936 |
|
| Provision for taxes | | $ | 2,264 |
| | $ | 10,751 |
| | $ | 2,620 |
|
| Effective tax rate | | 9.7 | % | | 52.8 | % | | 20.3 | % |
The majority of the decrease in our effective tax rate in 2018 compared to 2017 resulted from initial tax expense from the U.S. Tax Cuts and Jobs Act (Tax Reform) and the tax impacts from the ISecG divestiture that we had in 2017, but not in 2018. The reduction of the U.S. statutory rate, combined with the net impact of the enactment or repeal of specific tax law provisions through the Tax Reform, drove the remaining decrease in our effective tax rate in 2018. For further information on Tax Reform and its impacts, see "Note 9: Income Taxes" within the Consolidated Financial Statements.
Substantially all of the increase in our effective tax rate in 2017 compared to 2016 was driven by the one-time provisional impacts from the Tax Reform enacted on December 22, 2017, the 2017 ISecG divestiture, and a higher proportion of our income in higher tax rate jurisdictions.
|
| | |
MD&A | Consolidated Results and Analysis | 38 |
LIQUIDITY AND CAPITAL RESOURCES
We consider the following when assessing our liquidity and capital resources: |
| | | | | | | | |
| (Dollars in Millions) | | Dec 29,
2018 | | Dec 30,
2017 |
| Cash and cash equivalents, short-term investments, and trading assets | | $ | 11,650 |
| | $ | 14,002 |
|
| Other long-term investments | | $ | 3,388 |
| | $ | 3,712 |
|
| Loans receivable and other | | $ | 1,550 |
| | $ | 1,097 |
|
| Reverse repurchase agreements with original maturities greater than three months | | $ | 250 |
| | $ | 250 |
|
| Total debt | | $ | 26,359 |
| | $ | 26,813 |
|
| Temporary equity | | $ | 419 |
| | $ | 866 |
|
| Debt as a percentage of permanent stockholders’ equity | | 35.4 | % | | 38.8 | % |
Cash generated by operations is our primary source of liquidity. We maintain a diverse investment portfolio that we continually analyze based on issuer, industry, and country. When assessing our sources of liquidity, we include investments as shown in the preceding table. Substantially all of our investments in debt instruments and financing receivables are in investment-grade securities.
Other potential sources of liquidity include our commercial paper program and our automatic shelf registration statement on file with the SEC, pursuant to which we may offer an unspecified amount of debt, equity, and other securities. Under our commercial paper program, we have an ongoing authorization from our Board of Directors to borrow up to $10.0 billion. As of December 26, 2015, our microprocessors were manufactured on 300mm wafers, with29, 2018, $480 million of commercial paper remained outstanding. During 2018, we remarketed a substantial majority manufactured using our 14nm, 22nm,total of $423 million aggregate principal amount of bonds issued by the Industrial Development Authority of the City of Chandler, Arizona and 32nm process technologies. As we move to each succeeding generationthe State of manufacturing process technology, we incur significant start-up costs to prepare each factory for manufacturing. However, continuing to advance our process technology provides benefits that we believe justify these costs. The benefits of moving to each succeeding generation of manufacturing process technology can include using less space per transistor, reducing heat output from each transistor, and increasing the number of integrated features on each chip. These advancements can enable us to introduce new devices with higher functionality and complexity while controlling power, cost, and size. In addition, with each shift to a new process technology, we are able to produce more microprocessors per square footOregon Business Development Commission. We also repaid $600 million of our wafer fabrication facilities. 2.50% senior notes that matured in November 2018 and paid $2.4 billion in cash to satisfy conversion requests for a portion of our $2.0 billion 3.25% junior subordinated convertible debentures due 2039.
The costsenactment of Tax Reform in December 2017 imposed a tax on all previously untaxed earnings of non-U.S. subsidiaries of U.S. corporations. Future distributions of non-U.S. assets to develop newer process technologiesthe U.S. are significantly less than adding capacityno longer subject to U.S. taxation in most cases. As a result, in Q4 2017 we recognized a one-time provisional transition tax expense of $6.1 billion, which was adjusted to $5.9 billion in 2018. We expect to pay the tax in annual installments from 2019 through 2026. We believe that our current U.S. sources of cash and liquidity are sufficient to meet our tax liability.
During Q3 2017, we acquired 97.3% of Mobileye's outstanding ordinary shares for $14.5 billion net cash. We funded the acquisition of shares with cash held by building additional wafer fabrication facilities using older process technologies.our non-U.S. subsidiaries. During Q2 2018, we acquired the remaining outstanding ordinary shares for $380 million.
We use third-party foundriesbelieve we have sufficient financial resources to manufacture wafers for certain components, including communications, connectivity, and networking products. For example, the Intel Atom x3 processor is fabricated by a third-party foundry. In addition, we primarily use subcontractors to manufacture board-level products and systems. We purchase certain communications and connectivity products from external vendors primarilymeet our business requirements in the Asia-Pacific region.
Following thenext 12 months, including capital expenditures for worldwide manufacturing process, the majority of our components are subject toand assembly and test. We perform our components assemblytest; working capital requirements; and test at facilities in Malaysia, China,potential acquisitions, strategic investments, dividends, and Vietnam. To augment capacity, we use subcontractors to perform assembly and test of certain products, primarily chipsets and communications and connectivity products.common stock repurchases.
|
| | |
MD&A | Consolidated Results and Analysis | 39 |
|
|
SOURCES AND USES OF CASH (In Millions) |
Our NAND flash memory products are manufactured by IMFT and Micron using 20nm or 25nm process technology, and assembly and test of these products is performed by Micron and other external subcontractors. For further information, see "Note 5: Cash and Investments" in Part II, Item 8 of this Form 10-K. Additionally, in the second half of 2016, we will start usingIn summary, our facility in Dalian, China to help expand our manufacturing capacity in next-generation memory.cash flows for each period were as follows: The expansion is part of our multi-source supply strategy and will allow us to best serve our customers.Our employment and operating practices are consistent with, and we expect our suppliers and subcontractors to abide by, local country law. Intel expects all suppliers to comply with our Code of Conduct and the Electronic Industry Citizenship Coalition (EICC) Code of Conduct, both of which set standards that address the rights of workers to safe and healthy working conditions, environmental responsibility, compliance with privacy and data security obligations, and compliance with applicable laws. |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Net cash provided by operating activities | | $ | 29,432 |
| | $ | 22,110 |
| | $ | 21,808 |
|
| Net cash used for investing activities | | (11,239 | ) | | (15,762 | ) | | (25,817 | ) |
| Net cash provided by (used for) financing activities | | (18,607 | ) | | (8,475 | ) | | (5,739 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | (414 | ) | | $ | (2,127 | ) | | $ | (9,748 | ) |
We have thousands of suppliers, including subcontractors, providing our various materials, equipment, and service needs. We set expectations for supplier performance and reinforce those expectations with periodic assessments and audits. We communicate those expectations to our suppliers regularly and work with them to implement improvements when necessary. Where possible, we seek to have several sources of supply for all of these materials and resources, but we may rely on a single or limited number of suppliers, or upon suppliers in a single country. In those cases, we develop and implement plans and actions to reduce the exposure that would result from a disruption in supply. We have entered into long-term contracts with certain suppliers to help ensure a stable supply of silicon and semiconductor manufacturing tools.
Our products are typically manufactured at multiple Intel facilities around the world or by subcontractors. However, some products are manufactured in only one Intel or subcontractor facility, and we seek to implement action plans to reduce the exposure that would result from a disruption at any such facility. See "Risk Factors" in Part I, Item 1A of this Form 10-K.
|
| | |
MD&A | Consolidated Results and Analysis | 40 |
ResearchOPERATING ACTIVITIES
Cash provided by operating activities is net income adjusted for certain non-cash items and Developmentchanges in assets and liabilities.
For 2018 compared to 2017, the $7.3 billion increase in cash provided by operating activities was primarily due to higher net income, offset by changes in working capital. Changes in working capital were driven by taxes and accounts receivables, offset by relatively flat inventory levels. Income taxes paid, net of refunds, in 2018 compared to 2017 were flat as the benefit of a lower U.S. corporate tax rate was offset by the payment related to the 2017 U.S. Tax Reform transition tax. We received $1.4 billion of customer deposits and prepaid supply agreements in 2018, net of customer utilization, compared to $1.1 billion in 2017.
For 2017 compared to 2016, the $302 million increase in cash provided by operating activities was due to changes to working capital partially offset by adjustments for non-cash items and lower net income. Tax Reform did not have an impact on our 2017 cash provided by operating activities. The increase in cash provided by operating activities was driven by increased income before taxes and $1.1 billion receipts of customer deposits and prepaid supply agreements. These increases were partially offset by increased inventory and accounts receivable. Income taxes paid, net of refunds, in 2017 compared to 2016 were $2.9 billion higher due to higher income before taxes, taxable gains on sales of ASML, and taxes on the ISecG divestiture.
INVESTING ACTIVITIES
Investing cash flows consist primarily of capital expenditures; investment purchases, sales, maturities, and disposals; and proceeds from divestitures and cash used for acquisitions. Our capital expenditures were $15.2 billion in 2018 ($11.8 billion in 2017 and $9.6 billion in 2016).
The decrease in cash used for investing activities in 2018 compared to 2017 was primarily due to lower cash paid on acquisitions and increased cash from net trading asset activity. This was partially offset by increased capital expenditures, net available-for-sale debt investments activity, decreased proceeds from divestitures, and decreased sales of equity investments (substantially all from ASML sales).
The decrease in cash used for investing activities in 2017 compared to 2016 was primarily due to higher net activity of available-for-sale debt investments in 2017, proceeds from our divestiture of ISecG in 2017, and higher maturities and sales of trading assets in 2017. This activity was partially offset by higher capital expenditures in 2017.
FINANCING ACTIVITIES
Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, and proceeds from the sale of shares of common stock through employee equity incentive plans.
The increase in cash used for financing activities in 2018 compared to 2017 was primarily due to decreased long-term debt issuance and increased repurchases of common stock. During 2018, we repurchased $10.7 billion of common stock under our authorized common stock repurchase program, compared to $3.6 billion in 2017. In 2018, the Board approved a $15.0 billion increase in our authorized stock repurchase program. As of December 29, 2018, $17.3 billion remained available for repurchasing common stock under the repurchase authorization limit. We base our level of common stock repurchases on internal cash management decisions, and this level may fluctuate. Our total dividend payments were $5.5 billion in 2018 compared to $5.1 billion in 2017. We have paid a cash dividend in each of the past 105 quarters. In Q1 2019, the Board declared a quarterly cash dividend of $0.315 per share of common stock, payable on March 1, 2019 to stockholders of record on February 7, 2019.
The increase in cash used for financing activities in 2017 compared to 2016 was primarily due to net long-term debt activity, which was a use of cash in 2017 compared to a source of cash in 2016. Additionally, cash used for common stock repurchases was higher in 2017 compared to 2016.
|
| | |
MD&A | Consolidated Results and Analysis | 41 |
CONTRACTUAL OBLIGATIONS
We are committed to investing in world-class technology development, particularlySignificant contractual obligations as of December 29, 2018 were as follows: |
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| (In Millions) | | Total | | Less Than 1 Year | | 1–3 Years | | 3–5 Years | | More Than 5 Years |
| Operating lease obligations | | $ | 835 |
| | $ | 229 |
| | $ | 314 |
| | $ | 171 |
| | $ | 121 |
|
Capital purchase obligations1 | | 9,029 |
| | 7,888 |
| | 795 |
| | 345 |
| | 1 |
|
Other purchase obligations and commitments2 | | 3,249 |
| | 1,272 |
| | 1,781 |
| | 178 |
| | 18 |
|
Tax obligations3 | | 4,732 |
| | 143 |
| | 426 |
| | 1,234 |
| | 2,929 |
|
Long-term debt obligations4 | | 40,187 |
| | 1,518 |
| | 7,583 |
| | 6,173 |
| | 24,913 |
|
Other long-term liabilities5 | | 1,626 |
| | 722 |
| | 708 |
| | 95 |
| | 101 |
|
Total6 | | $ | 59,658 |
| | $ | 11,772 |
| | $ | 11,607 |
| | $ | 8,196 |
| | $ | 28,083 |
|
| |
1 | Capital purchase obligations represent commitments for the construction or purchase of property, plant and equipment. They were not recorded as liabilities on our consolidated balance sheets as of December 29, 2018, as we had not yet received the related goods nor taken title to the property. |
| |
2 | Other purchase obligations and commitments include payments due under various types of licenses and agreements to purchase goods or services, as well as payments due under non-contingent funding obligations. |
| |
3 | Tax obligations represent the future cash payments related to Tax Reform enacted in 2017 for the one-time transition tax on our previously untaxed foreign earnings. For further information, see "Note 9: Income Taxes" within the Consolidated Financial Statements. |
| |
4 | Amounts represent principal payments for all debt obligations and interest payments for fixed-rate debt obligations. Interest payments on floating-rate debt obligations, as well as the impact of fixed-rate to floating-rate debt swaps, are excluded. Debt obligations are classified based on their stated maturity date, regardless of their classification on the consolidated balance sheets. Any future settlement of convertible debt would impact our cash payments. |
| |
5 | Amounts represent future cash payments to satisfy other long-term liabilities recorded on our consolidated balance sheets, including the short-term portion of these long-term liabilities. Derivative instruments are excluded from the preceding table, as they do not represent the amounts that may ultimately be paid. |
| |
6 | Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities, except for the short-term portions of long-term debt obligations and other long-term liabilities. |
The expected timing of payments of the obligations in the designpreceding table is estimated based on current information. Timing of payments and manufactureactual amounts paid may be different, depending on the time of integrated circuits. R&D expendituresreceipt of goods or services, or changes to agreed-upon amounts for some obligations.
Contractual obligations for purchases of goods or services included in "Other purchase obligations and commitments" in the preceding table include agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. For obligations with cancellation provisions, the amounts included in the preceding table were $12.1 billion in 2015 ($11.5 billion in 2014limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee.
For the purchase of raw materials, we have entered into certain agreements that specify minimum prices and quantities based on a percentage of the total available market or based on a percentage of our future purchasing requirements. Due to the uncertainty of the future market and our future purchasing requirements, as well as the non-binding nature of these agreements, obligations under these agreements have been excluded from the preceding table. Our purchase orders for other products are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, some of our purchase orders represent authorizations to purchase rather than binding agreements.
Contractual obligations that are contingent upon the achievement of certain milestones have been excluded from the preceding table. Most of our milestone-based contracts are tooling related for the purchase of capital equipment. These arrangements are not considered contractual obligations until the milestone is met by the counterparty.$10.6 billion in 2013).As of December 29, 2018, assuming that all future milestones are met, the additional required payments would be approximately $688 million.
Our R&D activities are directed towardFor the deliverymajority of solutions consistingrestricted stock units (RSUs) granted, the number of hardware and software platforms and supporting services across a wide rangeshares of computing devices. We are focusedcommon stock issued on developing the technology innovationsdate the RSUs vest is net of the minimum statutory withholding requirements that we believe will deliver our next generation of products, which willpay in turn enable new form factors and usage models for businesses and consumers. We focus our R&D effortscash to the appropriate taxing authorities on advanced computing technologies, developing new microarchitectures, advancing our silicon manufacturing process technology, delivering the next generation of platforms, improving our platform initiatives, developing new solutions in emerging technologies (including memory and the Internet of Things), and developing software solutions and tools. Our R&D efforts are intended to enable new levels of performance and address areas such as energy efficiency, system-level integration, security, scalability for multi-core architectures, system manageability, and ease of use.
As partbehalf of our R&D efforts, we planemployees. The obligation to introduce a new Intel Core microarchitecture for desktops, notebooks (including Ultrabook devices and 2 in 1 systems), and Intel Xeon processors on a regular cadence. We expect to lengthenpay the relevant taxing authority is excluded from the preceding table, as the amount is contingent upon continued employment. In addition, the amount of time we will utilize our 14nm and our next-generation 10nm process technologies, further optimizing our products and process technologies while meeting the yearly market cadence for product introductions.
Advancesobligation is unknown, as it is based in our silicon technology have enabled us to continue making Moore’s Law a reality. In 2014, we began manufacturing our 5th generation Intel Core processor family using our 14nm process technology. In 2015, we released a new microarchitecture (our 6th generation Intel Core processor family), using our 14nm process technology. We also plan to introduce a third 14nm product, code-named "Kaby Lake." This product will have key performance enhancements as compared to our 6th generation Intel Core processor family. We are also developing 10nm manufacturing process technology, our next-generation process technology.
We have continued expandingpart on the advances anticipated by Moore’s Law by bringing new capabilities into silicon and producing new products optimized for a wider varietymarket price of applications. We expect these advances will result in a significant reduction in transistor leakage, lower active power, and an increase in transistor density to enable more smaller form factors, such as powerful, feature-rich phones and tablets with a longer battery life. For instance, we have acceleratedour common stock when the Intel Atom processor-based SoC roadmap for our mobile form factors (including tablets and phones), notebooks (including Ultrabook devices and 2 in 1 systems), the Internetawards vest.
|
| | |
MD&A | Consolidated Results and Analysis | 42 |
With our continued focus on silicon and manufacturing technology leadership,
During 2014, we entered into a series of agreements with ASML Holding N.V. (ASML) in 2012, certainTsinghua Unigroup Ltd. (Tsinghua Unigroup), an operating subsidiary of which were amended in 2014Tsinghua Holdings Co. Ltd., to, further define the commercial terms between the parties. These amended agreements, in whichamong other things, jointly develop Intel architecture and communications-based solutions for phones. Subject to regulatory approvals and other closing conditions, we have agreed to provide R&Dinvest up to $9.0 billion Chinese yuan (approximately $1.5 billion as of the date of the agreement) for a minority stake of Beijing Unisoc Technology Ltd. (Unisoc), formally Beijing UniSpreadtrum Technology Ltd. During 2015, we invested $966 million to complete the first phase of the equity investment, and the second phase of the investment will require additional funding over five years,of approximately $500 million; however, as our obligation is contingent upon regulatory approvals and other closing conditions, it has been excluded from the preceding table.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are intendedaffected by changes in currency exchange and interest rates, as well as equity and commodity prices. Our risk management programs reduce, but may not entirely eliminate, the impacts of these risks. All of the following potential changes are based on sensitivity analyses performed on our financial positions as of December 29, 2018 and December 30, 2017. Actual results may differ materially.
CURRENCY EXCHANGE RATES
We are exposed to acceleratecurrency exchange risks of non-U.S.-dollar-denominated investments in debt instruments and loans receivable, and may economically hedge this risk with foreign currency contracts, such as currency forward contracts or currency interest rate swaps. Gains or losses on these non-U.S.-currency investments are generally offset by corresponding losses or gains on the developmentrelated hedging instruments. We are exposed to currency exchange risks from our non-U.S.-dollar-denominated debt indebtedness and may use foreign currency contracts designated as cash flow hedges to manage this risk.
Substantially all of extreme ultraviolet (EUV) lithography projectsour revenue is transacted in U.S. dollars. However, a significant portion of our operating expenditures and deep ultraviolet immersion lithography projects, including generic developments applicablecapital purchases are incurred in other currencies, primarily the euro, the Japanese yen, the Israeli shekel, and the Chinese yuan. We have established currency risk management programs to both 300mmprotect against currency exchange rate risks associated with non-U.S. dollar forecasted future cash flows and 450mm.existing non-U.S. dollar monetary assets and liabilities. We may also hedge currency risk arising from funding of foreign currency-denominated future investments. We may utilize foreign currency contracts, such as currency forwards or option contracts in these hedging programs. We considered the historical trends in currency exchange rates and determined that it was reasonably possible that a weighted average adverse change of 20% in currency exchange rates could be experienced in the near term. Such an adverse change, after taking into account balance sheet hedges only and offsetting recorded monetary asset and liability positions outstanding as of December 29, 2018 and December 30, 2017, would result in an adverse impact on income before taxes of less than $46 million and less than $95 million, respectively.
INTEREST RATES
We are exposed to interest rate risk related to our fixed-rate investment portfolio and outstanding debt. The primary objective of our investment policy is to preserve principal and the financial flexibility to fund our business while maximizing yields, which generally track the U.S. dollar three-month LIBOR. We generally enter into interest rate contracts to convert the returns on our fixed-rate debt investment with remaining maturities longer than six months into U.S. dollar three-month LIBOR-based returns. We also enter into swaps to convert fixed-rate coupon payments into floating-rate coupon payments for our existing indebtedness. Gains or losses on these instruments are generally offset by corresponding losses or gains on the related hedging instruments.
A hypothetical increase in benchmark interest rates of up to 1.0%, after taking into account investment hedges, would have resulted in a decrease in the fair value of our investment portfolio of approximately $110 million as of December 29, 2018 (a hypothetical decrease of 1.0% would have resulted in an increase of approximately $100 million as of December 30, 2017).
Taking into account floating-rate debt, and fixed-rate debt that is swapped to floating-rate debt, a hypothetical increase in interest rates of up to 1.0% would result in an increase in annual interest expense on our indebtedness of approximately $215 million from debt outstanding as of December 29, 2018 (an increase of approximately $140 million from debt outstanding as of December 30, 2017). We have changed our presentation from the prior year to show the impact of interest rate changes on interest expense rather than on fair value of debt in order to present information that could hypothetically impact our net income and cash flows.
EQUITY PRICES
Our investments include marketable equity securities and equity derivative instruments. We typically do not attempt to reduce or eliminate our equity market exposure through hedging activities at the inception of our investments. In the event we do decide to enter into hedge arrangements, before doing so we evaluate legal, market, and economic factors, as well as the expected timing of disposal, to determine whether hedging is appropriate. Our equity market risk management program may include equity derivatives with or without hedge accounting designation that utilize warrants, equity options, or other equity derivatives.
We also utilize total return swaps to offset changes in liabilities related to the equity market risks of certain deferred compensation arrangements. Gains or losses from changes in fair value of these total return swaps are generally offset by the losses or gains on the related liabilities.
|
| | |
MD&A | Consolidated Results and Analysis | 43 |
Our R&D activities range from designingAs of December 29, 2018, the fair value of our marketable equity investments and developing new products and manufacturing processes to researching future technologies and products. We continue to make significant R&Dour equity derivative instruments, including hedging positions, was $1.4 billion ($4.2 billion as of December 30, 2017). A substantial majority of our marketable equity investments portfolio as of December 29, 2018 was concentrated in our investment in ASML of $1.1 billion ($3.6 billion as of December 30, 2017). To determine reasonably possible decreases in the developmentmarket value of SoC devicesour marketable equity investments, we have analyzed the historical market price sensitivity of our marketable equity investment portfolio. Assuming a decline of 40% in market prices, and after reflecting the impact of hedges and offsetting positions, the aggregate value of our marketable equity investments could decrease by approximately $0.6 billion, based on the value as of December 29, 2018 (a decrease in value of approximately $1.1 billion, based on the value as of December 30, 2017 using an assumed decline of 25%). Beginning in 2018, as explained in "Note 3: Recent Accounting Standards" within the Consolidated Financial Statements, changes in the fair value of our marketable equity securities will be measured and recorded at fair value with changes in fair value recorded through the income statement.
Many of the same factors that could result in an adverse movement of equity market prices affect our non-marketable equity investments, although we cannot always quantify the impacts directly. Financial markets are volatile, which could negatively affect the prospects of the companies we invest in, their ability to enable growthraise additional capital, and the likelihood of our ability to realize value in mobile form factors.our investments through liquidity events such as initial public offerings, mergers, and private sales. These types of investments involve a great deal of risk, and there can be no assurance that any specific company will grow or become successful; consequently, we could lose all or part of our investment. Our non-marketable equity securities had a carrying amount of $3.0 billion as of December 29, 2018 ($2.6 billion as of December 30, 2017) and included our investment in Unisoc of $658 million ($658 million for Unisoc as of December 30, 2017). The carrying amount of our equity method investments was $1.6 billion as of December 29, 2018 ($1.8 billion as of December 30, 2017). Substantially all of our equity method investments balance as of December 29, 2018 was concentrated in our IMFT investment of $1.6 billion ($1.5 billion for IMFT as of December 30, 2017).
COMMODITY PRICE RISK
Although we operate facilities that consume commodities, we are not directly affected by commodity price risk to a material degree. We have established forecasted transaction risk management programs to protect against fluctuations in commodity prices. We may use commodity derivatives contracts, such as commodity swaps, in these hedging programs. In addition, we continue to make significant investmentshave sourcing plans in communications and connectivityplace that mitigate the risk of a potential supplier concentration for tablets, phones, and other connected devices, including multimode LTE modems. Our investment in Cloudera, Inc. (Cloudera), completed in 2014, is evidenceour key commodities.
|
| | |
MD&A | Consolidated Results and Analysis | 44 |
SELECTED FINANCIAL DATA
|
| | | | | | | | | | | | | | | | | | | | |
Years Ended
(Dollars in Millions, Except Per Share Amounts) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 | | Dec 26,
2015 | | Dec 27,
2014 |
| Net revenue | | $ | 70,848 |
| | $ | 62,761 |
| | $ | 59,387 |
| | $ | 55,355 |
| | $ | 55,870 |
|
Gross margin1 | | $ | 43,737 |
| | $ | 39,098 |
| | $ | 36,233 |
| | $ | 34,679 |
| | $ | 35,609 |
|
Gross margin percentage1 | | 61.7 | % | | 62.3 | % | | 61.0 | % | | 62.6 | % | | 63.7 | % |
Research and development1 | | $ | 13,543 |
| | $ | 13,035 |
| | $ | 12,685 |
| | $ | 12,128 |
| | $ | 11,537 |
|
Marketing, general and administrative1 | | $ | 6,750 |
| | $ | 7,452 |
| | $ | 8,377 |
| | $ | 7,930 |
| | $ | 8,136 |
|
R&D and MG&A as a percentage of revenue1 | | 28.6 | % | | 32.6 | % | | 35.5 | % | | 36.2 | % | | 35.2 | % |
Operating income1 | | $ | 23,316 |
| | $ | 18,050 |
| | $ | 13,133 |
| | $ | 14,002 |
| | $ | 15,347 |
|
Net income2 | | $ | 21,053 |
| | $ | 9,601 |
| | $ | 10,316 |
| | $ | 11,420 |
| | $ | 11,704 |
|
Effective tax rate2 | | 9.7 | % | | 52.8 | % | | 20.3 | % | | 19.6 | % | | 25.9 | % |
Earnings per share2
| | | | | | | | | | |
| Basic | | $ | 4.57 |
| | $ | 2.04 |
| | $ | 2.18 |
| | $ | 2.41 |
| | $ | 2.39 |
|
| Diluted | | $ | 4.48 |
| | $ | 1.99 |
| | $ | 2.12 |
| | $ | 2.33 |
| | $ | 2.31 |
|
| Weighted average diluted shares of common stock outstanding | | 4,701 |
| | 4,835 |
| | 4,875 |
| | 4,894 |
| | 5,056 |
|
| Dividends per share of common stock, declared and paid | | $ | 1.20 |
| | $ | 1.0775 |
| | $ | 1.04 |
| | $ | 0.96 |
| | $ | 0.90 |
|
| Net cash provided by operating activities | | $ | 29,432 |
| | $ | 22,110 |
| | $ | 21,808 |
| | $ | 19,018 |
| | $ | 20,418 |
|
| Additions to property, plant and equipment | | $ | 15,181 |
| | $ | 11,778 |
| | $ | 9,625 |
| | $ | 7,326 |
| | $ | 10,105 |
|
| Repurchase of common stock | | $ | 10,730 |
| | $ | 3,615 |
| | $ | 2,587 |
| | $ | 3,001 |
| | $ | 10,792 |
|
| Payment of dividends to stockholders | | $ | 5,541 |
| | $ | 5,072 |
| | $ | 4,925 |
| | $ | 4,556 |
| | $ | 4,409 |
|
| | | | | | | | | | | |
| (Dollars in Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 | | Dec 26,
2015 | | Dec 27,
2014 |
| Property, plant and equipment, net | | $ | 48,976 |
| | $ | 41,109 |
| | $ | 36,171 |
| | $ | 31,858 |
| | $ | 33,238 |
|
| Total assets | | $ | 127,963 |
| | $ | 123,249 |
| | $ | 113,327 |
| | $ | 101,459 |
| | $ | 90,012 |
|
| Debt | | $ | 26,359 |
| | $ | 26,813 |
| | $ | 25,283 |
| | $ | 22,670 |
| | $ | 13,655 |
|
| Stockholders’ equity | | $ | 74,563 |
| | $ | 69,019 |
| | $ | 66,226 |
| | $ | 61,085 |
| | $ | 55,865 |
|
| Employees (in thousands) | | 107.4 |
| | 102.7 |
| | 106.0 |
| | 107.3 |
| | 106.7 |
|
| |
1 | In Q1 2018, we adopted "Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" on a retrospective basis. As a result of the adoption of this standard, cost of sales, operating expenses, and interest and other, net for periods 2017 and 2016 in the preceding table have been restated. |
| |
2 | In Q4 2017, we recognized a $5.4 billion higher income tax expense as a result of one-time impacts from Tax Reform. In 2018, our effective tax rate benefited from the reduction of the U.S. statutory federal tax rate. |
|
| | |
OTHER KEY INFORMATION | | 45 |
Our R&D model is based on a global organization that emphasizes a collaborative approach to identifying and developing new technologies, leading standards initiatives, and influencing regulatory policies to accelerate the adoption of new technologies, including joint pathfinding conducted between researchers at Intel Labs and our business groups. We centrally manage key cross-business group product initiatives to align and prioritize our R&D activities across these groups. In addition, we may augment our R&D activities by investing in companies or entering into agreements with companies that have similar R&D focus areas, as well as directly purchasing or licensing technology applicable to our R&D initiatives. To drive innovation and gain efficiencies, we intend to utilize our investments in intellectual property and R&D across our market segments.
Employees
As of December 26, 2015, we had 107,300 employees worldwide, with approximately 51% of those employees located in the U.S.
Sales and Marketing
CustomersSALES AND MARKETING
CUSTOMERS
We sell our products primarily to OEMsoriginal equipment manufacturers (OEMs) and ODMs.original design manufacturers (ODMs). ODMs provide design and manufacturing services to branded and unbranded private-label resellers. In addition, we sell our products tocustomers include other manufacturers including makers of a wide range ofand service providers, such as industrial and communications equipment. Our customers also include thosecommunication equipment manufacturers and cloud service providers, who buy PC components and our other products through distributor, reseller, retail, and OEM channels throughout the world. For more information about our customers, including customers who accounted for greater than 10% of our net consolidated revenue, see "Note 4: Operating Segments" within the Consolidated Financial Statements.
Our worldwide reseller sales channel consists of thousands of indirect customers—systems builders that purchase Intel® microprocessorsprocessors and other products from our distributors. We have a programincentive programs that allowsallow distributors to sell our microprocessors and other products in small quantities to customers of systems builders. Our microprocessors and other products are also available in direct retail outlets.
Hewlett-Packard Company, our largest customer in 2014, separated into HP Inc. and Hewlett Packard Enterprise Company on November 1, 2015. In 2015, these entities collectively accounted for 18% of our net revenue (18% in 2014 and 17% in 2013), Dell Inc. accounted for 15% of our net revenue (16% in 2014 and 15% in 2013), and Lenovo Group Limited accounted for 13% of our net revenue (12% in 2014 and 12% in 2013). No other customer accounted for more than 10% of our net revenue during such periods. For information about net revenue and operating income by operating segment, and net revenue from unaffiliated customers by country, see "Note 26: Operating Segments and Geographic Information" in Part II, Item 8 of this Form 10-K.
Sales ArrangementsSALES ARRANGEMENTS
Our products are sold through sales offices throughout the world. Sales of our products are frequently made via purchase order acknowledgments that contain standard terms and conditions covering matters such as pricing, payment terms, and warranties, as well as indemnities for issues specific to our products, such as patent and copyright indemnities. From time to time, we may enter into additional agreements with customers covering, for example, changes from our standard terms and conditions, new product development and marketing, and private-label branding, and other matters.branding. Our sales are routinely made using electronic and web-based processes that allow the customer to review inventory availability and track the progress of specific goods ordered. Pricing on particular products may vary based on volumes ordered and other factors. We also offer discounts, rebates, and other incentives to customers to increase acceptance of our products and technology.
Our products are generally shipped under terms that transfer titleproduct shipment from our facilities or delivery to the customer even in arrangements for whichlocation, as determined by the recognition of revenue and related cost of sales is deferred.agreed-upon shipping terms. Our standard terms and conditions of sale typically provide that payment is due at a later date, usually 30 days after shipment or delivery. We assess credit risk through quantitative and qualitative analysis. From this analysis, we establish shipping and credit limits, and determine whether we will seek to use one or more credit support protection devices, such as obtaining a parent guarantee, standby letter of credit, or credit insurance. Credit losses may still be incurred due to bankruptcy, fraud, or other failure of the customer to pay. For information about our allowance for doubtful receivables, see "Schedule II—Valuation and Qualifying Accounts" in Part IV of this Form 10-K.
Our sales to distributors are typically made under agreements allowing for price protection on unsold merchandise and a right of return on stipulated quantities of unsold merchandise. Under the price protection program, we give distributors credits for the difference between the original price paid and the current price that we offer. Our products typically have no contractual limit on the amount of price protection, nor is there a limit on the time horizon under which price protection is granted. The right of return granted generally consists of a stock rotation program in which distributors are able to exchange certain products based on the number of qualified purchases made by the distributor. We have the option to grant credit for, repair, or replace defective products, and there is no contractual limit on the amount of credit that may be granted to a distributor for defective products.
DistributionDISTRIBUTION
Distributors typically handle a wide variety of products, including those that compete with our products, and fill orders for many customers. Customers may place orders directly with us or through distributors. We have several distribution warehouses that are located in proximity to key customers.
Backlog
Over time, our larger customers have generally moved to lean-inventory or just-in-time operations rather than maintaining larger inventories of our products. As our customers continue to lower their inventories, our processes to fulfill their orders have evolved to meet their needs. As a result, our manufacturing production is based on estimates and advance non-binding commitments from customers as to future purchases. Our order backlog as of any particular date is a mix of these commitments and specific firm orders that are primarily made pursuant to standard purchase orders for delivery of products. Only a small portion of our orders are non-cancelable, and the dollar amount associated with the non-cancelable portion is not significant.
Seasonal TrendsSEASONAL TRENDS
Historically, our net revenue has typically been higher in the second half of the year than in the first half of the year, accelerating in the third quarter and peaking in the fourth quarter.
MarketingMARKETING
Our global marketing objectives are to build a strong, well-known, differentiated, and meaningful Intel corporate brand that connectsdrives preference with businesses and consumers, and to offer a limited number of meaningful and valuable brands in our portfolio to aid businesses and consumers in making informed choices about technology purchases. The Intel Core processor family and the Intel Quark,® Quark™, Intel Atom®, Intel® Celeron®, Intel® Pentium®, Intel® Xeon®, Intel® Xeon Phi,Phi™, and Intel® Itanium® trademarks make up our processor brands.
We promote brand awareness and preference, and generate demand through our own direct marketing, as well as through co-marketing programs. Our direct marketing activities primarily include advertising through digital and social media and television, as well as consumer and trade events, industry and consumer communications, and press relations. We market to consumer and business audiences, and focus on building awareness and generating demand for new form factors such as tablets, all-in-one devices, and 2 in 1 systems powered by Intel.our performance leadership products. Our key messaging focuses on increased performance, improved energy efficiency, and other capabilities such as connectivity communications, and security.communications.
|
| | |
OTHER KEY INFORMATION | | 46 |
Purchases byCertain customers often allow them to participate in cooperative advertising and marketing programs such as the Intel Inside® program. This program broadensThese cooperative advertising and marketing programs broaden the reach of our brands beyond the scope of our own direct marketing. Through the Intel Inside program, certainCertain customers are licensed to place Intel® logos on computing devices containing our microprocessors and processor technologies, and to use our brands in their marketing activities. The program includes a market development component that accrues funds based on purchases and partially reimburses customers for marketing activities for products featuring Intel® brands, subject to customers meeting defined criteria. These marketing activities primarily include advertising through digital and social media and television, as well as press relations. We have also entered into joint marketing arrangements with certain customers.
Intellectual Property RightsCOMPETITION
The computing industry is continuously evolving. New and Licensingexisting technology providers regularly introduce new and enhanced technologies and products. The marketplace can change quickly in response to such technologies and products, as well as to changes in customer and end-user requirements, expectations, and preferences. As technologies evolve and new market segments emerge, the boundaries between the market segments that we compete in may also change. We face significant competition in the development and market acceptance of our products in this environment.
In addition, in connection with our strategic transformation to a data-centric company, we have pursued a broader market opportunity by entering new areas and introducing adjacent products. We face new sources of competition in these market segments, including from incumbent competitors with well-established technologies and customer bases, more industry experience, significant financial resources, and greater brand recognition.
COMPETITORS
Our broad product portfolio offers end-to-end solutions to help our customers process, analyze, store, and transfer data, including platform products that range from high-performance platforms for cloud computing workloads to low-power platforms for edge computing devices. We face intense competition across each part of this portfolio from other companies that offer platform products, such as Advanced Micro Devices, Inc. (AMD); accelerator products such as GPUs, including NVIDIA Corporation (NVIDIA), as well as accelerator products such as ASICs, application-specific standard products, and FPGAs; memory and storage products; or connectivity products such as cellular modems. Some of these competitors have developed or utilize competing computing architectures for specific market segments or applications, such as low-power applications or emerging AI workloads. We also compete with internally developed semiconductors from OEMs, cloud service providers, and others, including customers. These companies may choose to vertically integrate their own proprietary semiconductor designs with their software assets, to offer greater product differentiation or increase product margins, or to customize such designs for their specific computing workloads. We may also face new sources of competition as a result of changes in industry participants through, for example, acquisitions or business collaborations, as well as new entrants, which could have a significant impact on our competitive position.
CCG.We are a leading provider of platforms for notebooks, 2-in-1 systems, and desktops, including high-end enthusiast PCs. We face existing and emerging competition in these product areas. Tablets, phones, and other mobile devices offered by numerous vendors are significant competitors to traditional PCs for many usages, and considerable blurring of system form factors currently exists in the marketplace. We face strong competition from AMD as well as from vendors who use applications processors that are based on the ARM* architecture, feature low-power or long battery-life operation, and are built in SoC formats that integrate numerous functions on one chip. We are competing with a number of large companies in the development of 5G cellular modems.
DCG.We are a leading provider of data center platforms, and face competition from incumbent competitors such as AMD, providers of accelerator products such as NVIDIA, and companies using ARM architecture, as well as from new entrants developing products customized for specific data center workloads and from internally developed solutions by cloud service providers and others. We see cloud computing, storage, and networking as areas of significant opportunity in our DCG business, as we seek to help our customers process, analyze, store, and transfer increasing amounts of data in connection with AI, autonomous driving, and other applications. We face strong competition in these areas.
| |
| • | IOTG.We have a long-standing position as a supplier of components and software for embedded products. This marketplace continues to expand significantly, with increasing types and numbers of smart and connected devices for retail, industrial, and consumer uses, including smart video. As this market segment evolves, we face numerous large and small incumbent processor competitors, as well as new entrants that use ARM architecture and other operating systems and software. In addition, the Internet of Things requires a broad range of connectivity solutions and we face competition from companies providing traditional wireless solutions such as cellular, WiFi, and Bluetooth®, as well as several new entrants who are taking advantage of new focused communications protocols. |
NSG.We compete against other providers of NAND flash memory products. We focus our efforts primarily on incorporating NAND flash memory into solution products, such as SSDs supporting enterprise and consumer applications. Our innovative Intel Optane technology offers a unique combination of performance, density, power, non-volatility, and cost advantages that redefines the memory storage hierarchy between conventional DRAM memory and NAND. We believe that our memory offerings, including our Intel Optane technology, complement our product offerings in our other segments.
|
| | |
OTHER KEY INFORMATION | | 47 |
PSG.We are a leading provider of programmable semiconductors and related products, including FPGAs and SoC FPGAs. We face competition from other programmable logic companies, as well as companies that make other types of semiconductor products, such as ASICs, application-specific standard products, GPUs, digital signal processors, and CPUs. Targeted growth areas for our programmable solutions include communications, data center, industrial, and military applications. The FPGA life cycle is long relative to other Intel products—from the time that a design win is secured, it generally takes three or more years before a customer starts volume production and we receive the associated revenue from such design win.
COMPETITIVE FACTORS
Our products primarily compete based on performance, energy efficiency, integration, ease-of-use, innovative design, features, price, quality, reliability, security features, software ecosystem and developer support, time-to-market, brand recognition, customer support and customization, and availability. The importance of these factors varies by the type of end system for the products. For example, performance might be among the most important factors for our products for data center servers, while energy efficiency and price, as well as density and non-volatility, might be among the most important factors for our memory products.
Our key competitive advantages include:
Well-positioned for growth in a new era of data-centric computing.The proliferation of data from the cloud, to the network, and out to the edge; the impending transition to 5G; and the growth of AI and analytics have driven a profound shift in computing, creating massive amounts of largely untapped data and a significant opportunity. We believe we are one of the few companies with a product portfolio that spans this new data-centric world. With products to help our customers process, analyze, store, and transfer large amounts of data, we have the opportunity to be the leading end-to-end platform provider for our customers.
Combination of our network of manufacturing and assembly and test facilities with our global architecture design teams. We have made significant capital and R&D investments in our integrated manufacturing network, which enables us to have more direct control over our design, development, and manufacturing processes; quality control; product cost; production timing; performance; power consumption; and manufacturing yield. We also have the scale and expertise necessary to enable deep engagement with our customers on their product needs. The increased cost of constructing new fabrication facilities to support smaller transistor geometries and larger wafers has led to a reduced number of companies that can build and equip leading-edge manufacturing facilities. Most of our competitors rely on third-party foundries, such as Taiwan Semiconductor Manufacturing Company, Ltd. or Samsung Electronics Co., Ltd., and subcontractors for manufacturing and assembly and test needs.
We also face competitive challenges associated with the development and implementation of our next-generation process technology. We announced earlier in 2018 that volume production on our 10nm process technology was being delayed from the second half of 2018 into 2019. We have made progress on improving 10nm yields during 2018, and we expect 10nm-based volume client systems on retail shelves for the 2019 holiday season. However, the delays in our transition to next-generation process technology may allow competitors to take advantage of potential improvements in performance, energy efficiency, cost and/or other features that may be offered by new process technologies developed by third-party foundries. While we believe we derive significant competitive advantages from being an integrated device manufacturer as discussed above, we are also subject to the inherent risks of next-generation process development.
INTELLECTUAL PROPERTY RIGHTS AND LICENSING
Intel owns and develops significant intellectual property (IP)IP and related IP rights around the world that relate to our products, services, R&D, and other activities and assets. Our IP portfolio includes patents, copyrights, trade secrets, trademarks, trade dress rights, and maskwork rights. We actively seek to protect our global IP rights and to deter unauthorized use of our IP and other assets. Such efforts can be difficult, however, particularly in countries that provide less protection to IP rights and in the absence of harmonized international IP standards. For a discussion of the risks related to IP and our IP rights, please see “We are subject to IP risks and risks associated with litigation and regulatory proceedings” in “Risk Factors” within Other Key Information. While our IP rights are important to our success, our business as a whole is not significantly dependent on any single patent, copyright, or other IP right. See "Risk Factors" in Part I, Item 1A, and "Note 25: Contingencies" in Part II, Item 8 of this Form 10-K.
We have obtained patents in the U.S. and other countries. Because of the fast pace of innovation and product development, and the comparative pace of governments’ patenting processes, our products are often obsolete before the patents related to them expire; in some cases, our products may be obsolete before the patents related to them are granted. As we expand our productsproduct offerings into new industries, we also seek to extend our patent development efforts to patent such products. In addition to developing patents based on our own R&D efforts, we may purchase or license patents from third parties to supplement our patent portfolio.parties. Established competitors in existing and new industries, as well as companies that purchase and enforce patents and other IP, may already have patents covering similar products. There is no assurance that we will be able to obtain patents covering our own products, or that we will be able to obtain licenses from other companies on favorable terms or at all.
The software that we distribute, including software embedded in our component-level and platform products, is entitled to copyright and other IP protection. To distinguish our products from our competitors’ products, we have obtained trademarks and trade names for our products, and we maintain cooperative advertising programs with customers to promote our brands and to identify products containing genuine Intel components. We also protect details about our processes, products, and strategies as trade secrets, keeping confidential the information that we believe provides us with a competitive advantage.
|
| | |
OTHER KEY INFORMATION | | 48 |
Compliance with Environmental, Health,
CRITICAL ACCOUNTING ESTIMATES
The methods, assumptions, and Safety Regulationsestimates that we use in applying our accounting policies may require us to apply judgments regarding matters that are inherently uncertain. We consider an accounting policy to be a critical estimate if: (1) we must make assumptions that were uncertain when the judgment was made, and (2) changes in the estimate assumptions, or selection of a different estimate methodology could have a significant impact on our financial position and the results that we report in our consolidated financial statements. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made.
Our compliance efforts focusRefer to "Note 2: Accounting Policies" within the Consolidated Financial Statements for further information on monitoring regulatoryour critical accounting estimates and resource trendspolicies, which are as follows:
Inventories-the transition of manufacturing costs to inventory, excluding factory excess capacity costs. Inventory reflected at the lower of cost or net realizable value considering future demand and setting company-wide performance targets for key resourcesmarket conditions;
Property, plant and emissions. These targets address several parameters, including product design; chemical, energy,equipment - the useful life determination and water use; waste recycling; the sourcerelated timing of certain mineralswhen depreciation begins;
Long-lived assets - the valuation methods and assumptions used in assessing the impairment of property, plant and equipment, identified intangibles, and goodwill, including the determination of asset groupings and the identification and allocation of goodwill to reporting units;
Non-marketable equity investments - the valuation estimates and assessment of impairment and observable price adjustments;
Business combinations - the assumptions used to allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions;
Income taxes - the identification and measurement of deferred tax assets and liabilities, and estimates associated with Tax Reform; and
Loss contingencies - the estimation of when a loss is probable and reasonably estimable.
RISK FACTORS
The following risks could materially and adversely affect our business, financial condition, cash flows, and results of operations, and the trading price of our common stock could decline. These risk factors do not identify all risks that we face; our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. Refer also to the other information set forth in this Annual Report on Form 10-K, including in MD&A and our financial statements and the related notes.
CHANGES IN PRODUCT DEMAND CAN ADVERSELY AFFECT OUR FINANCIAL RESULTS.
Demand for our products is variable and hard to predict. Our products are used in different market segments, and demand for our products may vary within or among the market segments served by our PC-centric and data-centric businesses. It is difficult to forecast these changes and their impact. For example, demand for our platform products may increase in one or more market segments while decreasing in others. Changes in the demand for our products, particularly our CCG and DCG platform products, may reduce our revenue, lower our gross margin, or require us to write down the value of our assets.
Important factors that could lead to variation in the demand for our products include:
business conditions, including downturns in the market segments in which we operate, or in the global or regional economies;
consumer confidence or income levels, and the levels of customer capital spending, which may be impacted by changes in market conditions, including changes in government borrowing, taxation, or spending policies; the credit market; or expected inflation, employment, and energy or other commodity prices;
our ability to timely introduce competitive products;
competitive and pricing pressures, including new product introductions and other actions taken by competitors;
the level of our customers’ inventories;
customer order patterns, including order cancellations, which may be affected by maturing product cycles, disruptions affecting customers, and other factors;
market acceptance and industry support of our new and maturing products, including the introduction and availability of products used together with our products; climate change;and
customer product needs and emissions.
As a company, we focus on reducing natural resource use, the solid and chemical waste by-products of our manufacturing processes, and the environmental impact of our products. We currently use a variety of materials in our manufacturing process that have the potential to adversely impact the environment and are subject to a variety of environmental, health, and safety (EHS) laws and regulations. Over the past several years, we have significantly reduced the use of lead and halogenated flame retardants in our products and manufacturing processes.
We work with non-governmental organizations (NGOs), OEMs, and retailers to help manage e-waste (including electronic products nearing the end of their useful lives) and to promote recycling. The European Union requires producers of certain electrical and electronic equipment to develop programs that let consumers return products for recycling. Many U.S. states and countries in Latin America and Asia also have or are developing similar e-waste take-back laws. Although these laws are typically targeted at the end electronic product and not components such as microprocessors, the inconsistency of many e-waste take-back laws,emerging technology trends, including changes in our product offerings,the levels and the lacknature of local e-waste management options in many areas pose a challenge for our compliance efforts.customer and end-user computing workloads.
|
| | |
OTHER KEY INFORMATION | | 49 |
Due to the complexity of our manufacturing operations, we may be unable to timely respond to fluctuations in demand and we may incur significant charges and costs.Because we own and operate high-tech fabrication facilities, our operations have high costs that are fixed or difficult to reduce in the short term, including our costs related to utilization of existing facilities, facility construction and equipment, R&D, and the employment and training of a highly skilled workforce. If product demand decreases or we fail to forecast demand accurately, we could be required to write off inventory or record excess capacity charges, which would lower our gross margin. If the demand decrease is prolonged, our manufacturing or assembly and test capacity could be underutilized, and we may be required to write down our long-lived assets, which would increase our expenses. We are anmay also be required to shorten the useful lives of under-used facilities and equipment and accelerate depreciation. Conversely, if product demand increases, we may be unable to add capacity fast enough to meet market demand, which could result in a loss of revenue opportunities or market share, legal claims, and/or damage to customer relationships.
We face significant competition.The industry leaderin which we operate is highly competitive and subject to rapid technological and market developments, changes in industry standards, changes in customer needs, and frequent product introductions and improvements. If we do not anticipate and respond to these developments, our competitive position may weaken, and our products or technologies might be uncompetitive or become obsolete. Our products primarily compete based on performance, energy efficiency, integration, ease-of-use, innovative design, features, price, quality, reliability, security features, software ecosystem and developer support, time-to-market, brand recognition, customer support and customization, and availability. The importance of these factors may vary by product—for example, if we do not continue to introduce data center platform products with performance leadership, our competitive position and market segment share in our effortsDCG business may be adversely affected. We will not realize our strategic goal to build ethical sourcingbecome the leading end-to-end provider for the new data-centric era of mineralscomputing if our products do not meet our customers’ needs in an increasingly competitive landscape.
We face intense competition across our product portfolio from companies offering platform products; accelerator products such as GPUs, ASICs, application-specific standard products, and FPGAs; memory and storage products; connectivity products such as cellular modems; and other semiconductor products. Some of these competitors have developed or utilize competing computing architectures for specific market segments or applications, and these architectures can produce beneficial network effects for competitors if an ecosystem of customers and application developers for such architectures grows at scale. We also compete with internally developed semiconductors from OEMs, cloud service providers, and others, including customers, and with new entrants. Introduction of competitive new products, aggressive pricing, and other actions taken by competitors could harm demand for our products and our business. Additionally, a number of business combinations and strategic partnerships in the semiconductor industry have occurred over the last several years, and more could occur in the future. Consolidation could lead to fewer customers, partners, or suppliers, any of which could negatively affect our financial results.
To compete successfully, we must maintain a successful R&D effort, develop new products and production processes, and improve our existing products and processes ahead of competitors. For example, we invest substantially in our network of manufacturing and assembly and test facilities, including "conflict minerals"the construction of new fabrication facilities to support smaller transistor geometries, and in the development of the advanced manufacturing technologies to produce such transistors. We do not expect all of our R&D investments to be successful. We may be unable to develop and market new products successfully, and the products and technologies we invest in and develop may not be well received by customers. Our R&D investments may not contribute to our future operating results for several years, if at all, and such contributions may not meet our expectations or even cover the costs of such investments. Additionally, the products and technologies offered by others may affect demand for, or pricing of, our products.
If we are not able to compete effectively, our financial results will be adversely affected, including reduced revenue and gross margin, and we may be required to accelerate the write-down of the value of certain assets.
Our investments in new businesses, products, and technologies are inherently risky and may not succeed. In recent years, in connection with our strategic transformation to a data-centric company, we have entered new areas and introduced adjacent products in programmable solutions, AI, and autonomous driving. We have also expanded our adjacent product offerings in client computing, the data center, the Internet of Things, and memory, with offerings such as modems, silicon photonics solutions, and Intel Optane technology products. As a result, we face new sources of competition, including, in certain of these market segments, from incumbent competitors with established technologies and customer bases and greater brand recognition. These developing products and market segments may require significant investment, may not grow as significantly as projected, or at all, or may utilize technologies that are different from the DRCones that we develop and adjoining countries.manufacture, and we may not realize an adequate return on our investments. For example, AI and machine learning are increasingly driving innovations in technology, but if they fail to deliver the benefits anticipated, or if our customers use competing technologies for these workloads, we may not realize a return on our investments in these areas. To be successful, we need to cultivate new industry relationships with customers and partners in these market segments. In 2013,addition, we accomplishedmust continually improve the cost, performance, integration, and energy efficiency of our goalproducts, as well as expand our software capabilities to provide customers with comprehensive computing solutions. Despite our ongoing efforts, there is no guarantee that we will achieve or maintain market demand or acceptance for our products and services in these various market segments.
Changes in the mix of products sold may impact our financial results. Our pricing and margins vary across our products and market segments due in part to marketability of our products and differences in their features or manufacturing costs. For example, our platform product offerings range from lower-priced and entry-level platforms, such as those based on Intel Atom processors, to higher-end platforms based on Intel Xeon processors. Our adjacent products also typically have significantly lower margins than our higher-priced platform products. If demand shifts from our higher-priced to lower-priced platform products in any of our market segments, or if our adjacent products represent an increasingly greater share of our mix of products sold, our gross margin percentage may decrease.
|
| | |
OTHER KEY INFORMATION | | 50 |
WE OPERATE GLOBALLY AND ARE SUBJECT TO SIGNIFICANT RISKS IN MANY JURISDICTIONS.
Global or regional conditions may harm our financial results. We have manufacturing, assembly and test, R&D, sales, and other operations in many countries, and some of our business activities may be concentrated in one or more geographic areas. Moreover, sales outside the U.S. accounted for approximately 84% of our revenue for the fiscal year ended December 29, 2018. As a result, our operations and our financial results, including our ability to manufacture, microprocessorsassemble and test, design, develop, or sell products, and the demand for our products, may be adversely affected by a number of global and regional factors outside of our control.
Adverse changes in global or regional economic conditions, including recession or slowing growth, changes or uncertainty in fiscal or monetary policy, higher interest rates, tighter credit, inflation, lower capital expenditures by businesses including on IT infrastructure, increases in unemployment, and lower consumer confidence and spending, could significantly harm demand for our products and make it more challenging to forecast our operating results and make business decisions, including regarding prioritization of investments in our business. An economic downturn or increased uncertainty may also lead to increased credit and collectibility risks, higher borrowing costs or limits on our access to capital markets, reduced liquidity, adverse impacts on our suppliers, failures of counterparties and other financial institutions, and declines in the value of our financial instruments.
International trade disputes may result in increased tariffs, trade barriers, and other protectionist measures that could increase our manufacturing costs, make our products less competitive, reduce consumer demand, or impede or slow the movement of our goods across borders. Increasing protectionism and economic nationalism may lead to further changes in trade policy, domestic sourcing initiatives, or other formal and informal measures that could make it more difficult to sell our products in some markets.
We may be adversely affected by other global and regional factors, including:
geopolitical and security issues, such as armed conflict and civil or military unrest, political instability, human rights concerns, and terrorist activity;
natural disasters, public health issues, and other catastrophic events;
inefficient infrastructure and other disruptions, such as supply chain interruptions and large-scale outages or unreliable provision of services from utilities, transportation, data hosting, or telecommunications providers;
formal or informal imposition of new or revised export, import, or doing-business regulations, including trade sanctions and tariffs, which could be changed without notice;
government restrictions on, or nationalization of our operations in any country, or restrictions on our ability to repatriate earnings from a particular country;
differing employment practices and labor issues;
ineffective legal protection of our IP rights in certain countries;
local business and cultural factors that differ from our current standards and practices;
continuing uncertainty regarding social, political, immigration, and tax and trade policies in the U.S. and abroad, including as a result of the United Kingdom's vote to withdraw from the European Union; and
fluctuations in the market values of our domestic and international investments, which can be negatively affected by liquidity, credit deterioration or losses, interest rate changes, financial results, political risk, sovereign risk, or other factors.
We are subject to laws and regulations worldwide that may differ among jurisdictions, affecting our operations in areas including, but not limited to: IP ownership and infringement; tax; import and export requirements; anti-corruption; foreign exchange controls and cash repatriation restrictions; data privacy requirements; competition; advertising; employment; product regulations; environment, health, and safety requirements; and consumer laws. Compliance with such requirements may be onerous and expensive, and may otherwise impact our business operations negatively. For example, unfavorable developments with evolving laws and regulations worldwide related to 5G or autonomous driving technology may limit global adoption, impede our strategy, and negatively impact our long-term expectations for our investments in these areas. Although we have policies, controls, and procedures designed to help ensure compliance with applicable laws, there can be no assurance that our employees, contractors, suppliers, and/or agents will not violate such laws or our policies. Violations of these laws and regulations could result in fines; criminal sanctions against us, our officers, or our employees; prohibitions on the conduct of our business; and damage to our reputation.
We may be affected by fluctuations in currency exchange rates.We are potentially exposed to adverse as well as beneficial movements in currency exchange rates. Although most of our sales occur in U.S. dollars, expenses may be paid in local currencies. An increase in the value of the dollar could increase the real cost to our customers of our products in those markets outside the U.S. where we sell in dollars, and a weakened dollar could increase the cost of expenses such as payroll, utilities, tax, and marketing expenses, as well as overseas capital expenditures. We also conduct certain investing and financing activities in local currencies. Our hedging programs may not be effective to offset any, or more than a portion, of the adverse impact of currency exchange rate movements; therefore, changes in exchange rates could harm our results of operations and financial condition.
|
| | |
OTHER KEY INFORMATION | | 51 |
Catastrophic events could have a material adverse effect on our operations and financial results.Our operations and business, and those of our customers and suppliers, could be disrupted by natural disasters; industrial accidents; public health issues; cybersecurity incidents; interruptions of service from utilities, transportation, telecommunications, or IT systems providers; or other catastrophic events. Our headquarters and many of our operations and facilities are in locations that are DRC conflict-free for tantalum, tin, tungsten,prone to earthquakes and gold. We continue our work to establish DRC conflict-free supply chains for our company and our industry, and are moving beyond microprocessors to validate our broader product base as DRC conflict-free in 2016 for these four minerals.
We seek to reduce our global greenhouse gas emissions by investing in energy conservation projects in our factories and working with suppliers to improve energy efficiency. We take a holistic approach to power management, addressing the challenge at the silicon, package, circuit, microarchitecture, macroarchitecture, platform, and software levels. We recognize thatother natural disasters. Global climate change may result in certain natural disasters occurring more frequently or with greater intensity, such as drought, wildfires, storms, sea-level rise, and flooding, and could disrupt the availability of water necessary for the operation of our fabrication facilities located in semi-arid regions. Catastrophic events could make it difficult or impossible to manufacture or deliver products to our customers, receive production materials from our suppliers, or perform critical functions, which could adversely affect our revenue and require significant recovery time and expenditures to resume operations. While we maintain business recovery plans that are intended to enable us to recover from natural disasters or other events that can be disruptive to our business, some of our systems are not fully redundant and we cannot be sure that our plans will fully protect us from all such disruptions. Furthermore, even if our operations are unaffected or recover quickly, if our customers cannot timely resume their own operations due to a catastrophic event, they may reduce or cancel their orders, which may adversely affect our results of operations.
We maintain a program of insurance coverage for a variety of property, casualty, and other risks. The types and amounts of insurance we obtain vary depending on availability, cost, and decisions with respect to risk retention. Some of our policies have large deductibles and broad exclusions. In addition, one or more of our insurance providers may be unable or unwilling to pay a claim. Losses not covered by insurance may be large, which could harm our results of operations and financial condition.
Damage to our reputation could damage our business. Our reputation is a critical factor in our relationships with customers, employees, governments, suppliers, and other stakeholders. If we fail to address, or appear to fail to address, issues that give rise to reputational risk, including those described throughout this "Risk Factors" section, we could significantly harm our reputation and our brands. Our reputation may also be damaged by how we respond to corporate crises. Corporate crises can arise from catastrophic events as well as from incidents involving unethical behavior or misconduct; product quality, security, or safety issues; allegations of legal noncompliance; internal control failures; corporate governance issues; data breaches; workplace safety incidents; environmental incidents; the use of our products for illegal or objectionable applications; marketing practices; media statements; the conduct of our suppliers or representatives; and other issues or incidents that, whether actual or perceived, result in adverse publicity. If we fail to respond quickly and effectively to address such crises, the ensuing negative public reaction could significantly harm our reputation and our brands and could lead to increases in litigation claims and asserted damages or subject us to regulatory actions or restrictions.
Damage to our reputation could reduce demand for our products and adversely affect our business and operating environment. It could reduce investor confidence in us, adversely affecting our stock price. It may also limit our ability to be seen as an employer of choice when competing for highly skilled employees. Moreover, repairing our reputation and brands may be difficult, time-consuming, and expensive.
WE ARE VULNERABLE TO PRODUCT AND MANUFACTURING-RELATED RISKS.
We are subject to risks associated with the development and implementation of new manufacturing process technology. Production of integrated circuits is a complex process. Realizing the economics of Moore’s Law is a strategic priority, and we are continually engaged in the development of next-generation process technologies at increasingly advanced nodes. We may not be successful or efficient in developing or implementing new process nodes and production processes. Our efforts to innovate involve significant expense and carry inherent risks, including difficulties in designing and developing such next-generation process technologies, failures to realize the expected benefits of next-generation process technologies, and investments in manufacturing assets and facilities that are made years in advance of the process node introduction.
Risks inherent in the development of next-generation process technologies include production timing delays, lower-than-anticipated manufacturing yields, and product defects and errata. For example, we announced earlier in 2018 that volume production on our 10nm process technology was being delayed from the second half of 2018 into 2019. We have made progress on improving 10nm yields during 2018, and we expect 10nm-based volume client systems on retail shelves for the 2019 holiday season. However, the delays in our transition to next-generation process technology may allow competitors to take advantage of potential improvements in performance, energy efficiency, cost and/or other features that may be offered by new process technologies developed by third-party foundries. Furthermore, without the benefit of next-generation process nodes, including additional competitive features on our products may result in larger die size products, manufacturing supply constraints and increased product costs.
Disruptions in the production process can also result from errors, defects in materials, delays in obtaining or revising operating permits and licenses, interruptions in our supply of materials or resources, and disruptions at our fabrication and assembly and test facilities due to accidents, maintenance issues, or unsafe working conditions—all of which could affect the timing of production ramps and yields.
Production issues can lead to increased costs and may affect our ability to meet product demand, which could adversely impact our business and the results of operations. In addition, if we face delays in the timing of our product introductions, we could become less competitive and lose revenue opportunities, and our gross margin could be adversely affected because we incur significant costs up front in the product development stage and earn revenue to offset these costs over time.
|
| | |
OTHER KEY INFORMATION | | 52 |
We face supply chain risks. Thousands of suppliers provide materials and equipment that we use in production and other aspects of our business. Where possible, we seek to have several sources of supply. However, for certain materials and equipment, including photolithography tools, we may rely on a single or a limited number of suppliers, or upon suppliers in a single location. In addition, supplier consolidation or business failures could impact the nature, quality, availability, and pricing of the products and services available to us. The inability of suppliers to deliver necessary production materials or equipment could disrupt our production processes and make it more difficult for us to implement our business strategy. Production could be disrupted by the unavailability of resources, such as water, silicon, electricity, gases, and other materials. The unavailability or reduced availability of materials or resources may require us to reduce production or incur additional costs, which could harm our business and results of operations. Our manufacturing operations and ability to meet product demand may also be impacted by IP or other litigation between our suppliers, where an injunction against Intel or a supplier could interrupt the availability of goods or services supplied to Intel by others.
We also rely on third-party providers to manufacture and assemble and test certain components or products. These have included components and products related to networking, communications, programmable semiconductor solutions, and memory, and may include these and other components and products in the future. If any of these third parties are unable to perform these services on a timely or cost-effective basis, in sufficient volumes, or at all, we may encounter supply delays or disruptions or incur additional costs that could adversely affect our business and financial results. For example, while we have an agreement providing for the supply of 3D XPoint memory from IMFT for a period following the close of Micron’s purchase of our interest in IMFT, we will need to fund and develop internal manufacturing options to continue 3D XPoint memory supply in the longer term.
In addition, increased regulation or stakeholder expectations regarding responsible sourcing practices could cause general economic risk.our compliance costs to increase or result in publicity that negatively affects our reputation. Moreover, given that we use many materials in the manufacturing of our products and rely on many suppliers to provide these materials, but do not directly control the procurement or employment practices of such suppliers, we could be subject to similar financial or reputational risks as a result of our suppliers' conduct.
We are subject to the risks of product defects, errata, or other product issues. Product defects and errata (deviations from published specifications) may result from problems in our product design or our manufacturing and assembly and test processes. Components and products we purchase or license from third-party suppliers, or attain through acquisitions, may also contain defects. We could face risks if products that we design, manufacture, or sell, or that include our technology, cause personal injury or property damage, even where the cause is unrelated to product defects or errata. These risks may increase as our products are introduced into new devices, market segments, technologies, or applications, including transportation and autonomous driving, healthcare, communications, and financial services, and other industrial, infrastructure, and consumer uses. Costs from defects, errata, or other product issues could include:
writing off some or all of the value of inventory;
recalling products that have been shipped;
providing product replacements or modifications;
reimbursing customers for certain costs they incur;
defending against litigation and/or paying resulting damages; and
paying fines imposed by regulatory agencies.
These costs could be large and may increase expenses and lower gross margin, and result in delay or loss of revenue. Any product defects, errata, or other issues could also damage our reputation, negatively affect product demand, delay product releases, or result in legal liability. The announcement of product defects or errata could cause customers to purchase products from competitors. Any of these occurrences could harm our business and financial results. In addition, although we maintain liability insurance, our coverage has certain exclusions and/or may not adequately cover liabilities incurred. Our insurance providers may be unable or unwilling to pay a claim, and losses not covered by insurance could be large, which could harm our financial condition.
We are subject to risks associated with environmental, health, and safety regulations. The manufacturing and assembly and test of our products require the use of hazardous materials that are subject to a broad array of environmental, health, and safety laws and regulations. Our failure to comply with these laws or regulations could result in:
regulatory penalties, fines, and legal liabilities;
suspension of production;
alteration of our manufacturing and assembly and test processes;
damage to our reputation; and
restrictions on our operations or sales.
Our failure to manage the use, transportation, emissions, discharge, storage, recycling, or disposal of hazardous materials could lead to increased costs or future liabilities. Our ability to expand or modify our manufacturing capability in the future may be impeded by environmental regulations, such as air quality and wastewater requirements. Environmental laws and regulations could also require us to acquire additional pollution abatement or remediation equipment, modify product designs, or incur other expenses. Regulations in response to climate change could result in increased manufacturing costs associated with air pollution requirements, and increased compliance and energy costs. Many new materials that we are evaluating for use in our operations may be subject to regulation under environmental laws and regulations. These restrictions could harm our business and results of operations by increasing our expenses or requiring us to alter manufacturing and assembly and test processes.
|
| | |
OTHER KEY INFORMATION | | 53 |
WE ARE SUBJECT TO CYBERSECURITY AND PRIVACY RISKS.
We face risks related to cybersecurity threats and incidents. We regularly face attempts by others to gain unauthorized access through the Internet, or to introduce malicious software, to our IT systems. Additionally, individuals or organizations, including malicious hackers, state-sponsored organizations, insider threats including employees and third-party service providers, or intruders into our physical facilities, may attempt to gain unauthorized access and corrupt the processes of hardware and software products that we manufacture and services we provide. Due to the widespread use of our products, we are a frequent target of computer hackers and organizations that intend to sabotage, take control of, or otherwise corrupt our manufacturing or other processes, products, and services. We are also a target of malicious attackers who attempt to gain access to our network or data centers or those of our customers or end users; steal proprietary information related to our business, products, employees, and customers; or interrupt our systems and services or those of our customers or others. Such attempts are increasing in number and in technical sophistication, and if successful, could expose us and the affected parties to risk of loss or misuse of proprietary or confidential information or disruptions of our business operations. Our IT infrastructure also includes products and services provided by third parties, and these providers may experience breaches of their systems and products that impact the security of our systems and our proprietary or confidential information.
From time to time, we encounter intrusions or unauthorized access to our network, products, services, or infrastructure. To date, none have resulted in any material adverse impact to our business or operations. Such incidents, whether or not successful, could result in our incurring significant costs related to, for example, rebuilding internal systems, writing down inventory value, implementing additional threat protection measures, providing modifications to our products and services, defending against litigation, responding to regulatory inquiries or actions, paying damages, providing customers with incentives to maintain the business relationship, or taking other remedial steps with respect to third parties, as well as reputational harm. In addition, these threats are constantly evolving, thereby increasing the difficulty of successfully defending against them or implementing adequate preventative measures. While we seek to detect and investigate all unauthorized attempts and attacks against our network, products, and services, and to prevent their recurrence where practicable through changes to our internal processes and tools and/or changes or updates to our products and services, we remain potentially vulnerable to additional known or unknown threats. In some instances, we, our customers, and the users of our products and services may be unaware of an incident or its magnitude and effects.
We face risks related to security vulnerabilities in our products. We or third parties regularly identify security vulnerabilities with respect to our processors and other products, as well as the operating systems and workloads running on them. As we have become a more data-centric company, our processors and other products are being used in more and different critical application areas that create new or increased cybersecurity and privacy risks, including applications that gather and process large amounts of data, such as the cloud or Internet of Things, and critical infrastructure and automotive applications. The security vulnerabilities identified in our processors include a category known as side-channel exploits, such as the variants referred to as “Spectre” and “Meltdown.” Additional categories and variants have been and may continue to be identified. Publicity about these and other security vulnerabilities and attempted or successful exploits, whether accurate or inaccurate, may result in increased attempts by third parties to identify additional vulnerabilities. Although vulnerabilities have often been discovered and mitigated in advance of being exploited, it is possible that vulnerabilities may not be mitigated before they become known. We, our customers, and the users of our products may not promptly learn of or be able to fully assess the magnitude or effects of a vulnerability, including the extent, if any, to which a vulnerability has been exploited. Subsequent events or new information could develop that changes our assessment of the impact of a security vulnerability, including additional information learned as we develop and deploy mitigations or updates, become aware of additional variants, evaluate the competitiveness of existing and new products, address future warranty or other claims or customer satisfaction considerations, as well as developments in the course of any litigation or regulatory inquiries or actions over these matters.
Mitigation techniques designed to address security vulnerabilities, including software and firmware updates or other preventative measures, may not be available on a timely basis—or at all—or may not operate as intended or effectively resolve vulnerabilities for all applications. In addition, we may be required to rely on third parties, including hardware, software, and services vendors, as well as our customers and end users, to develop and deploy mitigation techniques, and the availability, effectiveness, and performance impact of mitigation techniques may depend solely or in part on the actions of these third parties in determining whether and how to develop and deploy mitigations. We and such third parties may make prioritization decisions about which vulnerabilities to address, which could delay or limit development or deployment of a mitigation and harm our reputation. Security vulnerabilities and/or mitigation techniques may result in adverse performance effects, reboots, system instability or unavailability, loss of functionality, data loss or corruption, unpredictable system behavior, decisions by customers and end users to limit or change the applications in which they use our products or product features, or the misappropriation of data by third parties.
Security vulnerabilities and any limitations of, or adverse effects resulting from, mitigation techniques can adversely affect our results of operations, financial condition, customer relationships, prospects, and reputation in a number of ways, any of which may be material. For furtherexample, whether or not they involve attempted or successful exploits, they may result in our incurring significant costs related to developing and deploying updates and mitigations, writing down inventory value, defending against product claims and litigation, responding to regulatory inquiries or actions, paying damages, addressing customer satisfaction considerations, providing product replacements or modifications, or taking other remedial steps with respect to third parties. Adverse publicity about security vulnerabilities or mitigations could damage our reputation with customers or users and reduce demand for our products and services. These effects may be greater to the extent that competing products are not susceptible to the same vulnerabilities or if vulnerabilities can be more effectively mitigated in competing products. Moreover, third parties may release information regarding potential vulnerabilities of our products before mitigations are available, which, in turn, could lead to attempted or successful exploits, adversely affect our ability to introduce mitigations, or otherwise harm our business and reputation. For example, information on the “Spectre” and “Meltdown” side-channel variants was prematurely reported publicly before mitigation techniques to address all vulnerabilities were made widely available, and certain of the mitigation techniques did not operate as intended.
|
| | |
OTHER KEY INFORMATION | | 54 |
We may be subject to theft, loss, or misuse of personal data about our employees, customers, or other third parties, which could increase our expenses, damage our reputation, or result in legal or regulatory proceedings. The theft, loss, or misuse of personal data collected, used, stored, or transferred by us to run our business could result in significantly increased business and security costs or costs related to defending legal claims. Global privacy legislation, enforcement, and policy activity in this area are rapidly expanding and creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant, and noncompliance could expose us to significant monetary penalties, damage to our reputation, suspension of online services or sites in certain countries, and even criminal sanctions. Even our inadvertent failure to comply with federal, state, or international privacy-related or data protection laws and regulations could result in audits, regulatory inquiries, or proceedings against us by governmental entities or other third parties.
WE ARE SUBJECT TO IP RISKS AND RISKS ASSOCIATED WITH LITIGATION AND REGULATORY PROCEEDINGS.
We may be unable to enforce or protect our IP rights. We regard our patents, copyrights, trade secrets, and other IP rights as important to the success of our business. We rely on IP law—as well as confidentiality and licensing agreements with our customers, employees, technology development partners, and others—to protect our IP rights. Our ability to enforce these rights is subject to general litigation risks, as well as uncertainty as to the enforceability of climate change, see "Risk Factors"our IP rights in Part I, Item 1Avarious countries. Enforcement may be costly and time-consuming and may divert management attention. When we seek to enforce our rights, we may be subject to claims that our IP rights are invalid, not enforceable, or licensed to an opposing party. Our assertion of this Form 10-K. We seeIP rights may result in another party seeking to assert claims against us, which could harm our business. Governments may adopt regulations—and governments or courts may render decisions—requiring compulsory licensing of IP rights, or governments may require products to meet standards that favor local companies. Our inability to enforce our IP rights under any of these circumstances may harm our competitive position and business. In addition, the theft or unauthorized use or publication of our trade secrets and other confidential business information could harm our competitive position and reduce acceptance of our products; as a potential for higher energy costs driven by climate change regulations. Thisresult, the value of our investment in R&D, product development, and marketing could include items appliedbe reduced.
Our licenses with other companies and participation in industry initiatives may allow competitors to utilityuse our patent rights. Technology companies often bilaterally license patents between each other to settle disputes or as part of business agreements. Our competitors may have licenses to our patents, and under current case law, some of the licenses may exhaust our patent rights as to licensed product sales under some circumstances. Our participation in industry standards organizations or with other industry initiatives may require us to license our patents to companies that adopt industry-standard specifications. Depending on the rules of the organization, government regulations, or court decisions, we might have to grant licenses to our patents for little or no cost, and as a result, we may be unable to enforce certain patents against others, our costs of enforcing our licenses or protecting our patents may increase, and the value of our IP rights may be impaired.
Third parties may assert claims based on IP rights against us or our products, which could harm our business.We may face claims based on IP rights from individuals and companies, including claims from those who have aggregated patents acquired from multiple sources to form a new, larger portfolio to assert claims against us and other companies. Additionally, large patent portfolio owners may divest portions of their portfolios to more than one individual or company, increasing the number of parties who own IP rights previously all held by a single party. We are passed alongtypically engaged in a number of disputes involving IP rights. Claims that our products or processes infringe the IP rights of others, regardless of their merits, could cause us to incur large costs to respond to, defend, and resolve the claims, and they may divert the efforts and attention of our management and technical personnel from our business and operations. In addition, we may face claims based on the alleged theft or unauthorized use or disclosure of third-party trade secrets or confidential information or end-user data that we obtain in conducting our business. Any such incidents and claims could severely disrupt our business, and we could suffer losses, including the cost of product recalls and returns, and reputational harm. Furthermore, we have agreed to indemnify customers for certain IP rights claims against them. IP rights claims against our customers could also limit demand for our products or disrupt our customers’ businesses, which could in turn adversely affect our results of operations.
As a result of IP rights claims, we could:
pay monetary damages, including payments to satisfy indemnification obligations, or royalties;
stop manufacturing, using, selling, offering to sell, or importing products or technology subject to claims;
need to develop other products or technology not subject to claims, which could be time-consuming or costly; and/or
enter into settlement and license agreements, which agreements may not be available on commercially reasonable terms.
These IP rights claims could harm our competitive position, result in expenses, or require us to impair our assets. If we alter or stop production of affected items, our revenue could be harmed.
We rely on access to third-party IP, which may not be available to us on commercially reasonable terms or at all.Many of our products include third-party technology and/or implement industry standards, and may require licenses from third parties. Based on past experience and industry practice, we believe such licenses generally can be obtained on commercially reasonable terms. However, there is no assurance that the necessary licenses can be obtained on acceptable terms or at all. Failure to obtain the right to use third-party technology, or to license IP on commercially reasonable terms, could preclude us from selling certain products or otherwise have a material adverse impact on our financial condition and operating results.
|
| | |
OTHER KEY INFORMATION | | 55 |
We are subject to risks associated with litigation and regulatory proceedings.We may face legal claims or regulatory matters involving stockholder, consumer, competition, commercial, IP, and other issues on a global basis. As described in "Note 20: Commitments and Contingencies" within the Consolidated Financial Statements, we are engaged in a number of litigation and regulatory matters. Litigation and regulatory proceedings are inherently uncertain, and adverse rulings could occur, including monetary damages, or an injunction stopping us from manufacturing or selling certain products, engaging in certain business practices, or requiring other remedies, such as compulsory licensing of patents. An unfavorable outcome may result in a material adverse impact on our business, financial condition, and results of operations. In addition, regardless of the outcome, litigation and regulatory proceedings can be costly, time-consuming, disruptive to our operations, and distracting to management.
WE MUST ATTRACT, RETAIN, AND MOTIVATE KEY EMPLOYEES.
To be competitive, we must attract, retain, and motivate executives and other key employees. Hiring and retaining qualified executives, scientists, engineers, technical staff, and sales representatives are critical to our business, and competition for highly skilled employees in our industry can be intense. In addition, changes in immigration policies may impair our ability to recruit and hire technical and professional talent. Changes in the interpretation and application of employment-related laws to our workforce practices may also result in increased operating costs and less flexibility in how we meet our changing workforce needs. To help attract, retain, and motivate qualified employees, we use share-based awards, such as RSUs, and performance-based cash incentive awards. Our employee hiring and retention also depend on our ability to build and maintain a diverse and inclusive workplace culture and be viewed as an employer of choice. If our share-based or other compensation programs and workplace culture cease to be viewed as competitive, our ability to attract, retain, and motivate employees could be weakened, which could harm our results of operations. Furthermore, changes in our management team may disrupt our business, and the failure to successfully transition and assimilate key employees could adversely affect our results of operations.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR STRATEGIC TRANSACTIONS.
Our acquisitions, divestitures, and other strategic transactions could fail to achieve our financial or strategic objectives, disrupt our ongoing business, and adversely impact our results of operations. In furtherance of our business strategy, we routinely evaluate opportunities and enter into agreements for possible acquisitions, divestitures, and other strategic transactions. These transactions involve numerous risks, including:
we may not be able to identify opportunities in a timely manner or on terms acceptable to us;
the transaction may not advance our business strategy and its anticipated benefits may never materialize;
we may experience disruption of our ongoing operations and our management’s attention may be diverted;
we may fail to complete a transaction in a timely manner, if at all, due to our inability to obtain required government or other approvals, IP disputes or other litigation, difficulty in obtaining financing on terms acceptable to us, or other unforeseen factors;
we may not realize a satisfactory return on our investment, potentially resulting in an impairment of goodwill and other assets, and restructuring charges;
we may be unable to effectively enter new market segments through our strategic transactions or retain customers and partners of acquired businesses;
we may be unable to retain key personnel of acquired businesses or may have difficulty integrating employees, business systems, and technology;
controls, processes, and procedures of acquired businesses may not adequately ensure compliance with laws and regulations, and we may fail to identify compliance issues or liabilities;
we may fail to identify, or may underestimate, commitments, liabilities, and other risks associated with acquired businesses or assets; and/or
our acquisitions may result in dilutive issuances of our equity securities or significant additional debt.
Moreover, our resources are limited and our decision to pursue a transaction has opportunity costs; accordingly, if we pursue a particular transaction, we may need to forgo the prospect of entering into other transactions that could help us achieve our financial or strategic objectives.
Any of these risks could have a material adverse effect on our business, results of operations, financial condition, or cash flows, particularly in the case of a large acquisition or several concurrent acquisitions.
We invest in public and private companies and may not realize a return on our investments.We make investments in public and private companies around the world to further our strategic and financial objectives and to support certain key business initiatives. Companies in which we invest range from early-stage companies still defining their strategic direction to mature companies with established revenue streams and business models. Many of the instruments in which we invest are non-marketable and illiquid at the time of our initial investment, and we may not be able to achieve a return, if any, in a timely fashion. Our ability to realize a return on our investment in a private company, if any, is typically dependent on the company participating in a liquidity event, such as a public offering or acquisition. To the extent our investments are in marketable equity securities, as is typically the case for our public company investments, fluctuations in the fair value of those securities are recognized as gains or losses in our income statement, and consequently, declines in the fair value of these investments can reduce our net income. If any of the companies in which we invest are not successful, which may include failures to achieve business objectives as well as bankruptcy filings, we could recognize an impairment and/or lose all or part of our investment.
|
| | |
OTHER KEY INFORMATION | | 56 |
WE ARE SUBJECT TO SALES-RELATED RISKS.
We face risks related to sales through distributors and other third parties.We sell a significant portion of our products through third parties such as distributors, value-added resellers, and channel partners (collectively referred to as distributors), as well as OEMs and ODMs. We depend on many distributors to help us create end-customer demand, provide technical support and other value-added services to customers, fill customer orders, and stock our products. We may rely on one or more key distributors for a product, and a material change in our relationship with one or more of these distributors or their failure to perform as expected could reduce our revenue. Our ability to add or replace distributors for some of our products may be limited. In addition, our distributors' expertise in the determination and stocking of acceptable inventory levels for some of our products may not be easily transferable to a new distributor; as a result, end customers may be hesitant to accept the addition or replacement of a distributor. Using third parties for distribution exposes us to many risks, including competitive pressure and concentration, credit, and compliance risks. Distributors and other third parties may sell products that compete with our products, and we may need to provide financial and other incentives to focus them on the sale of our products. They may face financial difficulties, including bankruptcy, which could harm our collection of accounts receivable and financial results. Violations of the Foreign Corrupt Practices Act or similar laws by distributors or other third-party intermediaries could have a material impact on our business. Failure to manage risks related to our use of distributors and other third parties may reduce sales, increase expenses, and weaken our competitive position.
We receive a significant portion of our revenue from a limited number of customers. Collectively, our three largest customers accounted for approximately 39% of our net revenue in 2018 and 40% of our net revenue in 2017. We expect a small number of customers will continue to account for a significant portion of our revenue in the foreseeable future. Industry trends, such as carbonthe increasing shift of data center workloads to the public cloud, may increase customer concentration for certain of our data-centric businesses. If one of our key customers stops purchasing from us, materially reduces its demand for our products, or delays its orders for our products, we may experience a reduction in revenue, which could harm our results of operations and financial condition. To the extent we differentiate our products through customization to meet customer specifications, order changes, delays, or cancellations may result in non-recoverable costs. For more information about our customers, including customers who accounted for greater than 10% of our net consolidated revenue, see "Note 4: Operating Segments" within the Consolidated Financial Statements.
We face risks related to business transactions with U.S. government entities.We receive proceeds from services and products we provide to the U.S. government. U.S. government demand and payment may be affected by public sector budgetary cycles and funding authorizations. U.S. government contracts are subject to oversight, including special rules on accounting, IP rights, expenses, reviews, information handling, and security. Failure to comply with these rules could result in civil and criminal penalties and sanctions, including termination of contracts, fines, and suspensions, or debarment from future business with the U.S. government.
CHANGES IN OUR EFFECTIVE TAX RATE MAY REDUCE OUR NET INCOME.
A number of factors may increase our effective tax rates, which could reduce our net income, including:
changes in the volume and mix of profits earned across jurisdictions with varying tax rates;
the resolution of issues arising from tax audits, including payment of interest and penalties;
changes in the valuation of our deferred tax assets and liabilities, and in deferred tax valuation allowances;
adjustments to income taxes upon finalization of tax returns;
increases in expenses not deductible for tax purposes, including impairments of goodwill;
changes in available tax credits;
changes in our ability to secure new or renew existing tax holidays and incentives;
changes in U.S. federal, state, or foreign tax laws or their interpretation, including changes in the U.S. to the taxation of manufacturing enterprises and of non-U.S. income and expenses;
changes in accounting standards; and
our decision to repatriate non-U.S. earnings for which we have not previously provided for local country withholding taxes incurred upon repatriation.
WE MAY HAVE FLUCTUATIONS IN THE AMOUNT AND FREQUENCY OF OUR STOCK REPURCHASES.
We are not obligated to make repurchases under our stock repurchase program, and the amount, timing, and execution of our repurchases may fluctuate based on our priorities for the use of cash for other purposes—such as investing in our business, including operational spending, capital spending, and acquisitions, and returning cash to our stockholders as dividend payments—and because of changes in cash flows, tax laws, and the market price of our common stock.
|
| | |
OTHER KEY INFORMATION | | 57 |
NON-GAAP FINANCIAL MEASURES
In addition to disclosing financial results in accordance with GAAP, this document contains references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparison of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business and measuring our performance.
Our non-GAAP operating income and diluted earnings per share reflect adjustments for the following items, as well as the related income tax effects. Income tax effects have been calculated using an appropriate tax rate for each adjustment. We also provide a non-GAAP financial measure of free cash flow, as described below. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations from these results should be carefully evaluated.
ACQUISITION-RELATED ADJUSTMENTS
Deferred revenue write-down:Sales to distributors are made under agreements allowing for subsequent price adjustments and returns, and prior to 2018, were deferred until the products were resold by the distributor. Business combination accounting principles require us to write down to fair value the deferred revenue assumed in our acquisitions, as we have limited performance obligations associated with this deferred revenue. Our GAAP revenue and related cost of sales for the subsequent reselling by distributors to end customers after an acquisition do not reflect the full amounts that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP adjustments made in Q1 2016 eliminated the effect of the deferred revenue write-down associated with our acquisition of Altera. We believe these adjustments are useful to investors as an additional means to reflect revenue and gross margin trends of our business.
Inventory valuation adjustments: Business combination accounting principles require us to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company’s cost of manufacturing plus a portion of the expected profit margin. The non-GAAP adjustments to our cost of sales exclude the expected profit margin component that is recorded under business combination accounting principles associated with our acquisitions of Mobileye and Altera. We believe the adjustments are useful to investors as an additional means to reflect cost of sales and gross margin trends of our business.
Amortization of acquisition-related intangible assets:Amortization of acquisition-related intangible assets consists of amortization of intangible assets such as developed technology, brands, and customer relationships acquired in connection with business combinations. We record charges related to the amortization of these intangibles within both cost of sales and operating expenses in our GAAP financial statements. Amortization charges for our acquisition-related intangible assets are inconsistent in size and are significantly impacted by the timing and valuation of our acquisitions. Consequently, our non-GAAP adjustments exclude these charges to facilitate an evaluation of our current operating performance and comparisons to our past operating performance.
Other acquisition-related charges: Other acquisition-related charges exclude the impact of other charges associated with the acquisitions of Mobileye and Altera. These charges primarily include bankers' fees, compensation-related costs, and valuation charges for stock-based compensation incurred related to the acquisitions. We believe these adjustments are useful to investors as an additional means to reflect the spending trends of our business.
RESTRUCTURING AND OTHER CHARGES
Restructuring charges are costs associated with obtaining permitsa formal restructuring plan and are primarily related to employee severance and benefit arrangements. Other charges include asset impairments, pension charges, and costs associated with the ISecG divestiture. We exclude restructuring and other charges, including any adjustments to charges recorded in prior periods, for our manufacturing operations, emission cap and trade programs, or renewable portfolio standards.
We are committed to sustainability and take a leadership position in promoting voluntary environmental initiatives and working proactively with governments, environmental groups, and industry to promote global environmental sustainability.purposes of calculating certain non-GAAP measures. We believe that technology will be fundamentalthese costs do not reflect our current operating performance. Consequently, our non-GAAP adjustments exclude these charges to finding solutionsfacilitate an evaluation of our current operating performance and comparisons to our past operating performance.
ONGOING MARK-TO-MARKET ON MARKETABLE EQUITY SECURITIES
We exclude gains and losses resulting from ongoing mark-to-market adjustments of our marketable equity securities, after the initial mark-to-market adjustment is recorded upon a security becoming marketable, when calculating certain non-GAAP measures, as we do not believe this volatility correlates to our core operational performance. Consequently, our non-GAAP earnings per share figures exclude these impacts to facilitate an evaluation of our current performance and comparisons to our past operating performance.
GAINS OR LOSSES FROM DIVESTITURE
We divested ISecG in Q2 2017 and Wind River in Q2 2018. We exclude gains or losses and related tax impacts resulting from divestitures when calculating certain non-GAAP measures. We believe making these adjustments facilitates a better evaluation of our current operating performance and comparisons to our past operating performance.
|
| | |
OTHER KEY INFORMATION | | 58 |
TAX REFORM ADJUSTMENT
We recognized a higher income tax expense in Q4 2017 as a result of Tax Reform and have made adjustments to the world’s environmental challenges,original estimate in 2018. We exclude the Q4 2017 provisional tax estimate and 2018 provisional tax adjustments relating to the transition tax on our previously untaxed foreign earnings and the remeasurement of our deferred income taxes to the new U.S. statutory tax rate for purposes of calculating certain non-GAAP measures. We believe making this adjustment facilitates a better evaluation of our current operating performance and comparisons to past operating results.
FREE CASH FLOW
We reference a non-GAAP financial measure of free cash flow, which is used by management when assessing our sources of liquidity, capital resources, and quality of earnings. We believe this non-GAAP financial measure is helpful to investors in understanding our capital requirements and provides an additional means to reflect the cash flow trends of our business.
Following are the reconciliations of our most comparable GAAP measures to our non-GAAP measures presented:
|
| | | | | | | | | | | | |
Years Ended
(In Millions, Except Per Share Amounts) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Operating income | | $ | 23,316 |
| | $ | 18,050 |
| | $ | 13,133 |
|
| Deferred revenue write-down, net of cost of sales | | — |
| | — |
| | 64 |
|
| Inventory valuation adjustments | | — |
| | 55 |
| | 387 |
|
| Amortization of acquisition-related intangible assets | | 1,305 |
| | 1,089 |
| | 1,231 |
|
| Other acquisition-related charges | | — |
| | 113 |
| | 100 |
|
| Restructuring and other charges | | (72 | ) | | 384 |
| | 1,744 |
|
| Non-GAAP operating income | | $ | 24,549 |
| | $ | 19,691 |
| | $ | 16,659 |
|
|
| | | | | | | | | | | | |
| Earnings per share - Diluted | | $ | 4.48 |
| | $ | 1.99 |
| | $ | 2.12 |
|
| Deferred revenue write-down, net of cost of sales | | — |
| | — |
| | 0.01 |
|
| Inventory valuation adjustments | | — |
| | 0.01 |
| | 0.08 |
|
| Amortization of acquisition-related intangible assets | | 0.28 |
| | 0.22 |
| | 0.25 |
|
| Other acquisition-related charges | | — |
| | 0.02 |
| | 0.02 |
|
| Restructuring and other charges | | (0.02 | ) | | 0.08 |
| | 0.39 |
|
| (Gains) losses from divestitures | | (0.11 | ) | | (0.08 | ) | | — |
|
| Ongoing mark-to-market on marketable equity securities | | 0.03 |
| | — |
| | — |
|
| Tax Reform | | (0.06 | ) | | 1.13 |
| | — |
|
| Income tax effect | | (0.02 | ) | | 0.09 |
| | (0.15 | ) |
| Non-GAAP earnings per share - Diluted | | $ | 4.58 |
| | $ | 3.46 |
| | $ | 2.72 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 | | Dec 26,
2015 | | Dec 27,
2014 |
| Net cash provided by operating activities | | $ | 29,432 |
| | $ | 22,110 |
| | $ | 21,808 |
| | $ | 19,018 |
| | $ | 20,418 |
|
| Additions to property, plant and equipment | | (15,181 | ) | | (11,778 | ) | | (9,625 | ) | | (7,326 | ) | | (10,105 | ) |
| Free cash flow | | $ | 14,251 |
| | $ | 10,332 |
| | $ | 12,183 |
| | $ | 11,692 |
| | $ | 10,313 |
|
| | | | | | | | | | | |
| Net cash used for investing activities | | $ | (11,239 | ) | | $ | (15,762 | ) | | $ | (25,817 | ) | | $ | (8,183 | ) | | $ | (9,905 | ) |
| Net cash provided by (used for) financing activities | | $ | (18,607 | ) | | $ | (8,475 | ) | | $ | (5,739 | ) | | $ | 1,912 |
| | $ | (13,611 | ) |
|
| | |
OTHER KEY INFORMATION | | 59 |
PROPERTIES
As of December 29, 2018, our major facilities consisted of: |
| | | | | | | | | |
| (Square Feet in Millions) | | United States | | Other Countries | | Total |
| Owned facilities | | 30.5 |
| | 22.2 |
| | 52.7 |
|
| Leased facilities | | 1.0 |
| | 6.6 |
| | 7.6 |
|
| Total facilities | | 31.5 |
| | 28.8 |
| | 60.3 |
|
Our principal executive offices are located in the U.S. and approximately half of our wafer manufacturing activities in 2018 were also located in the U.S. For more information on our wafer fabrication and our assembly and test facilities, see "Manufactured Capital" within Fundamentals of Our Business.
We believe that the facilities described above are suitable and adequate for our present purposes and that the productive capacity in our facilities is being utilized or in the process of being prepared for utilization as we continue to invest capital to meet demand.
We do not identify or allocate assets by operating segment, as they are joining forces with industry, business,interchangeable in nature and governments to findused by multiple operating segments. For information on net property, plant and promote ways that technology can be used as a tool to combat climate change.equipment by country, see "Note 7: Other Financial Statement Details" within the Consolidated Financial Statements.
MARKET FOR OUR COMMON STOCK
The principal U.S. market on which Intel’s common stock (symbol INTC) is traded is the Nasdaq Global Select Market. For dividend information, see "Financial Information by Quarter (Unaudited)" within the Consolidated Financial Statements.
As of January 26, 2019, there were approximately 116,000 registered holders of record of Intel’s common stock. A substantially greater number of holders of Intel common stock are "street name" or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.
ISSUER PURCHASES OF EQUITY SECURITIES
We have been purchasing renewable energy at somean ongoing authorization, originally approved by our Board of Directors in 2005, and subsequently amended, to repurchase shares of our major sitescommon stock in open market or negotiated transactions. As of December 29, 2018, we were authorized to repurchase up to $90.0 billion, of which $17.3 billion remained available. This amount includes an increase of $15.0 billion in the authorization limit approved by our Board of Directors in November 2018.
Common stock repurchase activity under our publicly announced stock repurchase program during each quarter of 2018 was as follows: |
| | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (In Millions) | | Average Price Paid Per Share | | Dollar Value of Shares That May Yet Be Purchased Under the Program (In Millions) |
| December 31, 2017 - March 31, 2018 | | 40.8 |
| | $ | 47.93 |
| | $ | 11,237 |
|
| April 1, 2018 - June 30, 2018 | | 75.9 |
| | $ | 52.87 |
| | $ | 7,224 |
|
| July 1, 2018 - September 29, 2018 | | 50.1 |
| | $ | 49.83 |
| | $ | 4,728 |
|
| September 30, 2018 - December 29, 2018 | | 50.6 |
| | $ | 47.38 |
| | $ | 17,333 |
|
| Total | | 217.3 |
| |
|
| | |
Common stock repurchase activity under our stock repurchase program during Q4 2018 was as follows:
|
| | | | | | | | | | | |
| Period | | Total Number
of Shares
Purchased
(In Millions) | | Average Price
Paid Per Share | | Dollar Value of
Shares That May
Yet Be Purchased
Under the
Program
(In Millions) |
| September 30, 2018 - October 27, 2018 | | — |
| | $ | — |
| | $ | 19,728 |
|
| October 28, 2018 - November 24, 2018 | | 21.3 |
| | $ | 47.71 |
| | $ | 18,714 |
|
| November 25, 2018 - December 29, 2018 | | 29.3 |
| | $ | 47.15 |
| | $ | 17,333 |
|
| Total | | 50.6 |
| | | | |
|
| | |
OTHER KEY INFORMATION | | 60 |
We issue RSUs as part of our equity incentive plans. In our consolidated financial statements, we treat shares of common stock withheld for several years. We purchase renewable energy certificatestax purposes on behalf of our employees in connection with the vesting of RSUs as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. These withheld shares of common stock are not considered common stock repurchases under a multi-year contract. This purchase has placed Intel atour authorized common stock repurchase plan, and accordingly are not included in the top ofcommon stock repurchase totals in the U.S. Environmental Protection Agency Green Power Partnership rankings for the past eight years and is intended to help stimulate the market for green power, leading to additional generating capacity and, ultimately, lower costs.preceding table.
Distribution of Company InformationAVAILABILITY OF COMPANY INFORMATION
Our Internet address is www.intel.com. We publish voluntary reports on our website that outline our performance with respect to corporate responsibility, including EHSenvironmental, health, and safety compliance.
We use our Investor Relations website, www.intc.com, as a routine channel for distribution of important information, including news releases, analyst presentations, financial information, corporate governance practices, and financialcorporate responsibility information. We post our filings on our websiteat www.intc.com/sec the same day they are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC),SEC, including our annual and quarterly reports on Forms 10-K and 10-Q and current reports on Form 8-K; our proxy statements; and any amendments to those reports or statements. We post our quarterly and annual earnings results at www.intc.com/results.cfm, and do not distribute our financial results via a news wire service. All such postings and filings are available on our Investor Relations website free of charge. In addition, our Investor Relations website allows interested persons to sign up to automatically receive e-mail alerts when we post financial information. The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Form 10-K is not incorporated by reference in this Form 10-K unless expressly noted.
Executive Officers of the Registrant
The following sets forth certain information with regard to our executive officers as of February 12, 2016 (ages are as of December 26, 2015):
|
| | | | | | |
Andy D. Bryant, age 65 OTHER KEY INFORMATION | | Gregory R. Pearson, age 55
|
• 2012 – present
| | Chairman of the Board | | • 2014 – present
| | Senior VP; General Manager, Sales and Marketing Group |
• 2011 – 2012
| | Vice Chairman of the Board, Executive VP, Technology, Manufacturing and Enterprise Services; Chief Administrative Officer | | | |
| | | • 2008 – 2013
| | General Manager, Worldwide Sales and Operations Group |
| | | | |
• 2009 – 2011
| | Executive VP, Technology, Manufacturing, and Enterprise Services; Chief Administrative Officer | | • Joined Intel in 1983
|
| | | | | |
| | | Dr. Venkata S.M. "Murthy" Renduchintala, age 50
|
• 2007 – 2009
| | Executive VP, Finance and Enterprise Services; Chief Administrative Officer | | • 2015 – present
| | Executive VP; President, Client and Internet of Things (IoT) Businesses and Systems Architecture Group |
| | | | |
• 2001 – 2007
| | Executive VP; Chief Financial and Enterprise Services Officer | | | |
| | | • Joined Intel in 2015
|
• Member of Intel Corporation Board of Directors
| | |
• Member of Columbia Sportswear Company Board of Directors
| | Stacy J. Smith, age 53
|
| • 2012 – present
| | Executive VP; Chief Financial Officer |
• Member of McKesson Corporation Board of Directors
| | • 2010 – 2012
| | Senior VP; Chief Financial Officer |
• Joined Intel in 1981
| | • 2007 – 2010
| | VP; Chief Financial Officer |
| | • 2006 – 2007
| | VP; Assistant Chief Financial Officer |
William M. Holt, age 63
| | • 2004 – 2006
| | VP; Finance and Enterprise Services, Chief Information Officer |
• 2013 – present
| | Executive VP; General Manager, Technology and Manufacturing Group | | | |
| | | • Member of Autodesk, Inc. Board of Directors
|
• 2006 – 2013
| | Senior VP; General Manager, Technology and Manufacturing Group | | • Member of Virgin America, Inc. Board of Directors
|
| | | • Joined Intel in 1988
|
• 2005 – 2006
| | VP; Co-General Manager, Technology and Manufacturing Group | | |
| | | |
• Joined Intel in 1974
| | |
| | |
Brian M. Krzanich, age 55
| | |
• 2013 – present
| | Chief Executive Officer | | |
• 2012 – 2013
| | Executive VP; Chief Operating Officer | | |
• 2010 – 2012
| | Senior VP; General Manager, Manufacturing and Supply Chain | | |
| | | |
• 2006 – 2010
| | VP; General Manager, Assembly and Test | | |
• Member of Deere & Company Board of Directors
| | |
• Joined Intel in 1982
| | 61 |
The following risks could materially and adversely affect our business, financial condition, and results of operations, and the trading price of our common stock could decline. These risk factors do not identify all risks that we face; our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. You should also refer to the other information set forth in this Annual Report on Form 10-K, including "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes.
Changes in product demand can harm our results of operation and financial condition.
Demand for our products is variable and hard to predict. Changesin the demand for our products may reduce our revenue, increase our costs, lower our gross margin percentage, or require us to write down the value of our assets. Important factors that could lead to variation in the demand for our products include changes in:
business conditions, including downturns in the computing industry, or in the global or regional economies;
consumer confidence or income levels caused by changes in market conditions, including changes in government borrowing, taxation, or spending policies; the credit market; or expected inflation, employment, and energy or other commodity prices;
the level of our customers’ inventories;
competitive and pricing pressures, including actions taken by competitors;
customer product needs;
market acceptance and industry support of our new and maturing products; and
the technology supply chain, including supply constraints caused by natural disasters or other events.
We face significant competition. Theindustry in which we operate is highly competitive and subject to rapid technological and market developments, changes in industry standards, changes in customer needs, and frequent product introductions and improvements. If we do not anticipate and respond to these developments, our competitive position may weaken, and our products or technologies might be uncompetitive or obsolete. In recent years, our business focus has expanded and now includes the design and production of platforms for tablets, phones, and other devices across the compute continuum, including products for the Internet of Things, and related services. As a result, we face new sources of competition, including, in certain of these market segments, from incumbent competitors with established customer bases and greater brand recognition. To be successful, we need to cultivate new industry relationships with customers and partners in these market segments. In addition, we must continually improve the cost, integration, and energy efficiency of our products, as well as expand our software capabilities to provide customers with comprehensive computing solutions. Despite our ongoing efforts, there is no guarantee that we will achieve or maintain consumer and market demand or acceptance for our products and services in these various market segments.
To compete successfully, we must maintain a successful R&D effort, develop new products and production processes, and improve our existing products and processes ahead of competitors. For example, we invest substantially in our network of manufacturing and assembly and test facilities, including the construction of new fabrication facilities to support smaller transistor geometries and larger wafers. Our R&D efforts are critical to our success and are aimed at solving complex problems, and we do not expect all of our projects to be successful. We may be unable to develop and market new products successfully, and the products we invest in and develop may not be well-received by customers. Our R&D investments may not generate significant operating income or contribute to our future operating results for several years, and such contributions may not meet our expectations or even cover the costs of such investments. Additionally, the products and technologies offered by others may affect demand for, or pricing of, our products.
If we are not able to compete effectively, our financial results will be adversely affected, including increased costs and reduced revenue and gross margin, and we may be required to accelerate the write-down of the value of certain assets.
Changes in the mix of products sold may harm our financial results. Prices differ widely among the platforms we offer in our various market segments due to differences in features offered or manufacturing costs. For example, product offerings range from lower-priced and entry-level platforms, such as those based on Intel Quark or Intel Atom processors, to higher-end platforms based on Intel Xeon and Intel Itanium processors. If demand shifts from our higher-priced to lower-priced platforms in any of our market segments, our gross margin and revenue would decrease. In addition, when products are introduced, they tend to have higher costs because of initial development costs and lower production volumes relative to the previous product generation, which can impact gross margin.
We operate globally and are subject to significant risks in many jurisdictions.
Global or regional conditions may harm our financial results. We have manufacturing, assembly and test, R&D, sales, and other operations in many countries, and some of our business activities may be concentrated in one or more geographic areas. Moreover, sales outside the U.S. accounted for approximately 80% of our revenue for the fiscal year ended December 26, 2015. As a result, our operations and our financial results, including our ability to manufacture, assemble and test, design, develop, or sell products, may be adversely affected by a number of factors outside of our control, including:
global and local economic conditions;
geopolitical and security issues, such as armed conflict and civil or military unrest, crime, political instability, and terrorist activity;
natural disasters, public health issues, and other catastrophic events;
inefficient infrastructure and other disruptions, such as supply chain interruptions and large-scale outages or unreliable provision of services from utilities, transportation, data hosting, or telecommunications providers;
government restrictions on, or nationalization of our operations in any country, or restrictions on our ability to repatriate earnings from a particular country;
differing employment practices and labor issues;
formal or informal imposition of new or revised export and/or import and doing-business regulations, which could be changed without notice;
ineffective legal protection of our IP rights in certain countries; and
local business and cultural factors that differ from our normal standards and practices.
We are subject to laws and regulations worldwide, which may differ among jurisdictions, affecting our operations in areas including, but not limited to: IP ownership and infringement, tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, advertising, employment, environment, health, and safety. Compliance with such requirements may be onerous and expensive, and may otherwise impact our business operations negatively. Although we have policies, controls, and procedures designed to help ensure compliance with applicable laws, there can be no assurance that our employees, contractors, suppliers, and/or agents will not violate such laws or our policies. Violations of these laws and regulations could result in fines; criminal sanctions against us, our officers, or our employees; prohibitions on the conduct of our business; and damage to our reputation.
We may be affected by fluctuations in currency exchange rates. We are potentially exposed to adverse as well as beneficial movements in currency exchange rates. Although most of our sales occur in U.S. dollars, expenses may be paid in local currencies. An increase in the value of the dollar could increase the real cost to our customers of our products in those markets outside the U.S. where we sell in dollars, and a weakened dollar could increase the cost of expenses such as payroll, utilities, tax, and marketing expenses, as well as overseas capital expenditures. We also conduct certain investing and financing activities in local currencies. Our hedging programs reduce, but do not eliminate, the impact of currency exchange rate movements; therefore, changes in exchange rates could harm our results of operations and financial condition.
Catastrophic events or geopolitical conditions could have a material adverse effect on our operations and financial results. Our operations or systems could be disrupted by natural disasters; geopolitical conditions; terrorist activity; public health issues; cybersecurity incidents; interruptions of service from utilities, transportation or telecommunications providers; or other catastrophic events. Such events could make it difficult or impossible to manufacture or deliver products to our customers, receive production materials from our suppliers, or perform critical functions, which could adversely affect our revenue and require significant recovery time and expenditures to resume operations. While we maintain business recovery plans that are intended to enable us to recover from natural disasters or other events that can be disruptive to our business, some of our systems are not fully redundant and we cannot be sure that our plans will fully protect us from all such disruptions.
We maintain a program of insurance coverage for a variety of property, casualty, and other risks. The types and amounts of insurance we obtain vary depending on availability, cost, and decisions with respect to risk retention. Some of our policies have large deductibles and broad exclusions. In addition, one or more of our insurance providers may be unable or unwilling to pay a claim. Losses not covered by insurance may be large, which could harm our results of operations and financial condition.
We operate our own fabrication facilities and, as a result, are vulnerable to manufacturing-related risks.
Due to the variability in demand for our products, we may be unable to timely respond to reduce costs when demand declines or to increase production when demand increases. Our operations have high costs that are either fixed or difficult to reduce in the short term, including our costs related to manufacturing, such as facility construction and equipment, R&D, and the employment and training of a highly skilled workforce. If product demand decreases or we fail to forecast demand accurately, we could be required to write off inventory or record excess capacity charges, which would lower our gross margin. Our manufacturing or assembly and test capacity could be underutilized, and we may be required to write down our long-lived assets, which would increase our expenses. Factory-planning decisions may shorten the useful lives of facilities and equipment and cause us to accelerate depreciation.
Conversely, if product demand increases, we may be unable to add capacity fast enough to meet market demand. Our revenue and gross margin can also be affected by the timing of our product introductions and related expenses, including marketing expenses.
We are subject to risks associated with the development and implementation of new manufacturing process technology. We may not be successful or efficient in developing or implementing new production processes. Production of integrated circuits is a complex process. We are continually engaged in the transition from our existing process to the next-generation process technology. This consistent innovation involves significant expense and carries inherent risks, including difficulties in designing and developing next-generation process technologies, development and production timing delays, lower than anticipated manufacturing yields, and product defects and errata. Disruptions in the production process can also result from errors, defects in materials, delays in obtaining or revising operating permits and licenses, interruption in our supply of materials or resources, and disruptions at our fabrication and assembly and test facilities due to accidents, maintenance issues, or unsafe working conditions—all of which could affect the timing of production ramps and yields. Production issues can lead to increased costs and may affect our ability to meet product demand, which could adversely impact our business and the results from operations.
We face supply chain risks. Thousands of suppliers provide materials that we use in production and other aspects of our business. Where possible, we seek to have several sources of supply for all of those materials. However, for certain materials, we may rely on a single or a limited number of suppliers, or upon suppliers in a single location. In addition, consolidation among suppliers could impact the nature, quality, availability, and pricing of the products and services available to us. The inability of suppliers to deliver adequate supplies of production materials or other supplies could disrupt our production processes or make it more difficult for us to implement our business strategy. Production could be disrupted by the unavailability of resources used in production, such as water, silicon, electricity, gases, and other materials. The unavailability or reduced availability of materials or resources may require us to reduce production or incur additional costs, which could harm our business and results of operations.
We also rely on third-party providers to manufacture and assemble and test certain components or products, particularly those related to networking, mobile and communications, and NAND flash memory. If any of these third parties are unable to perform these services on a timely basis, we may encounter supply delays or disruptions that could adversely affect our financial results.
In addition, there are regulatory and other requirements, restrictions, and requests from various constituencies regarding sourcing practices and supplier conduct, with a trend toward expanding the scope of materials and locations where materials originate, regulating supplier behaviors, and increasing the required disclosures regarding such matters by public companies. Increased regulation and public pressure in this area would cause our compliance costs to increase and could negatively affect our reputation given that we use many materials in the manufacturing of our products and rely on many suppliers to provide these materials, but do not directly control their procurement or employment practices.
We are subject to the risks of product defects and errata. Product defects and errata (deviations from published specifications) may result from problems in our product design or our manufacturing and assembly and test processes. Components and products we purchase or license from third-party suppliers may also contain defects.
Costs from defects and errata could include:
writing off some or all of the value of inventory;
recalling products that have been shipped;
providing product replacements or modifications; and
defending against resulting litigation.
These costs could be large and may increase expenses and lower gross margin, and result in delay or loss of revenue. Any product defects, errata, or other issues that we do not detect or fix could also damage our reputation, negatively affect product demand, delay product releases, or result in legal liability. The announcement of product defects and errata could cause customers to purchase products from competitors as a result of possible shortages of our components or for other reasons. Any of these occurrences could harm our business and financial results.
We are subject to risks associated with environmental laws and regulations. The manufacturing and assembly and test of our products require the use of hazardous materials that are subject to a broad array of EHS laws and regulations. Our failure to comply with these laws or regulations could result in:
regulatory penalties, fines, and legal liabilities;
suspension of production;
alteration of our fabrication and assembly and test processes;
reputational challenges; and
restrictions on our operations or sales.
Our failure to manage the use, transportation, emissions, discharge, storage, recycling, or disposal of hazardous materials could lead to increased costs or future liabilities. Our ability to expand or modify our manufacturing capability in the future may be impeded by environmental regulations, such as air quality and wastewater requirements. Environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify product designs, or incur other expenses. Many new materials that we are evaluating for use in our operations may be subject to regulation under environmental laws and regulations. These restrictions could harm our business and results of operations by increasing our expenses or requiring us to alter manufacturing and assembly and test processes.
Climate change may also pose regulatory and environmental risks that could harm our results of operations and affect the way we conduct business. For example, climate change regulation could result in increased manufacturing costs associated with air pollution control requirements, and increased or new monitoring, recordkeeping, and reporting of greenhouse gas emissions. We also see the potential for higher energy costs driven by climate change regulations if, for example, utility companies pass on their costs to their customers. Furthermore, many of our operations are located in semi-arid regions that may become increasingly vulnerable to prolonged droughts due to climate change. Our fabrication facilities require significant water use and, while we recycle and reuse a portion of the water used, we may have difficulties obtaining sufficient water to fulfill our operational needs due the lack of available infrastructure.
We are subject to IP risks and risks associated with litigation and regulatory proceedings.
We may be unable to enforce or protect our IP rights. We regard our patents, copyrights, trade secrets, and other IP rights as important to the success of our business. We rely on IP law as well as confidentiality and licensing agreements with our customers, employees, technology development partners, and others to protect our IP rights. Our ability to enforce these rights is subject to general litigation risks, as well as uncertainty as to the enforceability of our IP rights in various countries. When we seek to enforce our rights, we may be subject to claims that the IP rights are invalid, not enforceable, or licensed to the opposing party. Our assertion of IP rights may result in the other party seeking to assert claims against us, which could harm our business. Governments may adopt regulations—and governments or courts may render decisions—requiring compulsory licensing of IP rights, or governments may require products to meet standards that serve to favor local companies. Our inability to enforce our IP rights under any of these circumstances may harm our competitive position and business. In addition, the theft or unauthorized use or publication of our trade secrets and other confidential business information could harm our competitive position and reduce acceptance of our products; as a result, the value of our investment in R&D, product development, and marketing could be reduced.
Our licenses with other companies and participation in industry initiatives may allow competitors to use our patent rights. Companies in our industry often bilaterally license patents between each other to settle disputes or as part of business agreements. Our competitors may have licenses to our patents, and under current case law, some of the licenses may exhaust our patent rights as to licensed product sales under some circumstances. Our participation in industry standards organizations or with other industry initiatives may require us to license our patents to companies that adopt industry-standard specifications. Depending on the rules of the organization, we might have to grant these licenses to our patents for little or no cost, and as a result, we may be unable to enforce certain patents against others, our costs of enforcing our licenses or protecting our patents may increase, and the value of our IP rights may be impaired.
Third parties may assert claims based on IP rights against us or our products, which could harm our business. We may face claims based on IP rights from individuals and companies, including those who have acquired patent portfolios to assert claims against other companies. We are normally engaged in a number of litigation matters involving IP rights. Claims that our products or processes infringe the IP rights of others, whether or not meritorious, could cause us to incur large costs to respond to, defend, and resolve, and they may divert the efforts and attention of management and technical personnel. In addition, we may face claims based on the theft or unauthorized use or disclosure of third-party trade secrets and other confidential business information or end-user data that we obtain in conducting our business. Any such incidents and claims could severely disrupt our business, and we could suffer losses, including the cost of product recalls and returns, and reputational harm. Furthermore, we have agreed to indemnify customers for certain IP rights claims against them. As a result of IP rights claims, we could:
pay monetary damages, including payments to satisfy indemnification obligations;
stop manufacturing, using, selling, offering to sell, or importing products or technology subject to claims;
develop other products or technology not subject to claims, which could be time-consuming or costly; and/or
enter into settlement and license agreements, which agreements may not be available on commercially reasonable terms.
These IP rights claims could harm our competitive position, result in expenses, or require us to impair our assets. If we alter or stop production of affected items, our revenue could be harmed.
We rely on access to third-party IP, which may not be available to us on commercially reasonable terms or at all. Many of our products include third-party IP and/or implement industry standards, which may require licenses from third parties. Based on past experience and industry practice, we believe such licenses generally can be obtained on commercially reasonable terms. However, there is no assurance that the necessary licenses can be obtained on acceptable terms or at all. Failure to obtain the right to use third-party IP, or to use such IP on commercially reasonable terms, could preclude us from selling certain products or otherwise have a material adverse impact on our financial condition and operating results.
We are subject to the risks associated with litigation and regulatory proceedings. We may face legal claims or regulatory matters involving stockholder, consumer, competition, and other issues on a global basis. As described in "Note 25: Contingencies" in Part II, Item 8 of this Form 10-K, we are engaged in a number of litigation and regulatory matters. Litigation and regulatory proceedings are inherently uncertain, and adverse rulings could occur, including monetary damages, or an injunction stopping us from manufacturing or selling certain products, engaging in certain business practices, or requiring other remedies, such as compulsory licensing of patents. An unfavorable outcome may result in a material adverse impact on our business, results of operations, financial position, and overall trends. In addition, regardless of the outcome, litigation can be costly, time-consuming, disruptive to our operations, and distracting to management.
We must attract, retain, and motivate key employees.
To be competitive, we must attract, retain, and motivate executives and other key employees. Hiring and retaining qualified executives, scientists, engineers, technical staff, and sales representatives are critical to our business, and competition for experienced employees can be intense. To help attract, retain, and motivate qualified employees, we use share-based and other performance-based incentive awards such as restricted stock units (RSUs) and cash bonuses. If our share-based or other compensation programs cease to be viewed as competitive and valuable benefits, our ability to attract, retain, and motivate employees could be weakened, which could harm our results of operations.
We are subject to cybersecurity and privacy risks.
Third parties attempt to gain unauthorized access to our network, products, services, and infrastructure. We regularly face attempts by others to gain unauthorized access through the Internet or to introduce malicious software to our information technology (IT) systems. Additionally, malicious hackers may attempt to gain unauthorized access and corrupt the processes of hardware and software products that we manufacture and services we provide. Due to the widespread use of our products and the high profile of our commercial security products, we or our products and services are a frequent target of computer hackers and organizations that intend to sabotage, take control of, or otherwise corrupt our manufacturing or other processes, products, and services. We are also a target of malicious attackers who attempt to gain access to our network or data centers or those of our customers or end users; steal proprietary information related to our business, products, employees, and customers; or interrupt our systems and services or those of our customers or others. We believe such attempts are increasing in number and in technical sophistication. From time to time, we encounter intrusions or unauthorized access to our network, products, services, or infrastructure. To date, none have resulted in any material adverse impact to our business or operations. In some instances, we, our customers, and the users of our products and services might be unaware of an incident or its magnitude and effects. While we seek to detect and investigate all unauthorized attempts and attacks against our network, products, and services, and to prevent their recurrence where practicable through changes to our internal processes and tools and/or changes or patches to our products and services, we remain potentially vulnerable to additional known or unknown threats. Such incidents, whether successful or unsuccessful, could result in our incurring significant costs related to, for example, rebuilding internal systems, reduced inventory value, providing modifications to our products and services, defending against litigation, responding to regulatory inquiries or actions, paying damages, or taking other remedial steps with respect to third parties. In addition, these threats are constantly evolving, thereby increasing the difficulty of successfully defending against them or implementing adequate preventative measures. Publicity about vulnerabilities and attempted or successful incursions could damage our reputation with customers or users, and reduce demand for our products and services.
We may be subject to theft, loss, or misuse of personal data about our employees, customers, or other third parties, which could increase our expenses, damage our reputation, or result in legal or regulatory proceedings. The theft, loss, or misuse of personal data collected, used, stored, or transferred by us to run our business could result in significantly increased security costs or costs related to defending legal claims. Global privacy legislation, enforcement, and policy activity in this area are rapidly expanding and creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant. In addition, even our inadvertent failure to comply with federal, state, or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others.
We are subject to risks associated with transactions.
We invest in companies for strategic reasons and may not realize a return on our investments. We make investments in public and private companies around the world to further our strategic objectives and support key business initiatives. Many of the instruments in which we invest are non-marketable at the time of our initial investment. Companies in which we invest range from early-stage companies still defining their strategic direction to mature companies with established revenue streams and business models. The success of our investment in any company is typically dependent on the availability to the company of additional funding on favorable terms, or a liquidity event, such as a public offering or acquisition. If any of the companies in which we invest fail, we could lose all or part of our investment. If we determine that an other-than-temporary decline in the fair value exists for an investment, we write down the investment to its fair value and recognize a loss.
Our acquisitions, divestitures, and other transactions could fail to achieve strategic objectives, disrupt our ongoing business, and harm our results of operations. In pursuingour business strategy, we routinely conduct discussions, evaluate opportunities, and enter into agreements for possible acquisitions, divestitures, and other transactions, such as joint ventures. Given that our resources are limited, our decision to complete an acquisition has opportunity costs and we may need to forgo the prospect of acquiring other companies or technologies that could help us achieve our strategic objectives. In addition to opportunity costs, these transactions involve large challenges and risks, including risks that:
the transaction may not advance our business strategy;
we may be unable to identify opportunities on terms acceptable to us;
we may not realize a satisfactory return;
we may experience disruption of our ongoing operations;
we may be unable to retain key personnel;
we may experience difficulty in integrating new employees, business systems, and technology;
acquired businesses may not have adequate controls, processes, and procedures to ensure compliance with laws and regulations, and our due diligence process may not identify compliance issues or other liabilities;
we may have difficulty entering new market segments;
we may be unable to retain the customers and partners of acquired businesses; and/or
there may be unknown, underestimated, and/or undisclosed commitments or liabilities.
When we decide to sell assets or a business, we may have difficulty selling on acceptable terms in a timely manner, and the agreed-upon terms and financing arrangements could be renegotiated due to changes in business or market conditions. These circumstances could delay the achievement of our strategic objectives or cause us to incur additional expense, or we may sell a business at a price or on terms that are less favorable than we had anticipated, resulting in a loss on the transaction.
If we do enter into agreements with respect to acquisitions, divestitures, or other transactions, we may fail to complete them due to factors such as:
failure to obtain regulatory or other approvals;
IP disputes or other litigation; or
difficulties obtaining financing for the transaction.
We are subject to sales-related risks.
We face risks related to sales through distributors and other third parties. We sell a significant portionof our products through third parties such as distributors, value-added resellers, OEMs, ODMs, Internet service providers, and channel partners (collectively referred to as distributors). Using third parties for distribution exposes us to many risks, including competitive pressure, concentration, credit risk, and compliance risks. Distributors may sell products that compete with our products, and we may need to provide financial and other incentives to focus distributors on the sale of our products. We may rely on one or more key distributors for a product, and the loss of these distributors could reduce our revenue. Distributors may face financial difficulties, including bankruptcy, which could harm our collection of accounts receivable and financial results. Violations of the Foreign Corrupt Practices Act or similar laws by distributors or other third-party intermediaries could have a material impact on our business. Failure to manage risks related to our use of distributors may reduce sales, increase expenses, and weaken our competitive position.
We face risks related to business transactions with U.S. government entities. We receive proceeds from services and products we provide to the U.S. government. U.S. government demand and payment may be affected by public sector budgetary cycles and funding authorizations. U.S. government contracts are subject to oversight, including special rules on accounting, IP rights, expenses, reviews, information handling, and security. Failure to comply with these rules could result in civil and criminal penalties and sanctions, including termination of contracts, fines, and suspensions, or debarment from future U.S. government business.
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying accounting policies.
The methods, estimates, and judgments that we use in applying accounting policies have a large impact on our results of operations. For more information, see "Critical Accounting Estimates" in Part II, Item 7 of this Form 10-K. These methods, estimates, and judgments are subject to large risks, uncertainties, and assumptions, and changes could affect our results of operations.
Changes in our effective tax rate may reduce our net income.
A number of factors may increase our effective tax rates, which could reduce our net income, including:
the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits;
changes in the valuation of our deferred tax assets and liabilities, and in deferred tax valuation allowances;
adjustments to income taxes upon finalization of tax returns;
increases in expenses not deductible for tax purposes, including impairments of goodwill;
changes in available tax credits;
changes in tax laws or their interpretation, including changes in the U.S. to the taxation of manufacturing enterprises and of non-U.S. income and expenses;
changes in U.S. generally accepted accounting principles; and
our decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes.
We may have fluctuations in the amount and frequency of our stock repurchases.
The amount, timing, and execution of our stock repurchase program may fluctuate based on our priorities for the use of cash for other purposes—such as investing in our business, including operational spending, capital spending, and acquisitions, and returning cash to our stockholders as dividend payments—and because of changes in cash flows and changes in tax laws.
Workforce restructuring actions may be disruptive to our operations and adversely affect our financial results.
In response to the business environment and to accomplish our strategic objectives, from time to time we may restructure our operations or make other adjustments to our workforce. Such workforce changes can result in restructuring charges in addition to those described in "Note 13: Restructuring and Asset Impairment Charges" in Part II, Item 8 of this Form 10-K. Such workforce changes can also temporarily reduce workforce productivity, which could be disruptive to our business and adversely affect our results of operations. In addition, we may not achieve or sustain the expected cost savings or other benefits of our restructuring plans, or do so within the expected time frame.
There are inherent limitations on the effectiveness of our controls.
We do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that resource constraints exist, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate due to changes in conditions or deterioration in the degree of compliance with policies or procedures. If our controls become inadequate, we could fail to meet our financial reporting obligations, our reputation may be adversely affected, our business and operating results could be harmed, and the market price of our stock could decline.
| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
As of December 26, 2015, our major facilities consisted of: |
| | | | | | | | | |
| (Square Feet in Millions) | | United States | | Other Countries | | Total |
Owned facilities1 | | 30.7 |
| | 17.2 |
| | 47.9 |
|
Leased facilities2 | | 2.1 |
| | 6.0 |
| | 8.1 |
|
| Total facilities | | 32.8 |
| | 23.2 |
| | 56.0 |
|
| |
1
| Leases on portions of the land used for these facilities expire on varying dates through 2062. |
| |
2
| Leases expire on varying dates through 2030 and generally include renewals at our option. |
Our principal executive offices are located in the U.S. and a majority of our wafer fabrication activities are also located in the U.S. We completed construction of development fabrication facilities in Oregon during 2014 that we expect will enable us to maintain our process technology lead. We also completed construction of a large-scale fabrication building in Arizona in 2013. A portion of the new Oregon and Arizona facilities are currently not in use and we are reserving the new buildings for additional capacity and future technologies. Incremental construction and equipment installation are required to ready the facilities for their intended use. Our Massachusetts fabrication facility was our last manufacturing facility on 200mm wafers and ceased production in Q1 2015. Outside the U.S., we have wafer fabrication facilities in Ireland, Israel, and China. Our fabrication facility in Ireland has transitioned to our 14nm process technology, with manufacturing continuing to ramp in 2016.Additionally, in the second half of 2016, we will start using our facility in Dalian, China to help expand our manufacturing capacity in next-generation memory. Our assembly and test facilities are located in Malaysia, China, and Vietnam. In addition, we have sales and marketing offices worldwide that are generally located near major concentrations of customers.
We believe that the facilities described above are suitable and adequate for our present purposes and that the productive capacity in our facilities is substantially being utilized or we have plans to utilize it.
We do not identify or allocate assets by operating segment. For information on net property, plant and equipment by country, see "Note 26: Operating Segments and Geographic Information" in Part II, Item 8 of this Form 10-K.
For a discussion of legal proceedings, see "Note 25: Contingencies" in Part II, Item 8 of this Form 10-K.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Information regarding the principal U.S. market in which Intel common stock is traded, including the market price range of Intel common stock and dividend information, can be found in "Financial Information by Quarter (Unaudited)" in Part II, Item 8 of this Form 10-K.
As of February 5, 2016, there were approximately 130,000 registered holders of record of Intel’s common stock. A substantially greater number of holders of Intel common stock are "street name" or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.
Issuer Purchases of Equity Securities
We have an ongoing authorization, originally approved by our Board of Directors in 2005, and subsequently amended, to repurchase up to $65.0 billion in shares of our common stock in open market or negotiated transactions. As of December 26, 2015, $9.4 billion remained available for repurchase under the existing repurchase authorization limit.
Common stock repurchase activity under our stock repurchase plan during each quarter of 2015 was as follows: |
| | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (In Millions) | | Average Price Paid Per Share | | Dollar Value of Shares That May Yet Be Purchased (In Millions) |
| December 28, 2014 – March 28, 2015 | | 21.3 |
| | $ | 35.14 |
| | $ | 11,643 |
|
| March 29, 2015 – June 27, 2015 | | 23.6 |
| | 31.83 |
| | 10,893 |
|
| June 28, 2015 – September 26, 2015 | | 34.8 |
| | 28.78 |
| | 9,892 |
|
| September 27, 2015 – December 26, 2015 | | 16.0 |
| | 31.24 |
| | $ | 9,391 |
|
| Total | | 95.7 |
| | $ | 31.36 |
| | |
Common stock repurchase activity under our stock repurchase plan during Q4 2015 was as follows: |
| | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (In Millions) | | Average Price Paid Per Share | | Dollar Value of Shares That May Yet Be Purchased Under the Plans (In Millions) |
| September 27, 2015 – October 24, 2015 | | 16.0 |
| | $ | 31.24 |
| | $ | 9,391 |
|
| October 25, 2015 – November 21, 2015 | | — |
| | — |
| | 9,391 |
|
| November 22, 2015 – December 26, 2015 | | — |
| | — |
| | $ | 9,391 |
|
| Total | | 16.0 |
| | $ | 31.24 |
| | |
In our consolidated financial statements, we treat shares of common stock withheld for tax purposes on behalf of our employees in connection with the vesting of RSUs as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. These withheld shares of common stock are not considered common stock repurchases under our authorized common stock repurchase plan and accordingly are not included in the common stock repurchase totals in the preceding table.
For further discussion, see "Note 19: Common Stock Repurchases" in Part II, Item 8 of this Form 10-K.
Stock Performance Graph
The line graph that follows compares the cumulative total stockholder return on our shares of common stock with the cumulative total return of the Dow Jones U.S. Technology Index* and the Standard & Poor’s S&P 500* Index for the five years ended December 26, 2015. The graph and table assume that $100 was invested on the last day of trading for the fiscal year 2010 in each of our shares of common stock, the Dow Jones U.S. Technology Index, and the S&P 500 Index, and that all dividends were reinvested. Cumulative total stockholder returns for our shares of common stock, the Dow Jones U.S. Technology Index, and the S&P 500 Index are based on our fiscal year.
Comparison of Five-Year Cumulative Return for Intel,
the Dow Jones U.S. Technology Index*, and the S&P 500* Index
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 |
| Intel Corporation | | $ | 100 |
| | $ | 122 |
| | $ | 104 |
| | $ | 137 |
| | $ | 207 |
| | $ | 199 |
|
| Dow Jones U.S. Technology Index | | $ | 100 |
| | $ | 100 |
| | $ | 110 |
| | $ | 141 |
| | $ | 175 |
| | $ | 179 |
|
| S&P 500 Index | | $ | 100 |
| | $ | 102 |
| | $ | 116 |
| | $ | 157 |
| | $ | 157 |
| | $ | 152 |
|
| |
ITEM 6. | SELECTED FINANCIAL DATA |
|
| | | | | | | | | | | | | | | | | | | | |
Years Ended
(Dollars in Millions, Except Per Share Amounts) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 | | Dec 29,
2012 | | Dec 31,
2011 |
| Net revenue | | $ | 55,355 |
| | $ | 55,870 |
| | $ | 52,708 |
| | $ | 53,341 |
| | $ | 53,999 |
|
| Gross margin | | $ | 34,679 |
| | $ | 35,609 |
| | $ | 31,521 |
| | $ | 33,151 |
| | $ | 33,757 |
|
| Gross margin percentage | | 62.6 | % | | 63.7 | % | | 59.8 | % | | 62.1 | % | | 62.5 | % |
| Research and development (R&D) | | $ | 12,128 |
| | $ | 11,537 |
| | $ | 10,611 |
| | $ | 10,148 |
| | $ | 8,350 |
|
| Marketing, general and administrative (MG&A) | | $ | 7,930 |
| | $ | 8,136 |
| | $ | 8,088 |
| | $ | 8,057 |
| | $ | 7,670 |
|
| R&D and MG&A as percentage of revenue | | 36.2 | % | | 35.2 | % | | 35.5 | % | | 34.1 | % | | 29.7 | % |
| Operating income | | $ | 14,002 |
| | $ | 15,347 |
| | $ | 12,291 |
| | $ | 14,638 |
| | $ | 17,477 |
|
| Net income | | $ | 11,420 |
| | $ | 11,704 |
| | $ | 9,620 |
| | $ | 11,005 |
| | $ | 12,942 |
|
| Effective tax rate | | 19.6 | % | | 25.9 | % | | 23.7 | % | | 26.0 | % | | 27.2 | % |
| Earnings per share of common stock | | | | | | | | | | |
| Basic | | $ | 2.41 |
| | $ | 2.39 |
| | $ | 1.94 |
| | $ | 2.20 |
| | $ | 2.46 |
|
| Diluted | | $ | 2.33 |
| | $ | 2.31 |
| | $ | 1.89 |
| | $ | 2.13 |
| | $ | 2.39 |
|
| Weighted average diluted shares of common stock outstanding | | 4,894 |
| | 5,056 |
| | 5,097 |
| | 5,160 |
| | 5,411 |
|
| Dividends per share of common stock | | | | | | | | | | |
| Declared | | $ | 0.96 |
| | $ | 0.90 |
| | $ | 0.90 |
| | $ | 0.87 |
| | $ | 0.7824 |
|
| Paid | | $ | 0.96 |
| | $ | 0.90 |
| | $ | 0.90 |
| | $ | 0.87 |
| | $ | 0.7824 |
|
| Net cash provided by operating activities | | $ | 19,017 |
| | $ | 20,418 |
| | $ | 20,776 |
| | $ | 18,884 |
| | $ | 20,963 |
|
| Additions to property, plant and equipment | | $ | 7,326 |
| | $ | 10,105 |
| | $ | 10,711 |
| | $ | 11,027 |
| | $ | 10,764 |
|
| Repurchase of common stock | | $ | 3,001 |
| | $ | 10,792 |
| | $ | 2,147 |
| | $ | 4,765 |
| | $ | 14,133 |
|
| Payment of dividends to stockholders | | $ | 4,556 |
| | $ | 4,409 |
| | $ | 4,479 |
| | $ | 4,350 |
| | $ | 4,127 |
|
| | | | | | | | | | | |
| (Dollars in Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 | | Dec 29,
2012 | | Dec 31,
2011 |
| Property, plant and equipment, net | | $ | 31,858 |
| | $ | 33,238 |
| | $ | 31,428 |
| | $ | 27,983 |
| | $ | 23,627 |
|
| Total assets | | $ | 103,065 |
| | $ | 91,900 |
| | $ | 92,297 |
| | $ | 84,285 |
| | $ | 71,083 |
|
| Debt | | $ | 22,670 |
| | $ | 13,655 |
| | $ | 13,385 |
| | $ | 13,382 |
| | $ | 7,295 |
|
| Temporary equity | | $ | 897 |
| | $ | 912 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Stockholders’ equity | | $ | 61,085 |
| | $ | 55,865 |
| | $ | 58,256 |
| | $ | 51,203 |
| | $ | 45,911 |
|
| Employees (in thousands) | | 107.3 |
| | 106.7 |
| | 107.6 |
| | 105.0 |
| | 100.1 |
|
During Q4 2015, the closing stock price conversion right condition of the 2009 debentures continues to be met and the debentures will be convertible at the option of the holders during Q1 2016. The excess of the amount of cash payable if converted over the carrying amount of the 2009 debentures was classified as temporary equity on our consolidated balance sheet. For further information, see "Note 15: Borrowings" in Part II, Item 8 of this Form 10-K.
During 2013 and 2015, management approved several restructuring actions, including targeted workforce reductions as well as exit of certain businesses and facilities. For further information, see "Note 13: Restructuring and Asset Impairment Charges" in Part II, Item 8 of this Form 10-K.
| |
ITEM 7.
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
Overview. Discussion of our business and overall analysis of financial and other highlights affecting the company in order to provide context for the remainder of MD&A.
Critical Accounting Estimates. Accounting estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
Results of Operations. Analysis of our financial results comparing 2015 to 2014 and comparing 2014 to 2013.
Liquidity and Capital Resources. Analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.
Fair Value of Financial Instruments. Discussion of the methodologies used in the valuation of our financial instruments.
Contractual Obligations and Off-Balance-Sheet Arrangements. Overview of contractual obligations, contingent liabilities, commitments, and off-balance-sheet arrangements outstanding as of December 26, 2015, including expected payment schedule.
The various sections of this MD&A contain a number of forward-looking statements that involve a number of risks and uncertainties. Words such as "anticipates," "expects," "intends," "goals," "plans," "believes," "seeks," "estimates," "continues," "may," "will," "should," and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in "Risk Factors" in Part I, Item 1A of this Form 10-K. Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of February 12, 2016, except for our acquisition of Altera completed on December 28, 2015 as discussed in “Note 8: Acquisitions” in Part II, Item 8 of this Form 10-K.
Overview
Our results of operations for each period were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Twelve Months Ended |
| (Dollars in Millions, Except Per Share Amounts) | | Dec 26,
2015 | | Dec 27,
2014 | | Change | | Dec 26,
2015 | | Dec 27,
2014 | | Change |
| Net revenue | | $ | 14,914 |
| | $ | 14,721 |
| | $ | 193 |
| | $ | 55,355 |
| | $ | 55,870 |
| | $ | (515 | ) |
| Gross margin | | $ | 9,590 |
| | $ | 9,621 |
| | $ | (31 | ) | | $ | 34,679 |
| | $ | 35,609 |
| | $ | (930 | ) |
| Gross margin percentage | | 64.3 | % | | 65.4 | % | | (1.1) pts |
| | 62.6 | % | | 63.7 | % | | (1.1) pts |
|
| Operating income | | $ | 4,299 |
| | $ | 4,453 |
| | $ | (154 | ) | | $ | 14,002 |
| | $ | 15,347 |
| | $ | (1,345 | ) |
| Net income | | $ | 3,613 |
| | $ | 3,661 |
| | $ | (48 | ) | | $ | 11,420 |
| | $ | 11,704 |
| | $ | (284 | ) |
| Diluted earnings per share of common stock | | $ | 0.74 |
| | $ | 0.74 |
| | $ | — |
| | $ | 2.33 |
| | $ | 2.31 |
| | $ | 0.02 |
|
| Effective tax rate | | 16.0 | % | | 21.4 | % | | (5.4) pts |
| | 19.6 | % | | 25.9 | % | | (6.3) pts |
|
MANAGEMENT’S DISCUSSIONFINANCIAL STATEMENTS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
We achieved record net revenue for Q4 2015 of $14.9 billion, up 1% from Q4 2014. We continue to see our business evolve as we execute on our strategy to leverage the "Virtuous Cycle of Growth" with higher DCG platform, NSG, and IOTG platform revenue. These operating segments made up nearly 40% of our revenue and more than 60% of our operating profit for full year 2015. DCG and IOTG both posted record net revenue for the quarter and was partially offset by lower CCG platform revenue. We continue to believe that the worldwide PC supply chain is healthy, with appropriate levels of inventory.
Gross margin of 64% decreased by approximately one percentage point from Q4 2014, primarily due to higher platform unit costs that resulted in part from a higher mix of 14nm platforms, and lower platform unit sales. These decreases were partially offset by higher platform average selling prices and, to a lesser extent, lower factory start-up costs. Gross margin increased approximately two percentage points compared to the midpoint of the Business Outlook in October 2015, primarily driven by lower platform unit costs, lower factory start-up costs, and higher platform average selling prices.
For full year 2015, our net revenue of $55.4 billion was down 1% from 2014, operating income of $14.0 billion, was down 9% from 2014, and diluted earnings per share of $2.33 were up 1% from 2014. CCG net revenue was down 8% as we continued to see weakness in the macroeconomic environment and, in particular, the PC market as we were coming off of a strong growth rate in the second half of 2014 with the Microsoft Windows* XP refresh. We continue to see growth in DCG, with net revenue up 11% and platform unit sales and average selling prices up 8% and 3%, respectively.
Gross margin of 63% was down approximately one point from 2014, driven by higher platform unit costs on 14nm and lower platform unit sales. These decreases were partially offset by higher platform average selling prices, primarily driven by a higher mix of DCG platforms and higher average selling prices on a richer mix of platforms within the desktop and DCG platforms. To a lesser extent, the decrease in gross margin was also partially offset by lower factory start-up costs on 14nm as well as lower production costs on 14nm, which were treated as a period charge in 2014. Operating profit was $14.0 billion in 2015, a decrease of $1.3 billion from 2014, driven by lower gross margin and increased investments in our growth market segments of the data center, Internet of Things, and memory. Our operating profit decrease was partially offset by lower investment in the PC market segment. Our effective tax rate for 2015 of 19.6% decreased 6.3 points from 2014, driven by one-time items and our decision to indefinitely reinvest certain prior years’ non-U.S. earnings.
The cash generation from our business remained strong, with cash from operations of $19.0 billion in 2015. During 2015, we purchased $7.3 billion of capital assets, down $2.8 billion from 2014. This change was primarily driven by our new strategy on next-generation process technology and manufacturing efficiencies, namely that we extended the length of time we plan to use the 14nm process technology by introducing a third 14nm product, code-named "Kaby Lake." This product will have key performance enhancements as compared to our 6th generation Intel Core processor family. We also returned cash to stockholders by both paying $4.6 billion in dividends and repurchasing $3.0 billion of common stock through our stock repurchase program. We ended the year with an investment portfolio of $25.3 billion, up approximately $11.3 billion from a year ago. That investment portfolio consisted of cash and cash equivalents, short-term investments, and trading assets. We issued approximately $9.5 billion of long-term debt to finance our Altera acquisition. For further information, see "Note 15: Borrowings" in Part II, Item 8 of this Form 10-K. Effective in Q1 2016, our annual dividend increased $0.08 to $1.04 per share and our Board of Directors declared a cash dividend of $0.26 per share of common stock.
Early in Q1 2016, we completed the acquisition of Altera. The acquisition will couple Intel’s leading-edge products and manufacturing process with Altera’s leading FPGA technology. The combination is expected to enable new classes of products that meet customer needs in the data center and Internet of Things market segments. We believe our product offerings and architectures will continue to enable innovation and growth in the data center and the Internet of Things market segments. The impact of the Altera acquisition has been reflected in our Business Outlook published in our January 2016 earnings release. For further information, see "Note 8: Acquisitions" in Part II, Item 8 of this Form 10-K.
Our Business Outlook for Q1 2016 and full year 2016 includes, where applicable, our current expectations for revenue, gross margin percentage, spending (R&D plus MG&A), and capital expenditures. We publish our Business Outlook in our quarterly earnings release.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Our Business Outlook and any updates thereto are publicly available on our Investor Relations website,www.intc.com. This Business Outlook is not incorporated by reference in this Form 10-K. We expect that our corporate representatives will, from time to time, meet publicly or privately with investors and others, and may reiterate the forward-looking statements contained in the Business Outlook or in this Form 10-K. The statements in the Business Outlook and forward-looking statements in this Form 10-K are subject to revision during the course of the year in our quarterly earnings releases and SEC filings and at other times. The forward-looking statements in the Business Outlook will be effective through the close of business on March 18, 2016, unless updated earlier. From the close of business on March 18, 2016 until our quarterly earnings release is published, currently scheduled for April 19, 2016, we will observe a "quiet period." During the quiet period, the Business Outlook and other forward-looking statements first published in our Form 8-K filed on January 14, 2016, and other forward-looking statements disclosed in the company's news releases and filings with the SEC, as reiterated or updated as applicable in this Form 10-K, should be considered historical, speaking as of prior to the quiet period only and not subject to update. During the quiet period, our representatives will not comment on our Business Outlook or our financial results or expectations. The exact timing and duration of the routine quiet period, and any others that we utilize from time to time, may vary at our discretion.
Critical Accounting Estimates
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:
the valuation of non-marketable equity investments and the determination of other-than-temporary impairments, which impact gains (losses) on equity investments, net when we record impairments;
the determination of useful lives for our property, plant and equipment and the related timing of when depreciation should begin;
the valuation and allocation of assets acquired and liabilities assumed in connection with business combinations;
the valuation and recoverability of long-lived assets (property, plant and equipment; identified intangibles and goodwill), which impact gross margin or operating expenses when we record asset impairments or accelerate their depreciation or amortization;
the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes;
the valuation of inventory, which impacts gross margin; and
the recognition and measurement of loss contingencies, which impact gross margin or operating expenses when we recognize a loss contingency, revise the estimate for a loss contingency, or record an asset impairment.
In the following section, we discuss these policies further, as well as the estimates and judgments involved.
Non-Marketable Equity Investments
We regularly invest in non-marketable equity instruments of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business models. The carrying value of our non-marketable equity investment portfolio, excluding equity derivatives, totaled $4.5 billion as of December 26, 2015 ($3.2 billion as of December 27, 2014).
Our non-marketable equity investments are recorded using the cost method or the equity method of accounting, depending on the facts and circumstances of each investment. Our non-marketable equity investments are classified within other long-term assets on the consolidated balance sheets.
Non-marketable equity investments are inherently risky, and their success depends on product development, market acceptance, operational efficiency, and other key business factors. The companies could fail or not be able to raise additional funds when needed, or they may receive lower valuations with less favorable investment terms than previous financings. These events could cause our investments to become impaired. In addition, financial market volatility could negatively affect our ability to realize value in our investments through liquidity events such as initial public offerings, mergers, and private sales. For further information about our investment portfolio risks, see "Risk Factors" in Part I, Item 1A of this Form 10-K.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
We determine the fair value of our non-marketable equity investments portfolio quarterly for impairment and disclosure purposes; however, the investments are recorded at fair value only if an impairment is recognized. The measurement of fair value requires significant judgment and includes a qualitative and quantitative analysis of events or circumstances that impact the fair value of the investment. Qualitative analysis of our investments involves understanding each investee’s revenue and earnings trends relative to pre-defined milestones and overall business prospects; the technological feasibility of our investee’s products and technologies; the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes; and the management and governance structure of the investee. Quantitative assessments of the fair value of our investments are developed using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable public companies, such as revenue, earnings, comparable performance multiples, recent financing rounds, the terms of investees’ issued interests, and the level of marketability of the investments. The selection of comparable companies requires management judgment and is based on a number of factors, including comparable companies’ sizes, growth rates, industries, and development stages. The income approach includes the use of a discounted cash flow model, which requires significant estimates regarding the investees' revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenue and costs are developed using available market, historical, and forecast data.
If the fair value of an investment is below our carrying value, we determine whether the investment is other-than-temporarily impaired based on our quantitative and qualitative analysis, which includes assessing the severity and duration of the impairment and the likelihood of recovery before disposal. If the investment is considered to be other-than-temporarily impaired, we record the investment at fair value by recognizing an impairment. Impairments of non-marketable equity investments were $166 million in 2015 ($140 million in 2014 and $112 million in 2013).
Property, Plant and Equipment Depreciation
Management judgment is required in determining the estimated economic useful lives of our property, plant and equipment, which can materially impact our depreciation expense. Accordingly, at least annually, we evaluate the period over which we expect to recover the economic value of these assets. During the assessment performed in Q4 2015, we considered factors such as the lengthening of the process technology cadence resulting in longer node transitions on both 14nm and 10nm products. With those longer transitions, we added a third product to our 14nm roadmap. We have also increased re-use of machinery and tools across each generation of process technology. As a result, we determined that the useful lives of machinery and equipment in our wafer fabrication facilities should be increased from four to five years. We will account for this as a change in estimate that will be applied prospectively, effective in Q1 2016. This change in depreciable life drives approximately $1.5 billion in lower depreciation expense for 2016. Approximately half of this benefit will increase gross margin (impacting both unit cost and start-up costs), approximately one-fourth will decrease R&D expenses, and the remaining one-fourth will result in lower inventory costs and ending inventory values.
As part of our long-range capacity planning, construction on certain facilities is on hold, and the facilities are not in use. These facilities are being held in a safe state, and we have plans to place them into service at a future date. The time at which these assets are placed into service depends on our existing manufacturing capacity, market demand for specific products, and where we are in the transition of products on our roadmap. Management is required to make judgments as to the timing of when these facilities will be readied for their intended use and placed into service for the manufacturing of our products, which is when depreciation begins.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Business Combinations
Accounting for acquisitions requires our management to estimate the fair value of the assets and liabilities acquired, which involves a number of judgments, assumptions, and estimates that could materially affect the timing or amounts recognized in our financial statements. The items involving the most significant assumptions, estimates, and judgments include determining the fair value of the following:
Intangible assets, including valuation methodology, estimations of future cash flows, and discount rates, as well as the estimated useful life of the intangible assets;
the acquired company’s brand, as well as assumptions about the period of time the acquired brand will continue to be used;
deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances, which are initially estimated as of the acquisition date;
inventory; property, plant and equipment; pre-existing liabilities or legal claims; deferred revenue; and contingent consideration, each as may be applicable, and
goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.
We allocate goodwill and intangible assets to the reporting unit(s) based on the reporting unit(s) that are expected to benefit from the business combination. Upon any reorganization of our operating segments, we reevaluate our reporting units and, if necessary, reassign goodwill using a relative fair value allocation approach.
Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year following the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.
Long-Lived Asset Impairments
Property, Plant and Equipment
We assess property, plant and equipment for impairment when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. We measure the recoverability of assets that we will continue to use in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows. If an asset grouping’s carrying value is not recoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. We measure the impairment by comparing the difference between the asset grouping’s carrying value and its fair value. Property, plant and equipment is considered a non-financial asset and is recorded at fair value only if an impairment charge is recognized.
Impairments are determined for groups of assets related to the lowest level of identifiable independent cash flows. Due to our asset usage model and the interchangeable nature of our semiconductor manufacturing capacity, we must make subjective judgments in determining the independent cash flows that can be related to specific asset groupings.
In addition, as we make manufacturing process conversions and other factory planning decisions, we must make subjective judgments regarding the remaining useful lives of assets, primarily process-specific semiconductor manufacturing tools and building improvements. When we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of depreciation over the assets’ new, shorter useful lives. Based on our analysis, impairments and accelerated depreciation of our property, plant and equipment totaled $151 million in 2015 ($115 million in 2014 and $172 million in 2013).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Identified Intangibles
We make judgments about the recoverability of purchased finite-lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of finite-lived intangible assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows that the asset is expected to generate. We perform an annual impairment assessment in the fourth quarter of each year for indefinite-lived intangible assets, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the carrying value of the assets may not be recoverable. Recoverability of indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If we determine that an individual asset is impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the asset.
The assumptions and estimates used to determine future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for specific product lines. Based on our impairment assessment, we recognized impairment charges of $7 million in 2015 ($36 million in 2014 and $17 million in 2013).
Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired. Goodwill is allocated to our reporting units based on the relative expected fair value provided by the acquisition. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component, and are consistent with the operating segments identified in "Note 26: Operating Segments and Geographic Information" in Part II, Item 8 of this Form 10-K.
We perform an annual impairment assessment in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is not considered impaired and we are not required to perform the two-step goodwill impairment test. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. Additionally, as part of this assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring a reporting unit’s fair value. For reporting units in which the impairment assessment concludes that it is more likely than not that the fair value is less than its carrying value, we perform the first step of the goodwill impairment test, which compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not considered impaired and we are not required to perform additional analysis. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the goodwill impairment test to determine the implied fair value of the reporting unit’s goodwill. If we determine during the second step that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, we record an impairment loss equal to the difference.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. Our goodwill impairment test uses a weighting of the income method and the market method to estimate a reporting unit’s fair value. The income method is based on a discounted future cash flow approach that uses the following assumptions and inputs: revenue, based on assumed market segment growth rates and our assumed market segment share; estimated costs; and appropriate discount rates based on a reporting unit's weighted average cost of capital as determined by considering the observable weighted average cost of capital of comparable companies. Our estimates of market segment growth, our market segment share, and costs are based on historical data, various internal estimates, and a variety of external sources. These estimates are developed as part of our routine long-range planning process. The same estimates are also used in planning for our long-term manufacturing and assembly and test capacity needs as part of our capital budgeting process, and for long-term and short-term business planning and forecasting. We test the reasonableness of the inputs and outcomes of our discounted cash flow analysis against available comparable market data. The market method is based on financial multiples of comparable companies and applies a control premium. A reporting unit’s carrying value represents the assignment of various assets and liabilities, excluding certain corporate assets and liabilities, such as cash, investments, and debt.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
For the annual impairment assessment in 2015, we determined that for each of our reporting units with significant amounts of goodwill, it was more likely than not that the fair value of the reporting units exceeded the carrying value. As a result, we concluded that performing the first step of the goodwill impairment test was not necessary for those reporting units. During the fourth quarter of each of the prior three fiscal years, we completed our annual impairment assessments and concluded that goodwill was not impaired in any of these years.
Income Taxes
We must make estimates and judgments in determining the provision for taxes for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes in these estimates may result in an increase or decrease to our tax provision in a subsequent period.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not more likely than not, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that we will ultimately recover the deferred tax assets recorded on our consolidated balance sheets. However, should a change occur in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determined that the recovery is not more likely than not. Recovery of a portion of our deferred tax assets is impacted by management’s plans with respect to holding or disposing of certain investments; therefore, changes in management’s plans with respect to holding or disposing of investments could affect our future provision for taxes.
We use a two-step process to recognize liabilities for uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately forecast actual outcomes. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.
We have not recognized U.S. deferred income taxes on certain undistributed non-U.S. earnings because we plan to indefinitely reinvest such earnings outside the U.S. Remittances of non-U.S. earnings are based on estimates and judgments of projected cash flow needs, as well as the working capital and investment requirements of our non-U.S. and U.S. operations. Material changes in our estimates of cash, working capital, and investment needs in various jurisdictions could require repatriation of indefinitely reinvested non-U.S. earnings, which would be subject to U.S. income taxes and applicable non-U.S. income and withholding taxes.
Inventory
Intel has a product development life cycle that corresponds with substantive engineering milestones. These engineering milestones are regularly and consistently applied in assessing the point at which our activities, and associated costs, change in nature from R&D to cost of sales. In order for a product to be manufactured in high volumes and sold to our customers under our standard warranty, it must meet our rigorous technical quality specifications. This milestone is known as product release qualification (PRQ). We have identified PRQ as the point at which the costs incurred to manufacture our products are included in the valuation of inventory.
To determine which costs can be included in the valuation of inventory, we must determine normal capacity at our manufacturing and assembly and test facilities, based on historical loadings compared to total available capacity. If the factory loadings are below the established normal capacity level, a portion of our manufacturing overhead costs would not be included in the cost of inventory; therefore, it would be recognized as cost of sales in that period, which would negatively impact our gross margin. We refer to these costs as excess capacity charges. Excess capacity charges were insignificant in 2015 (insignificant in 2014 and $319 million in 2013).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Inventory is valued at the lower of cost or market, based upon assumptions about future demand and market conditions. Product-specific facts and circumstances reviewed in the inventory valuation process include a review of our customer base, the stage of the product life cycle of our products, consumer confidence, customer acceptance of our products, and an assessment of selling price in relation to product cost. If the estimated market value of the inventory is less than the carrying value, we write down the inventory and record the difference as a charge to cost of sales. Inventory reserves increased by approximately $185 million in 2015 compared to 2014.
The valuation of inventory also requires us to estimate obsolete and excess inventory, as well as inventory that is not of saleable quality. The demand forecast is utilized in the development of our short-term manufacturing plans to enable consistency between inventory valuation and build decisions. The estimate of future demand is compared to work-in-process and finished goods inventory levels to determine the amount, if any, of obsolete or excess inventory. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to write off inventory, which would negatively impact our gross margin.
Loss Contingencies
We are subject to loss contingencies, including various legal and regulatory proceedings and asserted and potential claims, accruals related to repair or replacement of parts in connection with product defects, as well as product warranties and potential asset impairments that arise in the ordinary course of business. An estimated loss from such contingencies is recognized as a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a loss contingency is required if there is at least a reasonable possibility that a material loss has been incurred. The outcomes of legal and administrative proceedings and claims, and the estimation of product warranties and asset impairments, are subject to significant uncertainty. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. At least quarterly, we review the status of each significant matter, and we may revise our estimates. These revisions could have a material impact on our results of operations and financial position.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations
Consolidated statements of income data as a percentage of net revenue for each period were as follows: |
| | | | | | | | | | | | | | | | | | | | | |
Years Ended
(In Millions, Except Per Share Amounts) | | December 26, 2015 | | December 27, 2014 | | December 28, 2013 |
| | Dollars | | % of Net Revenue | | Dollars | | % of Net Revenue | | Dollars | | % of Net Revenue |
| Net revenue | | $ | 55,355 |
| | 100.0 | % | | $ | 55,870 |
| | 100.0 | % | | $ | 52,708 |
| | 100.0 | % |
| Cost of sales | | 20,676 |
| | 37.4 | % | | 20,261 |
| | 36.3 | % | | 21,187 |
| | 40.2 | % |
| Gross margin | | 34,679 |
| | 62.6 | % | | 35,609 |
| | 63.7 | % | | 31,521 |
| | 59.8 | % |
| Research and development | | 12,128 |
| | 21.9 | % | | 11,537 |
| | 20.6 | % | | 10,611 |
| | 20.1 | % |
| Marketing, general and administrative | | 7,930 |
| | 14.3 | % | | 8,136 |
| | 14.6 | % | | 8,088 |
| | 15.3 | % |
| Restructuring and asset impairment charges | | 354 |
| | 0.6 | % | | 295 |
| | 0.5 | % | | 240 |
| | 0.5 | % |
| Amortization of acquisition-related intangibles | | 265 |
| | 0.5 | % | | 294 |
| | 0.5 | % | | 291 |
| | 0.6 | % |
| Operating income | | 14,002 |
| | 25.3 | % | | 15,347 |
| | 27.5 | % | | 12,291 |
| | 23.3 | % |
| Gains (losses) on equity investments, net | | 315 |
| | 0.6 | % | | 411 |
| | 0.7 | % | | 471 |
| | 0.9 | % |
| Interest and other, net | | (105 | ) | | (0.2 | )% | | 43 |
| | 0.1 | % | | (151 | ) | | (0.3 | )% |
| Income before taxes | | 14,212 |
| | 25.7 | % | | 15,801 |
| | 28.3 | % | | 12,611 |
| | 23.9 | % |
| Provision for taxes | | 2,792 |
| | 5.1 | % | | 4,097 |
| | 7.4 | % | | 2,991 |
| | 5.6 | % |
| Net income | | $ | 11,420 |
| | 20.6 | % | | $ | 11,704 |
| | 20.9 | % | | $ | 9,620 |
| | 18.3 | % |
| Diluted earnings per share of common stock | | $ | 2.33 |
| | | | $ | 2.31 |
| | | | $ | 1.89 |
| | |
Our net revenue in 2015 decreased by $515 million, or 1%, compared to 2014. Platform unit sales were down 9% due to challenging macroeconomic conditions, particularly in the first half of the year, and higher PC demand in 2014 driven by the Microsoft Windows XP refresh. The decrease in PC demand was partially offset by higher DCG and IOTG platform unit sales. The decrease in revenue was partially offset by higher platform average selling prices, which were up 8%, as we benefited from a higher mix of DCG platform unit sales and higher average selling prices on desktop and DCG platforms. To a lesser extent, the decrease in revenue was partially offset by higher NSG revenue.
Our overall gross margin percentage was 62.6% in 2015, down from 63.7% in 2014. The decrease in gross margin percentage was primarily due to the gross margin decrease in the CCG operating segment. We derived a substantial majority of our overall gross margin dollars for 2015 and 2014 from the sale of platforms in the CCG and DCG operating segments. Our overall gross margin dollars in 2015 decreased by $930 million, or 3%, compared to 2014. The following results drove the change in gross margin in 2015 compared to 2014 by approximately the amounts indicated: |
| | | | |
| (In Millions) | | Gross Margin Reconciliation (2015 compared to 2014): |
| $ | (1,965 | ) | | Higher platform unit costs, primarily driven by the ramp of our 14nm process technology |
| 400 |
| | Lower factory start-up costs, primarily driven by the ramp of our 14nm process technology |
| 205 |
| | Lower production costs primarily on our 14nm products, which were treated as period charges in 2014, partially offset by higher pre-qualification product costs on 14nm products |
| 430 |
| | Other |
| $ | (930 | ) | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Our net revenue for 2014 was up $3.2 billion, or 6%, compared to 2013. Platform unit sales were up 19%, primarily driven by the ramp of our tablet platform and strength in the traditional PC business. To a lesser extent, higher NSG revenue also contributed to the increase. These increases were partially offset by lower platform average selling prices, which were down 10% primarily on mix shift on significantly higher tablet and phone platform unit sales and cash consideration associated with integrating our tablet and phone platforms. To a lesser extent, lower CCG phone component unit sales partially offset the increase in revenue.
Our overall gross margin percentage was 63.7% in 2014, up from 59.8% in 2013. The increase in gross margin percentage was primarily due to the gross margin increase in the CCG and DCG operating segments. We derived most of our overall gross margin dollars for 2014 and 2013 from the sale of platforms in the CCG and DCG operating segments. Our overall gross margin dollars for 2014 increased by $4.1 billion, or 13%, compared to 2013. The following results drove the change in gross margin in 2014 compared to 2013 by approximately the amounts indicated: |
| | | | |
| (In Millions) | | Gross Margin Reconciliation (2014 compared to 2013): |
| $ | 2,575 |
| | Lower platform unit costs |
| 1,160 |
| | Higher gross margin from platform revenue1 |
| 860 |
| | Lower factory start-up costs, primarily driven by our 14nm process technology |
| (507 | ) | | Other |
| $ | 4,088 |
| | |
| |
1
| Higher gross margin from platform revenue was driven by higher platform unit sales, which were partially offset by lower platform average selling prices. The decrease in platform average selling prices was due to a shift in market segment mix (higher tablet and phone platform unit sales with higher cash consideration to our customers associated with integration of our platform) and lower notebook platform average selling prices. |
Client Computing Group
The revenue and operating income for the CCG operating segment for 2015 and 2014 were as follows: |
| | | | | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Change | | % Change |
| Platform | | $ | 30,654 |
| | $ | 33,210 |
| | $ | (2,556 | ) | | (8 | )% |
| Other | | 1,565 |
| | 1,662 |
| | (97 | ) | | (6 | )% |
| Net revenue | | $ | 32,219 |
| | $ | 34,872 |
| | $ | (2,653 | ) | | (8 | )% |
| Operating income | | $ | 8,165 |
| | $ | 10,323 |
| | $ | (2,158 | ) | | (21 | )% |
| CCG platform unit sales | | | | | | | | (11 | )% |
| CCG platform average selling prices | | | | | | | | 4 | % |
Our CCG platform unit sales decreased in 2015 compared to 2014 due to challenging macroeconomic conditions, particularly in the first half of the year, and higher PC demand in 2014 driven by the Microsoft Windows XP refresh. Our results, as compared to the prior year, did benefit from a richer mix of high-performance platforms. Within the CCG operating segment, the following results drove the change in revenue in 2015 compared to 2014: |
| | | | |
| (In Millions) | | Revenue Reconciliation (2015 compared to 2014): |
| $ | (2,304 | ) | | Lower desktop platform unit sales, down 16% |
| (1,695 | ) | | Lower notebook platform unit sales, down 9% |
| 760 |
| | Higher desktop platform average selling prices, up 6% |
| 300 |
| | Higher notebook platform average selling prices, up 2% |
| 272 |
| | Higher tablet platform average selling prices |
| 14 |
| | Other |
| $ | (2,653 | ) | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following results drove the change in CCG operating income in 2015 compared to 2014 by approximately the amounts indicated: |
| | | | |
| (In Millions) | | Operating Income Reconciliation (2015 compared to 2014): |
| $ | (2,060 | ) | | Higher CCG platform unit costs |
| (1,565 | ) | | Lower CCG platform revenue1 |
| 435 |
| | Lower factory start-up costs, primarily driven by the ramp of our 14nm process technology |
| 430 |
| | Lower production costs primarily on our 14nm products, which were treated as a period charges in 2014 |
| 375 |
| | Lower operating expense |
| 227 |
| | Other |
| $ | (2,158 | ) | | |
| |
1
| Lower gross margin from lower CCG platform revenue was driven by lower CCG platform unit sales, partially offset by higher CCG platform average selling prices. CCG platform average selling prices increased due to higher average selling prices on desktop, notebook, and tablet platforms, partially offset by a market segment mix to phone platform from tablet and desktop platforms. |
The revenue and operating income for the CCG operating segment for 2014 and 2013 were as follows: |
| | | | | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 27,
2014 | | Dec 28,
2013 | | Change | | % Change |
| Platform | | $ | 33,210 |
| | $ | 32,385 |
| | $ | 825 |
| | 3 | % |
| Other | | 1,662 |
| | 2,260 |
| | (598 | ) | | (26 | )% |
| Net revenue | | $ | 34,872 |
| | $ | 34,645 |
| | $ | 227 |
| | 1 | % |
| Operating income | | $ | 10,323 |
| | $ | 8,708 |
| | $ | 1,615 |
| | 19 | % |
| CCG platform unit sales | | | | | | | | 20 | % |
| CCG platform average selling prices | | | | | | | | (15 | )% |
Our CCG operating segment results benefited from strength in the traditional PC business driven by the Microsoft Windows XP refresh. Within the CCG operating segment, the following market segment results drove the change in revenue in 2014 compared to 2013: |
| | | | |
| (In Millions) | | Revenue Reconciliation (2014 compared to 2013): |
| $ | 2,101 |
| | Higher notebook platform unit sales, up 11% |
| 501 |
| | Higher desktop platform unit sales, up 3% |
| 305 |
| | Higher tablet platform unit sales |
| (1,514 | ) | | Lower notebook platform average selling prices, down 7% |
| (711 | ) | | Lower tablet platform average selling prices, primarily driven by higher cash consideration to our customers associated with integrating our platform |
| (515 | ) | | Lower phone component unit sales |
| 60 |
| | Other |
| $ | 227 |
| | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following results drove the change in CCG operating income in 2014 compared to 2013 by approximately the amounts indicated: |
| | | | |
| (In Millions) | | Operating Income Reconciliation (2014 compared to 2013): |
| $ | 2,160 |
| | Lower CCG platform unit costs |
| 915 |
| | Lower factory start-up costs, primarily driven by our 14nm process technology |
| 80 |
| | Lower operating expense |
| (990 | ) | | Lower gross margin from CCG platform revenue1 |
| (345 | ) | | Lower phone component revenue |
| (205 | ) | | Other |
| $ | 1,615 |
| | |
| |
1
| Lower gross margin from CCG platform revenue was driven by lower CCG platform average selling prices, partially offset by higher CCG platform unit sales. Lower CCG platform average selling prices were due to a shift in market segment mix (higher tablet and phone platform unit sales) and lower notebook and tablet platform average selling prices. |
Data Center Group
The revenue and operating income for the DCG operating segment for 2015 and 2014 were as follows: |
| | | | | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Change | | % Change |
| Platform | | $ | 14,882 |
| | $ | 13,366 |
| | $ | 1,516 |
| | 11 | % |
| Other | | 1,095 |
| | 1,021 |
| | 74 |
| | 7 | % |
| Net revenue | | $ | 15,977 |
| | $ | 14,387 |
| | $ | 1,590 |
| | 11 | % |
| Operating income | | $ | 7,844 |
| | $ | 7,390 |
| | $ | 454 |
| | 6 | % |
| DCG platform unit sales | | | | | | | | 8 | % |
| DCG platform average selling prices | | | | | | | | 3 | % |
Our DCG platform revenue increased primarily due to growth in the Internet cloud computing market segment. To a lesser extent, growth in the communications infrastructure market segment also contributed to the increase. The following results drove the change in DCG revenue in 2015 compared to 2014: |
| | | | |
| (In Millions) | | Revenue Reconciliation (2015 compared to 2014): |
| $ | 1,023 |
| | Higher DCG platform unit sales |
| 493 |
| | Higher DCG platform average selling prices |
| 74 |
| | Other |
| $ | 1,590 |
| | |
The following results drove the change in DCG operating income in 2015 compared to 2014 by approximately the amounts indicated: |
| | | | |
| (In Millions) | | Operating Income Reconciliation (2015 compared to 2014): |
| $ | 1,415 |
| | Higher DCG platform revenue |
| (725 | ) | | Higher operating expense, primarily driven by higher shared product development costs |
| (236 | ) | | Other |
| $ | 454 |
| | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The revenue and operating income for the DCG operating segment for 2014 and 2013 were as follows: |
| | | | | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 27,
2014 | | Dec 28,
2013 | | Change | | % Change |
| Platform | | $ | 13,366 |
| | $ | 11,219 |
| | $ | 2,147 |
| | 19 | % |
| Other | | 1,021 |
| | 944 |
| | 77 |
| | 8 | % |
| Net revenue | | $ | 14,387 |
| | $ | 12,163 |
| | $ | 2,224 |
| | 18 | % |
| Operating income | | $ | 7,390 |
| | $ | 5,456 |
| | $ | 1,934 |
| | 35 | % |
| DCG platform unit sales | | | | | | | | 8 | % |
| DCG platform average selling prices | | | | | | | | 10 | % |
Our DCG platform revenue continued to benefit from growth in the cloud and technical computing market segments, with continued strengthening of the enterprise market segment. The following results drove the change in DCG revenue in 2014 compared to 2013: |
| | | | |
| (In Millions) | | Revenue Reconciliation (2014 compared to 2013): |
| $ | 1,200 |
| | Higher DCG platform average selling prices |
| 947 |
| | Higher DCG platform unit sales |
| 77 |
| | Other |
| $ | 2,224 |
| | |
The following results drove the change in DCG operating income in 2014 compared to 2013 by approximately the amounts indicated: |
| | | | |
| (In Millions) | | Operating Income Reconciliation (2014 compared to 2013): |
| $ | 2,020 |
| | Higher DCG platform revenue |
| 220 |
| | Lower DCG platform unit costs |
| (465 | ) | | Higher operating expense, primarily driven by higher direct and shared product development costs |
| 159 |
| | Other |
| $ | 1,934 |
| | |
Internet of Things Group
The revenue and operating income for the IOTG operating segment for 2015 and 2014 were as follows: |
| | | | | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Change | | % Change |
| Platform | | $ | 1,976 |
| | $ | 1,814 |
| | $ | 162 |
| | 9 | % |
| Other | | 322 |
| | 328 |
| | (6 | ) | | (2 | )% |
| Net revenue | | $ | 2,298 |
| | $ | 2,142 |
| | $ | 156 |
| | 7 | % |
| Operating income | | $ | 515 |
| | $ | 583 |
| | $ | (68 | ) | | (12 | )% |
Net revenue for the IOTG operating segment increased in 2015 compared to 2014, primarily due to higher IOTG platform unit sales based on strength in the retail market segment. The increase was partially offset by lower IOTG platform average selling prices.
Operating income for the IOTG operating segment decreased in 2015 compared to 2014, driven by continued investment in product development across our operating segments, including the Internet of Things market segment. This decrease was partially offset by lower unit costs related to product transition and higher IOTG platform revenue.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The revenue and operating income for the IOTG operating segment for 2014 and 2013 were as follows: |
| | | | | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 27,
2014 | | Dec 28,
2013 | | Change | | % Change |
| Platform | | $ | 1,814 |
| | $ | 1,485 |
| | $ | 329 |
| | 22 | % |
| Other | | 328 |
| | 316 |
| | 12 |
| | 4 | % |
| Net revenue | | $ | 2,142 |
| | $ | 1,801 |
| | $ | 341 |
| | 19 | % |
| Operating income | | $ | 583 |
| | $ | 532 |
| | $ | 51 |
| | 10 | % |
Net revenue for the IOTG operating segment increased by $341 million, or 19%, in 2014 compared to 2013. The increase was primarily due to higher IOTG platform unit sales based on strength in the retail and industrial market segments.
Operating income for the IOTG operating segment increased by $51 million, or 10%, in 2014 compared to 2013. The increase was primarily due to higher IOTG platform revenue, partially offset by higher IOTG platform operating expenses.
Software and Services Operating Segments
The revenue and operating income for the SSG operating segments, including the Intel Security Group and the Software and Services Group, for 2015 and 2014 were as follows: |
| | | | | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Change | | % Change |
| Net revenue | | $ | 2,167 |
| | $ | 2,216 |
| | $ | (49 | ) | | (2 | )% |
| Operating income | | $ | 210 |
| | $ | 81 |
| | $ | 129 |
| | 159 | % |
Operating income for the SSG operating segments increased in 2015 compared to 2014, driven by $132 million of lower operating expense.
The revenue and operating income for the SSG operating segments for 2014 and 2013 were as follows: |
| | | | | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 27,
2014 | | Dec 28,
2013 | | Change | | % Change |
| Net revenue | | $ | 2,216 |
| | $ | 2,188 |
| | $ | 28 |
| | 1 | % |
| Operating income | | $ | 81 |
| | $ | 57 |
| | $ | 24 |
| | 42 | % |
Operating Expenses
Operating expenses for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Research and development (R&D) | | $ | 12,128 |
| | $ | 11,537 |
| | $ | 10,611 |
|
| Marketing, general and administrative (MG&A) | | $ | 7,930 |
| | $ | 8,136 |
| | $ | 8,088 |
|
| R&D and MG&A as percentage of net revenue | | 36 | % | | 35 | % | | 35 | % |
| Restructuring and asset impairment charges | | $ | 354 |
| | $ | 295 |
| | $ | 240 |
|
| Amortization of acquisition-related intangibles | | $ | 265 |
| | $ | 294 |
| | $ | 291 |
|
Research and Development
R&D spending increased by $591 million, or 5%, in 2015 compared to 2014. The increase was due to higher investment in our products—primarily server, Internet of Things, and new devices—as well as expenses of newly acquired entities and higher process development costs for our 10nm process technology. This increase was partially offset by lower profit-dependent compensation and savings from the implementation of efficiencies within our CCG operating segment.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
R&D spending increased by $926 million, or 9%, in 2014 compared to 2013. The increase was due to higher process development costs for our 10nm process technology, higher compensation expenses for both profit-dependent compensation and annual salary increases, as well as higher investments in our products, primarily server and new devices. This increase was partially offset by lower product investments in our phone, tablet, and Intel Media businesses.
Marketing, General and Administrative
MG&A expenses decreased by $206 million, or 3%, in 2015 compared to 2014. This decrease was due to lower profit-dependent compensation as well as lower expenses from businesses that have been divested. MG&A expenses increased by $48 million in 2014 compared to 2013.
Restructuring and Asset Impairment Charges
Restructuring and asset impairment charges by program for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| 2015 restructuring program | | $ | 264 |
| | $ | — |
| | $ | — |
|
| 2013 restructuring program | | 90 |
| | 295 |
| | 240 |
|
| Total restructuring and asset impairment charges | | $ | 354 |
| | $ | 295 |
| | $ | 240 |
|
2015 Restructuring Program. Beginning in Q2 2015, management approved and commenced implementation of restructuring actions, primarily targeted workforce reductions, as we adjusted resources from areas of disinvestment to areas of investment. This program was substantially complete by the end of 2015.
Restructuring and asset impairment charges for the 2015 restructuring program in 2015 were as follows: |
| | | | |
Years Ended
(In Millions) | | Dec 26,
2015 |
| Employee severance and benefit arrangements | | $ | 250 |
|
| Asset impairments and other restructuring charges | | 14 |
|
| Total restructuring and asset impairment charges | | $ | 264 |
|
Restructuring and asset impairment activities for the 2015 restructuring program in 2015 were as follows: |
| | | | | | | | | | | | |
| (In Millions) | | Employee Severance and Benefits | | Asset Impairments and Other | | Total |
| Accrued restructuring balance as of December 27, 2014 | | $ | — |
| | $ | — |
| | $ | — |
|
| Additional accruals | | 292 |
| | 14 |
| | 306 |
|
| Adjustments | | (42 | ) | | — |
| | (42 | ) |
| Cash payments | | (225 | ) | | (1 | ) | | (226 | ) |
| Non-cash settlements | | — |
| | (6 | ) | | (6 | ) |
| Accrued restructuring balance as of December 26, 2015 | | $ | 25 |
| | $ | 7 |
| | $ | 32 |
|
We recorded the additional accruals as restructuring and asset impairment charges in the consolidated statements of income and within the “all other” operating segments category. A substantial majority of the accrued restructuring balance as of December 26, 2015 is expected to be paid within the next 12 months, and was recorded as a current liability within accrued compensation and benefits on the consolidated balance sheets.
Restructuring actions related to this program that were approved in 2015 impacted approximately 4,000 employees. We estimate that employee severance and benefit charges to date will result in gross annual savings of approximately $400 million, which will be realized within R&D, cost of sales, and MG&A. We began to realize these savings in Q2 2015 and expect to fully realize these savings after the actions are complete.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
2013 Restructuring Program. Beginning in Q3 2013, management approved and commenced implementation of several restructuring actions, including targeted workforce reductions and the exit of certain businesses and facilities. These actions include the wind down of our 200mm wafer fabrication facility in Massachusetts, which ceased production in Q1 2015, and the closure of our assembly and test facility in Costa Rica, which ceased production in Q4 2014. These targeted reductions will enable us to better align our resources in areas providing the greatest benefit in the current business environment. This program was substantially complete by the end of 2015.
Restructuring and asset impairment charges for the 2013 restructuring program for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Employee severance and benefit arrangements | | $ | 82 |
| | $ | 265 |
| | $ | 201 |
|
| Asset impairments and other restructuring charges | | 8 |
| | 30 |
| | 39 |
|
| Total restructuring and asset impairment charges | | $ | 90 |
| | $ | 295 |
| | $ | 240 |
|
Restructuring and asset impairment activities for the 2013 restructuring program for each period were as follows: |
| | | | | | | | | | | | |
| (In Millions) | | Employee Severance and Benefits | | Asset Impairments and Other | | Total |
| Accrued restructuring balance as of December 28, 2013 | | $ | 183 |
| | $ | — |
| | $ | 183 |
|
| Additional accruals | | 252 |
| | 31 |
| | 283 |
|
| Adjustments | | 13 |
| | (1 | ) | | 12 |
|
| Cash payments | | (327 | ) | | (6 | ) | | (333 | ) |
| Non-cash settlements | | — |
| | (13 | ) | | (13 | ) |
| Accrued restructuring balance as of December 27, 2014 | | 121 |
| | 11 |
| | 132 |
|
| Additional accruals | | 101 |
| | 9 |
| | 110 |
|
| Adjustments | | (19 | ) | | (1 | ) | | (20 | ) |
| Cash payments | | (171 | ) | | (10 | ) | | (181 | ) |
| Non-cash settlements | | — |
| | (3 | ) | | (3 | ) |
| Accrued restructuring balance as of December 26, 2015 | | $ | 32 |
| | $ | 6 |
| | $ | 38 |
|
We recorded the additional accruals and adjustments as restructuring and asset impairment charges in the consolidated statements of income and within the "all other" operating segments category. Substantially all of the accrued restructuring balance as of December 26, 2015 is expected to be paid within the next 12 months, and was recorded as a current liability within accrued compensation and benefits on the consolidated balance sheets.
Restructuring actions related to this program that were approved in 2015 impacted approximately 940 employees. Since Q3 2013, we have incurred a total of $625 million in restructuring and asset impairment charges. These charges include $548 million related to employee severance and benefit arrangements for approximately 8,500 employees, and $77 million in asset impairment charges and other restructuring charges.
We estimate that employee severance and benefit charges to date will result in gross annual savings of approximately $600 million, which will be realized within R&D, MG&A, and cost of sales. We began to realize these savings in Q4 2013 and expect to fully realize these savings after the actions are complete.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Share-Based Compensation
Share-based compensation totaled $1.3 billion in 2015 ($1.1 billion in 2014 and $1.1 billion in 2013). Share-based compensation was included in cost of sales and operating expenses.
As of December 26, 2015, unrecognized share-based compensation costs and the weighted average periods over which the costs are expected to be recognized were as follows: |
| | | | | | |
| (Dollars in Millions) | | Unrecognized Share-Based Compensation Costs | | Weighted Average Period |
| Restricted stock units | | $ | 1,789 |
| | 1.2 years |
| Stock options | | $ | 13 |
| | 8 months |
| Stock Purchase Plan | | $ | 14 |
| | 2 months |
Gains (Losses) on Equity Investments and Interest and Other, Net
Gains (losses) on equity investments, net and interest and other, net for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Gains (losses) on equity investments, net | | $ | 315 |
| | $ | 411 |
| | $ | 471 |
|
| Interest and other, net | | $ | (105 | ) | | $ | 43 |
| | $ | (151 | ) |
We recognized lower net gains on equity investments in 2015 compared to 2014 due to lower gains on sales of equity investments, partially offset by higher gains on third-party merger transactions.
We recognized lower net gains on equity investments in 2014 compared to 2013 due to lower gains on sales of equity investments, partially offset by higher gains on third-party merger transactions. The majority of gains on sales, net for 2014 resulted from gains on private equity sales. Net gains on equity investments for 2013 included gains of $439 million on the sales of our interest in Clearwire Communications, LLC and our shares in Clearwire Corporation in Q3 2013. For further information on these transactions, see "Note 5: Cash and Investments" in Part II, Item 8 of this Form 10-K.
We recognized an interest and other net loss in 2015 compared to a net gain in 2014 primarily due to higher interest expense, which includes the 2015 issuances of our $9.5 billion aggregate principal amount of senior unsecured notes. For further information on these transactions, see "Note 15: Borrowings" in Part II, Item 8 of this Form 10-K.
We recognized an interest and other net gain in 2014 compared to a net loss in 2013 due to a gain recognized on the divestiture of our Intel Media assets in 2014.
Provision for Taxes
Our provision for taxes and effective tax rate for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Income before taxes | | $ | 14,212 |
| | $ | 15,801 |
| | $ | 12,611 |
|
| Provision for taxes | | $ | 2,792 |
| | $ | 4,097 |
| | $ | 2,991 |
|
| Effective tax rate | | 19.6 | % | | 25.9 | % | | 23.7 | % |
Most of the decrease in our effective tax rate in 2015 compared to 2014 was driven by one-time items, a higher proportion of our income from lower tax jurisdictions, and our decision to indefinitely reinvest certain prior years’ non-U.S. earnings positively impacted our effective income tax rate.
A substantial majority of the increase in our effective tax rate between 2014 and 2013 was driven by the reenacted U.S. R&D tax credit in 2013 containing two years' worth of R&D tax credits. The U.S. R&D tax credit was reenacted in Q4 2014 retroactive for the full year. It was also reenacted in Q1 2013 retroactive to the beginning of 2012.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources |
| | | | | | | | |
| (Dollars in Millions) | | Dec 26,
2015 | | Dec 27,
2014 |
| Cash and cash equivalents, short-term investments, and trading assets | | $ | 25,313 |
| | $ | 14,054 |
|
| Other long-term investments | | $ | 1,891 |
| | $ | 2,023 |
|
| Loans receivable and other | | $ | 1,170 |
| | $ | 1,335 |
|
| Reverse repurchase agreements with original maturities greater than approximately three months | | $ | 1,000 |
| | $ | 450 |
|
| Unsettled trade liabilities and other | | $ | 99 |
| | $ | 77 |
|
| Short-term and long-term debt | | $ | 22,670 |
| | $ | 13,655 |
|
| Temporary equity | | $ | 897 |
| | $ | 912 |
|
| Debt as percentage of permanent stockholders’ equity | | 37.1 | % | | 24.4 | % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Sources and Uses of Cash
(In Millions)
In summary, our cash flows for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Net cash provided by operating activities | | $ | 19,017 |
| | $ | 20,418 |
| | $ | 20,776 |
|
| Net cash used for investing activities | | (8,183 | ) | | (9,905 | ) | | (18,073 | ) |
| Net cash provided by (used for) financing activities | | 1,912 |
| | (13,611 | ) | | (5,498 | ) |
| Effect of exchange rate fluctuations on cash and cash equivalents | | 1 |
| | (15 | ) | | (9 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | 12,747 |
| | $ | (3,113 | ) | | $ | (2,804 | ) |
Operating Activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
For 2015 compared to 2014, the $1.4 billiondecrease in cash provided by operating activities was due to changes in working capital, adjustments for non-cash items, and lower net income. The adjustments for non-cash items were lower due primarily to deferred taxes, partially offset by higher depreciation. Income taxes paid, net of refunds, in 2015 compared to 2014 were $1.2 billion lower due to lower income before taxes in 2015.
Changes in assets and liabilities as of December 26, 2015 compared to December 27, 2014 included a decrease in accrued compensation and benefits. This decrease was due to higher profit-dependent compensation in 2014 that was paid out in 2015, and an increase in inventories due primarily to the ramp of our 6th generation Intel Core processor family of products, partially offset by the timing of certain tax benefits that reduced our income taxes payable position in 2015.
Hewlett-Packard Company, our largest customer in 2014, separated into HP Inc. and Hewlett Packard Enterprise Company on November 1, 2015. In 2015, these entities collectively accounted for 18% of our net revenue (18% in 2014 and 17% in 2013), Dell Inc. accounted for 15% of our net revenue (16% in 2014 and 15% in 2013), and Lenovo Group Limited accounted for 13% of our net revenue (12% in 2014 and 12% in 2013). Combined, these customers accounted for 46% of our net revenue (46% in 2014 and 44% in 2013) and 49% of our accounts receivable as of December 26, 2015 (43% as of December 27, 2014).
For 2014 compared to 2013, the $358 million decrease in cash provided by operating activities was due to changes in working capital, partially offset by higher net income and adjustment for non-cash items.
Investing Activities
Investing cash flows consist primarily of capital expenditures; investment purchases, sales, maturities, and disposals; and proceeds from divestitures and cash used for acquisitions. Our capital expenditures were $7.3 billion in 2015 ($10.1 billion in 2014 and $10.7 billion in 2013).
The decrease in cash used for investing activities in 2015 compared to 2014 was primarily due to net trading assets activity (which was a source of cash in 2015 compared to a use of cash in 2014) and lower capital expenditures. This activity was partially offset by net available-for-sale activity (which was cash flow neutral in 2015 compared to a source of cash in 2014) and higher investments in non-marketable equity investments.
The decrease in cash used for investing activities in 2014 compared to 2013 was primarily due to net available-for-sale activity (which was a source of cash in 2014 compared to a use of cash in 2013) and a decrease in cash used for net trading assets activity. This activity was partially offset by an increase in investments in non-marketable equity investments.
Financing Activities
Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, and proceeds from the sale of shares of common stock through employee equity incentive plans.
Cash was provided by financing activities in 2015 compared to cash used by financing activities in 2014, primarily due to the issuance of $9.5 billion of long-term debt and fewer repurchases of common stock under our authorized stock repurchase program, partially offset by lower proceeds from the sales of common stock through employee equity incentive plans and repayments of short-term debt compared to borrowings in 2014. We have an ongoing authorization, originally approved by our Board of Directors in 2005, and subsequently amended, to repurchase up to$65.0 billion in shares of our common stock in the open market or negotiated transactions. During 2015, we repurchased $3.0 billion of common stock under our authorized common stock repurchase program, compared to $10.8 billion in 2014. As of December 26, 2015, $9.4 billion remained available for repurchasing common stock under the existing repurchase authorization limit. We base our level of common stock repurchases on internal cash management decisions, and this level may fluctuate. Proceeds from the sale of common stock through employee equity incentive plans totaled $866 million in 2015 compared to $1.7 billion in 2014. Our total dividend payments were $4.6 billion in 2015 compared to $4.4 billion in 2014. We have paid a cash dividend in each of the past 93 quarters. In January 2016, our Board of Directors declared a cash dividend of $0.26 per share of common stock for Q1 2016. The dividend is payable on March 1, 2016 to stockholders of record on February 7, 2016.
The increase in cash used for financing activities in 2014 compared to 2013 was primarily due to an increase in repurchases of common stock under our authorized stock repurchase program, partially offset by the issuance of short-term debt in 2014.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity
Cash generated by operations is our primary source of liquidity. We maintain a diverse investment portfolio that we continually analyze based on issuer, industry, and country. As of December 26, 2015, cash and cash equivalents, short-term investments, and trading assets totaled $25.3 billion ($14.1 billion as of December 27, 2014). The increased balance compared to December 27, 2014 was primarily related to the accumulation of cash consideration required for our acquisition of Altera, which closed on December 28, 2015, subsequent to our fiscal 2015 year-end. In addition to the $25.3 billion, we have $1.9 billion of other long-term investments, $1.2 billion of loans receivable and other, and $1.0 billion of reverse repurchase agreements with original maturities greater than approximately three months that we include when assessing our sources of liquidity. Substantially all of our investments in debt instruments are in A/A2 or better rated issuances, and a substantial majority of the issuances are rated AA-/Aa3 or better.
Other potential sources of liquidity include our commercial paper program and our automatic shelf registration statement on file with the SEC, pursuant to which we may offer an unspecified amount of debt, equity, and other securities. Under our commercial paper program, we have an ongoing authorization from our Board of Directors to borrow up to $5.0 billion, which increased in 2015 from $3.0 billion. Maximum borrowings under our commercial paper program were $900 million during 2015, and no commercial paper remained outstanding as of December 26, 2015. Our commercial paper was rated A-1+ by Standard & Poor’s and P-1 by Moody’s as of December 26, 2015. On December 21, 2015, we entered into a short-term credit facility to borrow up to $5.0 billion to facilitate the settlement of our acquisition of Altera. No borrowings were outstanding under this credit facility as of December 26, 2015 and it was closed in January 2016. In 2015, we issued $9.5 billion aggregate principal amount of senior unsecured notes. These notes were issued primarily to fund a portion of the cash consideration for our pending acquisition of Altera and for general corporate purposes, which may include the refinancing of existing indebtedness. For further information on the terms of the notes, see "Note 15: Borrowings" in Part II, Item 8 of this Form 10-K.
As of December 26, 2015, $11.1 billion of our $25.3 billion of cash and cash equivalents, short-term investments, and trading assets was held by our non-U.S. subsidiaries. Of the $11.1 billion held by our non-U.S. subsidiaries, approximately $2.6 billion was available for use in the U.S. without incurring additional U.S. income taxes in excess of the amounts already accrued in our financial statements as of December 26, 2015. The remaining amount of non-U.S. cash and cash equivalents, short-term investments, and trading assets has been indefinitely reinvested and, therefore, no U.S. current or deferred taxes have been accrued. This amount is earmarked for near-term investment in our operations outside the U.S. and future acquisitions of non-U.S. entities. We believe our U.S. sources of cash and liquidity are sufficient to meet our business needs in the U.S., and do not expect that we will need to repatriate the funds we have designated as indefinitely reinvested outside the U.S. Under current tax laws, should our plans change and we were to choose to repatriate some or all of the funds we have designated as indefinitely reinvested outside the U.S., such amounts would be subject to U.S. income taxes and applicable non-U.S. income and withholding taxes.
During 2015, we entered into a definitive agreement to acquire Altera in an all-cash transaction. The transaction closed on December 28, 2015, subsequent to our fiscal 2015 year-end. As of the date we entered into the agreement, the transaction had an approximate value of $16.7 billion. We financed a portion of the acquisition by issuing $9.5 billion in long-term debt during 2015 and borrowing $4.0 billion against our short-term credit facility in the first quarter of 2016. We funded the remainder of the acquisition with issuances of commercial paper and existing cash and investments. For information on our indebtedness, see "Note 15: Borrowings" in Part II, Item 8 of this Form 10-K.
We believe that we have sufficient financial resources to meet our business requirements in the next 12 months, including capital expenditures for worldwide manufacturing and assembly and test; working capital requirements; and potential dividends, common stock repurchases, acquisitions, and strategic investments.
Fair Value of Financial Instruments
When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions, such as an obligor’s credit risk, that market participants would use when pricing the asset or liability. For further information, see "Fair Value" in "Note 2: Accounting Policies" and "Note 4: Fair Value" in Part II, Item 8 of this Form 10-K.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Marketable Debt Instruments
As of December 26, 2015, our assets measured and recorded at fair value on a recurring basis included $23.4 billion of marketable debt instruments. Of these instruments, $13.2 billion was classified as Level 1, $10.0 billion as Level 2, and $118 million as Level 3.
Our marketable debt instruments that are measured and recorded at fair value on a recurring basis and classified as Level 1 were classified as such due to the use of observable market prices for identical instruments that are traded in active markets. We evaluate instrument-specific market data when determining whether the market for a debt instrument is active.
Of the $10.0 billion of marketable debt instruments measured and recorded at fair value on a recurring basis and classified as Level 2, approximately 50% was classified as Level 2 due to the use of a discounted cash flow model performed by us, and approximately 50% was classified as such due to the use of non-binding market consensus prices that were corroborated with observable market data.
Our marketable debt instruments that are measured and recorded at fair value on a recurring basis and classified as Level 3 are classified as such because the fair values are generally derived from discounted cash flow models, performed either by us or our pricing providers, using inputs that we are unable to corroborate with observable market data. We monitor and review the inputs and results of these valuation models to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
Loans Receivable and Reverse Repurchase Agreements
As of December 26, 2015, our assets measured and recorded at fair value on a recurring basis included $479 million of loans receivable and $2.4 billion of reverse repurchase agreements. All of these investments were classified as Level 2, as the fair value is determined using a discounted cash flow model with all significant inputs derived from or corroborated with observable market data.
Marketable Equity Securities
As of December 26, 2015, our assets measured and recorded at fair value on a recurring basis included $6.0 billion of marketable equity securities. Substantially all of these securities were classified as Level 1 because the valuations were based on quoted prices for identical securities in active markets. Our assessment of an active market for our marketable equity securities generally takes into consideration the number of days that each individual equity security trades over a specified period.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Contractual Obligations
Significant contractual obligations as of December 26, 2015 were as follows: |
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In Millions) | | Total | | Less Than 1 Year | | 1–3 Years | | 3–5 Years | | More Than 5 Years |
| Operating lease obligations | | $ | 1,200 |
| | $ | 234 |
| | $ | 376 |
| | $ | 264 |
| | $ | 326 |
|
Capital purchase obligations1 | | 5,746 |
| | 4,250 |
| | 1,496 |
| | — |
| | — |
|
Other purchase obligations and commitments2 | | 3,966 |
| | 1,784 |
| | 1,986 |
| | 196 |
| | — |
|
Long-term debt obligations3 | | 38,120 |
| | 2,299 |
| | 4,499 |
| | 3,383 |
| | 27,939 |
|
Other long-term liabilities4, 5 | | 1,263 |
| | 788 |
| | 214 |
| | 105 |
| | 156 |
|
Total6 | | $ | 50,295 |
| | $ | 9,355 |
| | $ | 8,571 |
| | $ | 3,948 |
| | $ | 28,421 |
|
| |
1
| Capital purchase obligations represent commitments for the construction or purchase of property, plant and equipment. They were not recorded as liabilities on our consolidated balance sheets as of December 26, 2015, as we had not yet received the related goods or taken title to the property.
|
| |
2
| Other purchase obligations and commitments include payments due under various types of licenses and agreements to purchase goods or services, as well as payments due under non-contingent funding obligations. Funding obligations include agreements to fund various projects with other companies.
|
| |
3
| Amounts represent principal and interest cash payments over the life of the debt obligations, including anticipated interest payments that are not recorded on our consolidated balance sheets. Debt obligations are classified based on their stated maturity date, regardless of their classification on the consolidated balance sheets. Any future settlement of convertible debt would impact our cash payments.
|
| |
4
| We are unable to reliably estimate the timing of future payments related to uncertain tax positions; therefore, $114 million of long-term income taxes payable has been excluded from the preceding table. However, long-term income taxes payable, recorded on our consolidated balance sheets, included these uncertain tax positions, reduced by the associated federal deduction for state taxes and U.S. tax credits arising from non-U.S. income taxes. |
| |
5
| Amounts represent future cash payments to satisfy other long-term liabilities recorded on our consolidated balance sheets, including the short-term portion of these long-term liabilities. Expected required contributions to our U.S. and non-U.S. pension plans and other postretirement benefit plans of $68 million to be made during 2016 are also included; however, funding projections beyond 2016 are not practicable to estimate. |
| |
6
| Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities, except for the short-term portions of long-term debt obligations and other long-term liabilities. |
The expected timing of payments of the obligations in the preceding table is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.
Contractual obligations for purchases of goods or services included in "Other purchase obligations and commitments" in the preceding table include agreements that are enforceable and legally binding on Intel and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. For obligations with cancellation provisions, the amounts included in the preceding table were limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee.
We have entered into certain agreements for the purchase of raw materials that specify minimum prices and quantities based on a percentage of the total available market or based on a percentage of our future purchasing requirements. Due to the uncertainty of the future market and our future purchasing requirements, as well as the non-binding nature of these agreements, obligations under these agreements have been excluded from the preceding table. Our purchase orders for other products are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, some of our purchase orders represent authorizations to purchase rather than binding agreements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Contractual obligations that are contingent upon the achievement of certain milestones have been excluded from the preceding table. These obligations include milestone-based co-marketing agreements, contingent funding or payment obligations, and milestone-based equity investment funding. These arrangements are not considered contractual obligations until the milestone is met by the counterparty. As of December 26, 2015, assuming that all future milestones are met, excluding the ASML milestones mentioned below, the additional required payments would be approximately $827 million. During 2012, we entered into a series of agreements with ASML intended to accelerate the development of EUV lithography, certain of which were amended in 2014. Under the amended agreements, Intel agreed to provide R&D funding totaling €829 millionover five years and committed to advance purchase orders for a specified number of tools from ASML. Our remaining obligation, contingent upon ASML achieving certain milestones, is approximately €367 million, or $403 million, as of December 26, 2015. As our obligation is contingent upon ASML achieving certain milestones, we have excluded this obligation from the preceding table.
For the majority of RSUs granted, the number of shares of common stock issued on the date the RSUs vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The obligation to pay the relevant taxing authority is excluded from the preceding table, as the amount is contingent upon continued employment. In addition, the amount of the obligation is unknown, as it is based in part on the market price of our common stock when the awards vest.
During 2014, we entered into a series of agreements with Tsinghua Unigroup Ltd. (Tsinghua Unigroup), an operating subsidiary of Tsinghua Holdings Co. Ltd., to, among other things, jointly develop Intel architecture- and communications-based solutions for phones. Subject to regulatory approvals and other closing conditions, we have also agreed to invest up to 9.0 billion Chinese yuan (approximately $1.5 billion as of the date of the agreement) for a minority stake of approximately 20% of UniSpreadtrum. During 2015, we invested $966 million to complete the first phase of the equity investment. The second phase of the investment will require additional funding of approximately $500 million; however, as our obligation is contingent upon regulatory approvals and other closing conditions, it has been excluded from the preceding table.
Off-Balance-Sheet Arrangements
As of December 26, 2015, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
| |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are affected by changes in currency exchange rates, interest rates, and equity prices. All of the following potential changes are based on sensitivity analyses performed on our financial positions as of December 26, 2015, and December 27, 2014. Actual results may differ materially.
Currency Exchange Rates
In general, we economically hedge currency risks of non-U.S.-dollar-denominated investments in debt instruments and loans receivable with currency forward contracts or currency interest rate swaps. Gains and losses on these non-U.S.-currency investments are generally offset by corresponding gains and losses on the related hedging instruments.
Substantially all of our revenue is transacted in U.S. dollars. However, a significant portion of our operating expenditures and capital purchases are incurred in or exposed to other currencies, primarily the euro, the Chinese yuan, the Japanese yen, and the Israeli shekel. We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in the fair value and the volatility of the functional currency equivalent of future cash flows caused by changes in exchange rates. We generally utilize currency forward contracts in these hedging programs. These programs reduce, but do not eliminate, the impact of currency exchange movements. For further information, see "Risk Factors" in Part I, Item 1A of this Form 10-K. We considered the historical trends in currency exchange rates and determined that it was reasonably possible that a weighted average adverse change of 20% in currency exchange rates could be experienced in the near term. Such an adverse change, after taking into account balance sheet hedges only and offsetting recorded monetary asset and liability positions, would have resulted in an adverse impact on income before taxes of less than $75 million as of December 26, 2015 (less than $50 million as of December 27, 2014).
Interest Rates
We generally hedge interest rate risks of fixed-rate debt investments with interest rate swaps, and we may elect to hedge interest rate risks of our indebtedness. Gains and losses on these instruments are generally offset by corresponding losses and gains on the related hedging instruments.
We are exposed to interest rate risk related to our investment portfolio and debt issuances. The primary objective of our investments in debt instruments is to preserve principal while maximizing yields, which generally track the U.S. dollar three-month LIBOR. A hypothetical decrease in benchmark interest rates of up to 1.0%, after taking into account investment hedges, would have resulted in an increase in the fair value of our investment portfolio of approximately $15 million as of December 26, 2015 (an increase of approximately $10 million as of December 27, 2014). After taking into account interest rate and currency swaps, a hypothetical decrease in interest rates of up to 1.0% would have resulted in an increase in the fair value of our indebtedness of approximately $1.6 billion as of December 26, 2015 (an increase of approximately $1.0 billion as of December 27, 2014). The increase from December 27, 2014 was primarily driven by the inclusion of $9.5 billion of senior unsecured notes issued in Q3 and Q4 2015. The fluctuations in fair value of our investment portfolio and indebtedness reflect only the direct impact of the change in interest rates. Other economic variables, such as equity market fluctuations and changes in relative credit risk, could result in a significantly higher decline in the fair value of our net investment position. For further information on how credit risk is factored into the valuation of our investment portfolio and debt issuances, see "Note 4: Fair Value" in Part II, Item 8 of this Form 10-K.
Equity Prices
Our investments include marketable equity securities and equity derivative instruments. We typically do not attempt to reduce or eliminate our equity market exposure through hedging activities at the inception of our investments. Before we enter into hedge arrangements, we evaluate legal, market, and economic factors, as well as the expected timing of disposal, to determine whether hedging is appropriate. Our equity market risk management program may include equity derivatives with or without hedge accounting designation that utilize warrants, equity options, or other equity derivatives.
We also utilize total return swaps to offset changes in liabilities related to the equity market risks of certain deferred compensation arrangements. Gains and losses from changes in fair value of these total return swaps are generally offset by the losses and gains on the related liabilities.
As of December 26, 2015, the fair value of our marketable equity investments and our equity derivative instruments, including hedging positions, was $6.0 billion ($7.1 billion as of December 27, 2014). Substantially all of our marketable equity investments portfolio as of December 26, 2015 was concentrated in our investment in ASML of $5.7 billion ($6.9 billion as of December 27, 2014). Our marketable equity method investments are excluded from our analysis, as the carrying value does not fluctuate based on market price changes unless an other-than-temporary impairment is deemed necessary. To determine reasonably possible decreases in the market value of our marketable equity investments, we have analyzed the historical market price sensitivity of our marketable equity investment portfolio. Assuming a decline of 30% in market prices, and after reflecting the impact of hedges and offsetting positions, the aggregate value of our marketable equity investments could decrease by approximately $1.8 billion, based on the value as of December 26, 2015 (a decrease in value of approximately $2.1 billion, based on the value as of December 27, 2014 using an assumed decline of 30%).
Many of the same factors that could result in an adverse movement of equity market prices affect our non-marketable equity investments, although we cannot always quantify the impact directly. Financial markets are volatile, which could negatively affect the prospects of the companies we invest in, their ability to raise additional capital, and the likelihood of our ability to realize value in our investments through liquidity events such as initial public offerings, mergers, and private sales. These types of investments involve a great deal of risk, and there can be no assurance that any specific company will grow or become successful; consequently, we could lose all or part of our investment. Our non-marketable cost method equity investments had a carrying amount of $2.9 billion as of December 26, 2015 ($1.8 billion as of December 27, 2014) and included our investment in UniSpreadtrum (which was made in 2015) and Cloudera of $966 million and $454 million, respectively ($454 million for Cloudera as of December 27, 2014). The carrying amount of our non-marketable equity method investments was $1.6 billion as of December 26, 2015 ($1.4 billion as of December 27, 2014). A majority of our non-marketable equity method investments balance as of December 26, 2015 was concentrated in our IMFT and Cloudera investments of $872 million and $256 million, respectively ($713 million and $280 million for IMFT and Cloudera, respectively, as of December 27, 2014).
Commodity Price Risk
Although we operate facilities that consume commodities, we are not directly affected by commodity price risk to a material degree. We have established forecasted transaction risk management programs to protect against fluctuations in the fair value and the volatility of future cash flows caused by changes in commodity prices. In addition, we have sourcing plans in place for our key commodities that mitigate the risk of a potential supplier concentration. For further information on commodity price risk, see "Note 6: Derivative Financial Instruments" in Part II, Item 8 of this Form 10-K.
| |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSSUPPLEMENTAL DETAILS
|
| |
| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | Page |
| |
| |
| |
| |
| |
| |
| |
| |
| | |
| Consolidated Statements of Income | |
| Consolidated Statements of Comprehensive Income | |
| Consolidated Balance Sheets | |
| Consolidated Statements of Cash Flows | |
| Consolidated Statements of Stockholders’ Equity | |
| | |
| |
| | |
| Basis | |
| Note 1: Basis of Presentation | |
| Note 2: Accounting Policies | |
| Note 3: Recent Accounting Standards | |
| Performance and Operations | |
| Note 4: Operating Segments | |
| Note 5: Earnings Per Share | |
| Note 6: Contract Liabilities | |
| Note 7: Other Financial Statement Details | |
| Note 8: Restructuring and Other Charges | |
| Note 9: Income Taxes | |
| Investments, Long-term Assets and Debt | |
| Note 10: Investments | |
| Note 11: Acquisitions and Divestitures | |
| Note 12: Goodwill | |
| Note 13: Identified Intangible Assets | |
| Note 14: Other Long-Term Assets | |
| Note 15: Borrowings | |
| Note 16: Fair Value | |
| Risk Management and Other | |
| Note 17: Other Comprehensive Income (Loss) | |
| Note 18: Derivative Financial Instruments | |
| Note 19: Retirement Benefit Plans | |
| Note 20: Employee Equity Incentive Plans | |
| Note 21: Commitments and Contingencies | |
| | |
| |
| Financial Information by Quarter | |
| Controls and Procedures | |
| Exhibits and Financial Statement Schedules | |
| Form 10-K Cross-Reference Index | |
|
|
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
TO THE STOCKHOLDERS AND THE BOARD OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMDIRECTORS OF INTEL CORPORATION
The Board of Directors and Stockholders of Intel CorporationOpinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Intel Corporation (the Company) as of December 26, 201529, 2018 and December 27, 2014, and30, 2017, the related consolidated statements of income, comprehensive income, cash flows and stockholders' equity for each of the three years in the period ended December 29, 2018, and the related notes and Schedule II - Valuation and Qualifying Accounts (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2018 and December 30, 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 26, 2015. Our audits29, 2018, in conformity with U.S. generally accepted accounting principles.
We also includedhave audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial statement schedule listedreporting as of December 29, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Index at Part IV, Item 15. Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 1, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on thesethe Company's financial statements and schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,
/s/ Ernst & Young LLP
We have served as the financial statements referred to above present fairly, in all material respects, the consolidated financial positionCompany's auditor since 1968.
San Jose, California
February 1, 2019
|
| | |
AUDITOR'S REPORTS | | 63 |
|
|
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF INTEL CORPORATION
Opinion on Internal Control Over Financial Reporting
We also have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), Intel Corporation'sCorporation’s internal control over financial reporting as of December 26, 2015,29, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and(2013 framework), (the COSO criteria). In our report dated February 12, 2016 expressed an unqualified opinion, thereon.
/s/ Ernst & Young LLP
San Jose, California
February 12, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Intel Corporation
We have audited Intel Corporation’s (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 26, 2015,29, 2018, based on criteria establishedthe COSO criteria.
We also have audited, in Internal Control—Integrated Framework issued byaccordance with the Committee of Sponsoring Organizationsstandards of the Treadway Commission (2013 framework) (the COSO criteria). Intel Corporation’sPublic Company Accounting Oversight Board (United States) (PCAOB), the 2018 consolidated financial statements of the Company and our report dated February 1, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’scompany‘s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Intel Corporation maintained, in all material respects, effective internal control over financial reporting as of December 26, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 consolidated financial statements of Intel Corporation and our report dated February 12, 2016, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Jose, California
February 12, 20161, 2019
|
| | |
AUDITOR'S REPORTS | | 64 |
INTEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
|
| | | | | | | | | | | | |
Years Ended
(In Millions, Except Per Share Amounts) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Net revenue | | $ | 55,355 |
| | $ | 55,870 |
| | $ | 52,708 |
|
| Cost of sales | | 20,676 |
| | 20,261 |
| | 21,187 |
|
| Gross margin | | 34,679 |
| | 35,609 |
| | 31,521 |
|
| Research and development | | 12,128 |
| | 11,537 |
| | 10,611 |
|
| Marketing, general and administrative | | 7,930 |
| | 8,136 |
| | 8,088 |
|
| Restructuring and asset impairment charges | | 354 |
| | 295 |
| | 240 |
|
| Amortization of acquisition-related intangibles | | 265 |
| | 294 |
| | 291 |
|
| Operating expenses | | 20,677 |
| | 20,262 |
| | 19,230 |
|
| Operating income | | 14,002 |
| | 15,347 |
| | 12,291 |
|
| Gains (losses) on equity investments, net | | 315 |
| | 411 |
| | 471 |
|
| Interest and other, net | | (105 | ) | | 43 |
| | (151 | ) |
| Income before taxes | | 14,212 |
| | 15,801 |
| | 12,611 |
|
| Provision for taxes | | 2,792 |
| | 4,097 |
| | 2,991 |
|
| Net income | | $ | 11,420 |
| | $ | 11,704 |
| | $ | 9,620 |
|
| Basic earnings per share of common stock | | $ | 2.41 |
| | $ | 2.39 |
| | $ | 1.94 |
|
| Diluted earnings per share of common stock | | $ | 2.33 |
| | $ | 2.31 |
| | $ | 1.89 |
|
| Weighted average shares of common stock outstanding: | | | | | | |
| Basic | | 4,742 |
| | 4,901 |
| | 4,970 |
|
| Diluted | | 4,894 |
| | 5,056 |
| | 5,097 |
|
|
|
| CONSOLIDATED STATEMENTS OF INCOME |
|
| | | | | | | | | | | | |
Years Ended
(In Millions, Except Per Share Amounts) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Net revenue | | $ | 70,848 |
| | $ | 62,761 |
| | $ | 59,387 |
|
| Cost of sales | | 27,111 |
| | 23,663 |
| | 23,154 |
|
| Gross margin | | 43,737 |
| | 39,098 |
| | 36,233 |
|
| Research and development | | 13,543 |
| | 13,035 |
| | 12,685 |
|
| Marketing, general and administrative | | 6,750 |
| | 7,452 |
| | 8,377 |
|
| Restructuring and other charges | | (72 | ) | | 384 |
| | 1,744 |
|
| Amortization of acquisition-related intangibles | | 200 |
| | 177 |
| | 294 |
|
| Operating expenses | | 20,421 |
| | 21,048 |
| | 23,100 |
|
| Operating income | | 23,316 |
| | 18,050 |
| | 13,133 |
|
| Gains (losses) on equity investments, net | | (125 | ) | | 2,651 |
| | 506 |
|
| Interest and other, net | | 126 |
| | (349 | ) | | (703 | ) |
| Income before taxes | | 23,317 |
| | 20,352 |
| | 12,936 |
|
| Provision for taxes | | 2,264 |
| | 10,751 |
| | 2,620 |
|
| Net income | | $ | 21,053 |
| | $ | 9,601 |
| | $ | 10,316 |
|
| Earnings per share - Basic | | $ | 4.57 |
| | $ | 2.04 |
| | $ | 2.18 |
|
| Earnings per share - Diluted | | $ | 4.48 |
| | $ | 1.99 |
| | $ | 2.12 |
|
| Weighted average shares of common stock outstanding: | | | | | | |
| Basic | | 4,611 |
| | 4,701 |
| | 4,730 |
|
| Diluted | | 4,701 |
| | 4,835 |
| | 4,875 |
|
See accompanying notes.
|
| | |
FINANCIAL STATEMENTS | Consolidated Statements of Income | 65 |
INTEL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Net income | | $ | 11,420 |
| | $ | 11,704 |
| | $ | 9,620 |
|
| Other comprehensive income (loss), net of tax: | | | | | | |
| Change in net unrealized holding gains (losses) on available-for-sale investments | | (710 | ) | | 577 |
| | 1,181 |
|
| Change in deferred tax asset valuation allowance | | (18 | ) | | (41 | ) | | (26 | ) |
| Change in net unrealized holding gains (losses) on derivatives | | 157 |
| | (427 | ) | | (89 | ) |
| Change in net prior service (costs) credits | | 7 |
| | (33 | ) | | 18 |
|
| Change in actuarial valuation | | 128 |
| | (402 | ) | | 520 |
|
| Change in net foreign currency translation adjustment | | (170 | ) | | (251 | ) | | 38 |
|
| Other comprehensive income (loss) | | (606 | ) | | (577 | ) | | 1,642 |
|
| Total comprehensive income | | $ | 10,814 |
| | $ | 11,127 |
| | $ | 11,262 |
|
|
| |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
|
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Net income | | $ | 21,053 |
| | $ | 9,601 |
| | $ | 10,316 |
|
Changes in other comprehensive income, net of tax:
| | | | | | |
| Net unrealized holding gains (losses) on available-for-sale equity investments | | — |
| | (434 | ) | | 415 |
|
| Net unrealized holding gains (losses) on derivatives | | (253 | ) | | 365 |
| | 7 |
|
| Actuarial valuation and other pension benefits (expenses), net | | 210 |
| | 317 |
| | (364 | ) |
| Translation adjustments and other | | (3 | ) | | 508 |
| | (12 | ) |
| Other comprehensive income (loss) | | (46 | ) | | 756 |
| | 46 |
|
| Total comprehensive income | | $ | 21,007 |
| | $ | 10,357 |
| | $ | 10,362 |
|
See accompanying notes.
|
| | |
FINANCIAL STATEMENTS | Consolidated Statements of Comprehensive Income | 66 |
INTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | | |
(In Millions, Except Par Value) | | Dec 26,
2015 | | Dec 27,
2014 |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 15,308 |
| | $ | 2,561 |
|
| Short-term investments | | 2,682 |
| | 2,430 |
|
| Trading assets | | 7,323 |
| | 9,063 |
|
| Accounts receivable, net of allowance for doubtful accounts of $40 ($38 in 2014) | | 4,787 |
| | 4,427 |
|
| Inventories | | 5,167 |
| | 4,273 |
|
| Deferred tax assets | | 2,036 |
| | 1,958 |
|
| Other current assets | | 3,053 |
| | 3,018 |
|
| Total current assets | | 40,356 |
| | 27,730 |
|
| | | | | |
| Property, plant and equipment, net | | 31,858 |
| | 33,238 |
|
| Marketable equity securities | | 5,960 |
| | 7,097 |
|
| Other long-term investments | | 1,891 |
| | 2,023 |
|
| Goodwill | | 11,332 |
| | 10,861 |
|
| Identified intangible assets, net | | 3,933 |
| | 4,446 |
|
| Other long-term assets | | 7,735 |
| | 6,505 |
|
| Total assets | | $ | 103,065 |
| | $ | 91,900 |
|
| | | | | |
| Liabilities, temporary equity, and stockholders’ equity | | | | |
| Current liabilities: | | | | |
| Short-term debt | | $ | 2,634 |
| | $ | 1,596 |
|
| Accounts payable | | 2,063 |
| | 2,748 |
|
| Accrued compensation and benefits | | 3,138 |
| | 3,475 |
|
| Accrued advertising | | 960 |
| | 1,092 |
|
| Deferred income | | 2,188 |
| | 2,205 |
|
| Other accrued liabilities | | 4,684 |
| | 4,895 |
|
| Total current liabilities | | 15,667 |
| | 16,011 |
|
| | | | | |
| Long-term debt | | 20,036 |
| | 12,059 |
|
| Long-term deferred tax liabilities | | 2,539 |
| | 3,775 |
|
| Other long-term liabilities | | 2,841 |
| | 3,278 |
|
| Commitments and contingencies (Notes 17 and 25) | |
| |
|
| Temporary equity | | 897 |
| | 912 |
|
| Stockholders’ equity: | | | | |
| Preferred stock, $0.001 par value, 50 shares authorized; none issued | | — |
| | — |
|
| Common stock, $0.001 par value, 10,000 shares authorized; 4,725 shares issued and outstanding (4,752 issued and 4,748 outstanding in 2014) and capital in excess of par value | | 23,411 |
| | 21,781 |
|
| Accumulated other comprehensive income (loss) | | 60 |
| | 666 |
|
| Retained earnings | | 37,614 |
| | 33,418 |
|
| Total stockholders’ equity | | 61,085 |
| | 55,865 |
|
| Total liabilities, temporary equity, and stockholders’ equity | | $ | 103,065 |
| | $ | 91,900 |
|
|
|
| CONSOLIDATED BALANCE SHEETS |
|
| | | | | | | | |
(In Millions, Except Par Value) | | Dec 29,
2018 | | Dec 30,
2017 |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 3,019 |
| | $ | 3,433 |
|
| Short-term investments | | 2,788 |
| | 1,814 |
|
| Trading assets | | 5,843 |
| | 8,755 |
|
| Accounts receivable, net of allowance for doubtful accounts of $33 ($25 in 2017) | | 6,722 |
| | 5,607 |
|
| Inventories | | 7,253 |
| | 6,983 |
|
| Other current assets | | 3,162 |
| | 2,908 |
|
| Total current assets | | 28,787 |
| | 29,500 |
|
| | | | | |
| Property, plant and equipment, net | | 48,976 |
| | 41,109 |
|
| Equity investments | | 6,042 |
| | 8,579 |
|
| Other long-term investments | | 3,388 |
| | 3,712 |
|
| Goodwill | | 24,513 |
| | 24,389 |
|
| Identified intangible assets, net | | 11,836 |
| | 12,745 |
|
| Other long-term assets | | 4,421 |
| | 3,215 |
|
| Total assets | | $ | 127,963 |
| | $ | 123,249 |
|
| | | | | |
| Liabilities, temporary equity, and stockholders’ equity | | | | |
| Current liabilities: | | | | |
| Short-term debt | | $ | 1,261 |
| | $ | 1,776 |
|
| Accounts payable | | 3,824 |
| | 2,928 |
|
| Accrued compensation and benefits | | 3,622 |
| | 3,526 |
|
| Deferred income | | — |
| | 1,656 |
|
| Other accrued liabilities | | 7,919 |
| | 7,535 |
|
| Total current liabilities | | 16,626 |
| | 17,421 |
|
| | | | | |
| Debt | | 25,098 |
| | 25,037 |
|
| Contract liabilities | | 2,049 |
| | — |
|
| Income taxes payable, non-current | | 4,897 |
| | 4,069 |
|
| Deferred income taxes | | 1,665 |
| | 3,046 |
|
| Other long-term liabilities | | 2,646 |
| | 3,791 |
|
| Commitments and Contingencies (Note 21) | |
| |
|
| Temporary equity | | 419 |
| | 866 |
|
| Stockholders’ equity: | | | | |
| Preferred stock, $0.001 par value, 50 shares authorized; none issued | | — |
| | — |
|
| Common stock, $0.001 par value, 10,000 shares authorized; 4,516 shares issued and outstanding (4,687 issued and outstanding in 2017) and capital in excess of par value | | 25,365 |
| | 26,074 |
|
| Accumulated other comprehensive income (loss) | | (974 | ) | | 862 |
|
| Retained earnings | | 50,172 |
| | 42,083 |
|
| Total stockholders’ equity | | 74,563 |
| | 69,019 |
|
| Total liabilities, temporary equity, and stockholders’ equity | | $ | 127,963 |
| | $ | 123,249 |
|
See accompanying notes.
|
| | |
FINANCIAL STATEMENTS | Consolidated Balance Sheets | 67 |
INTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Cash and cash equivalents, beginning of period | | $ | 2,561 |
| | $ | 5,674 |
| | $ | 8,478 |
|
| Cash flows provided by (used for) operating activities: | | | | | | |
| Net income | | 11,420 |
| | 11,704 |
| | 9,620 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation | | 7,821 |
| | 7,380 |
| | 6,790 |
|
| Share-based compensation | | 1,305 |
| | 1,148 |
| | 1,118 |
|
| Restructuring and asset impairment charges | | 354 |
| | 295 |
| | 240 |
|
| Excess tax benefit from share-based payment arrangements | | (159 | ) | | (122 | ) | | (49 | ) |
| Amortization of intangibles | | 890 |
| | 1,169 |
| | 1,242 |
|
| (Gains) losses on equity investments, net | | (263 | ) | | (354 | ) | | (425 | ) |
| Deferred taxes | | (1,270 | ) | | (703 | ) | | (900 | ) |
| Changes in assets and liabilities: | | | | | | |
| Accounts receivable | | (355 | ) | | (861 | ) | | 271 |
|
| Inventories | | (764 | ) | | (98 | ) | | 563 |
|
| Accounts payable | | (312 | ) | | (249 | ) | | 267 |
|
| Accrued compensation and benefits | | (711 | ) | | 4 |
| | 155 |
|
| Income taxes payable and receivable | | 386 |
| | (286 | ) | | 1,019 |
|
| Other assets and liabilities | | 675 |
| | 1,391 |
| | 865 |
|
| Total adjustments | | 7,597 |
| | 8,714 |
| | 11,156 |
|
| Net cash provided by operating activities | | 19,017 |
| | 20,418 |
| | 20,776 |
|
| Cash flows provided by (used for) investing activities: | | | | | | |
| Additions to property, plant and equipment | | (7,326 | ) | | (10,105 | ) | | (10,711 | ) |
| Acquisitions, net of cash acquired | | (913 | ) | | (934 | ) | | (925 | ) |
| Purchases of available-for-sale investments | | (8,259 | ) | | (7,007 | ) | | (12,493 | ) |
| Sales of available-for-sale investments | | 2,090 |
| | 1,227 |
| | 934 |
|
| Maturities of available-for-sale investments | | 6,168 |
| | 8,944 |
| | 8,336 |
|
| Purchases of trading assets | | (11,485 | ) | | (14,397 | ) | | (16,718 | ) |
| Maturities and sales of trading assets | | 13,372 |
| | 13,165 |
| | 13,677 |
|
| Investments in loans receivable and reverse repurchase agreements | | (2,550 | ) | | (150 | ) | | (200 | ) |
| Collection of loans receivable and reverse repurchase agreements | | 2,116 |
| | 117 |
| | 50 |
|
| Investments in non-marketable equity investments | | (2,011 | ) | | (1,377 | ) | | (440 | ) |
| Purchases of licensed technology and patents | | (120 | ) | | (92 | ) | | (36 | ) |
| Other investing | | 735 |
| | 704 |
| | 453 |
|
| Net cash used for investing activities | | (8,183 | ) | | (9,905 | ) | | (18,073 | ) |
| Cash flows provided by (used for) financing activities: | | | | | | |
| Increase (decrease) in short-term debt, net | | (474 | ) | | 235 |
| | (31 | ) |
| Proceeds from government grants | | 105 |
| | 104 |
| | 129 |
|
| Excess tax benefit from share-based payment arrangements | | 159 |
| | 122 |
| | 49 |
|
| Issuance of long-term debt, net of issuance costs | | 9,476 |
| | — |
| | — |
|
| Proceeds from sales of common stock through employee equity incentive plans | | 866 |
| | 1,660 |
| | 1,588 |
|
| Repurchase of common stock | | (3,001 | ) | | (10,792 | ) | | (2,147 | ) |
| Restricted stock unit withholdings | | (442 | ) | | (332 | ) | | (293 | ) |
| Payment of dividends to stockholders | | (4,556 | ) | | (4,409 | ) | | (4,479 | ) |
| Collateral associated with repurchase of common stock | | 325 |
| | (325 | ) | | — |
|
| Increase (decrease) in liability due to collateral associated with repurchase of common stock | | (325 | ) | | 325 |
| | — |
|
| Other financing | | (221 | ) | | (199 | ) | | (314 | ) |
| Net cash provided by (used for) financing activities | | 1,912 |
| | (13,611 | ) | | (5,498 | ) |
| Effect of exchange rate fluctuations on cash and cash equivalents | | 1 |
| | (15 | ) | | (9 | ) |
| Net increase (decrease) in cash and cash equivalents | | 12,747 |
| | (3,113 | ) | | (2,804 | ) |
| Cash and cash equivalents, end of period | | $ | 15,308 |
| | $ | 2,561 |
| | $ | 5,674 |
|
| Supplemental disclosures of cash flow information: | | | | | | |
| Cash paid during the year for: | | | | | | |
| Interest, net of capitalized interest | | $ | 186 |
| | $ | 167 |
| | $ | 204 |
|
| Income taxes, net of refunds | | $ | 3,439 |
| | $ | 4,639 |
| | $ | 2,874 |
|
|
|
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Cash and cash equivalents, beginning of period | | $ | 3,433 |
| | $ | 5,560 |
| | $ | 15,308 |
|
| Cash flows provided by (used for) operating activities: | | | | | | |
| Net income | | 21,053 |
| | 9,601 |
| | 10,316 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation | | 7,520 |
| | 6,752 |
| | 6,266 |
|
| Share-based compensation | | 1,546 |
| | 1,358 |
| | 1,444 |
|
| Amortization of intangibles | | 1,565 |
| | 1,377 |
| | 1,524 |
|
| (Gains) losses on equity investments, net | | 155 |
| | (2,583 | ) | | (432 | ) |
| Loss on debt conversion and extinguishment | | 260 |
| | 476 |
| | — |
|
| (Gains) losses on divestitures | | (497 | ) | | (387 | ) | | — |
|
| Deferred taxes | | (1,749 | ) | | 1,548 |
| | 257 |
|
| Changes in assets and liabilities: | | | | | | |
| Accounts receivable | | (1,714 | ) | | (781 | ) | | 65 |
|
| Inventories | | (214 | ) | | (1,300 | ) | | 119 |
|
| Accounts payable | | 211 |
| | 191 |
| | 182 |
|
| Accrued compensation and benefits | | (260 | ) | | 311 |
| | 291 |
|
| Customer deposits and prepaid supply agreements | | 1,367 |
| | 1,105 |
| | — |
|
| Income taxes payable and receivable | | 148 |
| | 5,230 |
| | 1,382 |
|
| Other assets and liabilities | | 41 |
| | (788 | ) | | 394 |
|
| Total adjustments | | 8,379 |
| | 12,509 |
| | 11,492 |
|
| Net cash provided by operating activities | | 29,432 |
| | 22,110 |
| | 21,808 |
|
| Cash flows provided by (used for) investing activities: | | | | | | |
| Additions to property, plant and equipment | | (15,181 | ) | | (11,778 | ) | | (9,625 | ) |
| Acquisitions, net of cash acquired | | (190 | ) | | (14,499 | ) | | (15,470 | ) |
| Purchases of available-for-sale debt investments | | (3,843 | ) | | (2,746 | ) | | (9,269 | ) |
| Sales of available-for-sale debt investments | | 195 |
| | 1,833 |
| | 2,847 |
|
| Maturities of available-for-sale debt investments | | 2,968 |
| | 3,687 |
| | 5,654 |
|
| Purchases of trading assets | | (9,503 | ) | | (13,700 | ) | | (12,237 | ) |
| Maturities and sales of trading assets | | 12,111 |
| | 13,970 |
| | 10,898 |
|
| Purchases of equity investments | | (874 | ) | | (1,619 | ) | | (963 | ) |
| Sales of equity investments | | 2,802 |
| | 5,236 |
| | 1,080 |
|
| Proceeds from divestitures | | 548 |
| | 3,124 |
| | — |
|
| Other investing | | (272 | ) | | 730 |
| | 1,268 |
|
| Net cash used for investing activities | | (11,239 | ) | | (15,762 | ) | | (25,817 | ) |
| Cash flows provided by (used for) financing activities: | | | | | | |
| Increase (decrease) in short-term debt, net | | 460 |
| | 12 |
| | (15 | ) |
| Issuance of long-term debt, net of issuance costs | | 423 |
| | 7,716 |
| | 2,734 |
|
| Repayment of debt and debt conversion | | (3,026 | ) | | (8,080 | ) | | (1,500 | ) |
| Proceeds from sales of common stock through employee equity incentive plans | | 555 |
| | 770 |
| | 1,108 |
|
| Repurchase of common stock | | (10,730 | ) | | (3,615 | ) | | (2,587 | ) |
| Payment of dividends to stockholders | | (5,541 | ) | | (5,072 | ) | | (4,925 | ) |
| Other financing | | (748 | ) | | (206 | ) | | (554 | ) |
| Net cash provided by (used for) financing activities | | (18,607 | ) | | (8,475 | ) | | (5,739 | ) |
| Net increase (decrease) in cash and cash equivalents | | (414 | ) | | (2,127 | ) | | (9,748 | ) |
| Cash and cash equivalents, end of period | | $ | 3,019 |
| | $ | 3,433 |
| | $ | 5,560 |
|
| Supplemental disclosures: | |
| | | | |
| Acquisition of property, plant and equipment included in accounts payable and accrued liabilities | | $ | 2,340 |
| | $ | 1,417 |
| | $ | 979 |
|
| Non-marketable equity investment in McAfee from divestiture | | $ | — |
| | $ | 1,078 |
| | $ | — |
|
| Cash paid during the year for: | | | | | | |
| Interest, net of capitalized interest | | $ | 448 |
| | $ | 624 |
| | $ | 682 |
|
| Income taxes, net of refunds | | $ | 3,813 |
| | $ | 3,824 |
| | $ | 877 |
|
See accompanying notes.
|
| | |
FINANCIAL STATEMENTS | Consolidated Statements of Cash Flows | 68 |
INTEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | |
| | | Common Stock and Capital in Excess of Par Value | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
(In Millions, Except Per Share Amounts) | | Number of Shares | | Amount | |
| Balance as of December 29, 2012 | | 4,944 |
| | $ | 19,464 |
| | $ | (399 | ) | | $ | 32,138 |
| | $ | 51,203 |
|
| Components of comprehensive income, net of tax: | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 9,620 |
| | 9,620 |
|
| Other comprehensive income (loss) | | — |
| | — |
| | 1,642 |
| | — |
| | 1,642 |
|
| Total comprehensive income | | | | | | | | | | 11,262 |
|
| Proceeds from sales of common stock through employee equity incentive plans, net tax deficiency, and other | | 130 |
| | 1,593 |
| | — |
| | — |
| | 1,593 |
|
| Share-based compensation | | — |
| | 1,117 |
| | — |
| | — |
| | 1,117 |
|
| Repurchase of common stock | | (94 | ) | | (345 | ) | | — |
| | (1,802 | ) | | (2,147 | ) |
| Restricted stock unit withholdings | | (13 | ) | | (293 | ) | | — |
| | — |
| | (293 | ) |
| Cash dividends declared ($0.90 per share of common stock) | | — |
| | — |
| | — |
| | (4,479 | ) | | (4,479 | ) |
| Balance as of December 28, 2013 | | 4,967 |
| | 21,536 |
| | 1,243 |
| | 35,477 |
| | 58,256 |
|
| Components of comprehensive income, net of tax: | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 11,704 |
| | 11,704 |
|
| Other comprehensive income (loss) | | — |
| | — |
| | (577 | ) | | — |
| | (577 | ) |
| Total comprehensive income | | | | | | | | | | 11,127 |
|
| Proceeds from sales of common stock through employee equity incentive plans, net excess tax benefit, and other | | 125 |
| | 1,787 |
| | — |
| | — |
| | 1,787 |
|
| Share-based compensation | | — |
| | 1,140 |
| | — |
| | — |
| | 1,140 |
|
| Temporary equity reclassification | | — |
| | (912 | ) | | — |
| | — |
| | (912 | ) |
| Repurchase of common stock | | (332 | ) | | (1,438 | ) | | — |
| | (9,354 | ) | | (10,792 | ) |
| Restricted stock unit withholdings | | (12 | ) | | (332 | ) | | — |
| | — |
| | (332 | ) |
| Cash dividends declared ($0.90 per share of common stock) | | — |
| | — |
| | — |
| | (4,409 | ) | | (4,409 | ) |
| Balance as of December 27, 2014 | | 4,748 |
| | 21,781 |
| | 666 |
| | 33,418 |
| | 55,865 |
|
| Components of comprehensive income, net of tax: | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 11,420 |
| | 11,420 |
|
| Other comprehensive income (loss) | | — |
| | — |
| | (606 | ) | | — |
| | (606 | ) |
| Total comprehensive income | | | | | | | | | | 10,814 |
|
| Proceeds from sales of common stock through employee equity incentive plans, net excess tax benefit, and other | | 87 |
| | 1,076 |
| | — |
| | — |
| | 1,076 |
|
| Share-based compensation | | — |
| | 1,314 |
| | — |
| | — |
| | 1,314 |
|
| Temporary equity reclassification | | — |
| | 15 |
| | — |
| | — |
| | 15 |
|
| Repurchase of common stock | | (96 | ) | | (453 | ) | | — |
| | (2,548 | ) | | (3,001 | ) |
| Restricted stock unit withholdings | | (14 | ) | | (322 | ) | | — |
| | (120 | ) | | (442 | ) |
| Cash dividends declared ($0.96 per share of common stock) | | — |
| | — |
| | — |
| | (4,556 | ) | | (4,556 | ) |
| Balance as of December 26, 2015 | | 4,725 |
| | $ | 23,411 |
| | $ | 60 |
| | $ | 37,614 |
| | $ | 61,085 |
|
|
|
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
|
| | | | | | | | | | | | | | | | | | | |
| | | Common Stock and Capital
in Excess of Par Value | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings | | Total |
(In Millions, Except Per Share Amounts) | | Number of
Shares | | Amount | |
| Balance as of December 26, 2015 | | 4,725 |
| | $ | 23,411 |
| | $ | 60 |
| | $ | 37,614 |
| | $ | 61,085 |
|
| Components of comprehensive income, net of tax: | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 10,316 |
| | 10,316 |
|
| Other comprehensive income (loss) | | — |
| | — |
| | 46 |
| | — |
| | 46 |
|
| Total comprehensive income | | | | | | | | | | 10,362 |
|
| Proceeds from sales of common stock through employee equity incentive plans, net tax benefit, and other | | 101 |
| | 1,322 |
| | — |
| | — |
| | 1,322 |
|
| Share-based compensation | | — |
| | 1,438 |
| | — |
| | — |
| | 1,438 |
|
| Repurchase of common stock | | (81 | ) | | (412 | ) | | — |
| | (2,180 | ) | | (2,592 | ) |
| Restricted stock unit withholdings | | (15 | ) | | (386 | ) | | — |
| | (78 | ) | | (464 | ) |
| Cash dividends declared ($1.04 per share of common stock) | | — |
| | — |
| | — |
| | (4,925 | ) | | (4,925 | ) |
| Balance as of December 31, 2016 | | 4,730 |
| | 25,373 |
| | 106 |
| | 40,747 |
| | 66,226 |
|
| Components of comprehensive income, net of tax: | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 9,601 |
| | 9,601 |
|
| Other comprehensive income (loss) | | — |
| | — |
| | 756 |
| | — |
| | 756 |
|
| Total comprehensive income | | | | | | | | | | 10,357 |
|
Proceeds from sales of common stock through employee equity incentive plans, net excess tax benefit, and other 1 | | 70 |
| | 1,172 |
| | — |
| | (1 | ) | | 1,171 |
|
| Share-based compensation | | — |
| | 1,296 |
| | — |
| | — |
| | 1,296 |
|
| Convertible debt | | — |
| | (894 | ) | | — |
| | — |
| | (894 | ) |
| Repurchase of common stock | | (101 | ) | | (552 | ) | | — |
| | (3,057 | ) | | (3,609 | ) |
| Restricted stock unit withholdings | | (12 | ) | | (321 | ) | | — |
| | (135 | ) | | (456 | ) |
| Cash dividends declared ($1.0775 per share of common stock) | | — |
| | — |
| | — |
| | (5,072 | ) | | (5,072 | ) |
| Balance as of December 30, 2017 | | 4,687 |
| | 26,074 |
| | 862 |
| | 42,083 |
| | 69,019 |
|
| Adjustment to opening balance for change in accounting principle | | — |
| | — |
| | (1,790 | ) | | 2,424 |
| | 634 |
|
| Opening balance as of December 31, 2017 | | 4,687 |
| | 26,074 |
| | (928 | ) | | 44,507 |
| | 69,653 |
|
| Components of comprehensive income, net of tax: | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 21,053 |
| | 21,053 |
|
| Other comprehensive income (loss) | | — |
| | — |
| | (46 | ) | | — |
| | (46 | ) |
| Total comprehensive income | | | | | | | | | | 21,007 |
|
Proceeds from sales of common stock through employee equity incentive plans, net excess tax benefit, and other 1 | | 56 |
| | 424 |
| | — |
| | — |
| | 424 |
|
| Share-based compensation | | — |
| | 1,548 |
| | — |
| | — |
| | 1,548 |
|
| Temporary equity reduction | | — |
| | 447 |
| | — |
| | — |
| | 447 |
|
| Convertible debt | | — |
| | (1,591 | ) | | — |
| | — |
| | (1,591 | ) |
| Repurchase of common stock | | (217 | ) | | (1,208 | ) | | — |
| | (9,650 | ) | | (10,858 | ) |
| Restricted stock unit withholdings | | (10 | ) | | (329 | ) | | — |
| | (197 | ) | | (526 | ) |
| Cash dividends declared ($1.20 per share of common stock) | | — |
| | — |
| | — |
| | (5,541 | ) | | (5,541 | ) |
| Balance as of December 29, 2018 | | 4,516 |
| | $ | 25,365 |
| | $ | (974 | ) | | $ | 50,172 |
| | $ | 74,563 |
|
| |
1 | Includes approximately $375 million of non-controlling interest activity due to our acquisition of Mobileye in 2017, which was eliminated in 2018 due to purchase of remaining shares. |
See accompanying notes.
|
| | |
FINANCIAL STATEMENTS | Consolidated Statements of Stockholders' Equity | 69 |
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Note 1: Basis of Presentation |
| |
| NOTE 1 : | BASIS OF PRESENTATION |
We have a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal years 2015, 2014,2018 and 20132017 were 52-week fiscal years. Fiscal year 2016 iswas a 53-week fiscal year andwith the first quarter of 2016 will bebeing a 14-week quarter. Our consolidated financial statements include the accounts of Intel Corporation (Intel) and our subsidiaries. We have eliminated intercompany accounts and transactions. We use the equity method to account for equity investments in instances in which we own common stock or similar interests and have the ability to exercise significant influence, but not control, over the investee. We have reclassified certain prior period amounts to conform to current period presentation.
As a result of our integration of McAfee Inc. (McAfee) in the third quarter of 2015, the functional currency for operations previously acquired from McAfee was changed to the U.S. dollar, making the U.S. dollar the functional currency for Intel and our subsidiaries.
Note 2: Accounting Policies
Use of EstimatesUSE OF ESTIMATES
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. The accounting estimates that require our most significant, difficult, and subjective judgments include:
the valuation of non-marketable equity investments and the determination of other-than-temporary impairments;
the determination of useful lives for our property, plant and equipment and the related timing of when depreciation should begin;
the valuation and allocation of assets acquired and liabilities assumed in connection with business combinations;
the valuation and recoverability of long-lived assets (property, plant and equipment; goodwill; and identified intangibles);
the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions);
the valuation of inventory; and
the recognition and measurement of loss contingencies.
The actual results that we experience may differ materially from our estimates.
|
| |
| NOTE 2 : | ACCOUNTING POLICIES |
REVENUE RECOGNITION
We recognize net product revenue when we satisfy performance obligations as evidenced by the transfer of control of our products or services to customers. Substantially all of our revenue is derived from product sales. In accordance with contract terms, revenue for product sales is recognized at the time of product shipment from our facilities or delivery to the customer location, as determined by the agreed upon shipping terms. Prior to 2018, on sales made to distributors that allowed for price protections or right of return until the distributor sold through the merchandise, we deferred product revenue and related costs of sales. We include shipping charges billed to customers in net revenue, and include the related shipping costs in cost of sales.
We measure revenue based on the amount of consideration we expect to be entitled to in exchange for products or services. Variable consideration is estimated and reflected as an adjustment to the transaction price. We determine variable consideration, which consists primarily of various sales price concessions, by estimating the most likely amount of consideration we expect to receive from the customer based on historical analysis of customer purchase volumes. Sales rebates earned by customers are offset against their receivable balances. Rebates earned by customers when they do not have outstanding receivable balances are recorded within other accrued liabilities. The impacts of distributor sales price reductions resulting from price protection agreements are also estimated based on historical analysis of such activity and are reflected as a reduction in net revenue.
We make payments to our customers through cooperative advertising programs for marketing activities for certain of our products. We generally record the payment as a reduction in revenue in the period that the revenue is earned, unless the payment is for a distinct service, which we record as expense when the marketing activities occur. During the second half of 2017, we transitioned customers from previous offerings under the Intel Inside® program to cooperative advertising offerings more tailored to customers and their marketing audiences. These cooperative advertising costs are recorded as a reduction of revenue beginning in the second half of 2017, as we no longer meet the criteria for recording these as expense.
INVENTORIES
We compute inventory cost on a first-in, first-out basis. Our process and product development life cycle corresponds with substantive engineering milestones. These engineering milestones are regularly and consistently applied in assessing the point at which our activities and associated costs change in nature from research and development (R&D) to cost of sales, and when cost of sales can be capitalized as inventory.
For a product to be manufactured in high volumes and sold to our customers under our standard warranty, it must meet our rigorous technical quality specifications. This milestone is known as product release qualification (PRQ). We have identified PRQ as the point at which the costs incurred to manufacture our products are included in the valuation of inventory. Prior to PRQ, costs that do not meet the criteria for R&D are included in cost of sales in the period incurred. If the point at which we estimate that inventory meets PRQ criteria changes in the future, the timing and recognition of costs would shift between R&D, inventory, and costs of sales. A single PRQ has previously ranged up to $770 million and is dependent on product type.
The valuation of inventory includes determining which fixed production overhead costs can be included in inventory based on the normal capacity of our manufacturing and assembly and test facilities. We apply our historical loadings compared to our total available capacity in a statistical model to determine our normal capacity level. If the factory loadings are below the established normal capacity level, a portion of our fixed production overhead costs would not be included in the cost of inventory; instead, it would be recognized as cost of sales in that period. We refer to these costs as excess capacity charges. Excess capacity charges are insignificant in the years presented. Charges in certain prior years have ranged from $46 million to $1.1 billion. The high end of the range would be $540 million when excluding the $1.1 billion charge taken in connection with the 2009 economic recession.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 70 |
Inventory is valued at the lower of cost or net realizable value, based upon assumptions about future demand and market conditions. Product-specific facts and circumstances reviewed in the inventory valuation process include a review of our customer base, the stage of the product life cycle, and an assessment of selling price in relation to product cost. Inventory reserves increased by approximately $295 million in 2018 compared to 2017.
The valuation of inventory also requires us to estimate obsolete and excess inventory, as well as inventory that is not of saleable quality. We use the demand forecast to develop our short-term manufacturing plans to enable consistency between inventory valuations and build decisions. We compare the estimate of future demand to work in process and finished goods inventory levels to determine the amount, if any, of obsolete or excess inventory. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to write off inventory.
PROPERTY, PLANT AND EQUIPMENT
We compute depreciation using the straight-line method over the estimated useful life of assets. We also capitalize interest on borrowings related to eligible capital expenditures. Capitalized interest is added to the cost of qualified assets and depreciated together with that asset cost. We record capital-related government grants earned as a reduction to property, plant and equipment.
Annually, we evaluate the period over which we expect to recover the economic value of our property, plant and equipment, considering factors such as the process technology cadence between node transitions, changes in machinery and equipment technology, and re-use of machinery and tools across each generation of process technology. As we make manufacturing process conversions and other factory planning decisions, we use assumptions involving the use of management judgments regarding the remaining useful lives of assets, primarily process-specific semiconductor manufacturing tools and building improvements. When we determine that the useful lives of assets are shorter or longer than we had originally estimated, we adjust the rate of depreciation to reflect the assets’ revised useful lives.
Assets are “grouped” and evaluated for impairment at the lowest level of identifiable cash flows. We assess property, plant and equipment for impairment when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. We measure the recoverability of assets that we will continue to use in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows arising from the use of that asset grouping. If an asset grouping carrying value is not recoverable through the pricerelated undiscounted cash flows, the asset grouping is considered to be impaired. We measure the impairment by comparing the difference between the asset grouping carrying value and its fair value.
We may have certain facilities, included within construction in progress, being held in a safe state and not currently in use that wouldwe plan to place into service at a future date. The time at which these assets are placed into service depends on our existing manufacturing capacity, market demand for our products, and where we are in the transition of products on our roadmap. Management makes judgments about the timing of when these facilities will be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants atreadied for their intended use and placed into service for the measurement date. manufacturing of our products. Depreciation is not recognized on these assets and they are not eligible for capitalized interest when construction is on hold.
FAIR VALUE
When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consideras well as assumptions that market participants would use when pricing the asset or liability. Our financial assets are measured and recorded at fair value on a recurring basis, except for costequity securities measured using the measurement alternative, equity method investments, cost method loans receivable, equity method investments, grants receivable, and reverse repurchase agreements with original maturities greater than approximately three months. Substantially all ofWe assess fair value hierarchy levels for our liabilities are not measuredissued debt and recorded at fair value.
Fair Value Hierarchyfixed-income investment portfolio based on the underlying instrument type.
The three levels of inputs that may be used to measure fair value are as follows:are:
Level 1.Quoted prices in active markets for identical assets or liabilities. We evaluate security-specific market data when determining whether a market is active.
Level 2.Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in less active markets, or model-derived valuations in which allvaluations. All significant inputs used in our valuations, such as discounted cash flows, are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. We use LIBOR-based yield curves, currency spot and forward rates, and credit ratings as significant inputs in our valuations. Level 2 inputs also include non-binding market consensus prices, that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.
66
When we use non-binding market consensus prices, we corroborate them with quoted market prices for similar instruments or compare them to output from internally developed pricing models such as discounted cash flow models.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level 3.Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. We monitor and review the inputs and results of these valuation models to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.
For further discussion
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 71 |
DEBT INVESTMENTS
We consider all highly liquid debt investments with original maturities from the date of purchase of approximately three months or less as cash equivalents. Cash equivalents can include investments such as corporate debt, financial institution instruments, government debt, and reverse repurchase agreements classified as cash equivalents. See "Note 4: Fair Value" for the instruments held as cash equivalents.
Trading Assetsagreements.
Marketable debt instrumentsinvestments are generally designated as trading assets when a market risk is economically hedged at inception with a related derivative instrument, or when the marketable debt instrumentinvestment itself is used to economically hedge foreigncurrency exchange rate risk from remeasurement. Investments designated as trading assets are reported at fair value. The gainsGains or losses ofon these investments arising from changes in fair value due to interest rate and currency market fluctuations and credit market volatility, largely offset by losses or gains on the related derivative instruments and balance sheet remeasurement, are recorded in interest and other, net. We also designate certain floating-rate securitized financial instruments, primarily asset-backed securities, as trading assets.
Available-for-Sale Investments
We consider all liquid available-for-saleMarketable debt instruments with original maturities from the date of purchase of approximately three months or less to be cash and cash equivalents. Available-for-sale debt instruments with original maturities at the date of purchase greater than approximately three months and remaining maturities of less than one yearinvestments are classified as short-term investments. Available-for-sale debt instruments with remaining maturities beyond one year are classified as other long-term investments.
Investments that we designate as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss), except as noted in the "Other-Than-Temporary Impairment" section that follows. We determine the cost of the investment sold based on an average cost basis at the individual security level. Ourconsidered available-for-sale investments include:
Marketable debt instruments when the interest rate and foreign currency risks are not hedged at the inception of the investment or when our criteria for designation as trading assets are not met. Available-for-sale debt investments with original maturities of approximately three months or less from the date of purchase are classified within cash and cash equivalents. Available-for-sale debt investments with original maturities at the date of purchase greater than approximately three months and remaining maturities of less than one year are classified as short-term investments. Available-for-sale debt investments with remaining maturities beyond one year are classified as other long-term investments. Available-for-sale debt investments are reported at fair value, with unrealized gains or losses, net of tax, recorded in accumulated other comprehensive income (loss). We generally hold these debt instruments to generate a return commensurate withdetermine the U.S.-dollar three-month LIBOR. Wecost of the investment sold based on an average cost basis at the individual security level, and record the interest income and realized gains and losses on the sale of these instruments in interest and other, net.
Marketable equity securities when there is no plan to sell or hedge the investment at the time of original classification. We acquire these equity investments to promote business and strategic objectives. To the extent that these investments continue to have strategic value, we typically do not attempt to reduce or eliminate the equity market risks through hedging activities. We record the realized gains or losses on the sale or exchange of marketable equity securities in gains (losses) on equity investments, net.
Non-Marketable and Other Equity Investments
Our non-marketable equity and other equity investments are included in other long-term assets. We account for non-marketable equity and other equity investments for which we do not have control over the investee as:
Equity method investments when we have the ability to exercise significant influence, but not control, over the investee. Equity method investments include marketable and non-marketable investments. Our proportionate share of the income or loss is recognized on a one-quarter lag and is recorded in gains (losses) on equity investments, net.
Non-marketable cost method investments when the equity method does not apply.
We record the realized gains or losses on the sale of equity method and non-marketable cost methodthese investments in gains (losses) on equity investments,interest and other, net.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other-Than-Temporary Impairment
Our available-for-sale investments and non-marketable and other equitydebt investments are subject to a periodic impairment review. Investments are considered impaired when the fair value is below the investment’s adjusted cost basis. Impairments affect earnings as follows:
Marketable debt instruments when the fair value is below amortized cost andreviews. For these investments, we intend to sell the instrument, or whenconsider whether it is more likely than not that we will be required to sell the instrumentinvestment before recovery of its amortized cost basis, or when we do not expect to recoverwhether recovery of the entire amortized cost basis of the instrument (thatinvestment is unlikely because a credit loss exists).exists. When we do not expect to recover the entire amortized cost basis of the instrument,investment, we separate other-than-temporary impairments into amounts representing credit losses, which are recognized in interest and other, net, and amounts not related to all other factors,credit losses, which are recognized in other comprehensive income (loss).
EQUITY INVESTMENTS
We regularly invest in equity securities of public and private companies to promote business and strategic objectives. Equity investments are measured and recorded as follows:
Marketable equity securities are equity securities with readily determinable fair value (RDFV) that are measured and recorded at fair value on a recurring basis with changes in fair value, whether realized or unrealized, recorded through the income statement. Prior to 2018, these securities were classified as available-for-sale securities and measured and recorded at fair value with unrealized changes in fair value recorded through other comprehensive income.
Non-marketable equity securitiesare equity securities without RDFV that are measured and recorded using a measurement alternative that measures the securities at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. Prior to fiscal 2018, these securities were accounted for using the cost method of accounting, measured at cost less other-than-temporary impairment.
Equity method investmentsare equity securities in investees we do not control but over which we have the ability to exercise significant influence. Equity method investments are measured at cost minus impairment, if any, plus or minus our share of equity method investee income or loss. Our proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag.
Realized and unrealized gains and losses resulting from changes in fair value or the sale of our equity investments are recorded in gains (losses) on equity investments, net. Prior to 2018, we recorded unrealized gains and losses through other comprehensive income (loss) and realized gains and losses on the sale, exchange, or impairment of these equity investments through gains (losses) on equity investments, net. The carrying value of our non-marketable equity securities is adjusted for qualifying observable price changes resulting from the issuance of similar or identical securities by the same issuer. Determining whether an observed transaction is similar to a security within our portfolio requires judgment based on the specific factsrights and circumstances present atpreferences of the timesecurities. Recording upward and downward adjustments to the carrying value of assessment, which include the considerationour equity securities as a result of general market conditions, the duration and extent to whichobservable price changes requires quantitative assessments of the fair value of our securities using various valuation methodologies and involves the use of estimates.
Non-marketable equity securities and equity method investments (collectively referred to as non-marketable equity investments) are also subject to periodic impairment reviews. Our quarterly impairment analysis considers both qualitative and quantitative factors that may have a significant impact on the investee's fair value. Qualitative factors considered include the investee's financial condition and business outlook, industry and sector performance, market for technology, operational and financing cash flow activities, and other relevant events and factors affecting the investee. When indicators of impairment exist, we prepare quantitative assessments of the fair value of our non-marketable equity investments using both the market and income approaches, which require judgment and the use of estimates, including discount rates, investee revenue and costs, and comparable market data of private and public companies, among others.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 72 |
Non-marketable equity securities are tested for impairment using a qualitative model similar to the model used for goodwill and long-lived assets. Upon determining that an impairment may exist, the security's fair value is calculated and compared to its carrying value and an impairment is recognized immediately if the carrying value exceeds the fair value. Prior to 2018, non-marketable equity securities were tested for impairment using the other-than-temporary impairment model.
Equity method investmentsare subject to periodic impairment reviews using the other-than-temporary impairment model, which considers the severity and duration of a decline in fair value below cost and our ability and intent to hold the investment for a sufficient period of time to allow for recoveryrecovery.
Impairments of value in the foreseeable future. We also consider specific adverse conditions related to the financial health of, and the business outlook for, the investee, which may include industry and sector performance, changes in technology, operational and financing cash flow factors, and changes in the investee’s credit rating. We record other-than-temporary impairments on marketable equity securities and marketable equity method investments in gains (losses) on equity investments net.
Non-marketable equity investments based on our assessment of the severity and duration of the impairment, and qualitative and quantitative analysis, including:
the investee’s revenue and earnings trends relative to pre-defined milestones and overall business prospects;
the technological feasibility of the investee’s products and technologies;
the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes;
the management and governance structure of the investee;
factors related to the investee’s ability to remain in business, such as the investee’s liquidity and debt ratios, and the rate at which the investee is using its cash; and
the investee’s receipt of additional funding at a lower valuation.
We record other-than-temporary impairments for non-marketable cost method investments and equity method investmentsare recorded in gains (losses) on equity investments, net.
Derivative Financial InstrumentsDERIVATIVE FINANCIAL INSTRUMENTS
Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk, and, to a lesser extent, equity market risk, commodity price risk, and credit risk.When possible, we We enter into master netting arrangements with counterparties to mitigate credit risk in derivative transactions.transactions by permitting net settlement of transactions with the same counterparty. A master netting arrangement may allowallows counterparties to net settle amounts owed to each other as a result of multiple, separate derivative transactions. Generally, our master netting agreements allow for net settlement in case of certain triggering events such as bankruptcy or default of one of the counterparties to the transaction. We may also elect to exchange cashenter into collateral security arrangements with certain of our counterparties onto exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds. We record the collateral within current other assets and long-term other assets with a regular basis. corresponding liability. For presentation on our consolidated balance sheets, we do not offset fair value amounts recognized for derivative instruments under master netting arrangements. Our derivative financial instruments are recordedpresented at fair value on a gross basis and are included in other current assets, other long-term assets, other accrued liabilities, or other long-term liabilities.
Cash flow hedges use foreign currency contracts, such as currency forwards and currency interest rate swaps, to hedge exposures for the following items:
Our accounting policies for derivative financial instruments are based on whether they meet the criteria for hedge accounting designation.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A designated hedge with exposure to variability in the functional currencyU.S.-dollar equivalent of the future foreign currencynon-U.S.-dollar-denominated cash flows of aassociated with our forecasted transactionoperating and capital purchases spending; and
coupon and principal payments for our non-U.S.-dollar-denominated indebtedness.
The after-tax gains or variability in the functional currency equivalent cash flows of a recognized asset or liability are examples of cash flow hedges. The criteria for designating a derivative as a cash flow hedge include the assessment of the instrument’s effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction, and the assessment of the probability that the underlying transaction will occur. For derivatives with cash flow hedge accounting designation, we report the after-tax gain or losslosses from the effective portion of thea cash flow hedge is reported as a component of accumulated other comprehensive income (loss) and reclassify itreclassified into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated statements of income as the impact of the hedgedhedge transaction. Derivatives that we designate asFor foreign currency contracts hedging our capital purchases, forward points are excluded from the hedge effectiveness assessment. Ineffective portions of cash flow hedges, as well as amounts excluded from the hedge effectiveness assessment, are recognized in earnings in interest and other, net. If the cash flow hedge transactions become probable not to occur, the corresponding amounts deferred in accumulated other comprehensive income (loss) would be immediately reclassified to interest and other, net. These derivatives are classified in the consolidated statements of cash flows in the same section as the underlying item, primarily within cash flows from operating activities.item.
A designatedFair value hedges use interest rate contracts, such as interest rate swaps, to hedge with exposureagainst changes in the fair value on certain of our fixed-rate indebtedness attributable to changes in the benchmark interest rate. The gains or losses on these hedges, as well as the offsetting losses or gains related to the changes in the fair value of a recognized asset or liability that arethe underlying hedged item attributable to the changes in the benchmark interest rate is one example of a fair value hedge. For derivatives with fair value hedge accounting designation, the gains and losses of the hedge as well as the offsetting gains and losses attributable to the changes in the benchmark interest rate on the underlying hedged itemrisk, are recognized in earnings in the current period. Derivatives that we designated as fair value hedgesperiod, primarily in interest and other, net. These derivatives are classified in the consolidated statements of cash flows in the same section as the underlying item, primarily within cash flows from financing activities.
Non-designated hedges use foreign currency contracts to economically hedge the functional currency equivalent cash flows of recognized monetary assets and liabilities, non-U.S.-dollar-denominated debt instruments classified as trading assets, and non-U.S.-dollar-denominated loans receivables recognized at fair value. We recognize gains and losses from changesalso use interest rate contracts to hedge interest rate risk related to our U.S.-dollar-denominated fixed-rate debt instruments classified as trading assets.
The change in fair value of these derivatives that are not designated as hedges for accounting purposesis recorded through earnings in the line item on the consolidated statements of income to which the derivatives most closely associated with the related exposures,relate, primarily in interest and other, net and gains (losses) on equity investments, net. As part of our strategic investment program, we also acquire equity derivative instruments, such as equity conversion rights associated with debt instruments, which we do not designate as hedging instruments. We recognize the gains or losses from changes in fair value of these equity derivative instruments in gains (losses) on equity investments, net. Realized gains and losses from derivatives not designated as hedges are classified in the consolidated statements of cash flows within cash flows from operating activities or investing activities, depending on the activity the exposure is most closely associated with.
Measurement of Effectiveness
Effectiveness for forwards is generally measured by comparing the cumulative changeChanges in the fair value of the hedge contractunderlying assets and liabilities associated with the cumulative changehedged risk are generally offset by the changes in the fair value of the forecasted cash flows of the hedged item. For currency forward contracts used in cash flow hedging strategies related to capital purchases, forward points are excluded, and effectiveness is measured using spot rates to value both the hedge contract and the hedged item. For currency forward contracts used in cash flow hedging strategies related to operating expenditures, forward points are included, and effectiveness is measured using forward rates to value both the hedge contract and the hedged item.
derivatives.Effectiveness for options is generally measured by comparing the cumulative change in the intrinsic value of the hedge contract with the cumulative change in the intrinsic value of an option instrument representing the hedged risks in the hedged item. Time value is excluded and effectiveness is measured using spot rates to value both the hedge contract and the hedged item.
Effectiveness for interest rate swaps and commodity swaps is generally measured by comparing the cumulative change in fair value of the swap with the cumulative change in the fair value of the hedged item.
If a cash flow hedge is discontinued because it is probable that the original hedged transaction will not occur as previously anticipated, the cumulative unrealized gain or loss on the related derivative is reclassified from accumulated other comprehensive income (loss) into earnings. Subsequent gains or losses on the related derivative instrument are recognized in interest and other, net in each period until the instrument matures, is terminated, is re-designated as a qualified cash flow hedge, or is sold. Ineffective portions of cash flow hedges, as well as amounts excluded from the assessment of effectiveness, are recognized in earnings in interest and other, net. For further discussion of our derivative instruments and risk management programs, see "Note 6: Derivative Financial Instruments."
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Securities LendingLOANS RECEIVABLE
We may enter into securities lending agreements with financial institutions, generally to facilitate hedging and certain investment and financing transactions. Selected securities may be loaned, secured by collateral in the form of cash or securities. The loaned securities continue to be carried as investment assets on our consolidated balance sheets. For lending agreements collateralized by cash and cash equivalents, collateral is recorded as an asset with a corresponding liability. For lending agreements collateralized by other securities, we do not record the collateral as an asset or a liability, unless the collateral is repledged.
Loans Receivable
We make loans to third parties that are classified within other current assets or other long-term assets. We may elect the fair value option for loans when the interest rate or foreign currency exchange rate risk is economically hedged at the inception of the loan with a related derivative instrument. We recordWhen the gains or losses on these loans arising from changes in fair value due to interest rate, currency, and counterparty credit changes, largely offset by losses or gains onoption is not elected, the related derivative instruments, in interest and other, net. Loans that are denominated in U.S. dollars and have a floating-rate couponloans are carried at amortized cost. We measure interest income for all loans receivable using the interest method, which is based on the effective yield of the loans rather than the stated coupon rate. For further discussion ofWe classify our loans receivable, see "Note 4: Fair Value."within other current and long-term assets.
Inventories
We compute inventory cost on a first-in, first-out basis. Costs incurred to manufacture our products are included in the valuation of inventory beginning in the quarter in which a product meets the technical criteria to qualify for sale to customers. Prior to qualification for sale, costs that do not meet the criteria for research and development (R&D) are included in cost of sales in the period incurred. Inventories at the end of each period were as follows:
|
| | | | | | | | |
| (In Millions) | | Dec 26,
2015 | | Dec 27,
2014 |
| Raw materials | | $ | 532 |
| | $ | 462 |
|
| Work in process | | 2,893 |
| | 2,375 |
|
| Finished goods | | 1,742 |
| | 1,436 |
|
| Total inventories | | $ | 5,167 |
| | $ | 4,273 |
|
Property, Plant and Equipment
Property, plant and equipment, net at the end of each period were as follows: |
| | | | | | | | |
| (In Millions) | | Dec 26,
2015 | | Dec 27,
2014 |
| Land and buildings | | $ | 25,578 |
| | $ | 22,989 |
|
| Machinery and equipment | | 48,459 |
| | 44,441 |
|
| Construction in progress | | 9,359 |
| | 12,279 |
|
| Total property, plant and equipment, gross | | 83,396 |
| | 79,709 |
|
Less: accumulated depreciation | | (51,538 | ) | | (46,471 | ) |
| Total property, plant and equipment, net | | $ | 31,858 |
| | $ | 33,238 |
|
We compute depreciation for financial reporting purposes using the straight-line method. As of December 26, 2015, substantially all of our depreciable property, plant and equipment assets were depreciated over the following estimated useful lives: machinery and equipment, 2 to 4 years; and buildings, 10 to 25 years. Beginning in 2016, our machinery and equipment will be depreciated over 2 to 5 years.
We capitalize a portion of interest on borrowings related to eligible capital expenditures. Capitalized interest is added to the cost of qualified assets and depreciated over the estimated useful lives of the assets. We record capital-related government grants earned as a reduction to property, plant and equipment.
70
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 73 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CREDIT RISK
Financial instruments that potentially subject us to concentrations of credit risk consist principally of investments in debt instruments, derivative financial instruments, loans receivable, reverse repurchase agreements, and trade receivables. We enter into master netting arrangements to mitigate credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty.
We generally place investments with high-credit-quality counterparties and, by policy, we limit the amount of credit exposure to any one counterparty based on our analysis of that counterparty’s relative credit standing. As required per our investment policy, substantially all of our investments in debt instruments and financing receivables are in investment-grade instruments. Credit-rating criteria for derivative instruments are similar to those for other investments. Due to master netting arrangements, the amounts subject to credit risk related to derivative instruments are generally limited to the amounts, if any, by which the counterparty’s obligations exceed our obligations with that counterparty. As of December 29, 2018, our total credit exposure to any single counterparty, excluding money market funds invested in U.S. treasury and U.S. agency securities and reverse repurchase agreements collateralized by treasury and agency securities, did not exceed $750 million. To further reduce credit risk, we obtain and secure available collateral from counterparties against obligations, including securities lending transactions, when we deem it appropriate.
Included within constructionA substantial majorityof our trade receivables are derived from sales to original equipment manufacturers (OEMs) and original design manufacturers (ODMs). We also have accounts receivable derived from sales to industrial and communications equipment manufacturers in progress we have certain facilities on holdthe computing and not in use. These facilities are being held in a safe state, and we have plans to place them into service at a future date. Depreciation is not recognized on these assets and they are not eligible for capitalized interest when construction is on hold. The balance of such assets was approximately $3.4 billioncommunications industries. We believe that the net accounts receivable balances from our three largest customers (45% as of December 26, 2015 (approximately $2.2 billion29, 2018) do not represent a significant credit risk, based on cash flow forecasts, balance sheet analysis, and past collection experience. For more information about the customers that represent our accounts receivable balance, see "Note 4: Operating Segments."
We have adopted credit policies and standards intended to accommodate industry growth and inherent risk. We believe that credit risks are moderated by the financial stability of our major customers. We assess credit risk through quantitative and qualitative analysis. From this analysis, we establish shipping and credit limits, and determine whether we will seek to use one or more credit support protection devices, such as obtaining a parent guarantee, standby letter of December 27, 2014).credit, or credit insurance.
BUSINESS COMBINATIONS
We record goodwill whenallocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on their estimated fair values at the time of an acquisition exceedsacquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The most subjective areas include determining the fair value of the net tangible and identified following:
intangible assets, acquired.including the valuation methodology, estimations of future cash flows, discount rates, market segment growth rates, and our assumed market segment share, as well as the estimated useful life of intangible assets;
deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances, which are initially estimated as of the acquisition date;
inventory; property, plant and equipment; pre-existing liabilities or legal claims; deferred revenue; and contingent consideration, each as may be applicable; and
goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.
Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. We assign theallocate goodwill to ourthe reporting units based onof the relativebusiness that are expected fair value provided byto benefit from the acquisition. business combination.
GOODWILL
We perform an annual impairment assessment of goodwill at the reporting unit level in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, which includes evaluatingexist. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment of a reporting unit’s goodwill. We perform impairment tests using a fair value approach when necessary.impairment. The reporting unit’s carrying value used in an impairment test represents the assignment of various assets and liabilities, excluding certain corporate assets and liabilities, such as cash, investments, and debt. For further discussion
Qualitative factors include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. Additionally, as part of goodwill, see "Note 10: Goodwill."this assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring a reporting unit’s fair value.
Identified Intangible Assets
Licensed technologyOur quantitative impairment test considers both the income approach and patents are generally amortizedthe market approach to estimate a reporting unit’s fair value. Significant estimates include market segment growth rates, our assumed market segment share, estimated costs, and discount rates based on a straight-line basis overreporting unit's weighted average cost of capital.
We test the periodsreasonableness of benefit. the inputs and outcomes of our discounted cash flow analysis against available market data. In the current year, the fair value for all of our reporting units substantially exceeds their carrying value, and our annual qualitative assessment did not indicate that a more detailed quantitative analysis was necessary.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 74 |
IDENTIFIED INTANGIBLE ASSETS
We amortize all acquisition-related intangible assets that are subject to amortization over their estimated useful life based on economic benefit.life. Acquisition-related in-process R&D assets represent the fair value of incomplete R&D projects that had not reached technological feasibility as of the date of acquisition; initially, these are classified as "other intangible assets" thatin-process R&D and are not subject to amortization. Assets related toOnce these R&D projects that have beenare completed, the asset balances are transferred from "other intangible assets"in-process R&D to "acquisition-relatedacquisition-related developed technology;" thesetechnology and are subject to amortization while assets relatedfrom this point forward. The asset balances relating to projects that have beenare abandoned after acquisition are impaired and expensed to R&D. In the quarter following the period in which identified intangible assets become fully amortized, we remove the fully amortized balances from the gross asset and accumulated amortization amounts.
The estimated useful life ranges for all identified intangible assets that are subject to amortization as of December 26, 2015 were as follows: |
| | | | |
| (In Years) | | Estimated Useful Life |
| Acquisition-related developed technology | | 3 | – | 9 |
| Acquisition-related customer relationships | | 5 | – | 11 |
| Acquisition-related brands | | 5 | – | 8 |
| Licensed technology and patents | | 2 | – | 17 |
We perform a quarterly review of significant finite-lived identified intangible assets to determine whether facts and circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. IfThese reviews can be affected by various factors, including external factors such factsas industry and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets, which is calculated based on projected discounted net cash flows. If an asset’s useful life is shorter than originally estimated, we accelerate the rate of amortizationeconomic trends, and amortize the remaining carrying value over the new, shorter useful life.
We perform an annual impairment assessment in the fourth quarter of each year for indefinite-lived intangible assets, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the carrying value of the assets may not be recoverable. If necessary, a quantitative impairment test is performed to compare the fair value of the indefinite-lived intangible asset with its carrying value. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets.
For further discussion of identified intangible assets, see "Note 11: Identified Intangible Assets."
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Product Warranty
The vast majority of our products are sold with a limited warranty on product quality and a limited indemnification for customers against intellectual property rights infringement claims related to our products. The accrual and the related expense for known product warranty issues were not significant during the periods presented. Due to product testing, the short time typically between product shipment and the detection and correction of product failures, and the historical rate of payments on indemnification claims, the accrual and related expense for estimated incurred but unidentified issues were not significant during the periods presented.
Revenue Recognition
We recognize net product revenue when the earnings process is complete,internal factors such as evidenced by an agreement with the customer, delivery has occurred, and acceptance, if applicable, as well as fixed pricing and probable collectability. We record pricing allowances, including discounts based on contractual arrangements with customers, when we recognize revenue as a reduction to both accounts receivable and net revenue. Because of frequent sales price reductions and rapid technology obsolescencechanges in our industry, we deferbusiness strategy and our forecasts for specific product revenue and related costs of sales from component sales made to distributors under agreements allowing price protection or right of return until the distributors sell the merchandise. The right of return granted generally consists of a stock rotation program in which distributors are able to exchange certain products based on the number of qualified purchases made by the distributor. Under the price protection program, we give distributors credits for the difference between the original price paid and the current price that we offer. We include shipping charges billed to customers in net revenue, and include the related shipping costs in cost of sales.lines.
Revenue from license agreements on our McAfee products generally includes service and support agreements for which the related revenue is deferred and recognized ratably over the performance period. Revenue derived from online subscription products is deferred and recognized ratably over the performance period. Professional services revenue is recognized as services are performed or, if required, upon customer acceptance. For arrangements with multiple elements, including software licenses, maintenance, and/or services, revenue is allocated across the separately identified deliverables and may be recognized or deferred. When vendor-specific objective evidence does not exist for undelivered elements such as maintenance and support, the entire arrangement fee is recognized ratably over the performance period. Direct costs, such as costs related to revenue-sharing and royalty arrangements associated with license arrangements, as well as component costs associated with product revenue and sales commissions, are deferred and amortized over the same period that the related revenue is recognized.We record deferred revenue offset by the related cost of sales on our consolidated balance sheets as deferred income.EMPLOYEE EQUITY INCENTIVE PLANS
Advertising
Cooperative advertising programs reimburse customers for marketing activities for certain of our products, subject to defined criteria. We accrue cooperative advertising obligations and record the costs at the same time that the related revenue is recognized. We record cooperative advertising costs as marketing, general and administrative (MG&A) expenses to the extent that an advertising benefit separate from the revenue transaction can be identified and the fair value of that advertising benefit received is determinable. We record any excess in cash paid to customers over the fair value of the advertising benefit we receive as a reduction in revenue. Advertising costs, including direct marketing costs, recorded within MG&A expenses were $1.8 billion in 2015 ($1.8 billion in 2014 and $1.9 billion in 2013).
Employee Equity Incentive Plans
We have employee equity incentive plans, which are described more fully in "Note 18: Employee Equity Incentive Plans." We use the straight-line attributionamortization method to recognize share-based compensation expense over the service period of the award.award, net of estimated forfeitures. Upon exercise, cancellation, forfeiture, or expiration of stock options, or upon vesting or forfeiture of restricted stock units (RSUs), we eliminate deferred tax assets for options and RSUs with multiple vesting dates for each vesting period on a first-in, first-out basis as if each vesting period were a separate award.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income TaxesINCOME TAXES
We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.
We recordassess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance to reduceagainst the deferred tax assets that we estimate will not ultimately be recoverable. We believe that we will ultimately recover the deferred tax assets recorded on our consolidated balance sheets. Recovery of a portion of our deferred tax assets is affected by management’s plans with respect to the amount that it is believed more likely than not to be realized.holding or disposing of certain investments; therefore, such changes could also affect our future provision for taxes.
We recognize tax benefits from uncertain tax positions only if that tax position(based on the technical merits of the position) it is more likely than not tothat the tax positions will be sustained on examination by the taxing authorities, based on the technical merits of the position. We then measure thetax authority. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefitamount that has a greateris more than 50% likelihood of beinglikely to be realized upon ultimate settlement. We recognize interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated statements of income.
We have completed the accounting associated with the December 22, 2017 enactment of the U.S. Tax Cuts and Jobs Act (Tax Reform). The U.S. Securities and Exchange Commission (SEC) had provided accounting and reporting guidance that allowed us to report provisional amounts within a measurement period up to one year from the enactment date. Complexities inherent in adopting the changes included additional guidance, interpretations of the law, and further analysis of data and tax positions. During 2018, as part of completing our accounting, we recognized approximately $300 million reduction to our one-time net tax charge related to the transition tax and the remeasurement of deferred income taxes. For more information about Tax Reform impacts, see “Note 9: Income Taxes.”
We recognize the tax impact of including certain foreign earnings in U.S. taxable income as a period cost. We have recognized deferred income taxes see "Note 23: Income Taxes."for local country income and withholding taxes that could be incurred on distributions of certain non-U.S. earnings or for outside basis differences in our subsidiaries, because we do not plan to indefinitely reinvest such earnings and basis differences. Remittances of non-U.S. earnings are based on estimates and judgments of projected cash flow needs, as well as the working capital and investment requirements of our non-U.S. and U.S. operations. Material changes in our estimates of cash, working capital, and investment needs in various jurisdictions could require repatriation of indefinitely reinvested non-U.S. earnings, which could be subject to applicable non-U.S. income and withholding taxes.
LOSS CONTINGENCIES
We are subject to loss contingencies, including various legal and regulatory proceedings, asserted and potential claims, liabilities related to repair or replacement of parts in connection with product defects, as well as product warranties and potential asset impairments that arise in the ordinary course of business. An estimated loss from such contingencies is recognized as a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 75 |
|
| |
| NOTE 3 : | RECENT ACCOUNTING STANDARDS |
ACCOUNTING STANDARDS ADOPTED
Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
Note 3: Recent Accounting StandardsStandard/Description:This amended standard was issued to provide additional guidance on the presentation of net periodic benefit cost in the income statement and on the components eligible for capitalization in assets. In accordance with the revised standard, we have separated the different components of net periodic benefit cost, presenting service cost components within operating income and other non-service components separately outside of operating income on the income statement. In addition, only service costs are now eligible for inventory capitalization.
In May 2014,Effective Date and Adoption Considerations:Effective in the first quarter of 2018. Changes to the presentation of benefit costs were required to be adopted retrospectively, while changes to the capitalization of service costs into inventories were required to be adopted prospectively. The standard permits, as a practical expedient, use of the amounts disclosed in the Retirement Benefit Plans footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirement.
Effect on Financial Accounting Standards Board (FASB)Statements or Other Significant Matters:Adoption of the amended standard resulted in the reclassification of non-service net periodic benefit costs from line items within operating income to interest and other, net, of approximately $114 million for the year ended December 30, 2017 ($259 million for the year ended December 31, 2016).
Revenue Recognition - Contracts with Customers
Standard/Description:This standard was issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles.all companies. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB agreed to delay the effective date by one year; accordingly, the new standard is effective for us beginning
Effective Date and Adoption Considerations:Effective in the first quarter of 2018 and we expect2018. This standard was adopted using a modified retrospective approach through a cumulative adjustment to adopt it at that time. Theretained earnings for the fiscal year beginning December 31, 2017.
Effect on Financial Statements or Other Significant Matters:Our adoption assessments identified a change in revenue recognition timing on our component sales made to distributors. Under the new standard, is requiredwe now recognize revenue when we deliver to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized atdistributor rather than deferring recognition until the distributor sells the components.
On the date of initial application. application, we removed the deferred income and related receivables on component sales made to distributors through a cumulative adjustment to retained earnings. The revenue deferral that was historically recognized in the following period is expected to be primarily offset by the acceleration of revenue recognition in the current period as control of the product transfers to our customer.
Our assessment also identified a change in expense recognition timing related to payments we make to our customers for distinct services they perform as part of cooperative advertising programs, which were previously recorded as operating expenses. We now recognize the expense for cooperative advertising in the period the marketing activities occur. Previously we recognized the expense in the period the customer was entitled to participate in the program, which coincided with the period of sale. On the date of initial adoption, we capitalized the expense of cooperative advertising not performed through a cumulative adjustment to retained earnings.
We have not yet selected a transition method, nor have we determinedcompleted our adoption and implemented policies, processes, and controls to support the impactstandard's measurement and disclosure requirements. Refer to the tables below, which summarize the impacts of the new standard on our consolidated financial statements.
In 2015, the FASB issued an amended standard requiring that we classify all deferred tax assets and liabilities as non-current on the balance sheet instead of separating deferred taxes into current and non-current. The amended standard is effective for us beginning in the first quarter of 2017; early adoption is permitted and we are evaluating whether we will early adopt. The amended standard may be adopted on either a prospective or retrospective basis. We do not expect that the adoption of this standard will have a significant impact onchanges discussed above to our financial position or resultsstatements recorded as an adjustment to opening balances for the fiscal year beginning December 31, 2017, and also provide comparative reporting of operations.the impacts of adopting the standard.
In 2015, the FASB issued an amended standard requiring that we recognize the effect on earnings of any adjustments identified during the measurement period after an acquisition in the same period the adjustment is identified, as opposed to the prior standard which required material adjustments be retrospectively adjusted. The amended standard is effective for us beginning in the first quarter of 2016. We do not expect that the adoption of this standard will have a significant impact on our consolidated financial statements.Financial Instruments - Recognition and Measurement
In January 2016, the FASB issuedStandard/Description:Requires changes to the accounting for financial instruments that primarily affect equity investments,securities, financial liabilities undermeasured using the fair value option, and the presentation and disclosure requirements for financialsuch instruments. This standard is effective for us beginning
Effective Date and Adoption Considerations:Effective in the first quarter of 2018; certain provisions allow2018. Changes to our marketable equity securities were required to be adopted using a modified retrospective approach through a cumulative effect adjustment to retained earnings for earlythe fiscal year beginning December 31, 2017. Since management has elected to apply the measurement alternative to non-marketable equity securities, changes to these securities were adopted prospectively.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 76 |
Effect on Financial Statements or Other Significant Matters:Marketable equity securities previously classified as available-for-sale equity investments are now measured and recorded at fair value with changes in fair value recorded through the income statement.
All non-marketable equity securities formerly classified as cost method investments are measured and recorded using the measurement alternative. Equity securities measured and recorded using the measurement alternative are recorded at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. Adjustments resulting from impairments and qualifying observable price changes are recorded in the income statement.
Beginning in the first quarter of 2018, in accordance with the standard, recurring fair value disclosures are no longer provided for equity securities measured using the measurement alternative. In addition, the previous impairment model has been replaced with a simplified qualitative impairment model. No initial adoption adjustment was recorded for these instruments since the standard was required to be applied prospectively for securities measured using the measurement alternative.
We have completed our adoption and we are evaluating whether we will electimplemented policies, processes, and controls to early adopt these provisions. support the standard's measurement and disclosure requirements. Refer to the table below, which summarizes impacts, net of tax, of the changes discussed above to our financial statements. This reflects an adjustment to opening balances for the fiscal year beginning December 31, 2017.
Opening Balance Adjustments
The new standard should be applied by meansfollowing table summarizes the effects of a cumulative-effectadopting Revenue Recognition - Contracts with Customers and Financial Instruments - Recognition and Measurement on our financial statements for the fiscal year beginning December 31, 2017 as an adjustment to the opening balance: |
| | | | | | | | | | | | | | | | | | | | |
| | | | | Adjustments from | | | | |
(In Millions) | | Balance as of Dec 30, 2017 | | Revenue Standard | | Financial Instruments Update | | Other1 | | Opening Balance as of Dec 31, 2017 |
| Assets: | | | | | | | | | | |
| Accounts receivable, net | | $ | 5,607 |
| | $ | (530 | ) | | $ | — |
| | $ | — |
| | $ | 5,077 |
|
| Inventories | | $ | 6,983 |
| | $ | 47 |
| | $ | — |
| | $ | — |
| | $ | 7,030 |
|
| Other current assets | | $ | 2,908 |
| | $ | 64 |
| | $ | — |
| | $ | (8 | ) | | $ | 2,964 |
|
| Equity investments | | $ | — |
| | $ | — |
| | $ | 8,579 |
| | $ | — |
| | $ | 8,579 |
|
| Marketable equity securities | | $ | 4,192 |
| | $ | — |
| | $ | (4,192 | ) | | $ | — |
| | $ | — |
|
| Other long-term assets | | $ | 7,602 |
| | $ | — |
| | $ | (4,387 | ) | | $ | (43 | ) | | $ | 3,172 |
|
| | | | | | | | | | | |
| Liabilities: | | | | | | | | | | |
| Deferred income | | $ | 1,656 |
| | $ | (1,356 | ) | | $ | — |
| | $ | — |
| | $ | 300 |
|
| Other accrued liabilities | | $ | 7,535 |
| | $ | 81 |
| | $ | — |
| | $ | — |
| | $ | 7,616 |
|
| Long-term deferred tax liabilities | | $ | 3,046 |
| | $ | 191 |
| | $ | — |
| | $ | (20 | ) | | $ | 3,217 |
|
| | | | | | | | | | | |
| Stockholders' equity: | | | | | | | | | | |
| Accumulated other comprehensive income (loss) | | $ | 862 |
| | $ | — |
| | $ | (1,745 | ) | | $ | (45 | ) | | $ | (928 | ) |
| Retained earnings | | $ | 42,083 |
| | $ | 665 |
| | $ | 1,745 |
| | $ | 14 |
| | $ | 44,507 |
|
| |
1 | Includes adjustments from the adoption of "Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory" and "Income Statement—Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." |
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 77 |
The following table summarizes the impacts of adopting the new revenue standard on our consolidated statements of income and balance sheets:
|
| | | | | | | | | | | | |
| | | For the fiscal year ended December 29, 2018 |
| (In Millions) | | As reported | | Adjustments | | Without new revenue standard |
| | | | | | | |
| Net revenue | | $ | 70,848 |
| | $ | (616 | ) | | $ | 70,232 |
|
| Cost of sales | | 27,111 |
| | (206 | ) | | 26,905 |
|
| Gross margin | | 43,737 |
| | (410 | ) | | 43,327 |
|
| Marketing, general and administrative | | 6,750 |
| | (70 | ) | | 6,680 |
|
| Operating income | | 23,316 |
| | (340 | ) | | 22,976 |
|
| Income before taxes | | 23,317 |
| | (340 | ) | | 22,977 |
|
| Provision for taxes | | 2,264 |
| | (64 | ) | | 2,200 |
|
| Net income | | $ | 21,053 |
| | $ | (276 | ) | | $ | 20,777 |
|
| | | | | | | |
| | | | | | | |
| Assets: | | | | | | |
| Accounts receivable | | $ | 6,722 |
| | $ | 216 |
| | $ | 6,938 |
|
| Inventories | | $ | 7,253 |
| | $ | 62 |
| | $ | 7,315 |
|
| Other current assets | | $ | 3,162 |
| | $ | 4 |
| | $ | 3,166 |
|
| | | | | | | |
| Liabilities: | | | | | | |
| Deferred income | | $ | — |
| | $ | 1,846 |
| | $ | 1,846 |
|
| Other accrued liabilities | | $ | 7,919 |
| | $ | (514 | ) | | $ | 7,405 |
|
| Deferred income taxes | | $ | 1,665 |
| | $ | (109 | ) | | $ | 1,556 |
|
| | | | | | | |
| Equity: | | | | | | |
| Retained earnings | | $ | 50,172 |
| | $ | (941 | ) | | $ | 49,231 |
|
ACCOUNTING STANDARDS NOT YET ADOPTED
Leases
Standard/Description:This new lease accounting standard requires that we recognize operating leased assets and corresponding liabilities on the balance sheet asand provide enhanced disclosure of lease activity.
Effective Date and Adoption Considerations:Effective in the first quarter of 2019. The standard requires a modified retrospective adoption. We can choose to apply the provisions at the beginning of the fiscal yearearliest comparative period presented in the financial statements or at the beginning of the period of adoption. We have elected to apply the guidance at the beginning of the period of adoption. Our leased assets and corresponding liabilities will exclude non-lease components.
Effect on Financial Statements or Other Significant Matters:We expect to record right-of-use leased assets and corresponding liabilities of approximately $625 million at the beginning of first quarter 2019.
Cloud Computing Implementation Costs
Standard/Description:The standard requires implementation costs incurred in cloud computing (i.e., hosting) arrangements that are service contracts to be assessed under existing guidance to determine which costs to capitalize as assets or expense as incurred.
Effective Date and Adoption Considerations:Effective in the first quarter of 2020. The standard requires adoption with certain exceptions. either retrospectively or prospectively.
Effect on Financial Statements or Other Significant Matters:We have not yet determined the impact of the newthis standard on our consolidated financial statements.
In 2015, we adopted an amended standard simplifying the presentation of debt issuance costs as a direct deduction from the carrying value of the debt liability rather than showing the debt issuance costs as an asset. We have applied the amendment retrospectively to the comparable period presented and it did not have a significant impact on our financial statements.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 78 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4: Fair Value |
| |
| NOTE 4 : | OPERATING SEGMENTS |
AssetsWe manage our business through the following operating segments:
|
|
• Client Computing Group (CCG) |
• Data Center Group (DCG) |
• Internet of Things Group (IOTG) |
• Non-Volatile Memory Solutions Group (NSG) |
• Programmable Solutions Group (PSG) |
• All other |
We offer platform products that incorporate various components and Liabilities Measuredtechnologies, including a microprocessor and Recorded at Fair Valuechipset, a stand-alone System-on-Chip (SoC), or a multichip package. A platform product may be enhanced by additional hardware, software, and services offered by Intel. Platform products are used in various form factors across our CCG, DCG, and IOTG operating segments. We derive a substantial majority of our revenue from platform products, which are our principal products and considered as one class of product.
CCG and DCG are our reportable operating segments. IOTG, NSG, and PSG do not meet the quantitative thresholds to qualify as reportable operating segments; however, we have elected to disclose the results of these non-reportable operating segments.
We have sales and marketing, manufacturing, engineering, finance, and administration groups. Expenses for these groups are generally allocated to the operating segments.
The "all other" category includes revenue and expenses such as:
results of operations from non-reportable segments not otherwise presented, including Mobileye results;
historical results of operations from divested businesses, including Intel Security Group (ISecG) results;
results of operations of start-up businesses that support our initiatives, including our foundry business;
amounts included within restructuring and other charges;
a portion of employee benefits, compensation, and other expenses not allocated to the operating segments; and
acquisition-related costs, including amortization and any impairment of acquisition-related intangibles and goodwill.
The Chief Operating Decision Maker (CODM), which is our Chief Executive Officer (CEO), allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss). The CODM does not evaluate operating segments using discrete asset information and we do not identify or allocate assets by operating segments. Based on the interchangeable nature of our manufacturing and assembly and test assets, most of the related depreciation expense is not directly identifiable within our operating segments, as it is included in overhead cost pools and subsequently absorbed into inventory as each product passes through our manufacturing process. As our products are then sold across multiple operating segments, it is impracticable to determine the total depreciation expense included as a Recurring Basiscomponent of each operating segment’s operating income (loss) results. Operating segments do not record inter-segment revenue. We do not allocate gains and losses from equity investments, interest and other income, or taxes to operating segments. Although the CODM uses operating income to evaluate the segments, operating costs included in one segment may benefit other segments. Except for these differences, the accounting policies for segment reporting are the same as for Intel as a whole.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 79 |
AssetsNet revenue and operating income (loss) for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Net revenue: | | | | | | |
| Client Computing Group | | | | | | |
| Platform |
| $ | 33,234 |
|
| $ | 31,226 |
|
| $ | 30,751 |
|
| Adjacent |
| 3,770 |
|
| 2,777 |
|
| 2,157 |
|
| | | 37,004 |
| | 34,003 |
| | 32,908 |
|
| Data Center Group | | | | | | |
| Platform | | 21,155 |
| | 17,439 |
| | 15,895 |
|
| Adjacent | | 1,836 |
| | 1,625 |
| | 1,341 |
|
| | | 22,991 |
| | 19,064 |
| | 17,236 |
|
| Internet of Things Group | | | | | | |
| Platform | | 3,065 |
| | 2,645 |
| | 2,290 |
|
| Adjacent | | 390 |
| | 524 |
| | 348 |
|
| | | 3,455 |
| | 3,169 |
| | 2,638 |
|
| Non-Volatile Memory Solutions Group | | 4,307 |
| | 3,520 |
| | 2,576 |
|
| Programmable Solutions Group | | 2,123 |
| | 1,902 |
| | 1,669 |
|
| All other | | 968 |
| | 1,103 |
| | 2,360 |
|
| Total net revenue | | $ | 70,848 |
| | $ | 62,761 |
| | $ | 59,387 |
|
| | | | | | | |
| Operating income (loss): | | | | | | |
| Client Computing Group | | $ | 14,222 |
| | $ | 12,919 |
| | $ | 10,646 |
|
| Data Center Group | | 11,476 |
| | 8,395 |
| | 7,520 |
|
| Internet of Things Group | | 980 |
| | 650 |
| | 585 |
|
| Non-Volatile Memory Solutions Group | | (5 | ) | | (260 | ) | | (544 | ) |
| Programmable Solutions Group | | 466 |
| | 458 |
| | (104 | ) |
| All other | | (3,823 | ) | | (4,112 | ) | | (4,970 | ) |
| Total operating income | | $ | 23,316 |
| | $ | 18,050 |
| | $ | 13,133 |
|
Disaggregated net revenue for each period was as follows:
|
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Platform revenue | | | | | | |
| Desktop platform | | $ | 12,220 |
| | $ | 11,647 |
| | $ | 12,371 |
|
| Notebook platform | | 20,930 |
| | 19,414 |
| | 18,203 |
|
| DCG platform | | 21,155 |
| | 17,439 |
| | 15,895 |
|
Other platform1 | | 3,149 |
| | 2,810 |
| | 2,467 |
|
| | | 57,454 |
| | 51,310 |
| | 48,936 |
|
| | | | | | | |
Adjacent revenue2 | | 13,394 |
| | 10,917 |
| | 8,290 |
|
| ISecG divested business | | — |
| | 534 |
| | 2,161 |
|
| Total revenue | | $ | 70,848 |
| | $ | 62,761 |
| | $ | 59,387 |
|
| |
1 | Includes our tablet, service provider, and IOTG platform revenue. |
| |
2 | Includes all of our non-platform products for CCG, DCG, and IOTG, such as modem, Ethernet, and silicon photonics, as well as NSG, PSG, and Mobileye products. |
In 2018, our three largest customers accounted for 39% of our net revenue (40% in 2017, 38% in 2016), with Dell Inc. accounting for 16% (16% in 2017, 15% in 2016), Lenovo Group Limited accounting for 12% (13% in 2017, 13% in 2016), and HP Inc. accounting for 11% (11% in 2017, 10% in 2016). These three customers accounted for 45% of our accounts receivable as of December 29, 2018 (36% as of December 30, 2017). Substantially all of the revenue from these customers was from the sale of platforms and other components by the CCG and DCG operating segments.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 80 |
Net revenue by country as presented below is based on the billing location of the customer. Revenue from unaffiliated customers for each period was as follows:
|
| | | | | | | | | | | | |
Years Ended (In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| China (including Hong Kong) | | $ | 18,824 |
| | $ | 14,796 |
| | $ | 13,977 |
|
| Singapore | | 15,409 |
| | 14,285 |
| | 12,780 |
|
| United States | | 14,303 |
| | 12,543 |
| | 12,957 |
|
| Taiwan | | 10,646 |
| | 10,518 |
| | 9,953 |
|
| Other countries | | 11,666 |
| | 10,619 |
| | 9,720 |
|
| Total net revenue | | $ | 70,848 |
| | $ | 62,761 |
| | $ | 59,387 |
|
|
| |
| NOTE 5 : | EARNINGS PER SHARE |
We computed basic earnings per share of common stock based on the weighted average number of shares of common stock outstanding during the period. We computed diluted earnings per share of common stock based on the weighted average number of shares of common stock outstanding plus potentially dilutive shares of common stock outstanding during the period.
|
| | | | | | | | | | | | |
Years Ended
(In Millions, Except Per Share Amounts) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Net income available to common stockholders | | $ | 21,053 |
| | $ | 9,601 |
| | $ | 10,316 |
|
| Weighted average shares of common stock outstanding—basic | | 4,611 |
| | 4,701 |
| | 4,730 |
|
| Dilutive effect of employee incentive plans | | 50 |
| | 47 |
| | 53 |
|
| Dilutive effect of convertible debt | | 40 |
| | 87 |
| | 92 |
|
| Weighted average shares of common stock outstanding—diluted | | 4,701 |
| | 4,835 |
| | 4,875 |
|
| Earnings per share - Basic | | $ | 4.57 |
| | $ | 2.04 |
| | $ | 2.18 |
|
| Earnings per share - Diluted | | $ | 4.48 |
| | $ | 1.99 |
| | $ | 2.12 |
|
Potentially dilutive shares of common stock from employee incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding RSUs, and the assumed issuance of common stock under the stock purchase plan. In December 2017, we paid cash to satisfy the conversion of our convertible debentures due 2035, which we excluded from our diluted earnings per share computation starting in the fourth quarter of 2017 and are no longer dilutive. Our convertible debentures due 2039 (2009 debentures) require settlement of the principal amount of the debt in cash upon conversion. Since the conversion premium is paid in cash or stock at our option, we determined the potentially dilutive shares of common stock by applying the treasury stock method. During 2018, we paid cash to satisfy the conversion of a portion of our 2009 debentures. The potentially dilutive shares associated with the converted portion were excluded from our diluted earnings per share computation in the quarter when conversions were tendered.
In all years presented, potentially dilutive securities that would have been anti-dilutive are insignificant and are excluded from the computation of diluted earnings per share. In all years presented, we included our 2009 debentures in the calculation of diluted earnings per share of common stock because the average market price was above the conversion price. We could potentially exclude the 2009 debentures in the future if the average market price is below the conversion price.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 81 |
|
| |
| NOTE 6 : | CONTRACT LIABILITIES |
|
| | | | | | | | |
| (In Millions) | | Dec 29,
2018 | | Opening Balance as of Dec 31, 2017 |
Prepaid supply agreements
| | $ | 2,587 |
| | $ | 105 |
|
| Other | | 122 |
| | 195 |
|
| Total contract liabilities | | $ | 2,709 |
| | $ | 300 |
|
Contract liabilities are primarily related to partial prepayments received from customers on long-term supply agreements toward future NSG product delivery. As new prepaid supply agreements are entered into and performance obligations are negotiated, this component of the contract liability balance will increase, and as customers purchase product and utilize their prepaid balances, the balance will decrease. The short-term portion of prepayments from supply agreements is reported on the consolidated balance sheets within other accrued liabilities.
The following table shows the changes in contract liability balances relating to prepaid supply agreements during 2018:
|
| | | | |
| (In Millions) | | |
| Prepaid supply agreements balance as of December 31, 2017 | | $ | 105 |
|
Additions and adjustments
| | 2,753 |
|
| Prepaids utilized | | (271 | ) |
| Prepaid supply agreements balance as of December 29, 2018 | | $ | 2,587 |
|
Additions and adjustments in 2018 include a$1.0 billion reclassification from customer deposits previously included in other long-term liabilities. The long-term supply agreements represent $4.6 billion in future anticipated revenues to be recognized ratably over the next five years.
|
| |
| NOTE 7 : | OTHER FINANCIAL STATEMENT DETAILS |
INVENTORIES
|
| | | | | | | | |
| (In Millions) | | Dec 29,
2018 | | Dec 30,
2017 |
| Raw materials | | $ | 813 |
| | $ | 738 |
|
| Work in process | | 4,511 |
| | 4,213 |
|
| Finished goods | | 1,929 |
| | 2,032 |
|
| Total inventories | | $ | 7,253 |
| | $ | 6,983 |
|
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 82 |
PROPERTY, PLANT AND EQUIPMENT
|
| | | | | | | | |
| (In Millions) | | Dec 29,
2018 | | Dec 30,
2017 |
| Land and buildings | | $ | 30,954 |
| | $ | 27,391 |
|
| Machinery and equipment | | 66,721 |
| | 57,192 |
|
| Construction in progress | | 16,643 |
| | 15,812 |
|
| Total property, plant and equipment, gross | | 114,318 |
| | 100,395 |
|
Less: accumulated depreciation | | 65,342 |
| | 59,286 |
|
| Total property, plant and equipment, net | | $ | 48,976 |
| | $ | 41,109 |
|
Substantially all of our depreciable property, plant and equipment assets were depreciated over the following estimated useful lives: machinery and equipment, 2 to 5 years, and buildings, 10 to 30 years.
Net property, plant and equipment by country at the end of each period was as follows:
|
| | | | | | | | | | | | |
| (In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| United States | | $ | 27,512 |
| | $ | 24,459 |
| | $ | 23,598 |
|
| Israel | | 8,861 |
| | 6,501 |
| | 3,923 |
|
| China | | 6,417 |
| | 4,275 |
| | 2,306 |
|
| Ireland | | 3,947 |
| | 3,938 |
| | 4,865 |
|
| Other countries | | 2,239 |
| | 1,936 |
| | 1,479 |
|
| Total property, plant and equipment, net | | $ | 48,976 |
| | $ | 41,109 |
| | $ | 36,171 |
|
OTHER ACCRUED LIABILITIES
Other accrued liabilities include deferred compensation of $1.7 billion as of December 29, 2018 ($1.7 billion as of December 30, 2017).
ADVERTISING
Advertising costs, including direct marketing, recorded within marketing, general and administrative (MG&A) expenses were $1.2 billion in 2018 ($1.4 billion in 2017 and $1.8 billion in 2016).
INTEREST AND OTHER, NET
The components of interest and other, net for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Interest income | | $ | 438 |
| | $ | 441 |
| | $ | 222 |
|
| Interest expense | | (468 | ) | | (646 | ) | | (733 | ) |
| Other, net | | 156 |
| | (144 | ) | | (192 | ) |
| Total interest and other, net | | $ | 126 |
|
| $ | (349 | ) |
| $ | (703 | ) |
Interest expense in the preceding table is net of$496 million of interest capitalized in 2018 ($313 million in 2017 and $135 million in 2016).
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 83 |
|
| |
| NOTE 8 : | RESTRUCTURING AND OTHER CHARGES |
|
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| 2016 Restructuring Program | | $ | (72 | ) | | $ | 135 |
| | $ | 1,681 |
|
| ISecG separation costs and other charges | | — |
| | 249 |
| | 63 |
|
| Total restructuring and other charges | | $ | (72 | ) | | $ | 384 |
| | $ | 1,744 |
|
2016 RESTRUCTURING PROGRAM
In the second quarter of 2016, management approved and commenced the 2016 Restructuring Program to accelerate our transformation from a PC company to one that powers the cloud and billions of smart, connected computing devices. Under this program, we closed certain facilities and reduced headcount globally to align our operations with evolving business needs by investing in our growth businesses and improving efficiencies. This program was completed in 2017.
Restructuring and other charges (benefits) by type for the 2016 Restructuring Program were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Employee severance and benefit arrangements | | $ | (72 | ) | | $ | 70 |
| | $ | 1,652 |
|
| Pension settlement charges | | — |
| | 25 |
| | — |
|
| Asset impairment and other charges | | — |
| | 40 |
| | 29 |
|
| Total restructuring and other charges | | $ | (72 | ) | | $ | 135 |
| | $ | 1,681 |
|
The Tax Reform enacted in December 2017 reduced the U.S. federal corporate tax rate from 35.0% to 21.0% starting in 2018, assessed a one-time transition tax on earnings of non-U.S. subsidiaries that have not been taxed previously in the U.S., and created new taxes on certain future foreign sourced earnings. We recorded a provisional income tax expense of $5.4 billion, net within our 2017 results related to Tax Reform. We completed our accounting for Tax Reform in the fourth quarter of 2018. Our final tax charge for Tax Reform was $5.1 billion, net and was made up of the recognition of the transition tax imposed on undistributed earnings from non-U.S. subsidiaries and remeasurement of deferred income taxes using the newly enacted statutory tax rate of 21.0%.
INCOME TAX PROVISION
Income before taxes and the provision for taxes consisted of the following: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Income before taxes: | | | | | | |
| U.S. | | $ | 14,753 |
| | $ | 11,141 |
| | $ | 6,957 |
|
| Non-U.S. | | 8,564 |
| | 9,211 |
| | 5,979 |
|
| Total income before taxes | | 23,317 |
| | 20,352 |
| | 12,936 |
|
| Provision for taxes: | | | | | | |
| Current: | | | | | | |
| Federal | | 2,786 |
| | 8,307 |
| | 1,319 |
|
| State | | (11 | ) | | 27 |
| | 13 |
|
| Non-U.S. | | 1,097 |
| | 899 |
| | 756 |
|
| Total current provision for taxes | | 3,872 |
| | 9,233 |
| | 2,088 |
|
| Deferred: | | | | | | |
| Federal | | (1,389 | ) | | 1,680 |
| | 658 |
|
| Other | | (219 | ) | | (162 | ) | | (126 | ) |
| Total deferred provision for taxes | | (1,608 | ) | | 1,518 |
| | 532 |
|
| Total provision for taxes | | $ | 2,264 |
| | $ | 10,751 |
| | $ | 2,620 |
|
| Effective tax rate | | 9.7 | % | | 52.8 | % | | 20.3 | % |
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 84 |
The difference between the tax provision at the statutory federal income tax rate and the tax provision as a percentage of income before income taxes (effective tax rate) for each period was as follows: |
| | | | | | | | | |
| Years Ended | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
| Statutory federal income tax rate | | 21.0 | % | | 35.0 | % | | 35.0 | % |
| Increase (reduction) in rate resulting from: | | | | | | |
| Non-U.S. income taxed at different rates | | (3.6 | ) | | (7.6 | ) | | (11.7 | ) |
| Research and development tax credits | | (2.7 | ) | | (2.3 | ) | | (2.3 | ) |
| Domestic manufacturing deduction benefit | | — |
| | (1.3 | ) | | (1.4 | ) |
| Foreign derived intangible income benefit | | (3.7 | ) | | — |
| | — |
|
| Tax Reform | | (1.3 | ) | | 26.8 |
| | — |
|
| ISecG divestiture | | — |
| | 3.3 |
| | — |
|
| Other | | (0.1 | ) | | (1.1 | ) | | 0.7 |
|
| Effective tax rate | | 9.7 | % | | 52.8 | % | | 20.3 | % |
The majority of the decrease in our effective tax rate in 2018 compared to 2017 was driven by non-recurring impacts in 2017 from Tax Reform and the ISecG divestiture. The reduction of the U.S. statutory rate combined with the net impact of the enactment or repeal of specific tax law provisions through Tax Reform drove the remaining decrease in our effective tax rate in 2018.
Substantially all of the increase in our effective tax rate in 2017 compared to 2016 was driven by the one-time impacts from Tax Reform enacted on December 22, 2017, the 2017 ISecG divestiture, and a higher proportion of our income in higher tax rate jurisdictions.
We derive the effective tax rate benefit attributed to non-U.S. income taxed at different rates primarily from our operations in China, Hong Kong, Ireland, and Israel. The statutory tax rates in these jurisdictions range from 12.5% to 25.0%. In addition, we are subject to reduced tax rates in China and Israel as long as we conduct certain eligible activities and make certain capital investments. These conditional reduced tax rates expire at various dates through 2026 and we expect to apply for renewals upon expiration.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 85 |
DEFERRED AND CURRENT INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities measuredfor financial reporting purposes and recorded at fair value on a recurring basisthe amounts for income tax purposes. Significant components of our deferred tax assets and liabilities at the end of each period were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 26, 2015 | | December 27, 2014 |
| | | Fair Value Measured and Recorded at Reporting Date Using | | Total | | Fair Value Measured and Recorded at Reporting Date Using | | Total |
| (In Millions) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | |
| Assets | | | | | | | | | | | | | | | | |
| Cash equivalents: | | | | | | | | | | | | | | | | |
| Corporate debt | | $ | — |
| | $ | 1,829 |
| | $ | — |
| | $ | 1,829 |
| | $ | — |
| | $ | 48 |
| | $ | — |
| | $ | 48 |
|
| Financial institution instruments | | 8,238 |
| | 1,277 |
| | — |
| | 9,515 |
| | 321 |
| | 1,119 |
| | — |
| | 1,440 |
|
| Government debt | | — |
| | 130 |
| | — |
| | 130 |
| | — |
| | — |
| | — |
| | — |
|
| Reverse repurchase agreements | | — |
| | 2,368 |
| | — |
| | 2,368 |
| | — |
| | 268 |
| | — |
| | 268 |
|
| Short-term investments: | | | | | | | | | | | | | | | | |
| Corporate debt | | 336 |
| | 764 |
| | 20 |
| | 1,120 |
| | 363 |
| | 412 |
| | 31 |
| | 806 |
|
| Financial institution instruments | | 145 |
| | 927 |
| | — |
| | 1,072 |
| | 149 |
| | 1,050 |
| | — |
| | 1,199 |
|
| Government debt | | 65 |
| | 425 |
| | — |
| | 490 |
| | 252 |
| | 173 |
| | — |
| | 425 |
|
| Trading assets: | | | | | | | | | | | | | | | | |
| Asset-backed securities | | — |
| | 275 |
| | 94 |
| | 369 |
| | — |
| | 766 |
| | 58 |
| | 824 |
|
| Corporate debt | | 1,744 |
| | 564 |
| | — |
| | 2,308 |
| | 2,625 |
| | 339 |
| | — |
| | 2,964 |
|
| Financial institution instruments | | 930 |
| | 701 |
| | — |
| | 1,631 |
| | 1,146 |
| | 613 |
| | — |
| | 1,759 |
|
| Government debt | | 1,107 |
| | 1,908 |
| | — |
| | 3,015 |
| | 1,295 |
| | 2,221 |
| | — |
| | 3,516 |
|
| Other current assets: | | | | | | | | | | | | | | | | |
| Derivative assets | | 32 |
| | 412 |
| | 1 |
| | 445 |
| | — |
| | 559 |
| | 2 |
| | 561 |
|
| Loans receivable | | — |
| | 137 |
| | — |
| | 137 |
| | — |
| | 505 |
| | — |
| | 505 |
|
| Marketable equity securities | | 5,891 |
| | 69 |
| | — |
| | 5,960 |
| | 7,097 |
| | — |
| | — |
| | 7,097 |
|
| Other long-term investments: | | | | | | | | | | | | | | | | |
| Asset-backed securities | | — |
| | — |
| | 4 |
| | 4 |
| | — |
| | 2 |
| | 4 |
| | 6 |
|
| Corporate debt | | 407 |
| | 801 |
| | — |
| | 1,208 |
| | 453 |
| | 728 |
| | 13 |
| | 1,194 |
|
| Financial institution instruments | | 171 |
| | 381 |
| | — |
| | 552 |
| | 189 |
| | 319 |
| | — |
| | 508 |
|
| Government debt | | 79 |
| | 48 |
| | — |
| | 127 |
| | 75 |
| | 240 |
| | — |
| | 315 |
|
| Other long-term assets: | | | | | | | | | | | | | | | | |
| Derivative assets | | — |
| | 30 |
| | 10 |
| | 40 |
| | — |
| | 35 |
| | 22 |
| | 57 |
|
| Loans receivable | | — |
| | 342 |
| | — |
| | 342 |
| | — |
| | 216 |
| | — |
| | 216 |
|
| Total assets measured and recorded at fair value | | 19,145 |
| | 13,388 |
| | 129 |
| | 32,662 |
| | 13,965 |
| | 9,613 |
| | 130 |
| | 23,708 |
|
| Liabilities | | | | | | | | | | | | | | | | |
| Other accrued liabilities: | | | | | | | | | | | | | | | | |
| Derivative liabilities | | 2 |
| | 210 |
| | — |
| | 212 |
| | — |
| | 563 |
| | — |
| | 563 |
|
| Other long-term liabilities: | | | | | | | | | | | | | | | | |
| Derivative liabilities | | — |
| | 33 |
| | — |
| | 33 |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Total liabilities measured and recorded at fair value | | $ | 2 |
| | $ | 243 |
| | $ | — |
| | $ | 245 |
| | $ | — |
| | $ | 580 |
| | $ | — |
| | $ | 580 |
|
|
| | | | | | | | |
| (In Millions) | | Dec 29,
2018 | | Dec 30,
2017 |
| Deferred tax assets: | | | | |
| Accrued compensation and other benefits | | $ | 570 |
| | $ | 711 |
|
| Share-based compensation | | 273 |
| | 241 |
|
| Deferred income | | — |
| | 211 |
|
| Inventory | | 517 |
| | 675 |
|
| State credits and net operating losses | | 1,297 |
| | 1,081 |
|
| Other, net | | 512 |
| | 887 |
|
| Gross deferred tax assets | | 3,169 |
| | 3,806 |
|
| Valuation allowance | | (1,302 | ) | | (1,171 | ) |
| Total deferred tax assets | | 1,867 |
| | 2,635 |
|
| Deferred tax liabilities: | | | | |
| Property, plant and equipment | | (878 | ) | | (943 | ) |
| Licenses and intangibles | | (744 | ) | | (881 | ) |
| Convertible debt | | (204 | ) | | (374 | ) |
| Unrealized gains on investments and derivatives | | (266 | ) | | (421 | ) |
| Transition tax | | — |
| | (1,850 | ) |
| Other, net | | (318 | ) | | (373 | ) |
| Total deferred tax liabilities | | (2,410 | ) | | (4,842 | ) |
| Net deferred tax assets (liabilities) | | $ | (543 | ) | | $ | (2,207 | ) |
| | | | | |
| Reported as: | | | | |
| Deferred tax assets | | 1,122 |
| | 840 |
|
| Deferred tax liabilities | | (1,665 | ) | | (3,046 | ) |
| Net deferred tax assets (liabilities) | | $ | (543 | ) | | $ | (2,207 | ) |
Deferred tax assets are included within other long-term assets on the consolidated balance sheets.
The valuation allowance as of December 29, 2018 included allowances primarily related to unrealized state credit carryforwards of $1.3 billion.
As of December 29, 2018, our federal and non-U.S. net operating loss carryforwards for income tax purposes were $246 million and $414 million, respectively. Most of the non-U.S. net operating loss carryforwards have no expiration date. The remaining non-U.S. and U.S. federal and state net operating loss carryforwards expire at various dates through 2039. A significant amount of the net operating loss carryforwards in the U.S. relates to acquisitions and, as a result, is limited in the amount that can be recognized in any one year. The non-U.S. net operating loss carryforwards include $39 million that is not likely to be recovered and has been reduced by a valuation allowance.
At December 29, 2018, we have undistributed earnings of certain foreign subsidiaries of approximately $18.0 billion that we have indefinitely invested, and on which we have not recognized deferred taxes. Estimating the amount of potential tax is not practicable because of the complexity and variety of assumptions necessary to compute the tax.
Current income taxes receivable of $162 million as of December 29, 2018 ($71 million as of December 30, 2017) are included in other current assets. Current income taxes payable of $366 million as of December 29, 2018 ($1.4 billion as of December 30, 2017) are included in other accrued liabilities.
Long-term income taxes payable of $4.9 billion as of December 29, 2018 ($4.1 billion as of December 30, 2017) includes uncertain tax positions, reduced by the associated federal deduction for state taxes and non-U.S. tax credits. Long-term income taxes payable may also include other long-term tax liabilities that are not uncertain but have not yet been paid, including the substantial majority of the transition tax from the Tax Reform, which is payable over eight years beginning in 2018.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 86 |
UNCERTAIN TAX POSITIONS
Unrecognized tax benefits were $283 million as of December 29, 2018 ($211 million as of December 30, 2017 and $154 million as of December 31, 2016). If the remaining balance of unrecognized tax benefits were recognized in a future period, it would result in a tax benefit of $178 million as of December 29, 2018 ($139 million as of December 30, 2017) and a reduction in the effective tax rate. The tax benefit for settlements, effective settlements, and remeasurements was insignificant in all periods presented. Interest, penalties, and accrued interest related to unrecognized tax benefits were insignificant in the periods presented.
We comply with the laws, regulations, and filing requirements of all jurisdictions in which we conduct business. We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible that certain U.S. federal and non-U.S. tax audits may be concluded within the next 12 months, which could increase or decrease the balance of our gross unrecognized tax benefits.
We file federal, state, and non-U.S. tax returns. For U.S. federal and non-U.S. tax returns, we are generally no longer subject to tax examinations for years prior to 2004. For U.S. state tax returns, we are no longer subject to tax examination for years prior to 2010. We have filed petitions before the U.S. Tax Court relating to the treatment of stock-based compensation expense in an inter-company cost-sharing transaction for certain pre-acquisition Altera tax years. The U.S. Tax Court ruled in favor of Altera and the U.S. Internal Revenue Service appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit. During 2018, the U.S. Court of Appeals heard oral arguments and the outcome of those appeals is pending.
DEBT INVESTMENTS
Trading Assets
Net losses related to trading assets still held at the reporting date were $188 million in 2018 (net gains of $414 million in 2017 and net losses of $295 million in 2016). Net gains on the related derivatives were $163 million in 2018 (net losses of $422 million in 2017 and net gains of $300 million in 2016).
Available-for-Sale Debt Investments
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 29, 2018 | | December 30, 2017 |
(In Millions) | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Corporate debt | | $ | 3,068 |
| | $ | 2 |
| | $ | (28 | ) | | $ | 3,042 |
| | $ | 2,294 |
| | $ | 4 |
| | $ | (13 | ) | | $ | 2,285 |
|
| Financial institution instruments | | 3,076 |
| | 3 |
| | (11 | ) | | 3,068 |
| | 3,387 |
| | 3 |
| | (9 | ) | | 3,381 |
|
| Government debt | | 1,069 |
| | 1 |
| | (9 | ) | | 1,061 |
| | 961 |
| | — |
| | (6 | ) | | 955 |
|
| Total available-for-sale debt investments | | $ | 7,213 |
| | $ | 6 |
| | $ | (48 | ) | | $ | 7,171 |
| | $ | 6,642 |
| | $ | 7 |
| | $ | (28 | ) | | $ | 6,621 |
|
Government debt includes instruments such as non-U.S. government bonds and U.S. agency securities.Financial institution instruments include instruments issued or managed by financial institutions in various forms, such as commercial paper, fixedfixed- and floating ratefloating-rate bonds, money market fund deposits, and time deposits.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the year ended December 26, 2015, we transferred corporate debt and financial institution instruments of approximately $628 million from Level 1 to Level 2 of the fair value hierarchy and approximately $403 million of financial institution instruments, corporate debt, and government debt from Level 2 to Level 1 ($177 million of corporate debt, financial institution instruments, and government debt from Level 1 to Level 2 and $395 million from Level 2 to Level 1 during 2014). These transfers were based on changes in market activity for the underlying instruments. Our policy is to reflect transfers between the fair value hierarchy levels at the beginning of the quarter in which a change in circumstances resulted in the transfer.
Investments in Debt Instruments
Debt instruments reflected in the preceding table include investments such as asset-backed securities, corporate debt, financial institution instruments, government debt, and reverse repurchase agreements classified as cash equivalents. We classify our debt instruments as Level 2 when we use observable market prices for identical instruments that are traded in less active markets. When observable market prices for identical instruments are not available, we price the debt instruments using our own models, such as a discounted cash flow model, or non-binding market consensus prices based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar instruments; and the internal assumptions of pricing providers or brokers that use observable market inputs and unobservable market inputs that we consider to be not significant. When we use non-binding market consensus prices, we corroborate them with quoted market prices for similar instruments or compare them to output from internally developed pricing models such as a discounted cash flow model. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. All significant inputs are derived from or corroborated with observable market data.
The fair values of debt instruments classified as Level 3 are generally derived from discounted cash flow models, performed either by us or our pricing providers, using inputs that we are unable to corroborate with observable market data. We monitor and review the inputs and results of these valuation models to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
Fair Value Option for Loans Receivable
We elected the fair value option for loans receivable when the interest rate or currency exchange rate risk was hedged at inception with a related derivative instrument. As of December 26, 2015 and December 27, 2014, the fair value of our loans receivable for which we elected the fair value option did not significantly differ from the contractual principal balance based on the contractual currency. Loans receivable are classified within other current assets and other long-term assets. Fair value is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Gains and losses from changes in fair value on the loans receivable and related derivative instruments, as well as interest income, are recorded in interest and other, net. During all periods presented, changes in the fair value of our loans receivable were largely offset by gains or losses on the related derivative instruments, resulting in an insignificant net impact on our consolidated statements of income. Gains and losses attributable to changes in credit risk are determined using observable credit default spreads for the issuer or comparable companies; these gains and losses were insignificant during all periods presented. We did not elect the fair value option for loans receivable when the interest rate or currency exchange rate risk was not hedged at inception with a related derivative instrument. Loans receivable not measured and recorded at fair value are included in the following "Financial Instruments Not Recorded at Fair Value on a Recurring Basis" section.
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
Our non-marketable equity investments, marketable equity method investments, and non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment is recognized.
Some of our non-marketable equity investments have been measured and recorded at fair value due to events or circumstances that significantly impacted the fair value of those investments, resulting in other-than-temporary impairments. We classified these investments as Level 3 because the valuations used unobservable inputs that were significant to the fair value measurements and required management judgment due to the absence of quoted market prices. Impairments recognized on non-marketable equity investments held as of December 26, 2015 were $160 million in 2015 ($128 million in 2014 on non-marketable equity investments held as of December 27, 2014 and $106 million in 2013 on non-marketable equity investments held as of December 28, 2013).
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On a quarterly basis, we measure the fair value of our grants receivable, cost method loans receivable, non-marketable cost method investments, reverse repurchase agreements with original maturities greater than approximately three months, and indebtedness carried at amortized cost plus applicable hedge adjustments; however, the assets are recorded at fair value only when an impairment is recognized. The carrying amounts and fair values of financial instruments not recorded at fair value on a recurring basis at the end of each period were as follows: |
| | | | | | | | | | | | | | | | | | | | |
| | | December 26, 2015 |
| | | Carrying Amount | | Fair Value Measured Using | | Fair Value |
| (In Millions) | | Level 1 | | Level 2 | | Level 3 | |
| Grants receivable | | $ | 593 |
| | $ | — |
| | $ | 600 |
| | $ | — |
| | $ | 600 |
|
| Loans receivable | | $ | 315 |
| | $ | — |
| | $ | 315 |
| | $ | — |
| | $ | 315 |
|
| Non-marketable cost method investments | | $ | 2,933 |
| | $ | — |
| | $ | — |
| | $ | 3,904 |
| | $ | 3,904 |
|
| Reverse repurchase agreements | | $ | 1,000 |
| | $ | — |
| | $ | 1,000 |
| | $ | — |
| | $ | 1,000 |
|
| Short-term debt | | $ | 2,593 |
| | $ | 1,513 |
| | $ | 1,563 |
| | $ | — |
| | $ | 3,076 |
|
| Long-term debt | | $ | 20,036 |
| | $ | 14,058 |
| | $ | 6,835 |
| | $ | — |
| | $ | 20,893 |
|
| NVIDIA Corporation cross-license agreement liability | | $ | 199 |
| | $ | — |
| | $ | 200 |
| | $ | — |
| | $ | 200 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 27, 2014 |
| | | Carrying Amount | | Fair Value Measured Using | | Fair Value |
| (In Millions) | | Level 1 | | Level 2 | | Level 3 | |
| Grants receivable | | $ | 676 |
| | $ | — |
| | $ | 679 |
| | $ | — |
| | $ | 679 |
|
| Loans receivable | | $ | 250 |
| | $ | — |
| | $ | 250 |
| | $ | — |
| | $ | 250 |
|
| Non-marketable cost method investments | | $ | 1,769 |
| | $ | — |
| | $ | — |
| | $ | 2,599 |
| | $ | 2,599 |
|
| Reverse repurchase agreements | | $ | 450 |
| | $ | — |
| | $ | 450 |
| | $ | — |
| | $ | 450 |
|
| Short-term debt | | $ | 1,580 |
| | $ | — |
| | $ | 2,145 |
| | $ | — |
| | $ | 2,145 |
|
| Long-term debt | | $ | 12,059 |
| | $ | 11,467 |
| | $ | 1,309 |
| | $ | — |
| | $ | 12,776 |
|
| NVIDIA Corporation cross-license agreement liability | | $ | 395 |
| | $ | — |
| | $ | 399 |
| | $ | — |
| | $ | 399 |
|
The fair value of our grants receivable is determined using a discounted cash flow model, which discounts future cash flows using an appropriate yield curve. As of December 26, 2015 and December 27, 2014, the carrying amount of our grants receivable was classified within other current assets and other long-term assets, as applicable.
The carrying amount and fair value of loans receivable exclude loans measured and recorded at fair value on a recurring basis. The fair value of our loans receivable and reverse repurchase agreements, including those held at fair value, is determined using a discounted cash flow model. All significant inputs in the models are derived from or corroborated with observable market data, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. The credit quality of these assets remains high, with credit ratings of A+/A1 for most of our loans receivable and a substantial majority of our reverse repurchase agreements as of December 26, 2015.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 26, 2015, and December 27, 2014, the unrealized loss position of our non-marketable cost method investments was insignificant. Our non-marketable cost method investments are valued using a qualitative and quantitative analysis of events or circumstances that impact the fair value of the investment. Qualitative analysis of our investments involves understanding our investee’s revenue and earnings trends relative to pre-defined milestones and overall business prospects; the technological feasibility of our investee’s products and technologies; the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes; and the management and governance structure of the investee. Quantitative assessments of the fair value of our investments are developed using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable public companies, such as revenue, earnings, comparable performance multiples, recent financing rounds, the terms of the investees’ issued interests, and the level of marketability of the investments. The selection of comparable companies requires management judgment and is based on a number of factors, including comparable companies’ sizes, growth rates, industries, and development stages. The income approach includes the use of a discounted cash flow model, which requires significant estimates regarding investees’ revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenue and costs are developed using available market, historical, and forecast data. We measure the fair value of our non-marketable cost method investments as close to the end of the period as feasible.
The carrying amount and fair value of short-term debt exclude drafts payable. Our short-term debt recognized at amortized cost includes our 2009 junior subordinated convertible debentures due 2039 (2009 debentures) and our 2011 senior notes due 2016. During the fourth quarter of 2015, the 2009 debentures were classified as short-term debt on the consolidated balance sheet and convertible at the option of the holder during the first quarter of 2016. For further information, see "Note 15: Borrowings." Our long-term debt recognized at amortized cost is composed of our senior notes and our convertible debentures. The fair value of our senior notes is classified as Level 1 when we use quoted prices in active markets and Level 2 when the quoted prices are from less active markets or when other observable inputs are used to determine fair value. The fair value of our 2009 and 2005 convertible debentures is determined using discounted cash flow models with observable market inputs, and takes into consideration variables such as interest rate changes, comparable instruments, subordination discount, and credit-rating changes; it is, therefore, classified as Level 2.
The NVIDIA Corporation (NVIDIA) cross-license agreement liability in the preceding table was incurred as a result of entering into a long-term patent cross-license agreement with NVIDIA in January 2011, pursuant to which we agreed to make payments to NVIDIA over six years. The carrying amount of the liability arising from the agreement was classified within other accrued liabilities and other long-term liabilities, based on the expected timing of the underlying payments ($200 million due in each of January 2015 and 2016 treated as cash used for financing activities). The fair value is determined using a discounted cash flow model, which discounts future cash flows using our incremental borrowing rates.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5: Cash and Investments
Cash and investments at the end of each period were as follows: |
| | | | | | | | |
| (In Millions) | | Dec 26,
2015 | | Dec 27,
2014 |
| Available-for-sale investments | | $ | 22,007 |
| | $ | 13,038 |
|
| Cash | | 1,466 |
| | 805 |
|
| Equity method investments | | 1,590 |
| | 1,446 |
|
| Loans receivable | | 794 |
| | 971 |
|
| Non-marketable cost method investments | | 2,933 |
| | 1,769 |
|
| Reverse repurchase agreements | | 3,368 |
| | 718 |
|
| Trading assets | | 7,323 |
| | 9,063 |
|
| Total cash and investments | | $ | 39,481 |
| | $ | 27,810 |
|
Available-for-Sale Investments
Available-for-sale investments at the end of each period were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 26, 2015 | | December 27, 2014 |
| (In Millions) | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Asset-backed securities | | $ | 5 |
| | $ | — |
| | $ | (1 | ) | | $ | 4 |
| | $ | 8 |
| | $ | — |
| | $ | (2 | ) | | $ | 6 |
|
| Corporate debt | | 4,164 |
| | 3 |
| | (10 | ) | | 4,157 |
| | 2,040 |
| | 13 |
| | (5 | ) | | 2,048 |
|
| Financial institution instruments | | 11,140 |
| | 1 |
| | (2 | ) | | 11,139 |
| | 3,146 |
| | 2 |
| | (1 | ) | | 3,147 |
|
| Government debt | | 748 |
| | — |
| | (1 | ) | | 747 |
| | 741 |
| | — |
| | (1 | ) | | 740 |
|
| Marketable equity securities | | 3,254 |
| | 2,706 |
| | — |
| | 5,960 |
| | 3,318 |
| | 3,779 |
| | — |
| | 7,097 |
|
| Total available-for-sale investments | | $ | 19,311 |
| | $ | 2,710 |
| | $ | (14 | ) | | $ | 22,007 |
| | $ | 9,253 |
| | $ | 3,794 |
| | $ | (9 | ) | | $ | 13,038 |
|
Government debt includes instruments such as non-U.S. government bonds and U.S. agency securities.Financial institution instruments include instruments issued or managed by financial institutions in various forms, such as commercial paper, fixed and floating rate bonds, money market fund deposits, and time deposits. Substantially all time deposits were issued by institutions outside the U.S. as of December 26, 201529, 2018and December 27, 2014.30, 2017.
For information on the unrealized holding gains (losses) on available-for-sale investments reclassified out of accumulated other comprehensive income (loss) into the consolidated statements of income, see "Note 24: Other Comprehensive Income (Loss)."
During 2015, we sold available-for-sale investments for proceeds of $2.2 billion, of which $144 million related to sales of cash and cash equivalents ($1.7 billion in 2014, of which $509 million related to sales of cash and cash equivalents; and $1.3 billion in 2013, of which $339 million related to sales of cash and cash equivalents). The gross realized gains on sales of available-for-sale investments were $133 million in 2015 ($136 million in 2014 and $146 million in 2013). We determine the cost of an investment sold on an average cost basis at the individual security level. Impairments recognized on available-for-sale investments were insignificant for all periods presented.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and fair valuevalues of available-for-sale debt investments by contractual maturity as of December 26, 201529, 2018 were as follows: | | | (In Millions) | | Cost | | Fair Value | | Fair Value |
| Due in 1 year or less | | $ | 5,896 |
| | $ | 5,893 |
| | $ | 3,233 |
|
| Due in 1–2 years | | 1,271 |
| | 1,268 |
| | 404 |
|
| Due in 2–5 years | | 623 |
| | 620 |
| | 2,776 |
|
| Due after 5 years | | | 208 |
|
| Instruments not due at a single maturity date | | 8,267 |
| | 8,266 |
| | 550 |
|
| Total | | $ | 16,057 |
| | $ | 16,047 |
| | $ | 7,171 |
|
Equity Method Investments
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 87 |
EQUITY INVESTMENTS
|
| | | | | | | | |
| (In Millions) | | Dec 29,
2018 | | Dec 30,
2017 |
| Marketable equity securities | | $ | 1,440 |
| | $ | 4,192 |
|
| Non-marketable equity securities | | 2,978 |
| | 2,613 |
|
| Equity method investments | | 1,624 |
| | 1,774 |
|
| Total | | $ | 6,042 |
| | $ | 8,579 |
|
The components of gains (losses) on equity investments, net for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 |
Ongoing mark-to-market adjustments on marketable equity securities1
| | $ | (129 | ) | | $ | — |
| | $ | — |
|
Observable price adjustments on non-marketable equity securities1 | | 202 |
| | — |
| | — |
|
| Impairment charges | | (424 | ) | | (833 | ) | | (187 | ) |
Sale of equity investments and other 2 | | 226 |
| | 3,484 |
| | 693 |
|
| Total gains (losses) on equity investments, net | | $ | (125 | ) |
| $ | 2,651 |
|
| $ | 506 |
|
| |
1 | Ongoing mark-to-market adjustments and observable price adjustments relate to the new financial instruments standard adopted in the first quarter of 2018, and are not applicable in prior periods. |
| |
2 | Sale of equity investments and other includes realized gains (losses) on sales of non-marketable equity investments, our share of equity method investee gains (losses), and initial fair value adjustments recorded upon a security becoming marketable. In 2017 and 2016, sales of equity investments and other also includes realized gains (losses) on sales of available-for-sale equity securities, which are now reflected in ongoing mark-to-market adjustments on marketable equity securities. |
In 2018, we recognized $202 million in upward observable price adjustments and there were no downward adjustments. Observable price adjustments are not applicable to prior periods. We also recognized impairments of $132 million on non-marketable equity securities ($555 million in 2017 and $184 million in 2016).
In 2018, we recognized $153 million in equity method investee losses ($223 million in 2017 and $38 million in 2016).
In 2017 and 2016, we recognized $3.4 billion and $407 million, respectively, in realized gains on sales of a portion of our interest in ASML Holding N.V. (ASML). During the second quarter of 2017, we determined we had an other-than-temporary decline in the fair value of our investment in Cloudera, Inc. and recognized an impairment charge of $278 million.
Gains and losses for our marketable and non-marketable equity securities during the period were as follows:
|
| | | | |
| (In Millions) | | Dec 29,
2018 |
| Net gains (losses) recognized during the period on equity securities | | $ | 298 |
|
| Less: Net (gains) losses recognized during the period on equity securities sold during the period | | (445 | ) |
| Unrealized gains (losses) recognized during the period on equity securities still held at the reporting date | | $ | (147 | ) |
Equity method investments classified within other long-term assets, at the end of each period were as follows:
| | | | | December 26, 2015 | | December 27, 2014 | | December 29, 2018 | | December 30, 2017 |
| (Dollars In Millions) | | Carrying Value | | Ownership Percentage | | Carrying Value | | Ownership Percentage | | Carrying Value | | Ownership Percentage | | Carrying Value | | Ownership Percentage |
| IM Flash Technologies, LLC | | $ | 872 |
| | 49 | % | | $ | 713 |
| | 49 | % | | $ | 1,574 |
| | 49 | % | | $ | 1,505 |
| | 49 | % |
| Cloudera, Inc. | | 256 |
| | 17 | % | | 280 |
| | 17 | % | |
| Intel-GE Care Innovations, LLC | | 64 |
| | 50 | % | | 108 |
| | 50 | % | |
| McAfee | | | — |
| | 49 | % | | 153 |
| | 49 | % |
| Other equity method investments | | 398 |
| | | | 345 |
| | | | 50 |
| | | | 116 |
| | |
| Total | | $ | 1,590 |
| | | | $ | 1,446 |
| | | | $ | 1,624 |
| | | | $ | 1,774 |
| | |
IM Flash Technologies, LLC
Since the inception of IM Flash Technologies, LLC (IMFT) was formed in 2006 by Micron Technology, Inc. (Micron) and Intel haveto jointly developeddevelop NAND flash memory and most recently, 3D XPointXPoint™ technology products. Intel also purchases jointly developed products directly from Micron under certain supply agreements.
The IMFT operating agreement, most recently amended in January 2016, continues through 2024 unless earlier terminated under certain terms and conditions, and provides for certain buy-sell rights of the joint venture. Intel has the right to cause Micron to buy our interest in IMFT. If we exercise this right, Micron would set the closing date of the transaction within two years following such election and could elect to receive financing from us for one to two years. Subsequent to our put right, and commencing in January 2019, Micron has the right to call our interest in IMFT with the closing date to be effective within one year. IMFT is aan unconsolidated variable interest entity and all costs of IMFT are passed on to Micron and Intel through sale of products or services in proportional share of ownership. Intel'sAs of December 29, 2018, we own a 49% interest in IMFT. Our portion of IMFT costs primarily related to product purchases and production-related services, was approximately $494 million in 2018 (approximately $415 million in 2017 and $400 million in 2015 (approximately $400 million in 2014 and approximately $380 million in 2013)2016). The amount due to IMFT for product purchases and services provided was approximately $20 million as
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 88 |
IMFT depends on Micron and Intel for any additional cash needs to be provided in the form of cash calls or member debt financing (MDF). Extensions of MDF may be converted to a capital contribution at the lender's request, or may be repaid upon availability of funds.
In July 2018, Intel and Micron announced that they agreed to complete joint development for the second generation of 3D XPoint technology, which is expected to occur in the first half of 2019 and technology development beyond that generation will be pursued independently by the two companies to optimize the technology for their respective product and business needs. Our known maximum exposure to loss approximatedWe recognized an impairment charge of $290 million million during the third quarter of 2018. This reduced the carrying value of our equity method investment balance in IMFT which was $872 million as of December 26, 2015. Except for the amount due to IMFT for product purchases and production-related services, we did not have any additional liabilities recognized on our consolidated balance sheets$1.6 billion in connectionline with our interests in this joint venture asexpectation of December 26, 2015. Our potential future losses could be higher than the carrying amount of our investment, as Intel andcash flows. In January 2019, Micron are liable for other future operating costs or obligations of IMFT. Future cash calls could also increase our investment balance and the related exposureexercised its right to loss. In addition, because we are currently committed to purchasing 49% of IMFT’s production output and production-related services, we may be required to purchase products at a cost in excess of realizable value.
We have determined that we do not have the characteristics of a consolidating investor in the variable interest entity and, therefore, we account forcall our interest in IMFT. The call transaction will close between six and twelve months from the date Micron exercised the call option. We will continue to purchase product manufactured at the IMFT usingfacility for a period of up to one year following the equity methodclose date.
McAfee
During the second quarter of accounting.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cloudera, Inc.
During 2014, we invested in Cloudera, Inc. (Cloudera). Our fully diluted ownershipthe ISecG business and retained a49% interest in Cloudera is 17%McAfee as of December 26, 2015.partial consideration. Our investment is accounted for under the equity and cost methods of accounting based on the rights associated with different instruments we own, and is classified within other long-term assets. The carrying value of our equity method investment was $256 million and of our cost method investment was $454 million as of December 26, 2015 ($280 million for our equity method investment and $454 million for our cost method investment as of December 27, 2014).
Intel-GE Care Innovations, LLC
During 2011, Intel and General Electric Company (GE) formed Intel-GE Care Innovations, LLC (Care Innovations), an equally owned joint venture in the healthcare industry that focuses on independent living and delivery of health-related services by means of telecommunications. The company was formed by combining assets of GE Healthcare’s Home Health division and Intel’s Digital Health Group.
Care Innovations is a variable interest entity and depends on Intel and GE for any additional cash needs. Our known maximum exposure to loss approximated the carrying value of our investment balance in Care Innovations, which was $64 million as of December 26, 2015.
Intel and GE equally share the power to direct all of Care Innovations' activities that most significantly impact its economic performance. We have determined that we do not have the characteristics of a consolidating investor in the variable interest entity and, therefore, we account for our interest in Care Innovations using the equity method of accounting.
Clearwire Communications, LLC
During 2013,the third quarter of 2017, we sold our interest in Clearwire Communications, LLC (Clearwire LLC), which we originally acquired in 2008, for proceedsreceived a $735 million dividend from McAfee. For further information related to the divestiture of $328 million. These proceeds are included in other investing within investing activities on the consolidated statements of cash flows. We recognized a gain on the sale of our interest in Clearwire LLC of $328 million.
For proceeds received and gains recognized for each investment,ISecG business, see "Note 20: Gains (Losses) on Equity Investments, Net.11: Acquisitions and Divestitures."
Non-marketable cost method investments
The carrying value of our non-marketable cost method investments was $2.9 billion as of December 26, 2015 ($1.8 billion as of December 27, 2014), of which $454 million and $966 million related to our cost method investments in Cloudera and Beijing UniSpreadtrumUnisoc Technology Ltd. (UniSpreadtrum), respectively. In 2015, we recognized impairments of $164 million on non-marketable cost method investments, which is included within gains (losses) on equity investments, net on the consolidated statements of income ($130 million in 2014 and $103 million in 2013).
Investment in Beijing UniSpreadtrum Technology Ltd.(Unisoc)
During 2014, we entered into a series of agreementsan agreement with Tsinghua Unigroup Ltd. (Tsinghua Unigroup), an operating subsidiary of Tsinghua Holdings Co. Ltd., to among other things, jointly develop Intel® architecture- and communications-based solutions for phones. We agreed to invest up to 9.0 billion Chinese yuan (approximately $1.5 billion as of the date of the agreement)phones. During 2015, we invested $966 million for a minority stake of approximately 20% ofBeijing UniSpreadtrum Technology Ltd, a holding company under Tsinghua Unigroup. During 2015,2017, we invested$966 million to complete the first phasereduced our expectation of the equity investment.company's future operating performance due to competitive pressures, which resulted in an impairment charge of $308 million. During 2018, Beijing UniSpreadtrum Technology Ltd and RDA Microelectronics merged and rebranded themselves as Beijing Unisoc Technology Ltd. (Unisoc). We have determined we will not have significant influence over the company and, therefore, we account for our interest using the cost method of accounting. Subject to regulatory approvals and other closing conditions, the second phase of the investment will require additional funding of approximately $500 million.
Trading Assets
As of December 26, 2015, and December 27, 2014, substantially all of our trading assets were marketable debt instruments. Net losses related to trading assets still held at the reporting date were $152 millionin 2015 (net losses of $530 million in 2014 and net losses of $70 million in 2013). Net gains on the related derivatives were $137 million in 2015 (net gains of $525 million in 2014 and $86 million in 2013).
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6: Derivative Financial Instruments
Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk, and, to a lesser extent, equity market risk, commodity price risk, and credit risk.
Currency Exchange Rate Risk
We are exposed to currency exchange rate risk, and generally hedge our exposures with currency forward contracts, currency interest rate swaps, or currency options. Substantially all of our revenue is transacted in U.S. dollars. However, a significant portion of our operating expenditures and capital purchases is incurred in or exposed to other currencies, primarily the euro, the Chinese yuan, the Japanese yen, and the Israeli shekel. We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in the fair value and the volatility of the functional currency equivalent of future cash flows caused by changes in exchange rates. Our non-U.S.-dollar-denominated investments in debt instruments and loans receivable are generally hedged with offsetting currency forward contracts or currency interest rate swaps. We may also hedge currency risk arising from funding foreign currency-denominated forecasted investments. These programs reduce, but do not eliminate, the impact of currency exchange movements.
Our currency risk management programs include:
Currency derivatives with cash flow hedge accounting designation that utilize currency forward contracts and currency options to hedge exposures to the variability in the U.S.-dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. These instruments generally mature within 12 months. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedgeUnisoc as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated statements of income as the impact of the hedged transaction. We utilize currency interest rate swaps to hedge exposures to the variability in the U.S.-dollar equivalent of coupon and principal payments associated with our non-U.S.-dollar-denominated indebtedness.
Currency derivatives without hedge accounting designation that utilize currency forward contracts or currency interest rate swaps to economically hedge the functional currency equivalent cash flows of recognized monetary assets and liabilities, non-U.S.-dollar-denominated debt instruments classified as trading assets, and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. A substantial majority of these instruments mature within 12 months. Changes in the functional currency equivalent cash flows of the underlying assets and liabilities are approximately offset by the changes in the fair value of the related derivatives. We record net gains or losses in the line item on the consolidated statements of income most closely associated with the related exposures, primarily in interest and other, net, except for equity-related gains or losses, which we primarily record in gains (losses) onnon-marketable equity investments, net.
Interest Rate Risk
Our primary objective for holding investments in debt instruments is to preserve principal while maximizing yields. We generally swap the returns on our investments in fixed-rate debt instruments with remaining maturities longer than six months into U.S. dollar three-month LIBOR-based returns, unless management specifically approves otherwise. We may elect to swap fixed coupon payments on our debt issuances for floating rate coupon payments. These swaps are settled at various interest payment times involving cash payments at each interest and principal payment date, with the majority of the contracts having quarterly payments.
Our interest rate risk management programs include:
Interest rate derivatives with cash flow hedge accounting designation that utilize interest rate swap agreements to modify the interest characteristics of debt instruments. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated statements of income as the impact of the hedged transaction.
Interest rate derivatives with fair value hedge accounting designation that utilize interest rate swap agreements to hedge against changes in fair value on certain fixed rate debt due to fluctuations in the benchmark interest rate. For these derivatives, we recognize gains and losses in interest and other, net, along with the offsetting gains and losses attributable to the changes in the benchmark interest rate on the underlying hedged items.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest rate derivatives without hedge accounting designation that utilize interest rate swaps and currency interest rate swaps in economic hedging transactions, including hedges of non-U.S.-dollar-denominated debt instruments classified as trading assets and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. Floating interest rates on the swaps generally reset on a quarterly basis. Changes in the fair value of the debt instruments classified as trading assets and loans receivable recognized at fair value are generally offset by changes in the fair value of the related derivatives, both of which are recorded in interest and other, net.
Equity Market Risk
Our investments include marketable equity securities and equity derivative instruments. We typically do not attempt to reduce or eliminate our equity market exposure through hedging activities at the inception of our investments. Before we enter into hedge arrangements, we evaluate legal, market, and economic factors, as well as the expected timing of disposal, to determine whether hedging is appropriate. Our equity market risk management program may include equity derivatives with or without hedge accounting designation that utilize warrants, equity options, or other equity derivatives. We recognize changes in the fair value of such derivatives in gains (losses) on equity investments, net.security.
We also utilize total return swaps to offset changes in liabilities related to the equity market risks of certain deferred compensation arrangements. Gains and losses from changes in fair value of these total return swaps are generally offset by the losses and gains on the related liabilities, both of which are recorded in cost of sales and operating expenses. Deferred compensation liabilities were $1.3 billion as of December 26, 2015 ($1.2 billion as of December 27, 2014), and are included in other accrued liabilities.
Commodity Price Risk
We operate facilities that consume commodities and have established forecasted transaction risk management programs to protect against fluctuations in the fair value and the volatility of future cash flows caused by changes in commodity prices, such as those for natural gas. These programs reduce, but do not always eliminate, the impact of commodity price movements.
Our commodity price risk management program may include commodity derivatives with cash flow hedge accounting designation that utilize commodity swap contracts to hedge future cash flow exposures to the variability in commodity prices. These instruments generally mature within 12 months. For these derivatives, we report the after-tax gain (loss) from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) and reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated statements of income as the impact of the hedged transaction.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Volume of Derivative Activity
Total gross notional amounts for outstanding derivatives (recorded at fair value) at the end of each period were as follows: |
| | | | | | | | | | | | |
| (In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Currency forwards | | $ | 11,212 |
| | $ | 15,578 |
| | $ | 13,404 |
|
| Currency interest rate swaps | | 5,509 |
| | 5,446 |
| | 4,377 |
|
| Embedded debt derivatives | | 3,600 |
| | 3,600 |
| | 3,600 |
|
| Interest rate swaps | | 5,212 |
| | 1,347 |
| | 1,377 |
|
| Total return swaps | | 1,061 |
| | 1,056 |
| | 914 |
|
| Other | | 61 |
| | 49 |
| | 67 |
|
| Total | | $ | 26,655 |
|
| $ | 27,076 |
|
| $ | 23,739 |
|
The gross notional amounts for currency forwards and currency interest rate swaps (presented by currency) at the end of each period were as follows: |
| | | | | | | | | | | | |
| (In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Chinese yuan | | $ | 2,231 |
| | $ | 3,097 |
| | $ | 1,116 |
|
| Euro | | 6,084 |
| | 7,486 |
| | 6,874 |
|
| Israeli shekel | | 1,674 |
| | 2,489 |
| | 2,244 |
|
| Japanese yen | | 2,663 |
| | 3,779 |
| | 4,116 |
|
| Other | | 4,069 |
| | 4,173 |
| | 3,431 |
|
| Total | | $ | 16,721 |
|
| $ | 21,024 |
|
| $ | 17,781 |
|
During the fourth quarter of 2014, we entered into $1.5 billion of forward contracts to hedge our anticipated equity funding of the UniSpreadtrum investment. The hedges were designated as cash flow hedges and the related gains and losses attributable to changes in the spot rates were recognized in accumulated other comprehensive income (loss). Hedge gains and losses attributable to changes in the forward rates were recognized in interest and other, net. During 2015, we discontinued cash flow hedge accounting treatment for $478 million of forward contracts since we could no longer assert that funding is probable to occur within the initially specified timeline. Hedge losses accumulated in other comprehensive income and subsequently released to interest and other, net, related to these de-designated forward contracts were insignificant.
During 2015, we entered into $4.4 billion of interest rate swap agreements to hedge against changes in the fair value attributable to the benchmark interest rates related to $4.4 billion of our outstanding senior notes. These hedges were designated as fair value hedges. During 2015, we entered into $577 million of currency interest rate swap agreements to hedge against the variability in the U.S.-dollar equivalent of coupon and principal payments associated with our non-U.S.-dollar-denominated indebtedness. These hedges were designated as cash flow hedges.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Derivative Instruments in the Consolidated Balance Sheets
The fair value of our derivative instruments at the end of each period were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 26, 2015 | | December 27, 2014 |
| (In Millions) | | Other Current Assets | | Other Long-Term Assets | | Other Accrued Liabilities | | Other Long-Term Liabilities | | Other Current Assets | | Other Long-Term Assets | | Other Accrued Liabilities | | Other Long-Term Liabilities |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
| Currency forwards | | $ | 20 |
| | $ | 3 |
| | $ | 83 |
| | $ | 2 |
| | $ | 6 |
| | $ | 1 |
| | $ | 497 |
| | $ | 9 |
|
| Interest rate swaps | | — |
| | 1 |
| | — |
| | 14 |
| | — |
| | — |
| | — |
| | — |
|
| Currency interest rate swaps | | — |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total derivatives designated as hedging instruments | | 20 |
|
| 11 |
|
| 83 |
|
| 16 |
|
| 6 |
|
| 1 |
|
| 497 |
|
| 9 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
| Currency forwards | | 20 |
| | — |
| | 63 |
| | — |
| | 207 |
| | — |
| | 44 |
| | — |
|
| Currency interest rate swaps | | 370 |
| | 18 |
| | 52 |
| | — |
| | 344 |
| | 34 |
| | 7 |
| | — |
|
| Embedded debt derivatives | | — |
| | — |
| | — |
| | 17 |
| | — |
| | — |
| | 4 |
| | 8 |
|
| Interest rate swaps | | 2 |
| | — |
| | 12 |
| | — |
| | 3 |
| | — |
| | 11 |
| | — |
|
| Total return swaps | | 32 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other | | 1 |
| | 11 |
| | — |
| | — |
| | 1 |
| | 22 |
| | — |
| | — |
|
| Total derivatives not designated as hedging instruments | | 425 |
|
| 29 |
|
| 129 |
|
| 17 |
|
| 555 |
|
| 56 |
|
| 66 |
|
| 8 |
|
| Total derivatives | | $ | 445 |
|
| $ | 40 |
|
| $ | 212 |
|
| $ | 33 |
|
| $ | 561 |
|
| $ | 57 |
|
| $ | 563 |
|
| $ | 17 |
|
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amounts Offset in the Consolidated Balance Sheets
The gross amounts of our derivative instruments and reverse repurchase agreements subject to master netting arrangements with various counterparties, and cash and non-cash collateral posted under such agreements at the end of each period were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 26, 2015 |
| | | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | |
| (In Millions) | | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheet | | Net Amounts Presented in the Balance Sheet | | Financial Instruments | | Cash and Non-Cash Collateral Received or Pledged | | Net Amount |
| Assets: | | | | | | | | | | | | |
| Derivative assets subject to master netting arrangements | | $ | 482 |
| | $ | — |
| | $ | 482 |
| | $ | (201 | ) | | $ | (188 | ) | | $ | 93 |
|
| Reverse repurchase agreements | | 3,368 |
| | — |
| | 3,368 |
| | — |
| | (3,368 | ) | | — |
|
| Total assets | | 3,850 |
|
| — |
|
| 3,850 |
|
| (201 | ) |
| (3,556 | ) |
| 93 |
|
| Liabilities: | | | | | | | | | | | | |
| Derivative liabilities subject to master netting arrangements | | 242 |
| | — |
| | 242 |
| | (201 | ) | | (27 | ) | | 14 |
|
| Total liabilities | | $ | 242 |
|
| $ | — |
|
| $ | 242 |
|
| $ | (201 | ) |
| $ | (27 | ) |
| $ | 14 |
|
|
| |
| NOTE 11 : | ACQUISITIONS AND DIVESTITURES |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 27, 2014 |
| | | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | |
| (In Millions) | | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheet | | Net Amounts Presented in the Balance Sheet | | Financial Instruments | | Cash and Non-Cash Collateral Received or Pledged | | Net Amount |
| Assets: | | | | | | | | | | | | |
| Derivative assets subject to master netting arrangements | | $ | 559 |
| | $ | — |
| | $ | 559 |
| | $ | (365 | ) | | $ | (78 | ) | | $ | 116 |
|
| Reverse repurchase agreements | | 718 |
| | — |
| | 718 |
| | — |
| | (718 | ) | | — |
|
| Total assets | | 1,277 |
|
| — |
|
| 1,277 |
|
| (365 | ) |
| (796 | ) |
| 116 |
|
| Liabilities: | | | | | | | | | | | | |
| Derivative liabilities subject to master netting arrangements | | 559 |
| | — |
| | 559 |
| | (365 | ) | | (80 | ) | | 114 |
|
| Total liabilities | | $ | 559 |
|
| $ | — |
|
| $ | 559 |
|
| $ | (365 | ) |
| $ | (80 | ) |
| $ | 114 |
|
We obtain and secure available collateral from counterparties against obligations, including securities lending transactions and reverse repurchase agreements, when we deem it appropriate.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivatives in Cash Flow Hedging Relationships
The before-tax gains (losses), attributed to the effective portion of cash flow hedges, recognized in other comprehensive income (loss) for each period were as follows: |
| | | | | | | | | | | | |
| | | Gains (Losses) Recognized in OCI on Derivatives (Effective Portion) |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Currency forwards | | $ | (305 | ) | | $ | (587 | ) | | $ | (167 | ) |
Currency interest rate swaps and other
| | 7 |
| | (2 | ) | | 1 |
|
| Total | | $ | (298 | ) |
| $ | (589 | ) |
| $ | (166 | ) |
Gains and losses on derivative instruments in cash flow hedging relationships related to hedge ineffectiveness and amounts excluded from effectiveness testing were insignificant during all periods presented in the preceding tables. Additionally, for all periods presented, there was an insignificant impact on results of operations from discontinued cash flow hedges, which arises when forecasted transactions are probable of not occurring.
For information on the unrealized holding gains (losses) on derivatives reclassified out of accumulated other comprehensive income into the consolidated statements of income, see "Note 24: Other Comprehensive Income (Loss)."
Derivatives in Fair Value Hedging Relationships
The effects of derivative instruments designated as fair value hedges, recognized in interest and other, net for each period were as follows: |
| | | | | | | | | | | | |
| | | Gains (Losses) Recognized in Statement of Income on Derivatives |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Interest rate swap | | $ | (13 | ) | | $ | — |
| | $ | — |
|
| Hedged item | | 13 |
| | — |
| | — |
|
| Total | | $ | — |
|
| $ | — |
|
| $ | — |
|
There was no ineffectiveness duringall periods presented in the preceding table.
Derivatives Not Designated as Hedging Instruments
The effects of derivative instruments not designated as hedging instruments on the consolidated statements of income for each period were as follows:
|
| | | | | | | | | | | | | | |
Years Ended
(In Millions) | | Location of Gains (Losses) Recognized in Income on Derivatives | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Currency forwards | | Interest and other, net | | $ | (50 | ) | | $ | 144 |
| | $ | 44 |
|
| Currency interest rate swaps | | Interest and other, net | | 346 |
| | 456 |
| | 29 |
|
| Interest rate swaps | | Interest and other, net | | (6 | ) | | (3 | ) | | — |
|
| Total return swaps | | Various | | (27 | ) | | 68 |
| | 140 |
|
| Other | | Gains (losses) on equity investments, net | | (11 | ) | | (6 | ) | | 6 |
|
| Other | | Interest and other, net | | (2 | ) | | — |
| | — |
|
| Total | | $ | 250 |
|
| $ | 659 |
|
| $ | 219 |
|
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7: Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of investments in debt instruments, derivative financial instruments, loans receivable, reverse repurchase agreements, and trade receivables. When possible, we enter into master netting arrangements with counterparties to mitigate credit risk in derivative transactions. A master netting arrangement may allow counterparties to net settle amounts owed to each other as a result of multiple, separate derivative transactions. For presentation on our consolidated balance sheets, we do not offset fair value amounts recognized for derivative instruments under master netting arrangements.
We generally place investments with high-credit-quality counterparties and, by policy, we limit the amount of credit exposure to any one counterparty based on our analysis of that counterparty’s relative credit standing. Substantially all of our investments in debt instruments are in A/A2 or better rated issuances, and a substantial majority of the issuances are rated AA-/Aa3 or better. Our investment policy requires substantially all investments with original maturities at the time of investment of up to six months to be rated at least A-2/P-2 by Standard & Poor’s/Moody’s, and specifies a higher minimum rating for investments with longer maturities. For instance, investments with maturities of greater than three years generally require a minimum rating of AA-/Aa3 at the time of investment. Government regulations imposed on investment alternatives of our non-U.S. subsidiaries, or the absence of A-rated counterparties in certain countries, result in some minor exceptions. Credit-rating criteria for derivative instruments are similar to those for other investments. Due to master netting arrangements, the amounts subject to credit risk related to derivative instruments are generally limited to the amounts, if any, by which the counterparty’s obligations exceed our obligations with that counterparty. As of December 26, 2015, our total credit exposure to any single counterparty, excluding money market funds invested in U.S. treasury and U.S. agency securities and reverse repurchase agreements collateralized by treasury and agency securities, did not exceed $500 million. To further reduce credit risk, we obtain and secure available collateral from counterparties against obligations, including securities lending transactions, when we deem it appropriate.
A substantial majority of our trade receivables are derived from sales to original equipment manufacturers and original design manufacturers. We also have accounts receivable derived from sales to industrial and communications equipment manufacturers in the computing and communications industries. Hewlett-Packard Company, our largest customer in 2014, separated into HP Inc. and Hewlett Packard Enterprise Company on November 1, 2015. These entities, together with Dell Inc. and Lenovo Group Limited, represent our largest customers. Collectively, these customers accounted for 46% of net revenue for 2015 (46% for 2014 and 44% for 2013) and 49% of net accounts receivable as of December 26, 2015 (43% as of December 27, 2014). We believe that the net accounts receivable balances from these largest customers do not represent a significant credit risk, based on cash flow forecasts, balance sheet analysis, and past collection experience.
We have adopted credit policies and standards intended to accommodate industry growth and inherent risk. We believe that credit risks are moderated by the financial stability of our major customers. We assess credit risk through quantitative and qualitative analysis. From this analysis, we establish shipping and credit limits, and determine whether we will seek to use one or more credit support protection devices, such as obtaining a parent guarantee, standby letter of credit, or credit insurance.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8: Acquisitions
During 2015,2018, we completed eightfive acquisitions qualifying as business combinations that were not material to our operations. During 2017, in exchange for aggregate consideration (net of cash acquired) of $1.0 billion, a substantial majority of which was cash consideration. Substantially all ofaddition to the consideration was allocated to goodwill and other intangible assets, such as acquisition-related developed technology and acquisition-related customer relationships. Included in these acquisitions is ourMobileye acquisition of Lantiq Semiconductor (Lantiq), intended to extend Intel's success in cable home gateways into DSL and fiber markets. We acquired Lantiq in the second quarter of 2015 for net cash consideration of $345 million, substantially all of which was allocated to goodwill and intangible assets, such as acquisition-related developed technology and acquisition-related customer relationships. The operating results of Lantiq are included in our Client Computing Group operating segment.
During 2014,shown below, we completed eighttwo acquisitions qualifying as business combinations. During 2016, we acquired Altera for $14.5 billion, and, in addition, completed 11 acquisitions qualifying as business combinations in exchange for aggregate consideration of $963 million, substantially all cash consideration. A substantial majority of the consideration was allocated to goodwill and acquisition-related developed technology intangible assets. Included in these$1.1 billion.
Other acquisitions is our acquisition of the Axxia Networking Business (Axxia business) of Avago Technologies Limited, intended to accelerate growth in the mobile wireless base station business. We acquired the Axxia business in the fourth quarter of 2014 for net cash consideration of $650 million, substantially all of which was allocated to goodwill and acquisition-related developed technology intangible assets. The operating results of the Axxia business are included in our Data Center Group (DCG) operating segment.
During 2013, we completed 12 acquisitions qualifying as business combinations in exchange for aggregate net cash consideration of $925 million. Most of the consideration was allocated to goodwill and acquisition-related developed technology intangible assets. Included in these acquisitions is our acquisition of Stonesoft Oyj (Stonesoft), intended to expand our network security solutions, specifically addressing next-generation firewall products. We acquired Stonesoft in the third quarter of 2013 for net cash consideration of $381 million, substantially all of which was allocated to goodwill and acquisition-related developed technology intangible assets. Stonesoft's operating results are included in our software and services operating segments.
Acquisitions completed in 2015, 2014,2018, 2017, and 2013,2016, both individually and in the aggregate, were not significant to our results of operations.operations, and substantially all of the consideration, which primarily consisted of cash, was allocated to goodwill and identifiable intangible assets. For information on the assignment of goodwill to our operating segments, see "Note 10: Goodwill"12: Goodwill," and for information on the classification of intangible assets, see "Note 11:13: Identified Intangible Assets."
AcquisitionMobileye
As of Altera CorporationAugust 21, 2017, upon the completion of our tender offer, we acquired 97.3% of the outstanding ordinary shares of Mobileye, a global leader in the development of computer vision and machine learning, data analysis, localization, and mapping for advanced driver- assistance systems and autonomous driving. This acquisition combines Mobileye's leading computer vision expertise with Intel’s high-performance computing and connectivity expertise to create automated driving solutions from car to cloud. The combination is expected to accelerate innovation for the automotive industry and position Intel as a leading technology provider in the fast-growing market for highly and fully autonomous vehicles. The transaction also extends Intel’s strategy to invest in data-intensive market opportunities that build on our strengths in computing and connectivity from the cloud, through the network, to the device. We acquired the remaining 2.7% of Mobileye shares in April 2018.
Total consideration to acquire Mobileye was $14.9 billion (net of $366 million of cash and cash equivalents acquired), of which $14.5 billion was paid in 2017 and the remainder in 2018.
The fair values of the assets acquired and liabilities assumed in the acquisition of Mobileye, by major class, were recognized as follows: |
| | | | |
| (In Millions) | | |
| Short-term investments and marketable securities | | $ | 370 |
|
| Tangible assets | | 227 |
|
| Goodwill | | 10,283 |
|
| Identified intangible assets | | 4,482 |
|
| Current liabilities | | (69 | ) |
| Deferred tax liabilities and other | | (418 | ) |
| Total | | $ | 14,875 |
|
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 89 |
We assumed outstanding unvested Mobileye stock options and RSUs granted under two Mobileye equity plans. We will not grant additional equity awards under these two Mobileye equity plans. In connection with the acquisition, we recognized share-based compensation expense of $71 million for cash-settled awards.
Goodwill of $10.3 billion arising from the acquisition is attributed to the expected synergies and other benefits that will be generated from the combination of Intel and Mobileye. Substantially all of the goodwill recognized is not expected to be deductible for tax purposes. The goodwill recognized from the acquisition is included within "all other."
The identified intangible assets assumed in the acquisition of Mobileye were recognized as follows: |
| | | | | | |
| | | Fair Value
(In Millions) | | Weighted Average
Estimated Useful Life
(In Years) |
| Developed technology | | $ | 2,346 |
| | 9 |
| Customer relationships and brands | | 777 |
| | 12 |
| Identified intangible assets subject to amortization | | 3,123 |
| | |
| In-process research and development | | 1,359 |
| | |
| Identified intangible assets not subject to amortization | | 1,359 |
| | |
| Total identified intangible assets | | $ | 4,482 |
| | |
DIVESTITURES
Wind River Systems, Inc. (Wind River)
During the second quarter of 2015,2018, we entered intocompleted the divestiture of Wind River and recognized a definitive agreementpre-tax gain of $494 million.
Intel Security Group
On April 3, 2017, we closed the transaction with TPG VII Manta Holdings, L.P., now known as Manta Holdings, L.P. (TPG), transferring certain assets and liabilities relating to acquire Altera Corporation (Altera)ISecG to a newly formed, jointly owned, separate cybersecurity company called McAfee.
Total consideration received was $4.2 billion, consisting of $924 million in an all-cash transaction. The transaction closed on December 28, 2015, subsequent to our fiscal 2015 year-end. Altera is a global semiconductor company that designs and sells programmable semiconductors and related products, including programmable logic devices, which incorporate field-programmable gate array (FPGAs) and complex programmable logic devices, and highly integrated System-on-Chip (SoC) devices. This acquisition is expected to expand our reach within the compute continuum, as the combination of our leading-edge products and manufacturing process with Altera's leading FPGA technology is expected to enable new classes of platforms that meet customer needscash proceeds, $1.1 billion in the data centerform of equity representing a 49% ownership interest in McAfee, and Internet$2.2 billion in the form of Things market segments.
Upon completion of the acquisition, each outstanding share of Altera common stockpromissory notes issued by McAfee and subject to certain exceptions, each share of Altera common stock underlying vested stock option awards, restricted stock unit awards and performance-based restricted stock unit awards were converted into the right to receive $54.00 per share in cash, without interest.TPG. During the third and fourth quarters of 2015, we issued $9.5 billion in aggregate principal amount of senior unsecured debt, and in the first quarter of 2016 we borrowed $4.02017, McAfee and TPG repaid the $2.2 billion against our short-term credit facility, in order to fund a portionof promissory notes, which are included within proceeds from divestiture.
The carrying amounts of the total purchase price (netmajor classes of cash acquired) of $14.5 billion. For more information on our indebtedness, see "Note 15: Borrowings."
Since the closing of this acquisition occurred subsequent to our fiscal year-end, the allocation of the purchase price to the underlyingISecG assets
acquired and liabilities
assumed is subject to a formal valuation process, which has not yet been completed. We will reflect the preliminary valuation of the net assets acquired and the operational results of Altera beginning December 28, 2015, the close dateas of the transaction
in our first quarterclose date included the following: |
| | | | |
| (In Millions) | | Apr 1,
2017 |
| Accounts receivable | | $ | 317 |
|
| Goodwill | | 3,601 |
|
| Identified intangible assets | | 965 |
|
| Other assets | | 276 |
|
| Total assets | | $ | 5,159 |
|
| | | |
| Deferred income | | $ | 1,553 |
|
| Other liabilities | | 276 |
|
| Total liabilities | | $ | 1,829 |
|
As of 2016. The purchase price allocation will be finalized as soon as practicablethe transaction close date, we recognized a pre-tax gain of $387 million within "Interest and other, net," which is net of $507 million of currency translation adjustment losses reclassified from accumulated other comprehensive income (loss) associated with currency charges on the measurement period, but not later than one year following the acquisition close date.carrying values of ISecG goodwill and identified intangible assets. In addition, we recognized a tax expense of $822 million.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 90 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Although the purchase price allocation for this acquisition and pro forma financial information is not yet available, we expect a substantial majority of the purchase price will be allocated to goodwill and acquisition-related developed technology and other identified intangible assets. Additionally, we assumed $1.5 billion of aggregate principal amount of Altera's outstanding indentures. Altera became a new Intel operating segment called the Programmable Solutions Group upon acquisition.
Note 9: Divestitures
In 2015, we completed three separate divestiture transactions. As a result of these transactions, we received aggregate net cash consideration of $153 million, included within investing activities on the consolidated statements of cash flows, and recognized a gain within interest and other, net on the consolidated statements of income.
During the first quarter of 2014, we completed the divestiture of the assets of Intel Media, a business division dedicated to the development of cloud TV products and services, to Verizon Communications Inc. As a result of the transaction, we received aggregate net cash consideration of $150 million, included within investing activities on the consolidated statements of cash flows, and recognized a gain within interest and other, net on the consolidated statements of income.
Goodwill activity for each period was as follows: | | | (In Millions) | | Dec 27,
2014 | | Acquisitions | | Currency Exchange and Other | | Dec 26,
2015 | | Dec 30,
2017 | | Acquisitions | | Transfers | | Other | | Dec 29,
2018 |
| Client Computing Group | | $ | 3,708 |
| | $ | 370 |
| | $ | — |
| | $ | 4,078 |
| | $ | 4,356 |
| | $ | 47 |
| | $ | — |
| | $ | — |
| | $ | 4,403 |
|
| Data Center Group | | 2,376 |
| | 28 |
| | — |
| | 2,404 |
| | 5,421 |
| | 3 |
| | — |
| | — |
| | 5,424 |
|
| Internet of Things Group | | 428 |
| | — |
| | — |
| | 428 |
| | 1,126 |
| | 16 |
| | 480 |
| | (43 | ) | | 1,579 |
|
| Software and services operating segments | | 4,236 |
| | 10 |
| | (206 | ) | | 4,040 |
| |
| Programmable Solutions Group | | | 2,490 |
| | 89 |
| | — |
| | — |
| | 2,579 |
|
| All other | | 113 |
| | 269 |
| | — |
| | 382 |
| | 10,996 |
| | 7 |
| | (480 | ) | | 5 |
| | 10,528 |
|
| Total | | $ | 10,861 |
| | $ | 677 |
| | $ | (206 | ) | | $ | 11,332 |
| | $ | 24,389 |
| | $ | 162 |
| | $ | — |
| | $ | (38 | ) | | $ | 24,513 |
|
| | | (In Millions) | | Dec 28,
2013 | | Acquisitions | | Currency Exchange and Other | | Dec 27,
2014 | | Dec 31,
2016 | | Acquisitions | | Transfers | | Other | | Dec 30,
2017 |
| Client Computing Group | | $ | 3,689 |
| | $ | 19 |
| | $ | — |
| | $ | 3,708 |
| | $ | 4,356 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,356 |
|
| Data Center Group | | 1,969 |
| | 407 |
| | — |
| | 2,376 |
| | 5,412 |
| | 9 |
| | — |
| | — |
| | 5,421 |
|
| Internet of Things Group | | 428 |
| | — |
| | — |
| | 428 |
| | 1,123 |
| | 3 |
| | — |
| | — |
| | 1,126 |
|
| Software and services operating segments | | 4,409 |
| | 41 |
| | (214 | ) | | 4,236 |
| |
| Programmable Solutions Group | | | 2,490 |
| | — |
| | — |
| | — |
| | 2,490 |
|
| All other | | 18 |
| | 113 |
| | (18 | ) | | 113 |
| | 718 |
| | 10,278 |
| | — |
| | — |
| | 10,996 |
|
| Total | | $ | 10,513 |
| | $ | 580 |
| | $ | (232 | ) | | $ | 10,861 |
| | $ | 14,099 |
| | $ | 10,290 |
| | $ | — |
| | $ | — |
| | $ | 24,389 |
|
During the firstthird quarter of 2015,2018, we combinedmade an organizational change to combine our artificial intelligence investments in edge computing with IOTG; accordingly, approximately $480 million of goodwill was reallocated from "all other" to the PC Client Group and Mobile and Communications Group to create the Client Computing Group (CCG). All prior-period amounts have been retrospectively adjusted to reflect this organizational structure. For further information, see "Note 26: Operating Segments and Geographic Information."IOTG operating segment.
During the fourth quarters of 2015, 2014,2018, 2017, and 2013,2016, we completed our annual impairment assessments and we concluded that goodwill was not impaired in any of these years. The accumulated impairment losses as of December 26, 201529, 2018 were $719 million: $365$365 million associated with CCG, $275$275 million associated with DCG, and $79 million associated with the Internet of Things Group.IOTG.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 91 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11: Identified Intangible Assets |
| |
| NOTE 13 : | IDENTIFIED INTANGIBLE ASSETS |
|
| | | | | | | | | | | | |
| | | December 29, 2018 |
| (In Millions) | | Gross Assets | | Accumulated Amortization | | Net |
| Acquisition-related developed technology | | $ | 9,611 |
| | $ | (3,021 | ) | | $ | 6,590 |
|
| Acquisition-related customer relationships and brands | | 2,179 |
| | (527 | ) | | 1,652 |
|
| Licensed technology and patents | | 2,932 |
| | (1,406 | ) | | 1,526 |
|
| Identified intangible assets subject to amortization | | 14,722 |
| | (4,954 | ) | | 9,768 |
|
| In-process research and development | | 1,497 |
| | — |
| | 1,497 |
|
| Other intangible assets | | 571 |
| | — |
| | 571 |
|
| Identified intangible assets not subject to amortization | | 2,068 |
| | — |
| | 2,068 |
|
| Total identified intangible assets | | $ | 16,790 |
| | $ | (4,954 | ) | | $ | 11,836 |
|
|
| | | | | | | | | | | | |
| | | December 30, 2017 |
| (In Millions) | | Gross Assets | | Accumulated Amortization | | Net |
| Acquisition-related developed technology | | $ | 8,912 |
| | $ | (1,922 | ) | | $ | 6,990 |
|
| Acquisition-related customer relationships and brands | | 2,195 |
| | (342 | ) | | 1,853 |
|
| Licensed technology and patents | | 3,104 |
| | (1,370 | ) | | 1,734 |
|
| Identified intangible assets subject to amortization | | 14,211 |
| | (3,634 | ) | | 10,577 |
|
| In-process research and development | | 2,168 |
| | — |
| | 2,168 |
|
| Identified intangible assets not subject to amortization | | 2,168 |
| | — |
| | 2,168 |
|
| Total identified intangible assets | | $ | 16,379 |
| | $ | (3,634 | ) | | $ | 12,745 |
|
Identified intangible assets at the end of each period were as follows: |
| | | | | | | | | | | | |
| | | December 26, 2015 |
| (In Millions) | | Gross Assets | | Accumulated Amortization | | Net |
| Acquisition-related developed technology | | $ | 2,928 |
| | $ | (2,276 | ) | | $ | 652 |
|
| Acquisition-related customer relationships | | 1,738 |
| | (1,219 | ) | | 519 |
|
| Acquisition-related brands | | 59 |
| | (55 | ) | | 4 |
|
| Licensed technology and patents | | 3,017 |
| | (1,200 | ) | | 1,817 |
|
| Identified intangible assets subject to amortization | | 7,742 |
| | (4,750 | ) | | 2,992 |
|
| Acquisition-related brands | | 767 |
| | — |
| | 767 |
|
| Other intangible assets | | 174 |
| | — |
| | 174 |
|
| Identified intangible assets not subject to amortization | | 941 |
| | — |
| | 941 |
|
| Total identified intangible assets | | $ | 8,683 |
| | $ | (4,750 | ) | | $ | 3,933 |
|
|
| | | | | | | | | | | | |
| | | December 27, 2014 |
| (In Millions) | | Gross Assets | | Accumulated Amortization | | Net |
| Acquisition-related developed technology | | $ | 3,009 |
| | $ | (2,192 | ) | | $ | 817 |
|
| Acquisition-related customer relationships | | 1,698 |
| | (1,001 | ) | | 697 |
|
| Acquisition-related brands | | 61 |
| | (49 | ) | | 12 |
|
| Licensed technology and patents | | 3,153 |
| | (1,224 | ) | | 1,929 |
|
| Identified intangible assets subject to amortization | | 7,921 |
| | (4,466 | ) | | 3,455 |
|
| Acquisition-related brands | | 788 |
| | — |
| | 788 |
|
| Other intangible assets | | 203 |
| | — |
| | 203 |
|
| Identified intangible assets not subject to amortization | | 991 |
| | — |
| | 991 |
|
| Total identified intangible assets | | $ | 8,912 |
| | $ | (4,466 | ) | | $ | 4,446 |
|
As a result of our acquisitions and purchases of licensed technology and patents, identified intangible assetssubject to amortization recorded for each period and their respective estimated weighted average useful lifelives were as follows: | | | | | December 26, 2015 | | December 27, 2014 | | December 29, 2018 | | December 30, 2017 |
| | | Gross Assets (In Millions) | | Estimated Useful Life (In Years) | | Gross Assets (In Millions) | | Estimated Useful Life (In Years) | | Gross Assets (In Millions) | | Estimated Useful Life (In Years) | | Gross Assets (In Millions) | | Estimated Useful Life (In Years) |
| Acquisition-related developed technology | | $ | 238 |
| | 6 | | $ | 175 |
| | 6 | | $ | 35 |
| | 7 | | $ | 2,346 |
| | 9 |
| Acquisition-related customer relationships | | $ | 110 |
| | 11 | | $ | 79 |
| | 9 | |
| Acquisition-related customer relationships and brands | | | $ | — |
| | 0 | | $ | 777 |
| | 12 |
| Licensed technology and patents | | $ | 176 |
| | 7 | | $ | 93 |
| | 8 | | $ | 66 |
| | 6 | | $ | 162 |
| | 7 |
All intangible assets acquired during 2015 are subject to amortization. During 2014, we acquired other intangible assets of $197 million that were not subject to amortization.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortization expenses with presentation location onrecorded for identified intangible assets in the consolidated statements of income for each period and the estimated useful life ranges were as follows: | | Years Ended
(In Millions) | | Location | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 | | Location | | Dec 29,
2018 | | Dec 30,
2017 | | Dec 31,
2016 | | Estimated
Useful Life Range (In Years) |
| Acquisition-related developed technology | | Cost of sales | | $ | 343 |
| | $ | 600 |
| | $ | 576 |
| | Cost of sales | | $ | 1,105 |
| | $ | 912 |
| | $ | 937 |
| | 5 | – | 11 |
| Acquisition-related customer relationships | | Amortization of acquisition-related intangibles | | 258 |
| | 284 |
| | 279 |
| |
| Acquisition-related brands | | Amortization of acquisition-related intangibles | | 7 |
| | 10 |
| | 12 |
| |
| Acquisition-related customer relationships and brands | | | Amortization of acquisition-related intangibles | | 200 |
| | 177 |
| | 294 |
| | 6 | – | 12 |
| Licensed technology and patents | | Cost of sales | | 282 |
| | 275 |
| | 272 |
| | Cost of sales | | 260 |
| | 288 |
| | 293 |
| | 2 | – | 17 |
| Other intangible assets | | Reduction of revenue | | — |
| | — |
| | 103 |
| |
| Total amortization expenses | | $ | 890 |
| | $ | 1,169 |
| | $ | 1,242 |
| | $ | 1,565 |
| | $ | 1,377 |
| | $ | 1,524 |
| |
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 92 |
Based on identified intangible assets that are subject to amortization as of December 26, 2015 (which do not include intangibles from the Altera acquisition), weWe expect future amortization expense for each periodthe next five years to be as follows: | | | (In Millions) | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
| Acquisition-related developed technology | | $ | 260 |
| | $ | 115 |
| | $ | 101 |
| | $ | 98 |
| | $ | 64 |
| | $ | 1,114 |
| | $ | 1,082 |
| | $ | 1,047 |
| | $ | 1,008 |
| | $ | 1,005 |
|
| Acquisition-related customer relationships | | 229 |
| | 143 |
| | 42 |
| | 25 |
| | 22 |
| |
| Acquisition-related brands | | 3 |
| | — |
| | — |
| | — |
| | — |
| |
| Acquisition-related customer relationships and brands | | | 200 |
| | 199 |
| | 199 |
| | 177 |
| | 173 |
|
| Licensed technology and patents | | 282 |
| | 239 |
| | 187 |
| | 186 |
| | 174 |
| | 249 |
| | 218 |
| | 204 |
| | 196 |
| | 139 |
|
| Total future amortization expenses | | $ | 774 |
| | $ | 497 |
| | $ | 330 |
| | $ | 309 |
| | $ | 260 |
| | $ | 1,563 |
| | $ | 1,499 |
| | $ | 1,450 |
| | $ | 1,381 |
| | $ | 1,317 |
|
Note 12: Other Long-Term Assets
Other long-term assets at the end of each period were as follows: |
| | | | | | | | |
| (In Millions) | | Dec 26,
2015 | | Dec 27,
2014 |
| Equity method investments | | $ | 1,590 |
| | $ | 1,446 |
|
| Non-marketable cost method investments | | 2,933 |
| | 1,769 |
|
| Non-current deferred tax assets | | 600 |
| | 622 |
|
| Pre-payments for property, plant and equipment | | 623 |
| | 636 |
|
| Loans receivable | | 642 |
| | 416 |
|
| Grants receivable | | 318 |
| | 312 |
|
| Reverse repurchase agreements | | 350 |
| | 350 |
|
| Other | | 679 |
| | 954 |
|
| Total other long-term assets | | $ | 7,735 |
| | $ | 6,505 |
|
|
| |
| NOTE 14 : | OTHER LONG-TERM ASSETS |
As of December 26, 2015, the carrying amount of our non-marketable cost method investments includes $966 million related to our investment in UniSpreadtrum. For further information, see "Note 5: Cash and Investments."
During 2015, we received and transferred $213 million of equipment from pre-payments for property, plant and equipment to property, plant and equipment. Substantially all of the equipment was prepaid in 2012 and 2013. We recognized the pre-payments within operating activities in the consolidated statement of cash flows when we paid for the equipment, and the receipt of the equipment is reflected as a non-cash transaction in the current period.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13: Restructuring and Asset Impairment Charges
Restructuring and asset impairment charges by program for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| 2015 restructuring program | | $ | 264 |
| | $ | — |
| | $ | — |
|
| 2013 restructuring program | | 90 |
| | 295 |
| | 240 |
|
| Total restructuring and asset impairment charges | | $ | 354 |
| | $ | 295 |
| | $ | 240 |
|
|
| | | | | | | | |
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 |
| Non-current deferred tax assets | | $ | 1,122 |
| | $ | 840 |
|
| Pre-payments for property, plant and equipment | | 1,507 |
| | 714 |
|
| Loans receivable | | 479 |
| | 860 |
|
| Other | | 1,313 |
| | 801 |
|
| Total other long-term assets | | $ | 4,421 |
| | $ | 3,215 |
|
2015 Restructuring ProgramBeginning in the second quarter of 2015, management approved and commenced implementation of restructuring actions, primarily targeted workforce reductions, as we adjusted resources from areas of disinvestment to areas of investment. This program was substantially complete by the end of the 2015.
Restructuring and asset impairment charges for the 2015 restructuring program in 2015 were as follows: |
| | | | |
Years Ended
(In Millions) | | Dec 26,
2015 |
| Employee severance and benefit arrangements | | $ | 250 |
|
| Asset impairments and other restructuring charges | | 14 |
|
| Total restructuring and asset impairment charges | | $ | 264 |
|
Restructuring and asset impairment activities for the 2015 restructuring program in 2015 were as follows:SHORT-TERM DEBT
|
| | | | | | | | | | | | |
| (In Millions) | | Employee Severance and Benefits | | Asset Impairments and Other | | Total |
| Accrued restructuring balance as of December 27, 2014 | | $ | — |
| | $ | — |
| | $ | — |
|
| Additional accruals | | 292 |
| | 14 |
| | 306 |
|
| Adjustments | | (42 | ) | | — |
| | (42 | ) |
| Cash payments | | (225 | ) | | (1 | ) | | (226 | ) |
| Non-cash settlements | | — |
| | (6 | ) | | (6 | ) |
| Accrued restructuring balance as of December 26, 2015 | | $ | 25 |
| | $ | 7 |
| | $ | 32 |
|
|
| | | | | | | | |
(In Millions) | | Dec 29,
2018 | | Dec 30,
2017 |
| Commercial paper and drafts payable | | $ | 500 |
| | $ | 37 |
|
| Current portion of long-term debt | | 761 |
| | 1,739 |
|
| Total short-term debt | | $ | 1,261 |
| | $ | 1,776 |
|
We recorded the additional accrualsOur current portion of long-term debt includes our 2009 junior subordinated convertible debentures due 2039, as restructuring and asset impairment charges in the consolidated statements of income and within the “all other” operating segments category. A substantial majority of the accrued restructuring balancewell as of December 26, 2015 is expected to be paid within the next 12 months, and was recordeddebt classified as a current liability within accrued compensation and benefitsshort-term based on the consolidated balance sheets.contractual maturity.
Restructuring actions related to this program that were approved in 2015 impacted approximately 4,000 employees.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2013 Restructuring Program
Beginning in the third quarter of 2013, management approved and commenced implementation of several restructuring actions, including targeted workforce reductions and the exit of certain businesses and facilities. These actions include the wind down of our 200mm wafer fabrication facility in Massachusetts, which ceased production in the first quarter of 2015, and the closure of our assembly and test facility in Costa Rica, which ceased production in the fourth quarter of 2014. These targeted reductions will enable us to better align our resources in areas providing the greatest benefit in the current business environment. This program was substantially complete by the end of 2015.
Restructuring and asset impairment charges for the 2013 restructuring program for each period were as follows: |
| | | | | | | | | | | | |
Years Ended
(In Millions) | | Dec 26,
2015 | | Dec 27,
2014 | | Dec 28,
2013 |
| Employee severance and benefit arrangements | | $ | 82 |
| | $ | 265 |
| | $ | 201 |
|
| Asset impairments and other restructuring charges | | 8 |
| | 30 |
| | 39 |
|
| Total restructuring and asset impairment charges | | $ | 90 |
| | $ | 295 |
| | $ | 240 |
|
Restructuring and asset impairment activities for the 2013 restructuring program for each period were as follows: |
| | | | | | | | | | | | |
| (In Millions) | | Employee Severance and Benefits | | Asset Impairments and Other | | Total |
| Accrued restructuring balance as of December 28, 2013 | | $ | 183 |
| | $ | — |
| | $ | 183 |
|
| Additional accruals | | 252 |
| | 31 |
| | 283 |
|
| Adjustments | | 13 |
| | (1 | ) | | 12 |
|
| Cash payments | | (327 | ) | | (6 | ) | | (333 | ) |
| Non-cash settlements | | — |
| | (13 | ) | | (13 | ) |
| Accrued restructuring balance as of December 27, 2014 | | 121 |
| | 11 |
| | 132 |
|
| Additional accruals | | 101 |
| | 9 |
| | 110 |
|
| Adjustments | | (19 | ) | | (1 | ) | | (20 | ) |
| Cash payments | | (171 | ) | | (10 | ) | | (181 | ) |
| Non-cash settlements | | — |
| | (3 | ) | | (3 | ) |
| Accrued restructuring balance as of December 26, 2015 | | $ | 32 |
| | $ | 6 |
| | $ | 38 |
|
We recorded the additional accruals and adjustments as restructuring and asset impairment charges in the consolidated statements of income and within the "all other" operating segments category. Substantially all of the accrued restructuring balance as of December 26, 2015 is expected to be paid within the next 12 months, and was recorded as a current liability within accrued compensation and benefits on the consolidated balance sheets.
Restructuring actions related to this program that were approved in 2015 impacted approximately 940 employees. Since the third quarter of 2013, we have incurred a total of $625 million in restructuring and asset impairment charges. These charges include $548 million related to employee severance and benefit arrangements for approximately 8,500 employees, and $77 million in asset impairment charges and other restructuring charges.
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14: Deferred Income
Deferred income at the end of each period was as follows: |
| | | | | | | | |
| (In Millions) | | Dec 26,
2015 | | Dec 27,
2014 |
| Deferred income on shipments of components to distributors | | $ | 920 |
| | $ | 944 |
|
| Deferred income from software, services, and other | | 1,268 |
| | 1,261 |
|
| Current deferred income | | 2,188 |
| | 2,205 |
|
| Non-current deferred income from software, services, and other | | 530 |
| | 483 |
|
| Total deferred income | | $ | 2,718 |
|
| $ | 2,688 |
|
We classify non-current deferred income from software, services, and other within other long-term liabilities on the consolidated balance sheets.
Note 15: Borrowings
Short-Term Debt
Our short-term debt at the end of each period was as follows: |
| | | | | | | | |
| (In Millions) | | Dec 26,
2015 | | Dec 27,
2014 |
| Drafts payable | | $ | 41 |
| | $ | 16 |
|
| Commercial paper | | — |
| | 500 |
|
| Current portion of long-term debt | | 2,602 |
| | 1,088 |
|
| Less: debt issuance costs associated with the current portion of long-term debt | | (9 | ) | | (8 | ) |
| Total short-term debt | | $ | 2,634 |
| | $ | 1,596 |
|
We have an ongoing authorization from our Board of Directors to borrow up to $5.0 billion, which our Board of Directors increased in 2015 from $3.0$10.0 billion under our commercial paper program. Maximum borrowings under our commercial paper program in 2015 were $900 million ($2.4 billion in 2014). We had no outstanding commercial paper as of December 26, 2015 ($500 million as of December 27, 2014). Our commercial paper was rated A-1+ by Standard & Poor’s and P-1 by Moody’s as of December 26, 2015.
On December 21, 2015 we entered into a short-term credit facility to borrow up to $5.0 billion in order to facilitate the settlement of our acquisition of Altera. There were no borrowings outstanding under this credit facility as of December 26, 2015 and it was closed in January 2016.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 93 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-Term Debt
Our indebtedness is carried at amortized cost plus applicable hedge adjustments. Our long-term debt at the end of each period was as follows:LONG-TERM DEBT
|
| | | | | | | | | | | | | |
| (In Millions) | | Maturity Date | | Stated Interest Rate | | Dec 26,
2015 | | Dec 27,
2014 |
| Fourth quarter 2015 debt issuance of $915 million | | | | | | | | |
| Senior notes | | December 2045 | | 4.70 | % | | $ | 908 |
| | $ | — |
|
| Fourth quarter 2015 Australian dollar-denominated debt issuance of A$800 million | | | | | | | | |
Senior notes1 | | December 2019 | | 3.25 | % | | 181 |
| | — |
|
Senior notes1 | | December 2022 | | 4.00 | % | | 397 |
| | — |
|
| Third quarter 2015 debt issuance of $1.0 billion | | | | | | | | |
| Senior notes | | August 2045 | | 4.90 | % | | 1,009 |
| | — |
|
| Third quarter 2015 debt issuance of $7.0 billion | | | | | | | | |
| Senior notes | | July 2020 | | 2.45 | % | | 1,748 |
| | — |
|
| Senior notes | | July 2022 | | 3.10 | % | | 996 |
| | — |
|
| Senior notes | | July 2025 | | 3.70 | % | | 2,247 |
| | — |
|
| Senior notes | | July 2045 | | 4.90 | % | | 1,998 |
| | — |
|
| 2012 debt issuance of $6.2 billion | | | | | | | | |
| Senior notes | | December 2017 | | 1.35 | % | | 2,999 |
| | 2,998 |
|
| Senior notes | | December 2022 | | 2.70 | % | | 1,492 |
| | 1,495 |
|
| Senior notes | | December 2032 | | 4.00 | % | | 744 |
| | 744 |
|
| Senior notes | | December 2042 | | 4.25 | % | | 924 |
| | 924 |
|
| 2011 debt issuance of $5.0 billion | | | | | | | | |
| Senior notes | | October 2016 | | 1.95 | % | | 1,499 |
| | 1,499 |
|
| Senior notes | | October 2021 | | 3.30 | % | | 1,997 |
| | 1,997 |
|
| Senior notes | | October 2041 | | 4.80 | % | | 1,490 |
| | 1,490 |
|
| 2009 debt issuance of $2.0 billion | | | | | | | | |
| Junior subordinated convertible debentures | | August 2039 | | 3.25 | % | | 1,103 |
| | 1,088 |
|
| 2005 debt issuance of $1.6 billion | | | | | | | | |
| Junior subordinated convertible debentures | | December 2035 | | 2.95 | % | | 975 |
| | 960 |
|
| Long-term debt | | | | | | 22,707 |
| | 13,195 |
|
| Less: current portion of long-term debt | | | | | | (2,602 | ) | | (1,088 | ) |
| Less: debt issuance costs | | | | | | (69 | ) | | (48 | ) |
| Total long-term debt | | | | | | $ | 20,036 |
| | $ | 12,059 |
|
|
| | | | | | | | | | |
| | | December 29, 2018 | | December 30, 2017 |
| (In Millions) | | Effective Interest Rate | | Amount | | Amount |
| Floating-rate senior notes: | | | | | | |
| Three-month LIBOR plus 0.08%, due May 2020 | | 2.29% | | $ | 700 |
| | $ | 700 |
|
| Three-month LIBOR plus 0.35%, due May 2022 | | 2.56% | | 800 |
| | 800 |
|
| Fixed-rate senior notes: | | | | | | |
| 2.50%, due November 2018 | | —% | | — |
| | 600 |
|
3.25%, due December 20191 | | 2.11% | | 177 |
| | 194 |
|
| 1.85%, due May 2020 | | 1.89% | | 1,000 |
| | 1,000 |
|
| 2.45%, due July 2020 | | 2.49% | | 1,750 |
| | 1,750 |
|
| 1.70%, due May 2021 | | 1.79% | | 500 |
| | 500 |
|
| 3.30%, due October 2021 | | 3.67% | | 2,000 |
| | 2,000 |
|
| 2.35%, due May 2022 | | 2.67% | | 750 |
| | 750 |
|
| 3.10%, due July 2022 | | 3.47% | | 1,000 |
| | 1,000 |
|
4.00%, due December 20221 | | 2.89% | | 389 |
| | 428 |
|
| 2.70%, due December 2022 | | 3.06% | | 1,500 |
| | 1,500 |
|
| 4.10%, due November 2023 | | 3.22% | | 400 |
| | 400 |
|
| 2.88%, due May 2024 | | 3.03% | | 1,250 |
| | 1,250 |
|
| 2.70%, due June 2024 | | 2.79% | | 600 |
| | 600 |
|
| 3.70%, due July 2025 | | 4.16% | | 2,250 |
| | 2,250 |
|
| 2.60%, due May 2026 | | 2.62% | | 1,000 |
| | 1,000 |
|
| 3.15%, due May 2027 | | 3.21% | | 1,000 |
| | 1,000 |
|
| 4.00%, due December 2032 | | 3.70% | | 750 |
| | 750 |
|
| 4.80%, due October 2041 | | 4.49% | | 802 |
| | 802 |
|
| 4.25%, due December 2042 | | 3.87% | | 567 |
| | 567 |
|
| 4.90%, due July 2045 | | 4.56% | | 772 |
| | 772 |
|
| 4.70%, due December 2045 | | 3.45% | | 915 |
| | 915 |
|
| 4.10%, due May 2046 | | 3.72% | | 1,250 |
| | 1,250 |
|
| 4.10%, due May 2047 | | 3.59% | | 1,000 |
| | 1,000 |
|
| 4.10%, due August 2047 | | 2.91% | | 640 |
| | 640 |
|
| 3.73%, due December 2047 | | 3.90% | | 1,967 |
| | 1,967 |
|
| Oregon and Arizona bonds: | | | | | | |
| 2.40% - 2.70%, due December 2035 - 2040 | | 2.49% | | 423 |
| | — |
|
| Junior subordinated convertible debentures: | | | | | | |
3.25%, due August 20392 | | 3.42% | | 988 |
| | 2,000 |
|
| Total senior notes and other borrowings | | | | 27,140 |
| | 28,385 |
|
| Unamortized premium/discount and issuance costs | | | | (891 | ) | | (1,357 | ) |
| Hedge accounting fair value adjustments | | | | (390 | ) | | (252 | ) |
| Long-term debt | | | | 25,859 |
| | 26,776 |
|
| Current portion of long-term debt | | | | (761 | ) | | (1,739 | ) |
| Total long-term debt | | | | $ | 25,098 |
| | $ | 25,037 |
|
| |
1 | To manage foreign currency risk associated with the Australian-dollar-denominated notes issued in 2015, we entered into currency interest rate swaps with an aggregate notional amount of $577 million, which effectively converted these notes to U.S.-dollar-denominated notes. For further discussion on our currency interest rate swaps, see "Note 6:18: Derivative Financial Instruments." Principal and unamortized discount/issuance costs for the Australian-dollar-denominated notes in the table above were calculated using foreign currency exchange rates as of December 29, 2018 and December 30, 2017. |
| |
2 | Effective interest rate for the year ended December 30, 2017 was 4.03%. |
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 94 |
The fair value of our convertible debentures is determined using discounted cash flow models with observable market inputs, and takes into consideration variables such as interest rate changes, comparable instruments, subordination discount, and credit-rating changes. As of December 29, 2018 and December 30, 2017, the fair value of short- and long-term debt (excluding commercial paper and drafts payable) was $27.1 billion and $29.4 billion, respectively. These liabilities are classified as Level 2 within the fair value hierarchy, based on the nature of the fair value inputs.
Senior Notes
During 2015,2017, we issued a total of $9.5$7.7 billion aggregate principal amount of senior unsecured notes, to fundwhich excludes the private placement of $2.0 billion of senior notes issued in December 2017, as discussed in the following paragraph. We used the net proceeds from the offerings of the notes for general corporate purposes, which included refinancing of outstanding debt and repurchase of shares of our common stock. Additionally, we redeemed our $1.0 billion, 4.90% senior notes due August 2045.
In December 2017, we completed exchange and cash offers for our outstanding 4.80% senior notes due 2041, 4.25% senior notes due 2042, and 4.90% senior notes due 2045 (Old Notes). As a portionresult of the exchange offer, we issued in a private placement $2.0 billion principal amount of 3.73% senior notes due 2047 and paid $293 million cash in exchange for $1.9 billion aggregate principal amount of the Old Notes. As a result of the cash consideration for our acquisition of Altera. The acquisition of Altera closed on December 28, 2015, subsequentoffer, we paid $518 million to our fiscal 2015 year-end. For more informationrepurchase $425 million aggregate principal amount and recognized a $93 million loss on the closingextinguishment of our Altera acquisition, see "Note 8: Acquisitions."the Old Notes.
All of ourOur floating-rate senior notes pay a fixed rate ofinterest quarterly and our fixed-rate senior notes pay interest semiannually. A portionAs of December 29, 2018 and December 30, 2017, the total principal amount of our fixed coupon payments related to ourfixed-rate senior notes have been swapped for floating rate coupon payments. For more information on ourthat was converted to variable-rate indebtedness using interest rate swaps see "Note 6: Derivative Financial Instruments."was $20.0 billion and $12.9 billion, respectively. We may redeem the fixed-rate notes prior to their maturity at our option at specified redemption prices and subject to certain restrictions. The obligations under the notes rank equally in right of payment with all of our other existing and future senior unsecured indebtedness and will effectively rank junior to all liabilities of our subsidiaries.
Oregon and Arizona Bonds
95
