e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 26, 2010.
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-06217
INTEL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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94-1672743 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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2200 Mission College Boulevard, Santa Clara, California
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95054-1549 |
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(Address of principal executive offices)
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(Zip Code) |
(408) 765-8080
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Shares outstanding of the Registrants common stock:
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Class
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Outstanding as of July 23, 2010 |
Common stock, $0.001 par value
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5,568 million |
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 26, |
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June 27, |
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June 26, |
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June 27, |
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(In Millions, Except Per Share Amounts) |
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2010 |
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2009 |
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2010 |
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2009 |
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Net revenue |
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$ |
10,765 |
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$ |
8,024 |
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$ |
21,064 |
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$ |
15,169 |
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Cost of sales |
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3,530 |
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3,945 |
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7,300 |
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7,852 |
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Gross margin |
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7,235 |
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4,079 |
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13,764 |
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7,317 |
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Research and development |
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1,666 |
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1,303 |
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3,230 |
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2,620 |
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Marketing, general and administrative |
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1,584 |
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2,695 |
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3,098 |
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3,893 |
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Restructuring and asset impairment charges |
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91 |
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165 |
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Amortization of acquisition-related intangibles |
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4 |
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2 |
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7 |
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4 |
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Operating expenses |
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3,254 |
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4,091 |
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6,335 |
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6,682 |
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Operating income (loss) |
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3,981 |
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(12 |
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7,429 |
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635 |
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Gains (losses) on equity method investments, net |
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76 |
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(44 |
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37 |
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(116 |
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Gains (losses) on other equity investments, net |
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117 |
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(25 |
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125 |
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(66 |
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Interest and other, net |
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11 |
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31 |
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40 |
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126 |
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Income (loss) before taxes |
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4,185 |
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(50 |
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7,631 |
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579 |
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Provision for taxes |
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1,298 |
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348 |
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2,302 |
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348 |
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Net income (loss) |
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$ |
2,887 |
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$ |
(398 |
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$ |
5,329 |
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$ |
231 |
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Basic earnings (loss) per common share |
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$ |
0.52 |
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$ |
(0.07 |
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$ |
0.96 |
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$ |
0.04 |
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Diluted earnings (loss) per common share |
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$ |
0.51 |
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$ |
(0.07 |
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$ |
0.94 |
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$ |
0.04 |
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Cash dividends declared per common share |
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$ |
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$ |
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$ |
0.315 |
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$ |
0.28 |
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Weighted average common shares outstanding: |
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Basic |
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5,563 |
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5,595 |
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5,546 |
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5,584 |
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Diluted |
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5,711 |
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5,595 |
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5,696 |
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5,656 |
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See accompanying notes.
2
INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
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June 26, |
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Dec. 26, |
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(In Millions) |
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2010 |
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2009 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
5,514 |
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$ |
3,987 |
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Short-term investments |
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6,715 |
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5,285 |
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Trading assets |
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6,074 |
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4,648 |
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Accounts receivable, net |
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2,430 |
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2,273 |
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Inventories |
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3,345 |
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2,935 |
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Deferred tax assets |
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1,206 |
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1,216 |
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Other current assets |
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1,180 |
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813 |
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Total current assets |
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26,464 |
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21,157 |
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Property, plant and equipment, net of accumulated
depreciation of $31,472 ($30,597 as of December 26, 2009) |
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16,946 |
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17,225 |
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Marketable equity securities |
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916 |
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773 |
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Other long-term investments |
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3,947 |
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4,179 |
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Goodwill |
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4,481 |
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4,421 |
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Other long-term assets |
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4,937 |
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5,340 |
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Total assets |
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$ |
57,691 |
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$ |
53,095 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Short-term debt |
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$ |
215 |
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$ |
172 |
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Accounts payable |
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2,126 |
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1,883 |
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Accrued compensation and benefits |
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1,962 |
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2,448 |
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Accrued advertising |
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958 |
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773 |
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Deferred income on shipments to distributors |
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582 |
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593 |
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Income taxes payable |
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86 |
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Other accrued liabilities |
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2,094 |
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1,636 |
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Total current liabilities |
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7,937 |
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7,591 |
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Long-term income taxes payable |
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174 |
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193 |
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Long-term debt |
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2,058 |
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2,049 |
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Long-term deferred tax liabilities |
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586 |
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555 |
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Other long-term liabilities |
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1,095 |
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1,003 |
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Contingencies (Note 23) |
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Stockholders equity: |
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Preferred stock |
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Common stock and capital in excess of par value, 5,567 shares
issued and outstanding (5,523 as of December 26, 2009) |
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15,741 |
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14,993 |
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Accumulated other comprehensive income (loss) |
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231 |
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393 |
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Retained earnings |
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29,869 |
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26,318 |
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Total stockholders equity |
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45,841 |
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41,704 |
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Total liabilities and stockholders equity |
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$ |
57,691 |
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$ |
53,095 |
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See accompanying notes.
3
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
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Six Months Ended |
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June 26, |
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June 27, |
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(In Millions) |
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2010 |
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2009 |
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Cash and cash equivalents, beginning of period |
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$ |
3,987 |
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$ |
3,350 |
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Cash flows provided by (used for) operating activities: |
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Net income |
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5,329 |
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231 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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2,166 |
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2,419 |
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Share-based compensation |
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480 |
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471 |
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Restructuring, asset impairment, and net loss on retirement of assets |
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16 |
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212 |
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Excess tax benefit from share-based payment arrangements |
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(62 |
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Amortization of intangibles |
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124 |
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137 |
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(Gains) losses on equity method investments, net |
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(37 |
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116 |
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(Gains) losses on other equity investments, net |
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(125 |
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66 |
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Deferred taxes |
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2 |
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116 |
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Changes in assets and liabilities: |
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Trading assets |
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(20 |
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Accounts receivable |
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(147 |
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(226 |
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Inventories |
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(395 |
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927 |
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Accounts payable |
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243 |
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(664 |
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Accrued compensation and benefits |
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(513 |
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(695 |
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Income taxes payable and receivable |
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(23 |
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(39 |
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Other assets and liabilities |
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507 |
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711 |
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Total adjustments |
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2,236 |
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3,531 |
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Net cash provided by operating activities |
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7,565 |
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3,762 |
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Cash flows provided by (used for) investing activities: |
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Additions to property, plant and equipment |
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(1,976 |
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(2,490 |
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Acquisitions, net of cash acquired |
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(70 |
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Purchases of available-for-sale investments |
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(6,863 |
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(2,953 |
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Maturities and sales of available-for-sale investments |
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5,962 |
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3,063 |
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Purchases of trading assets |
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(4,791 |
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(881 |
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Maturities and sales of trading assets |
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3,571 |
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1,545 |
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Loans receivable |
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(439 |
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(243 |
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Investments in non-marketable equity investments |
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(169 |
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(124 |
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Return of equity method investments |
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99 |
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239 |
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Other investing activities |
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34 |
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28 |
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Net cash provided by (used for) investing activities |
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(4,642 |
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(1,816 |
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Cash flows provided by (used for) financing activities: |
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Increase (decrease) in short-term debt, net |
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43 |
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(76 |
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Proceeds from government grants |
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79 |
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Excess tax benefit from share-based payment arrangements |
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62 |
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Proceeds from sales of shares through employee equity incentive plans |
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386 |
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248 |
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Repurchase and retirement of common stock |
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(219 |
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(79 |
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Payment of dividends to stockholders |
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(1,747 |
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(1,563 |
) |
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Net cash used for financing activities |
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(1,396 |
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(1,470 |
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Net increase (decrease) in cash and cash equivalents |
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1,527 |
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|
476 |
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Cash and cash equivalents, end of period |
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$ |
5,514 |
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$ |
3,826 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest, net of capitalized interest |
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$ |
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$ |
3 |
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Income taxes, net of refunds |
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$ |
2,359 |
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$ |
278 |
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See accompanying notes.
4
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited
Note 1: Basis of Presentation
We prepared our interim consolidated condensed financial statements that accompany these notes in
conformity with U.S. generally accepted accounting principles, consistent in all material respects
with those applied in our Annual Report on Form 10-K for the year ended December 26, 2009.
We have made estimates and judgments affecting the amounts reported in our consolidated condensed
financial statements and the accompanying notes. The actual results that we experience may differ
materially from our estimates. The accounting estimates that require our most significant,
difficult, and subjective judgments include:
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the valuation of non-marketable equity investments and the determination of
other-than-temporary impairments; |
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the assessment of recoverability of long-lived assets; |
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the recognition and measurement of current and deferred income taxes (including
the measurement of uncertain tax positions); and |
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the valuation of inventory. |
The interim financial information is unaudited, but reflects all normal adjustments that are, in
our opinion, necessary to provide a fair statement of results for the interim periods presented.
This interim information should be read in conjunction with the consolidated financial statements
in our Annual Report on Form 10-K for the year ended December 26, 2009.
Note 2: Accounting Changes
In the first quarter of 2010, we adopted new standards for determining whether to consolidate a
variable interest entity. These new standards eliminated a mandatory quantitative approach to
determine whether a variable interest gives the entity a controlling financial interest in a
variable interest entity in favor of a qualitatively focused analysis, and require an ongoing
reassessment of whether an entity is the primary beneficiary. The adoption of these new standards
did not impact our consolidated statements of operations or balance sheets.
Note 3: Recent Accounting Standards
In October 2009, the Financial Accounting Standards Board (FASB) issued new standards for revenue
recognition with multiple deliverables. These new standards impact the determination of when the
individual deliverables included in a multiple-element arrangement may be treated as separate units
for accounting purposes. Additionally, these new standards modify the manner in which the
arrangement consideration is allocated across the separately identified deliverables by no longer
permitting the residual method of allocating arrangement consideration. These new standards are
required to be adopted in the first quarter of 2011; however, early adoption is permitted. We do
not expect these new standards to significantly impact our consolidated financial statements.
In October 2009, the FASB issued new standards for the accounting for certain revenue arrangements
that include software. These new standards amend the scope of pre-existing software revenue
guidance by removing from the guidance tangible products and certain software. These new standards
are required to be adopted in the first quarter of 2011; however, early adoption is permitted. We
do not expect these new standards to significantly impact our consolidated financial statements.
In January 2010, the FASB issued amended standards that require additional fair value disclosures.
These disclosure requirements are effective in two phases. In the first quarter of 2010, we adopted
the requirements for disclosures about inputs and valuation techniques used to measure fair value
as well as disclosures about significant transfers. Beginning in the first quarter of 2011, these
amended standards will require presentation of disaggregated activity within the reconciliation for
fair value measurements using significant unobservable inputs (Level 3). These amended standards do
not affect our consolidated statements of operations or balance sheets.
5
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 4: Fair Value
Fair value is the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. When
determining fair value, we consider the principal or most advantageous market in which we would
transact, and we consider assumptions that market participants would use when pricing the asset or
liability. Our financial instruments are measured and recorded at fair value, except for equity
method investments, cost method investments, cost method loans receivable, accounts receivable, and
most of our liabilities.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less
active markets), or model-derived valuations in which all significant inputs are observable or can
be derived principally from or corroborated with observable market data for substantially the full
term of the assets or liabilities. 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.
Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement
of the fair value of assets or liabilities. 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.
Marketable Debt Instruments
Marketable debt instruments include instruments such as commercial paper, corporate bonds,
government bonds, bank deposits, asset-backed securities, municipal bonds, and money market fund
deposits. When we use observable market prices for identical securities that are traded in less
active markets, we classify our marketable debt instruments as Level 2. When observable market
prices for identical securities are not available, we price our marketable debt instruments using
non-binding market consensus prices that are corroborated with observable market data; quoted
market prices for similar instruments; or pricing models, such as a discounted cash flow model,
with all significant inputs derived from or corroborated with observable market data. Non-binding
market consensus prices are 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 and/or similar securities; and the internal
assumptions of pricing providers or brokers that use observable market inputs and, to a lesser
degree, unobservable market inputs. We corroborate non-binding market consensus prices with
observable market data using statistical models when observable market data exists. The discounted
cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and
forward rates, and credit ratings.
Our marketable debt instruments that are classified as Level 3 are classified as such due to the
lack of observable market data to corroborate either the non-binding market consensus prices or the
non-binding broker quotes. When observable market data is not available, we corroborate non-binding
market consensus prices and non-binding broker quotes using available unobservable data.
6
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the
following types of instruments as of June 26, 2010 and December 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2010 |
|
|
December 26, 2009 |
|
|
|
Fair Value Measured and Recorded at |
|
|
|
|
|
|
Fair Value Measured and Recorded at |
|
|
|
|
|
|
Reporting Date Using |
|
|
|
|
|
|
Reporting Date Using |
|
|
|
|
(In Millions) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
|
|
|
$ |
3,964 |
|
|
$ |
|
|
|
$ |
3,964 |
|
|
$ |
|
|
|
$ |
2,919 |
|
|
$ |
|
|
|
$ |
2,919 |
|
Bank deposits |
|
|
|
|
|
|
479 |
|
|
|
|
|
|
|
479 |
|
|
|
|
|
|
|
459 |
|
|
|
|
|
|
|
459 |
|
Money market fund deposits |
|
|
195 |
|
|
|
|
|
|
|
|
|
|
|
195 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
48 |
|
Government bonds |
|
|
367 |
|
|
|
296 |
|
|
|
|
|
|
|
663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
|
|
|
|
2,990 |
|
|
|
|
|
|
|
2,990 |
|
|
|
|
|
|
|
2,525 |
|
|
|
|
|
|
|
2,525 |
|
Corporate bonds |
|
|
287 |
|
|
|
1,035 |
|
|
|
1 |
|
|
|
1,323 |
|
|
|
133 |
|
|
|
1,560 |
|
|
|
76 |
|
|
|
1,769 |
|
Government bonds |
|
|
605 |
|
|
|
1,112 |
|
|
|
|
|
|
|
1,717 |
|
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
250 |
|
Bank deposits |
|
|
|
|
|
|
671 |
|
|
|
|
|
|
|
671 |
|
|
|
|
|
|
|
697 |
|
|
|
|
|
|
|
697 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
27 |
|
Money market fund deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
17 |
|
Trading assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
|
|
|
|
940 |
|
|
|
|
|
|
|
940 |
|
|
|
|
|
|
|
882 |
|
|
|
|
|
|
|
882 |
|
Corporate bonds |
|
|
126 |
|
|
|
919 |
|
|
|
|
|
|
|
1,045 |
|
|
|
80 |
|
|
|
1,005 |
|
|
|
45 |
|
|
|
1,130 |
|
Government bonds |
|
|
104 |
|
|
|
2,470 |
|
|
|
|
|
|
|
2,574 |
|
|
|
|
|
|
|
1,351 |
|
|
|
|
|
|
|
1,351 |
|
Bank deposits |
|
|
|
|
|
|
198 |
|
|
|
|
|
|
|
198 |
|
|
|
|
|
|
|
264 |
|
|
|
|
|
|
|
264 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
398 |
|
|
|
398 |
|
|
|
|
|
|
|
|
|
|
|
618 |
|
|
|
618 |
|
Municipal bonds |
|
|
|
|
|
|
382 |
|
|
|
|
|
|
|
382 |
|
|
|
|
|
|
|
390 |
|
|
|
|
|
|
|
390 |
|
Money market fund deposits |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
Marketable equity securities |
|
|
6 |
|
|
|
525 |
|
|
|
|
|
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
receivable |
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
|
|
|
|
|
268 |
|
|
|
|
|
|
|
268 |
|
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
136 |
|
Marketable equity securities |
|
|
777 |
|
|
|
139 |
|
|
|
|
|
|
|
916 |
|
|
|
676 |
|
|
|
97 |
|
|
|
|
|
|
|
773 |
|
Other long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
202 |
|
|
|
857 |
|
|
|
94 |
|
|
|
1,153 |
|
|
|
366 |
|
|
|
1,329 |
|
|
|
248 |
|
|
|
1,943 |
|
Government bonds |
|
|
141 |
|
|
|
2,380 |
|
|
|
|
|
|
|
2,521 |
|
|
|
17 |
|
|
|
1,948 |
|
|
|
|
|
|
|
1,965 |
|
Bank deposits |
|
|
|
|
|
|
207 |
|
|
|
|
|
|
|
207 |
|
|
|
|
|
|
|
162 |
|
|
|
|
|
|
|
162 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
66 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
109 |
|
Other long-term assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
|
|
|
|
544 |
|
|
|
|
|
|
|
544 |
|
|
|
|
|
|
|
249 |
|
|
|
|
|
|
|
249 |
|
Derivative assets |
|
|
|
|
|
|
43 |
|
|
|
25 |
|
|
|
68 |
|
|
|
|
|
|
|
1 |
|
|
|
31 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured and
recorded
at fair value |
|
$ |
2,816 |
|
|
$ |
20,543 |
|
|
$ |
598 |
|
|
$ |
23,957 |
|
|
$ |
1,333 |
|
|
$ |
16,241 |
|
|
$ |
1,154 |
|
|
$ |
18,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
|
|
|
$ |
325 |
|
|
$ |
8 |
|
|
$ |
333 |
|
|
$ |
|
|
|
$ |
112 |
|
|
$ |
65 |
|
|
$ |
177 |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
121 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
123 |
|
|
|
123 |
|
Other long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured and
recorded at fair
value |
|
$ |
|
|
|
$ |
366 |
|
|
$ |
129 |
|
|
$ |
495 |
|
|
$ |
|
|
|
$ |
161 |
|
|
$ |
188 |
|
|
$ |
349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government bonds includes bonds issued or deemed to be guaranteed by non-U.S. governments, Federal
Deposit Insurance Company (FDIC)-insured corporate bonds, U.S. agency securities, and U.S. Treasury
securities.
7
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
The tables below present reconciliations for all assets and liabilities measured and recorded at
fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and
six months ended June 26, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measured and Recorded Using Significant Unobservable Inputs (Level 3) |
|
|
|
|
|
|
Corporate |
|
|
Asset-Backed |
|
|
Derivative |
|
|
Derivative |
|
|
Long-Term |
|
|
Total Gains |
|
(In Millions) |
|
Bonds |
|
|
Securities |
|
|
Assets |
|
|
Liabilities |
|
|
Debt |
|
|
(Losses) |
|
Balance as of March 27, 2010 |
|
$ |
89 |
|
|
$ |
656 |
|
|
$ |
27 |
|
|
$ |
(6 |
) |
|
$ |
(121 |
) |
|
|
|
|
Total gains or losses (realized and unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
|
|
|
|
1 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(2 |
) |
Included in other comprehensive
income (loss) |
|
|
3 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Purchases, sales, issuances, and settlements, net |
|
|
3 |
|
|
|
(180 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 26, 2010 |
|
$ |
95 |
|
|
$ |
478 |
|
|
$ |
25 |
|
|
$ |
(8 |
) |
|
$ |
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains or losses included
in earnings related to assets and liabilities
still held as of June 26, 2010 |
|
$ |
|
|
|
$ |
2 |
|
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
(1 |
) |
|
|
|
Fair Value Measured and Recorded Using Significant Unobservable Inputs (Level 3) |
|
|
|
|
|
|
Corporate |
|
|
Asset-Backed |
|
|
Derivative |
|
|
Derivative |
|
|
Long-Term |
|
|
Total Gains |
|
(In Millions) |
|
Bonds |
|
|
Securities |
|
|
Assets |
|
|
Liabilities |
|
|
Debt |
|
|
(Losses) |
|
Balance as of December 26, 2009 |
|
$ |
369 |
|
|
$ |
754 |
|
|
$ |
31 |
|
|
$ |
(65 |
) |
|
$ |
(123 |
) |
|
|
|
|
Total gains or losses (realized and unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
(2 |
) |
|
|
5 |
|
|
|
(6 |
) |
|
|
(2 |
) |
|
|
2 |
|
|
|
(3 |
) |
Included in other comprehensive
income (loss) |
|
|
1 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Purchases, sales, issuances, and settlements, net |
|
|
(116 |
) |
|
|
(287 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Transfers out of Level 3 |
|
|
(157 |
) |
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 26, 2010 |
|
$ |
95 |
|
|
$ |
478 |
|
|
$ |
25 |
|
|
$ |
(8 |
) |
|
$ |
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains or losses included
in earnings related to assets and liabilities
still held as of June 26, 2010 |
|
$ |
|
|
|
$ |
5 |
|
|
$ |
(6 |
) |
|
$ |
(2 |
) |
|
$ |
2 |
|
|
$ |
(1 |
) |
The tables below present reconciliations for all assets and liabilities measured and recorded at
fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and
six months ended June 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measured and Recorded Using Significant Unobservable Inputs (Level 3) |
|
|
|
|
|
|
Government |
|
|
Corporate |
|
|
Asset-Backed |
|
|
Derivative |
|
|
Derivative |
|
|
Long-Term |
|
|
Total Gains |
|
(In Millions) |
|
Bonds |
|
|
Bonds |
|
|
Securities |
|
|
Assets |
|
|
Liabilities |
|
|
Debt |
|
|
(Losses) |
|
Balance as of March 28, 2009 |
|
$ |
|
|
|
$ |
226 |
|
|
$ |
980 |
|
|
$ |
22 |
|
|
$ |
(42 |
) |
|
$ |
(123 |
) |
|
|
|
|
Total gains or losses (realized
and unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
|
|
|
|
1 |
|
|
|
16 |
|
|
|
(6 |
) |
|
|
8 |
|
|
|
(1 |
) |
|
|
18 |
|
Included in other comprehensive
income (loss) |
|
|
(6 |
) |
|
|
5 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
Purchases, sales, issuances, and
settlements, net |
|
|
250 |
|
|
|
145 |
|
|
|
(89 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in to Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
Transfers out of Level 3 |
|
|
|
|
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 27, 2009 |
|
$ |
244 |
|
|
$ |
272 |
|
|
$ |
895 |
|
|
$ |
17 |
|
|
$ |
(48 |
) |
|
$ |
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains or
losses included in earnings
related to assets and
liabilities still held as of
June 27, 2009 |
|
$ |
|
|
|
$ |
1 |
|
|
$ |
15 |
|
|
$ |
(5 |
) |
|
$ |
8 |
|
|
$ |
(1 |
) |
|
$ |
18 |
|
8
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measured and Recorded Using Significant Unobservable Inputs (Level 3) |
|
|
|
|
|
|
Government |
|
|
Corporate |
|
|
Asset-Backed |
|
|
Derivative |
|
|
Derivative |
|
|
Long-Term |
|
|
Total Gains |
|
(In Millions) |
|
Bonds |
|
|
Bonds |
|
|
Securities |
|
|
Assets |
|
|
Liabilities |
|
|
Debt |
|
|
(Losses) |
|
Balance as of December 27, 2008 |
|
$ |
|
|
|
$ |
555 |
|
|
$ |
1,083 |
|
|
$ |
15 |
|
|
$ |
(25 |
) |
|
$ |
(122 |
) |
|
|
|
|
Total gains or losses (realized and
unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
|
|
|
|
1 |
|
|
|
40 |
|
|
|
(5 |
) |
|
|
20 |
|
|
|
(2 |
) |
|
|
54 |
|
Included in other comprehensive
income (loss) |
|
|
(6 |
) |
|
|
(9 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34 |
) |
Purchases, sales, issuances, and
settlements, net |
|
|
250 |
|
|
|
88 |
|
|
|
(209 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in to Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53 |
) |
|
|
|
|
|
|
|
|
Transfers out of Level 3 |
|
|
|
|
|
|
(363 |
) |
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 27, 2009 |
|
$ |
244 |
|
|
$ |
272 |
|
|
$ |
895 |
|
|
$ |
17 |
|
|
$ |
(48 |
) |
|
$ |
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains or
losses included in earnings related
to assets and liabilities still
held as of June 27, 2009 |
|
$ |
|
|
|
$ |
(3 |
) |
|
$ |
39 |
|
|
$ |
(4 |
) |
|
$ |
20 |
|
|
$ |
(2 |
) |
|
$ |
50 |
|
For all periods presented, gains and losses (realized and unrealized) included in earnings were
primarily reported in interest and other, net on the consolidated condensed statements of
operations. During the three and six months ended June 26, 2010 and June 27, 2009, we transferred
corporate bonds from Level 3 to Level 2 due to a greater availability of observable market data
and/or non-binding market consensus prices to value or corroborate the value of these instruments.
Our policy is to reflect transfers in and transfers out at the beginning of the quarter in which a
change in circumstances resulted in the transfer.
Fair Value Option for Financial Assets/Liabilities
We elected the fair value option for loans made to third parties when the interest rate or foreign
exchange rate risk was hedged at inception with a related derivative instrument. As of June 26,
2010, the fair value of our loans receivable for which we elected the fair value option did not
significantly differ from the foreign denominated contractual principal balance. These loans
receivable are classified within 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
the three and six months ended June 26, 2010, losses from fair value changes of our loans
receivable were largely offset by gains from fair value changes of the related derivative
instruments, resulting in an insignificant net impact on our consolidated condensed statements of
operations. Gains and losses attributable to changes in credit risk are determined using observable
credit default spreads for comparable companies and were insignificant during the three and six
months ended June 26, 2010. We did not elect the fair value option for loans when the interest rate
or foreign exchange rate risk was not hedged at inception with a related derivative instrument.
Under accounting standards effective in 2008, all of our non-convertible long-term debt was
eligible at inception to be accounted for at fair value. However, we elected this fair value option
only for the bonds issued in 2007 by the Industrial Development Authority of the City of Chandler,
Arizona (2007 Arizona bonds). In connection with the 2007 Arizona bonds, we entered into a total
return swap agreement that effectively converts the fixed rate obligation on the bonds to a
floating U.S.-dollar LIBOR-based rate. As a result, changes in the fair value of this debt are
largely offset by changes in the fair value of the total return swap agreement, without the need to
apply hedge accounting provisions. We did not elect this fair value option for our Arizona bonds
issued in 2005, since the bonds were carried at amortized cost and were not eligible to apply hedge
accounting provisions due to the use of non-derivative hedging instruments. The 2007 Arizona bonds
are included within the long-term debt balance on our consolidated condensed balance sheets. As of
June 26, 2010 and December 26, 2009, no other instruments were similar to the long-term debt
instrument for which we elected fair value treatment.
As of June 26, 2010, the fair value of the 2007 Arizona bonds did not significantly differ from the
contractual principal balance. The fair value of the 2007 Arizona bonds was determined using inputs
that are observable in the market or that can be derived from or corroborated with observable
market data, as well as unobservable inputs that were significant to the fair value. Gains and
losses on the 2007 Arizona bonds and the related swap are recorded in interest and other, net on
the consolidated condensed statements of operations. We capitalize interest associated with the
2007 Arizona bonds. We add capitalized interest to the cost of qualified assets and amortize it
over the estimated useful lives of the assets.
9
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
Our non-marketable equity investments and non-financial assets, such as intangible assets and
property, plant and equipment, are
recorded at fair value only if an impairment charge is recognized. The following table presents the
financial instruments and non-financial assets that were measured and recorded at fair value on a
non-recurring basis during the six months ended June 26, 2010, and the gains (losses) recorded
during the three and six months ended June 26, 2010 on those assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains |
|
|
Total Gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) for |
|
|
(Losses) for |
|
|
|
Net Carrying |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Value as of |
|
|
Fair Value Measured and Recorded Using |
|
|
Ended |
|
|
Ended |
|
(In Millions) |
|
June 26, 2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
June 26, 2010 |
|
|
June 26, 2010 |
|
Non-marketable equity investments |
|
$ |
126 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
130 |
|
|
$ |
(17 |
) |
|
$ |
(63 |
) |
Property, plant and equipment |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) for assets held
as of June 26, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(17 |
) |
|
$ |
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) for property, plant
and equipment assets no longer held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(7 |
) |
|
$ |
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) for recorded
non-recurring
measurement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(24 |
) |
|
$ |
(103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the financial instruments and non-financial assets that were measured
and recorded at fair value on a non-recurring basis during the six months ended June 27, 2009, and
the gains (losses) recorded during the three and six months ended June 27, 2009 on those assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains |
|
|
Total Gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) for |
|
|
(Losses) for |
|
|
|
Net Carrying |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Value as of |
|
|
Fair Value Measured and Recorded Using |
|
|
Ended |
|
|
Ended |
|
(In Millions) |
|
June 27, 2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
June 27, 2009 |
|
|
June 27, 2009 |
|
Non-marketable equity investments |
|
$ |
113 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
115 |
|
|
$ |
(39 |
) |
|
$ |
(115 |
) |
Property, plant and equipment |
|
$ |
13 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
15 |
|
|
$ |
|
|
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) for assets held
as of June 27, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(39 |
) |
|
$ |
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) for non-marketable
equity investments no longer held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
(3 |
) |
Gains (losses) for property, plant
and equipment assets no longer held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(25 |
) |
|
$ |
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) for recorded
non-recurring
measurement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(64 |
) |
|
$ |
(180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of our impaired non-marketable equity investments may not equal our fair value
measurement at the time of impairment due to the subsequent recognition of equity method
adjustments, and the carrying value of our impaired property, plant and equipment may not equal our
fair value measurement at the time of impairment due to the subsequent recognition of depreciation
expense.
A portion of our non-marketable equity investments were measured and recorded at fair value in the
first six months of 2010 and 2009 due to events or circumstances that significantly impacted the
fair value of these investments, resulting in other-than-temporary impairment charges. We
classified these measurements as Level 3, as we used unobservable inputs to the valuation
methodologies that were significant to the fair value measurements, and the valuations required
management judgment due to the absence of quoted market prices. We determine the fair value of our
non-marketable equity investments using the market and income approaches. The market approach
includes the use of financial metrics and ratios of comparable public companies. The selection of
comparable companies requires management judgment and is based on a number of factors, including
comparable companies sizes, growth rates, industries, development stages, and other relevant
factors. The income approach includes the use of a discounted cash flow model, which requires the
following significant estimates for the investee: revenue, based on assumed market segment size and
assumed market segment share; costs; and discount rates based on the risk profile of comparable
companies. Estimates of market segment size, market segment share, and costs are developed by the
investee and/or Intel using historical data and available market data. The valuation of these
non-marketable equity investments also takes into account variables such as conditions reflected in
the capital markets, recent financing activities by the investees, the investees capital
structure, and differences in seniority and rights associated with the investees capital
structure.
Additionally, certain of our property, plant and equipment were measured and recorded at fair value
during the first six months of 2010 and 2009 due to events or circumstances we identified that
indicated that the carrying value of the assets or the asset grouping was not recoverable,
resulting in impairment charges. Most of these asset impairments related to manufacturing assets.
10
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
We measure the fair value of our non-marketable equity investments, debt carried at amortized cost,
and cost method loans receivable quarterly for disclosure purposes; however, they are recorded at
fair value only if an impairment charge is recognized. The carrying amounts and fair values of
financial instruments not recorded at fair value on a recurring basis as of June 26, 2010 and
December 26, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2010 |
|
|
December 26, 2009 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
(In Millions) |
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Non-marketable equity investments |
|
$ |
2,777 |
|
|
$ |
4,918 |
|
|
$ |
3,411 |
|
|
$ |
5,723 |
|
Loans receivable |
|
$ |
218 |
|
|
$ |
218 |
|
|
$ |
100 |
|
|
$ |
100 |
|
Long-term debt |
|
$ |
2,094 |
|
|
$ |
2,385 |
|
|
$ |
2,083 |
|
|
$ |
2,314 |
|
The carrying amount and fair value of loans receivable exclude $544 million of loans measured and
recorded at fair value as of June 26, 2010 ($249 million as of December 26, 2009). The carrying
amount and fair value of long-term debt excludes $121 million of long-term debt measured and
recorded at fair value as of June 26, 2010 ($123 million as of December 26, 2009). The carrying
amount and fair value of the current portion of long-term debt are included in long-term debt in
the table above.
Our non-marketable equity investments as of December 26, 2009 included our investment in Numonyx
B.V. We sold our ownership interest in Numonyx to Micron Technology, Inc. in the second quarter of
2010. As of December 26, 2009, the fair value was based on managements assessment of Numonyx as of
that date, therefore the value implied by the pending sale was not applicable to that assessment.
For further information, see Note 10: Non-Marketable Equity Investments.
As of June 26, 2010, we had non-marketable equity investments in an unrealized loss position of $15
million that had a fair value of $135 million (unrealized loss position of $30 million on
non-marketable equity investments with a fair value of $205 million as of December 26, 2009).
The fair value of our loans receivable is determined using a discounted cash flow model with all
significant inputs derived from or corroborated with observable market data. The fair value of our
long-term debt takes into consideration variables such as credit-rating changes and interest rate
changes.
Note 5: Trading Assets
Trading assets as of June 26, 2010 and December 26, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
Dec. 26, |
|
(In Millions) |
|
2010 |
|
|
2009 |
|
Marketable debt instruments |
|
$ |
5,543 |
|
|
$ |
4,648 |
|
Marketable equity securities |
|
|
531 |
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets |
|
$ |
6,074 |
|
|
$ |
4,648 |
|
|
|
|
|
|
|
|
In the second quarter of 2010, we sold our ownership interest in Numonyx to Micron. The Micron
shares we received in the transaction are classified as trading assets. For further information,
see Note 10: Non-Marketable Equity Investments.
Net losses on marketable debt instruments classified as trading assets still held at the reporting
date were $173 million in the second quarter of 2010 and $234 million in the first half of 2010
(gains of $59 million in the second quarter of 2009 and $82 million in the first half of 2009). Net
gains on the related derivatives were $143 million in the second quarter of 2010 and $191 million
in the first half of 2010 (losses of $27 million in the second quarter of 2009 and $13 million in
the first half of 2009).
Net gains on marketable equity securities classified as trading assets still held at the reporting
date, excluding the impacts of the related derivatives, were $38 million in the second quarter of
2010 and the first half of 2010 (gains of $36 million in the second quarter of 2009 and $7 million
in the first half of 2009).
11
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 6: Available-for-Sale Investments
Available-for-sale investments as of June 26, 2010 and December 26, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2010 |
|
|
December 26, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
(In Millions) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Commercial paper |
|
$ |
6,955 |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
6,954 |
|
|
$ |
5,444 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,444 |
|
Government bonds |
|
|
4,897 |
|
|
|
10 |
|
|
|
(6 |
) |
|
|
4,901 |
|
|
|
2,205 |
|
|
|
11 |
|
|
|
(1 |
) |
|
|
2,215 |
|
Corporate bonds |
|
|
2,500 |
|
|
|
9 |
|
|
|
(12 |
) |
|
|
2,497 |
|
|
|
3,688 |
|
|
|
38 |
|
|
|
(14 |
) |
|
|
3,712 |
|
Bank deposits |
|
|
1,356 |
|
|
|
1 |
|
|
|
|
|
|
|
1,357 |
|
|
|
1,317 |
|
|
|
1 |
|
|
|
|
|
|
|
1,318 |
|
Marketable equity securities |
|
|
423 |
|
|
|
508 |
|
|
|
(15 |
) |
|
|
916 |
|
|
|
387 |
|
|
|
386 |
|
|
|
|
|
|
|
773 |
|
Money market fund deposits |
|
|
195 |
|
|
|
|
|
|
|
|
|
|
|
195 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
65 |
|
Asset-backed securities |
|
|
92 |
|
|
|
|
|
|
|
(12 |
) |
|
|
80 |
|
|
|
154 |
|
|
|
|
|
|
|
(18 |
) |
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
investments |
|
$ |
16,418 |
|
|
$ |
528 |
|
|
$ |
(46 |
) |
|
$ |
16,900 |
|
|
$ |
13,260 |
|
|
$ |
436 |
|
|
$ |
(33 |
) |
|
$ |
13,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government bonds includes bonds issued or deemed to be guaranteed by non-U.S. governments,
FDIC-insured corporate bonds, U.S. agency securities, and U.S. Treasury securities. Bank deposits
were primarily issued by institutions outside the U.S. as of June 26, 2010 and December 26, 2009.
As of June 26, 2010, $18 million of the $46 million gross unrealized losses related to individual
securities that had been in a continuous loss position for 12 months or more ($26 million as of
December 26, 2009).
The amortized cost and fair value of available-for-sale debt investments as of June 26, 2010, by
contractual maturity, were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
Cost |
|
|
Fair Value |
|
Due in 1 year or less |
|
$ |
11,828 |
|
|
$ |
11,829 |
|
Due in 12 years |
|
|
2,645 |
|
|
|
2,647 |
|
Due in 25 years |
|
|
1,235 |
|
|
|
1,233 |
|
Instruments not due at a single maturity date |
|
|
287 |
|
|
|
275 |
|
|
|
|
|
|
|
|
Total |
|
$ |
15,995 |
|
|
$ |
15,984 |
|
|
|
|
|
|
|
|
Instruments not due at a single maturity date in the table above includes asset-backed securities
and money market fund deposits.
We sold available-for-sale investments for proceeds of $44 million in the second quarter of 2010
and $337 million in the first half of 2010 ($32 million in the second quarter of 2009 and $62
million in the first half of 2009). The gross realized gains on sales of available-for-sale
investments were $12 million in the second quarter of 2010 and $79 million in the first half of
2010 ($9 million in the second quarter of 2009 and $11 million in the first half of 2009) and were
related to our sales of marketable equity securities. We determine the cost of an investment sold
on an average cost basis at the individual security level. Impairment charges recognized on
available-for-sale investments as well as gross realized losses were insignificant in the first
half of 2010 and 2009.
The before-tax net unrealized holding gains (losses) on available-for-sale investments that have
been included in other comprehensive income (loss) and the before-tax net gains (losses)
reclassified from accumulated other comprehensive income (loss) into earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net unrealized
holding gains
(losses) included
in other
comprehensive
income (loss) |
|
$ |
(17 |
) |
|
$ |
157 |
|
|
$ |
134 |
|
|
$ |
223 |
|
Net gains (losses)
reclassified from
accumulated other
comprehensive
income (loss) into
earnings |
|
$ |
7 |
|
|
$ |
(3 |
) |
|
$ |
74 |
|
|
$ |
(8 |
) |
12
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 7: Inventories
Inventories at the end of each period were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
Dec. 26, |
|
(In Millions) |
|
2010 |
|
|
2009 |
|
Raw materials |
|
$ |
407 |
|
|
$ |
437 |
|
Work in process |
|
|
1,637 |
|
|
|
1,469 |
|
Finished goods |
|
|
1,301 |
|
|
|
1,029 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
3,345 |
|
|
$ |
2,935 |
|
|
|
|
|
|
|
|
Note 8: 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 and commodity price
risk. We currently do not hold derivative instruments for the purpose of managing credit risk since
we limit the amount of credit exposure to any one counterparty and generally enter into derivative
transactions with high-credit-quality counterparties. We also enter into master netting
arrangements with counterparties when possible 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
condensed balance sheets, we do not offset fair value amounts recognized for derivative instruments
under master netting arrangements.
Currency Exchange Rate Risk
We are exposed to currency exchange rate risk on our non-U.S.-dollar-denominated investments in
debt instruments and loans receivable, which are generally hedged with offsetting currency forward
contracts, currency options, or currency interest rate swaps. Substantially all of our revenue and
a majority of our expense and capital purchasing activities are transacted in U.S. dollars.
However, certain operating expenditures and capital purchases are incurred in or exposed to other
currencies, primarily the euro, the Japanese yen, and the Israeli shekel. We have established
balance sheet and forecasted transaction currency risk management programs to protect against
fluctuations in fair value and the volatility of future cash flows caused by changes in exchange
rates. These programs reduce, but do not entirely 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 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 within the same
line item on the consolidated condensed statements of operations as the impact of the
hedged transaction. |
|
|
|
|
Currency derivatives without hedge accounting designation that utilize currency
forward contracts, currency options, or currency interest rate swaps to economically hedge
the functional currency equivalent cash flows of recognized monetary assets and liabilities
and non-U.S.-dollar-denominated debt instruments classified as trading assets. The maturity
of these instruments generally occurs within 12 months, except for derivatives associated
with certain long-term equity-related investments and our loans receivable that generally
mature within five years. Changes in the U.S.-dollar-equivalent cash flows of the
underlying assets and liabilities are approximately offset by the changes in fair values of
the related derivatives. We record net gains or losses in the line item on the consolidated
condensed statements of operations most closely associated with the economic underlying,
primarily in interest and other, net, except for equity-related gains or losses, which we
primarily record in gains (losses) on other 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.
13
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
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
reclassify it into earnings in the same period or periods in which the hedged transaction
affects earnings, and within the same line item on the consolidated condensed statements of
operations as the impact of the hedged transaction. |
|
|
|
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. Floating interest rates on the swaps are reset on a monthly, quarterly, or
semiannual basis. Changes in fair
value of the debt instruments classified as trading assets are generally offset by changes
in fair value of the related derivatives, both of which are recorded in interest and other,
net. |
Equity Market Risk
Our marketable investments include marketable equity securities and equity derivative instruments.
To the extent that our marketable equity securities have strategic value, we typically do not
attempt to reduce or eliminate our equity market exposure through hedging activities. We may enter
into transactions to reduce or eliminate the equity market risks for our investments in strategic
equity derivative instruments, including warrants. For securities that we no longer consider
strategic, we evaluate legal, market, and economic factors in our decision on the timing of
disposal and whether it is possible and appropriate to hedge the equity market risk. Our equity
market risk management program includes equity derivatives 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 other equity investments, net. 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 gains and losses on the related liabilities, both of which
are recorded in interest and other, net.
In the second quarter of 2010, we sold our ownership interest in Numonyx to Micron for
consideration consisting of shares of Micron. We have entered into equity options that economically
hedge approximately two-thirds of the shares we received and expect to receive from the
transaction. For further information, see Note 10: Non-Marketable Equity Investments.
Commodity Price Risk
We operate facilities that consume commodities, and have established forecasted transaction risk
management programs to protect against fluctuations in 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 entirely eliminate, the impact of commodity price movements.
Our commodity price risk management program includes 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 within the same line
item on the consolidated condensed statements of operations as the impact of the hedged
transaction.
Volume of Derivative Activity
Total gross notional amounts for outstanding derivatives (recorded at fair value) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
Dec. 26, |
|
|
June 27, |
|
(In Millions) |
|
2010 |
|
|
2009 |
|
|
2009 |
|
Currency forwards |
|
$ |
6,940 |
|
|
$ |
5,732 |
|
|
$ |
3,666 |
|
Embedded debt derivatives |
|
|
3,600 |
|
|
|
3,600 |
|
|
|
1,600 |
|
Currency interest rate swaps |
|
|
2,287 |
|
|
|
1,577 |
|
|
|
825 |
|
Interest rate swaps |
|
|
2,156 |
|
|
|
1,698 |
|
|
|
763 |
|
Total return swaps |
|
|
525 |
|
|
|
530 |
|
|
|
125 |
|
Equity options |
|
|
511 |
|
|
|
50 |
|
|
|
34 |
|
Currency options |
|
|
94 |
|
|
|
375 |
|
|
|
281 |
|
Other |
|
|
68 |
|
|
|
80 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,181 |
|
|
$ |
13,642 |
|
|
$ |
7,358 |
|
|
|
|
|
|
|
|
|
|
|
14
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
The gross notional amounts for currency forwards, currency interest rate swaps, and currency
options (presented by currency) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26 |
|
|
Dec. 26, |
|
|
June 27, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
|
2009 |
|
Euro |
|
$ |
4,371 |
|
|
$ |
3,330 |
|
|
$ |
2,049 |
|
Japanese yen |
|
|
2,412 |
|
|
|
1,764 |
|
|
|
656 |
|
Israeli shekel |
|
|
712 |
|
|
|
707 |
|
|
|
657 |
|
British pound sterling |
|
|
514 |
|
|
|
563 |
|
|
|
606 |
|
Chinese yuan |
|
|
368 |
|
|
|
434 |
|
|
|
354 |
|
Malaysian ringgit |
|
|
310 |
|
|
|
310 |
|
|
|
213 |
|
Other |
|
|
634 |
|
|
|
576 |
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,321 |
|
|
$ |
7,684 |
|
|
$ |
4,772 |
|
|
|
|
|
|
|
|
|
|
|
We utilize a rolling hedge strategy for the majority of our currency forward contracts with cash
flow hedge accounting designation that hedges exposures to the variability in the U.S.-dollar
equivalent of anticipated non-U.S.-dollar-denominated cash flows. All of our currency forward
contracts are settled at maturity with one cash-payment exchange.
We use interest rate swaps and currency interest rate swaps to hedge interest rate and currency
exchange rate risk components for our fixed-rate debt instruments with remaining maturities longer
than six months and for debt instruments denominated in currencies other than the U.S. dollar.
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.
Credit-Risk-Related Contingent Features
An insignificant amount of our derivative instruments contain credit-risk-related contingent
features, such as provisions that require our debt to maintain an investment grade credit rating
from each of the major credit rating agencies. As of June 26, 2010 and December 26, 2009, we did
not have any derivative instruments with credit-risk-related contingent features that were in a
significant net liability position.
Fair Values of Derivative Instruments in the Consolidated Condensed Balance Sheets
The fair values of our derivative instruments as of June 26, 2010 and December 26, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2010 |
|
|
Dec. 26, 2009 |
|
|
|
Other |
|
|
Other |
|
|
Other |
|
|
Other |
|
|
Other |
|
|
Other |
|
|
Other |
|
|
Other |
|
|
|
Current |
|
|
Long-Term |
|
|
Accrued |
|
|
Long-Term |
|
|
Current |
|
|
Long-Term |
|
|
Accrued |
|
|
Long-Term |
|
(In Millions) | |
Assets |
|
|
Assets |
|
|
Liabilities |
|
|
Liabilities |
|
|
Assets |
|
|
Assets |
|
|
Liabilities |
|
|
Liabilities |
|
Derivatives designated as
hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency forwards |
|
$ |
29 |
|
|
$ |
2 |
|
|
$ |
144 |
|
|
$ |
5 |
|
|
$ |
81 |
|
|
$ |
1 |
|
|
$ |
20 |
|
|
$ |
1 |
|
Other |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as
hedging instruments |
|
$ |
31 |
|
|
$ |
2 |
|
|
$ |
144 |
|
|
$ |
5 |
|
|
$ |
82 |
|
|
$ |
1 |
|
|
$ |
24 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as
hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency forwards |
|
$ |
77 |
|
|
$ |
|
|
|
$ |
16 |
|
|
$ |
|
|
|
$ |
40 |
|
|
$ |
|
|
|
$ |
11 |
|
|
$ |
|
|
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81 |
|
|
|
|
|
Currency interest rate swaps |
|
|
144 |
|
|
|
40 |
|
|
|
23 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
47 |
|
|
|
9 |
|
Embedded debt derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 |
|
Total return swaps |
|
|
|
|
|
|
2 |
|
|
|
28 |
|
|
|
|
|
|
|
4 |
|
|
|
3 |
|
|
|
4 |
|
|
|
|
|
Equity options |
|
|
12 |
|
|
|
7 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
5 |
|
|
|
|
|
Other |
|
|
4 |
|
|
|
17 |
|
|
|
4 |
|
|
|
|
|
|
|
5 |
|
|
|
20 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated
as hedging instruments |
|
$ |
237 |
|
|
$ |
66 |
|
|
$ |
189 |
|
|
$ |
36 |
|
|
$ |
54 |
|
|
$ |
31 |
|
|
$ |
153 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
268 |
|
|
$ |
68 |
|
|
$ |
333 |
|
|
$ |
41 |
|
|
$ |
136 |
|
|
$ |
32 |
|
|
$ |
177 |
|
|
$ |
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Derivatives in Cash Flow Hedging Relationships
The before-tax effects of derivative instruments in cash flow hedging relationships for the three
and six months ended June 26, 2010 and June 27, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) |
|
|
|
|
|
|
Recognized in |
|
|
|
|
|
|
OCI on Derivatives |
|
|
Gains (Losses) Reclassified from Accumulated |
|
|
|
(Effective Portion) |
|
|
OCI into Income by Derivative Instrument Type (Effective Portion) |
|
(In Millions) | |
Q2 2010 |
|
|
Q2 2009 |
|
|
Location |
|
Q2 2010 |
|
|
Q2 2009 |
|
Currency forwards |
|
$ |
(126 |
) |
|
$ |
65 |
|
|
Cost of sales |
|
$ |
8 |
|
|
$ |
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
8 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
Marketing, general and administrative |
|
|
(1 |
) |
|
|
(10 |
) |
Other |
|
|
3 |
|
|
|
(2 |
) |
|
Cost of sales |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(123 |
) |
|
$ |
63 |
|
|
|
|
$ |
14 |
|
|
$ |
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) |
|
|
|
|
|
|
Recognized in |
|
|
|
|
|
|
OCI on Derivatives |
|
|
Gains (Losses) Reclassified from Accumulated |
|
|
|
(Effective Portion) |
|
|
OCI into Income by Derivative Instrument Type (Effective Portion) |
|
(In Millions) | |
YTD 2010 |
|
|
YTD 2009 |
|
|
Location |
|
YTD 2010 |
|
|
YTD 2009 |
|
Currency forwards |
|
$ |
(178 |
) |
|
$ |
(59 |
) |
|
Cost of sales |
|
$ |
29 |
|
|
$ |
(30 |
) |
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
17 |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
Marketing, general and administrative |
|
|
6 |
|
|
|
(23 |
) |
Other |
|
|
3 |
|
|
|
(7 |
) |
|
Cost of sales |
|
|
(3 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(175 |
) |
|
$ |
(66 |
) |
|
|
|
$ |
49 |
|
|
$ |
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 tables above. We estimate that we will reclassify approximately
$50 million (before taxes) of net derivative losses included in other accumulated comprehensive
income (loss) into earnings within the next 12 months. For all periods presented, there was not a
significant impact on results of operations from discontinued cash flow hedges as a result of
forecasted transactions that did not occur.
Derivatives Not Designated as Hedging Instruments
The effects of derivative instruments not designated as hedging instruments on the consolidated
condensed statements of operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
Location of Gains (Losses) |
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions) | |
Recognized in Income on Derivative |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Currency interest rate swaps |
|
Interest and other, net |
|
$ |
144 |
|
|
$ |
(21 |
) |
|
$ |
226 |
|
|
$ |
(5 |
) |
Currency forwards |
|
Interest and other, net |
|
|
108 |
|
|
|
(1 |
) |
|
|
143 |
|
|
|
(27 |
) |
Interest rate swaps |
|
Interest and other, net |
|
|
(33 |
) |
|
|
11 |
|
|
|
(46 |
) |
|
|
17 |
|
Total return swaps |
|
Interest and other, net |
|
|
(26 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
1 |
|
Other |
|
Interest and other, net |
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
Equity options |
|
Gains (losses) on other equity investments, net |
|
|
50 |
|
|
|
|
|
|
|
15 |
|
|
|
3 |
|
Other |
|
Gains (losses) on other equity investments, net |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
243 |
|
|
$ |
(8 |
) |
|
$ |
332 |
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 9: Other Long-Term Assets
Other long-term assets at the end of each period were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
Dec. 26, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
Non-marketable equity method investments |
|
$ |
1,917 |
|
|
$ |
2,472 |
|
Non-marketable cost method investments |
|
|
860 |
|
|
|
939 |
|
Identified intangible assets |
|
|
782 |
|
|
|
883 |
|
Non-current deferred tax assets |
|
|
236 |
|
|
|
278 |
|
Loans receivable |
|
|
644 |
|
|
|
249 |
|
Other |
|
|
498 |
|
|
|
519 |
|
|
|
|
|
|
|
|
Total other long-term assets |
|
$ |
4,937 |
|
|
$ |
5,340 |
|
|
|
|
|
|
|
|
Note 10: Non-Marketable Equity Investments
IMFT/IMFS
Micron and Intel formed IM Flash Technologies, LLC (IMFT) in January 2006 and IM Flash Singapore,
LLP (IMFS) in February 2007. We established these joint ventures to manufacture NAND flash memory
products for Micron and Intel. As of June 26, 2010, we own a 49% interest in IMFT and a 43%
interest in IMFS. Our investment in IMFT/IMFS was $1.6 billion as of June 26, 2010 and December 26,
2009. The IMFS fabrication facility is in its startup phase with initial production expected in
2011. Intel has made limited additional investments in the first half of 2010 and will assess any
additional investments in IMFS based on market conditions. IMFT and IMFS are each governed by a
Board of Managers, with Micron and Intel initially appointing an equal number of managers to each
of the boards. The number of managers appointed by each party adjusts depending on the parties
ownership interests. These ventures will operate until 2016 but are subject to prior termination
under certain terms and conditions.
These joint ventures are variable interest entities. All costs of the joint ventures will be passed
on to Micron and Intel through our purchase agreements. IMFT and IMFS are dependent upon Micron and
Intel for any additional cash requirements. Our known maximum exposure to loss approximated our
investment balance in IMFT/IMFS as of June 26, 2010. Our investment in these ventures is classified
within other long-term assets. As of June 26, 2010, except for the amount due to IMFT/IMFS for
product purchases and services, we did not incur any additional liabilities in connection with our
interests in these joint ventures. In addition to the potential loss of our existing investment,
our actual losses could be higher, as Intel and Micron are liable for other future operating costs
and/or obligations of IMFT/IMFS. In addition, future cash calls could increase our investment
balance and the related exposure to loss. Finally, as we are currently committed to purchasing 49%
of IMFT/IMFSs production output and production-related services, we may be required to purchase
products at a cost in excess of realizable value.
Our portion of IMFT costs, primarily related to product purchases and production-related services,
was approximately $180 million during the second quarter of 2010 and approximately $365 million
during the first half of 2010 (approximately $185 million during the second quarter of 2009 and
approximately $395 million during the first half of 2009). The amount due to IMFT for product
purchases and services provided was approximately $85 million as of June 26, 2010 (approximately
$75 million as of December 26, 2009). During the first half of 2010, $97 million was returned to
Intel by IMFT, which is reflected as a return of equity method investment within investing
activities on the consolidated condensed statements of cash flows ($218 million during the first
half of 2009). In 2010, IMFT has increased its capital expenditures compared to 2009. The cash used
for those capital expenditures reduced the amount of cash provided by IMFT to us as a return of
equity method investment in the first half of 2010.
Under the accounting standards for consolidating variable interest entities, the consolidating
investor is the entity that has the power to direct the activities of the venture that most
significantly impact the ventures economic performance and that has the obligation to absorb
losses or the right to receive benefits from the venture that could potentially be significant to
the venture. We have determined that we do not have both of these characteristics and, therefore,
we account for our interests using the equity method of accounting.
17
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Numonyx
In 2008, we divested our NOR flash memory business in exchange for a 45.1% ownership interest in
Numonyx. As of December 26, 2009, our investment balance in Numonyx was $453 million and was
classified within other long-term assets. During the second quarter of 2010, we sold our ownership
interest in Numonyx to Micron and recognized a gain on sale of $91 million, which is included in
gains (losses) on equity method investments, net. In exchange for our investment in Numonyx we
received 55.6 million shares of Micron common stock, with an additional 8.6 million shares held in
escrow for 12 months after the sale, and we issued a $72 million short-term note payable.
Subsequent to the end of the second quarter, we received approximately 2.3 million additional
shares of Micron common stock in connection with the sale by Numonyx of a facility to
STMicroelectronics, N.V. These additional 2.3 million shares and the 8.6 million shares that are
held in escrow are classified as marketable equity securities receivable within other current
assets. The Micron shares we received are classified within trading assets. We have entered into
equity options that economically hedge approximately two-thirds of the shares we received and expect to
receive.
In 2008, Numonyx entered into an unsecured, four-year senior credit facility of up to $550 million,
consisting of a $450 million term loan and a $100 million revolving loan. Intel and
STMicroelectronics had each provided the lenders with a guarantee of 50% of the payment obligations
of Numonyx under the senior credit facility. The Numonyx senior credit facility that was supported
by our guarantee was repaid in connection with the closing of Microns acquisition of Numonyx.
SMART
We hold an equity interest in SMART Technologies, Inc. Subsequent to the end of the second quarter
of 2010, SMART completed an initial public offering of shares approved for listing on the NASDAQ
Global Select Market*. We sold approximately 10 million of our 27.5 million shares in the secondary
offering. As a result of that sale, we expect to recognize a gain of approximately $175 million
that will be included in gains (losses) on equity method investments, net in the third quarter of
2010.
Note 11: Gains (Losses) on Equity Method Investments, Net
Gains (losses) on equity method investments, net included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Equity method losses, net |
|
$ |
(9 |
) |
|
$ |
(41 |
) |
|
$ |
(44 |
) |
|
$ |
(103 |
) |
Impairment charges |
|
|
(6 |
) |
|
|
(3 |
) |
|
|
(10 |
) |
|
|
(13 |
) |
Other, net |
|
|
91 |
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) on equity method investments, net |
|
$ |
76 |
|
|
$ |
(44 |
) |
|
$ |
37 |
|
|
$ |
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2010, we recognized a gain of $91 million on the sale of our ownership
interest in Numonyx, included in other, net in the table above. For further information, see
Note 10: Non-Marketable Equity Investment.
Note 12: Gains (Losses) on Other Equity Investments, Net
Gains (losses) on other equity investments, net included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Impairment charges |
|
$ |
(11 |
) |
|
$ |
(36 |
) |
|
$ |
(53 |
) |
|
$ |
(105 |
) |
Gains on sales, net |
|
|
20 |
|
|
|
9 |
|
|
|
103 |
|
|
|
10 |
|
Other, net |
|
|
108 |
|
|
|
2 |
|
|
|
75 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) on other equity investments, net |
|
$ |
117 |
|
|
$ |
(25 |
) |
|
$ |
125 |
|
|
$ |
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net for the three and six months ended June 26, 2010 is primarily related to fair value
gains on the equity interest in Micron we received from the sale of our ownership interest in
Numonyx and gains on equity options established prior to the Numonyx sale that economically hedge a
portion of our Micron equity interest. For further information, see Note 10: Non-Marketable Equity
Investments.
18
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 13: Interest and Other, Net
The components of interest and other, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Interest income |
|
$ |
29 |
|
|
$ |
38 |
|
|
$ |
55 |
|
|
$ |
110 |
|
Other, net |
|
|
(18 |
) |
|
|
(7 |
) |
|
|
(15 |
) |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and other, net |
|
$ |
11 |
|
|
$ |
31 |
|
|
$ |
40 |
|
|
$ |
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14: Goodwill
Net goodwill activity for the first half of 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Intel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Architecture |
|
|
Other |
|
|
|
|
|
|
PC Client |
|
|
Data Center |
|
|
Operating |
|
|
Operating |
|
|
|
|
(In Millions) | |
Group |
|
|
Group |
|
|
Segments |
|
|
Segments |
|
|
Total |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2009 |
|
$ |
2,220 |
|
|
$ |
1,459 |
|
|
$ |
507 |
|
|
$ |
235 |
|
|
$ |
4,421 |
|
Additions due to business combinations |
|
|
14 |
|
|
|
|
|
|
|
25 |
|
|
|
21 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2010 |
|
$ |
2,234 |
|
|
$ |
1,459 |
|
|
$ |
532 |
|
|
$ |
256 |
|
|
$ |
4,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first half of 2010, we completed two acquisitions. The goodwill recognized from these
acquisitions was assigned to our Software and Services Group, our Ultra-Mobility Group, our PC
Client Group, and our Embedded and Communications Group. Our Software and Services Group is
included in the other operating segments category in the table above while our Ultra-Mobility Group
and our Embedded and Communications Group are both included in the other Intel architecture
operating segments category.
No goodwill was impaired during the first half of 2010 and 2009, and the accumulated impairment
losses as of December 26, 2009 and June 26, 2010 were $713 million: $355 million associated with
our PC Client Group, $279 million associated with our Data Center Group, and $79 million associated
with other Intel architecture operating segments.
Note 15: Identified Intangible Assets
We classify identified intangible assets within other long-term assets on the consolidated
condensed balance sheets. Identified intangible assets consisted of the following as of June 26,
2010 and December 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2010 |
|
|
|
Gross |
|
|
Accumulated |
|
|
|
|
(In Millions) | |
Assets |
|
|
Amortization |
|
|
Net |
|
Intellectual property assets |
|
$ |
1,203 |
|
|
$ |
(691 |
) |
|
$ |
512 |
|
Acquisition-related developed technology |
|
|
168 |
|
|
|
(62 |
) |
|
|
106 |
|
Other intangible assets |
|
|
217 |
|
|
|
(53 |
) |
|
|
164 |
|
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets |
|
$ |
1,588 |
|
|
$ |
(806 |
) |
|
$ |
782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 26, 2009 |
|
|
|
Gross |
|
|
Accumulated |
|
|
|
|
(In Millions) | |
Assets |
|
|
Amortization |
|
|
Net |
|
Intellectual property assets |
|
$ |
1,190 |
|
|
$ |
(616 |
) |
|
$ |
574 |
|
Acquisition-related developed technology |
|
|
166 |
|
|
|
(34 |
) |
|
|
132 |
|
Other intangible assets |
|
|
509 |
|
|
|
(332 |
) |
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets |
|
$ |
1,865 |
|
|
$ |
(982 |
) |
|
$ |
883 |
|
|
|
|
|
|
|
|
|
|
|
19
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
We recorded the amortization of identified intangible assets on the consolidated condensed
statements of operations as cost of sales, amortization of acquisition-related intangibles, or a
reduction of revenue. The amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Intellectual property assets |
|
$ |
37 |
|
|
$ |
38 |
|
|
$ |
75 |
|
|
$ |
74 |
|
Acquisition-related developed technology |
|
$ |
14 |
|
|
$ |
1 |
|
|
$ |
28 |
|
|
$ |
3 |
|
Other intangible assets |
|
$ |
12 |
|
|
$ |
36 |
|
|
$ |
21 |
|
|
$ |
60 |
|
Based on the identified intangible assets that are subject to amortization as of June 26, 2010, we
expect future amortization expense to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
of 2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Intellectual property assets |
|
$ |
74 |
|
|
$ |
97 |
|
|
$ |
86 |
|
|
$ |
69 |
|
|
$ |
59 |
|
Acquisition-related developed technology |
|
$ |
27 |
|
|
$ |
46 |
|
|
$ |
24 |
|
|
$ |
9 |
|
|
$ |
|
|
Other intangible assets |
|
$ |
11 |
|
|
$ |
28 |
|
|
$ |
31 |
|
|
$ |
30 |
|
|
$ |
21 |
|
Note 16: Restructuring and Asset Impairment Charges
The following table summarizes restructuring and asset impairment charges by program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
2009 restructuring program |
|
$ |
|
|
|
$ |
88 |
|
|
$ |
|
|
|
$ |
149 |
|
2006 efficiency program |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and asset impairment charges |
|
$ |
|
|
|
$ |
91 |
|
|
$ |
|
|
|
$ |
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2006 efficiency program was completed in 2009.
2009 Restructuring Program
In the first quarter of 2009, management approved plans to restructure some of our manufacturing
and assembly and test operations. These plans included closing two assembly and test facilities in
Malaysia, one facility in the Philippines, and one facility in China; stopping production at a
200mm wafer fabrication facility in Oregon; and ending production at our 200mm wafer fabrication
facility in California. The 2009 restructuring program is complete. Restructuring and asset
impairment charges were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Employee severance and benefit arrangements |
|
$ |
|
|
|
$ |
88 |
|
|
$ |
|
|
|
$ |
142 |
|
Asset impairment charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and asset impairment charges |
|
$ |
|
|
|
$ |
88 |
|
|
$ |
|
|
|
$ |
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the restructuring activity for the 2009 restructuring program during
the first half of 2010:
|
|
|
|
|
|
|
Employee |
|
|
|
Severance and |
|
(In Millions) | |
Benefits |
|
Accrued restructuring balance as of December 26, 2009 |
|
$ |
26 |
|
Additional accruals |
|
|
|
|
Adjustments |
|
|
|
|
Cash payments |
|
|
(26 |
) |
Non-cash settlements |
|
|
|
|
|
|
|
|
Accrued restructuring balance as of June 26, 2010 |
|
$ |
|
|
|
|
|
|
Under the 2009 restructuring program, we incurred $208 million of charges related to employee
severance and benefit arrangements for approximately 6,500 employees.
20
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 17: Borrowings
In 2005, we issued $1.6 billion of junior subordinated convertible debentures (the 2005 debentures)
due in 2035. The conversion rate for the 2005 debentures adjusts for certain events outlined in the
indenture governing the debentures, such as quarterly dividend distributions in excess of $0.10 per
share. As of June 26, 2010, the conversion rate was 32.52 shares of common stock per $1,000
principal amount of debentures, representing an effective conversion price of approximately $30.75
per share of common stock. As of December 26, 2009, the conversion rate was 32.12 shares of common
stock per $1,000 principal amount of debentures, representing an effective conversion price of
approximately $31.14 per share of common stock.
Note 18: Employee Equity Incentive Plans
Our equity incentive plans are broad-based, long-term programs intended to attract and retain
talented employees and align stockholder and employee interests.
Under the 2006 Equity Incentive Plan (2006 Plan), 428 million shares of common stock have been made
available for issuance as equity awards to employees and non-employee directors. A maximum of 253
million of these shares can be awarded as non-vested shares (restricted stock) or non-vested share
units (restricted stock units). As of June 26, 2010, 189 million shares remained available for
future grant under the 2006 Plan.
The 2006 Stock Purchase Plan allows eligible employees to purchase shares of our common stock at
85% of the value of our common stock on specific dates. Rights to purchase shares are granted
during the first and third quarters of each year. Under the 2006 Stock Purchase Plan, we made
240 million shares of common stock available for issuance through August 2011. As of June 26, 2010,
147 million shares were available for issuance under the 2006 Stock Purchase Plan.
Share-Based Compensation
Share-based compensation recognized in the second quarter of 2010 was $232 million and $480 million
for the first half of 2010 ($258 million in the second quarter of 2009 and $471 million for the
first half of 2009).
We estimate the fair value of restricted stock unit awards with time-based vesting using the value
of our common stock on the date of grant, reduced by the present value of dividends expected to be
paid on our common stock prior to vesting. We estimate the fair value of market-based restricted
stock units using a Monte Carlo simulation model on the date of grant. We based the weighted
average estimated values of restricted stock unit grants, as well as the weighted average
assumptions that we used in calculating the fair value, on estimates at the date of grant, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Estimated values |
|
$ |
22.56 |
|
|
$ |
14.59 |
|
|
$ |
22.71 |
|
|
$ |
14.54 |
|
Risk-free interest rate |
|
|
1.1 |
% |
|
|
0.9 |
% |
|
|
1.1 |
% |
|
|
0.9 |
% |
Dividend yield |
|
|
2.6 |
% |
|
|
3.5 |
% |
|
|
2.6 |
% |
|
|
3.5 |
% |
Volatility |
|
|
n/a |
|
|
|
46 |
% |
|
|
30 |
% |
|
|
46 |
% |
We use the Black-Scholes option pricing model to estimate the fair value of options granted under
our equity incentive plans and rights to acquire stock granted under our stock purchase plan. We
based the weighted average estimated values of employee stock option grants and rights granted
under the stock purchase plan, as well as the weighted average assumptions used in calculating
these values, on estimates at the date of grant, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
Stock Purchase Plan |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Estimated values |
|
$ |
4.87 |
|
|
$ |
4.73 |
|
|
$ |
4.83 |
|
|
$ |
4.72 |
|
|
$ |
4.57 |
|
|
$ |
3.82 |
|
Expected life (in years) |
|
|
4.7 |
|
|
|
4.7 |
|
|
|
5.0 |
|
|
|
4.9 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Risk-free interest rate |
|
|
2.5 |
% |
|
|
1.8 |
% |
|
|
2.6 |
% |
|
|
1.8 |
% |
|
|
0.2 |
% |
|
|
0.4 |
% |
Volatility |
|
|
27 |
% |
|
|
46 |
% |
|
|
28 |
% |
|
|
46 |
% |
|
|
32 |
% |
|
|
54 |
% |
Dividend yield |
|
|
2.6 |
% |
|
|
3.5 |
% |
|
|
2.7 |
% |
|
|
3.6 |
% |
|
|
3.2 |
% |
|
|
4.2 |
% |
Under the stock purchase plan, rights to purchase shares are only granted during the first and
third quarters of each year.
21
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Restricted Stock Unit Awards
Activity with respect to outstanding restricted stock units for the first half of 2010 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant- |
|
|
|
Number of |
|
|
Date Fair |
|
(In Millions, Except Per Share Amounts) | |
Shares |
|
|
Value |
|
December 26, 2009 |
|
|
105.4 |
|
|
$ |
17.03 |
|
Granted |
|
|
30.8 |
|
|
$ |
22.71 |
|
Vested |
|
|
(31.3 |
) |
|
$ |
17.50 |
|
Forfeited |
|
|
(1.9 |
) |
|
$ |
17.35 |
|
|
|
|
|
|
|
|
|
June 26, 2010 |
|
|
103.0 |
|
|
$ |
18.58 |
|
|
|
|
|
|
|
|
|
The aggregate fair value of awards that vested during the first half of 2010 was $746 million,
which represents the market value of Intel common stock on the date that the restricted stock units
vest. The grant date fair value of awards that vested during the first half of 2010 was $548
million. The number of restricted stock units vested includes shares that we withheld on behalf of
employees to satisfy the minimum statutory tax withholding requirements. As of June 26, 2010,
three million of the outstanding restricted stock units were market-based restricted stock units.
Stock Option Awards
Activity with respect to outstanding stock options for the first half of 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average |
|
(In Millions, Except Per Share Amounts) | |
Shares |
|
|
Exercise Price |
|
December 26, 2009 |
|
|
451.3 |
|
|
$ |
25.08 |
|
Grants |
|
|
19.7 |
|
|
$ |
23.34 |
|
Exercises |
|
|
(12.0 |
) |
|
$ |
18.70 |
|
Cancellations and forfeitures |
|
|
(7.2 |
) |
|
$ |
26.65 |
|
Expirations |
|
|
(42.6 |
) |
|
$ |
60.56 |
|
|
|
|
|
|
|
|
|
June 26, 2010 |
|
|
409.2 |
|
|
$ |
21.46 |
|
|
|
|
|
|
|
|
|
Options exercisable as of: |
|
|
|
|
|
|
|
|
December 26, 2009 |
|
|
297.7 |
|
|
$ |
28.44 |
|
June 26, 2010 |
|
|
259.0 |
|
|
$ |
22.79 |
|
During the first half of 2010, the aggregate intrinsic value of stock option exercises was $54
million, which represents the difference between the exercise price and the value of Intel common
stock at the time of exercise.
Stock Purchase Plan
Employees purchased 9.8 million shares in the first half of 2010 (22.3 million shares in the first
half of 2009) for $161 million ($247 million in the first half of 2009) under the 2006 Stock
Purchase Plan.
Note 19: Common Stock Repurchases
We issue restricted stock units as part of our equity incentive plans. For the majority of
restricted stock units granted, the number of shares issued on the date the restricted stock units
vest is net of the statutory withholding requirements that we pay in cash to the appropriate taxing
authorities on behalf of our employees. During the first half of 2010, we withheld 9.2 million
shares (5.2 million shares during the first half of 2009) to satisfy $219 million ($79 million
during the first half of 2009) of employees tax obligations. Although shares withheld are not
issued, they are treated as common stock repurchases in our financial statements, as they reduce
the number of shares that would have been issued upon vesting.
22
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 20: Earnings (Loss) Per Share
We computed our basic and diluted earnings (loss) per common share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions, Except Per Share Amounts) | |
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) available to common stockholders |
|
$ |
2,887 |
|
|
$ |
(398 |
) |
|
$ |
5,329 |
|
|
$ |
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic |
|
|
5,563 |
|
|
|
5,595 |
|
|
|
5,546 |
|
|
|
5,584 |
|
Dilutive effect of employee equity incentive plans |
|
|
96 |
|
|
|
|
|
|
|
98 |
|
|
|
21 |
|
Dilutive effect of convertible debt |
|
|
52 |
|
|
|
|
|
|
|
52 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
5,711 |
|
|
|
5,595 |
|
|
|
5,696 |
|
|
|
5,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
0.52 |
|
|
$ |
(0.07 |
) |
|
$ |
0.96 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
0.51 |
|
|
$ |
(0.07 |
) |
|
$ |
0.94 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We computed our basic earnings (loss) per common share using net income (loss) available to common
stockholders and the weighted average number of common shares outstanding during the period. We
computed diluted earnings (loss) per common share using net income (loss) available to common
stockholders and the weighted average number of common shares outstanding plus potentially dilutive
common shares outstanding during the period. Net income (loss) available to participating
securities was insignificant for all periods presented.
Potentially dilutive common shares 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 restricted stock units, and the assumed issuance of common stock under the stock
purchase plan. Potentially dilutive common shares are determined by applying the if-converted
method for the 2005 debentures. However, as our 2009 debentures, which were issued during the third
quarter of 2009, require settlement of the principal amount of the debt in cash upon conversion,
with the conversion premium paid in cash or stock at our option, potentially dilutive common shares
are determined by applying the treasury stock method for these debentures.
Due to our net loss in the second quarter of 2009, the assumed exercise of outstanding stock
options, the assumed vesting of outstanding restricted stock units, the assumed issuance of common
stock under the stock purchase plan, and the assumed conversion of our 2005 debentures had an
anti-dilutive effect. If we had recognized net income in the second quarter of 2009, the dilutive
effect of employee equity incentive plans would have been 32 million shares and the dilutive effect
of convertible debt would have been 51 million shares.
For the second quarter of 2010, we excluded 118 million outstanding weighted average stock options
(152 million for the first half of 2010) from the calculation of diluted earnings per common share
because the exercise prices of these stock options were greater than or equal to the average market
value of the common shares (578 million for the first half of 2009). These options could be
included in the calculation in the future if the average market value of the common shares
increases and is greater than the exercise price of these options. We also excluded our 2009
debentures from the calculation of diluted earnings per common share because the conversion option
of these debentures was anti-dilutive. In the future, we could have potentially dilutive shares if
the average market price is above the conversion price.
23
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 21: Comprehensive Income (Loss)
The components of total comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
2,887 |
|
|
$ |
(398 |
) |
|
$ |
5,329 |
|
|
$ |
231 |
|
Change in net unrealized holding gain (loss) on
available-for-sale investments |
|
|
(16 |
) |
|
|
101 |
|
|
|
38 |
|
|
|
147 |
|
Change in deferred tax asset valuation allowance |
|
|
(6 |
) |
|
|
40 |
|
|
|
28 |
|
|
|
51 |
|
Change in net unrealized holding gain (loss) on
derivatives |
|
|
(109 |
) |
|
|
85 |
|
|
|
(174 |
) |
|
|
31 |
|
Change in net prior service costs |
|
|
(40 |
) |
|
|
|
|
|
|
(40 |
) |
|
|
|
|
Change in net actuarial losses |
|
|
(12 |
) |
|
|
11 |
|
|
|
(14 |
) |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
2,704 |
|
|
$ |
(161 |
) |
|
$ |
5,167 |
|
|
$ |
471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in deferred tax asset valuation allowance was primarily attributed to changes in
unrealized holding gains on our available-for-sale investments. This amount will be relieved as
these investments are sold or mature. The changes in net prior service costs are a result of the
recognition in the second quarter of 2010 of an amendment to the U.S. Sheltered Employee Retirement
Medical Account (SERMA). The amendment allows participants to use their SERMA credits to purchase
health insurance in plans not sponsored by Intel.
The components of accumulated other comprehensive income (loss), net of tax, at the end of each
period were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
Dec. 26, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
Accumulated net unrealized holding gain (loss)
on available-for-sale investments |
|
$ |
299 |
|
|
$ |
261 |
|
Accumulated net change in deferred tax asset valuation allowance |
|
|
174 |
|
|
|
146 |
|
Accumulated net unrealized holding gain (loss) on derivatives |
|
|
(34 |
) |
|
|
140 |
|
Accumulated net prior service costs |
|
|
(37 |
) |
|
|
3 |
|
Accumulated net actuarial losses |
|
|
(170 |
) |
|
|
(156 |
) |
Accumulated transition obligation |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss) |
|
$ |
231 |
|
|
$ |
393 |
|
|
|
|
|
|
|
|
As of June 26, 2010 and December 26, 2009, accumulated unrealized non-credit-related
other-than-temporary impairment losses on available-for-sale debt instruments were insignificant.
Note 22: Taxes
The European Commission (EC) fine incurred in the second quarter of 2009 is not tax deductible. For
further information on the EC fine, see Note 23: Contingencies. The EC fine of $1.447 billion,
with no associated reduction in the provision for taxes, significantly impacted our effective tax
rate for the three and six months ended June 27, 2009. As the EC fine was not deductible, we
recognized a provision for taxes in the second quarter of 2009 despite a net loss before taxes.
24
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 23: Contingencies
Legal Proceedings
We are currently a party to various legal proceedings, including those noted in this section. While
management presently believes that the ultimate outcome of these proceedings, individually and in
the aggregate, will not materially harm the companys financial position, cash flows, or overall
trends in results of operations, legal proceedings and related government investigations are
subject to inherent uncertainties, and unfavorable rulings or other events could occur. Unfavorable
rulings could include substantial money damages, and in matters for which injunctive relief or
other conduct remedies are sought, an injunction or other order prohibiting us from selling one or
more products at all or in particular ways, precluding particular business practices, or requiring
other remedies such as compulsory licensing of intellectual property. Were unfavorable final
outcomes to occur, there exists the possibility of a material adverse impact on our business,
results of operations, financial position, and overall trends. It is also possible that we could
conclude it is in the best interests of our stockholders, employees, and customers to settle one or
more such matters, and any such settlement could include substantial payments; however, we have not reached this conclusion with
respect to any particular matter at this time. Except as may be otherwise indicated, the outcomes
in these matters are not reasonably estimable.
A number of proceedings generally have challenged and continue to challenge certain of our
competitive practices. The allegations in these proceedings vary and are described in more detail
in the following paragraphs, but in general contend that we improperly condition price rebates and
other discounts on our microprocessors on exclusive or near-exclusive dealing by some of our
customers; claim that our software compiler business unfairly prefers Intel microprocessors over
competing microprocessors and that, through the use of our compilers and other means, we have
caused inaccurate and misleading benchmark results concerning our microprocessors to be
disseminated; allege that we unfairly controlled the content and timing of release of various
standard computer interfaces developed by Intel in cooperation with other industry participants;
and accuse us of engaging in various acts of improper competitive activity in competing against
what is referred to as general purpose graphics processing units, including certain licensing
practices and our actions in connection with developing and disclosing potential competitive
technology.
We believe that we compete lawfully and that our marketing, business, intellectual property, and
other challenged practices benefit our customers and our stockholders, and we will continue to
vigorously defend ourselves in these proceedings. While we have settled some of these matters, the
distractions caused by challenges to these practices from the remaining matters are undesirable,
and the legal and other costs associated with defending and resolving our position have been and
continue to be significant. We assume that these challenges could continue for a number of years
and may require the investment of substantial additional management time and substantial financial
resources to explain and defend our position.
Government Competition Matters and Related Consumer Class Actions
In 2001, the European Commission (EC) commenced an investigation regarding claims by Advanced Micro
Devices, Inc. (AMD) that we used unfair business practices to persuade clients to buy our
microprocessors. Since that time, we have received numerous requests for information and documents
from the EC, and we have responded to each of those requests. The EC issued a Statement of
Objections in July 2007 and held a hearing on that Statement in March 2008. The EC issued a
Supplemental Statement of Objections in July 2008.
In May 2009, the EC issued a decision finding that we had violated Article 82 of the EC Treaty and
Article 54 of the European Economic Area (EEA) Agreement. In general, the EC found that we violated
Article 82 (later renumbered as Article 102 by a new treaty) by offering alleged conditional
rebates and payments that required our customers to purchase all or most of their x86
microprocessors from us. The EC also found that we violated Article 82 by making alleged payments
to prevent sales of specific rival products. The EC imposed a fine on us in the amount of 1.06
billion ($1.447 billion as of May 2009), which we subsequently paid during the third quarter of
2009, and also ordered us to immediately bring to an end the infringement referred to in the EC
decision. In the second quarter of 2009, we recorded the related charge within marketing, general
and administrative on the consolidated condensed statements of operations.
The EC decision exceeds 500 pages in length and does not contain specific direction on whether or
how we should modify our business practices. Instead, the decision states that we should cease and
desist from further conduct that, in the ECs opinion, would violate applicable law. We have taken
steps, which are subject to the ECs ongoing review, to comply with that decision pending appeal.
We opened discussions with the EC to better understand the decision and to explain changes to our
business practices. Based on our current understanding and expectations, we do not believe any such
changes will be material to our financial position, results, or cash flows. We strongly disagree
with the ECs decision, and we have appealed the decision to the Court of First Instance (which has
been renamed as the General Court under a new treaty) in July 2009. The Court requested and we
filed a shorter version of our brief in September 2009. The EC
filed its answer in March 2010. On July 8, 2010, we filed our reply brief in support of the appeal. The
General Courts decision, after additional briefing and oral argument, is expected in 2012.
25
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
In June 2005, we received an inquiry from the Korea Fair Trade Commission (KFTC) requesting
documents from our Korean subsidiary related to marketing and rebate programs that we entered into
with Korean PC manufacturers. In February 2006, the KFTC initiated an inspection of documents at
our offices in Korea. In September 2007, the KFTC served on us an Examination Report alleging that
sales to two customers during parts of 20022005 violated Koreas Monopoly Regulation and Fair
Trade Act. In December 2007, we submitted our written response to the KFTC. In February 2008, the
KFTCs examiner submitted a written reply to our response. In March 2008, we submitted a further
response. In April 2008, we participated in a pre-hearing conference before the KFTC, and we
participated in formal hearings in May and June 2008. In June 2008, the KFTC announced its intent
to fine us approximately $25 million for providing discounts to Samsung Electronics Co., Ltd. and
TriGem Computer Inc. In November 2008, the KFTC issued a final written decision concluding that our
discounts had violated Korean antitrust law and imposing a fine on us of approximately $20 million,
which we paid in January 2009. In December 2008, we appealed this decision by filing a lawsuit in
the Seoul High Court seeking to overturn the KFTCs decision. The KFTC through its attorneys filed
its answer to our complaint in March 2009. Thereafter we and the KFTC will provide arguments to the
court in sequential briefs.
In November 2009, the State of New York filed a lawsuit against us in the U.S. District Court for
the District of Delaware. The lawsuit alleges that we violated federal antitrust laws; the New York
Donnelly Act, which prohibits contracts or agreements to monopolize; and the New York Executive
Law, which proscribes underlying violations of federal and state antitrust laws. The lawsuit
alleges that we engaged in a systematic worldwide campaign of illegal, exclusionary conduct to
maintain its monopoly power and prices in the market for x86 microprocessors through the use of
various alleged actions, including exclusive or near-exclusive agreements from large computer
makers in exchange for loyalty payments and bribes, and other alleged threats and retaliation.
The plaintiff claims that our alleged actions harmed consumers, competition, and innovation. The
lawsuit seeks a declaration that our alleged actions have violated the federal and New York
antitrust laws and the New York Executive Law, an injunction to prevent further alleged unlawful
acts, unspecified damages in an amount to be proven at trial, trebled as provided for by law,
restitution, disgorgement, $1 million for each violation of the Donnelly Act proven by the
plaintiff, and attorneys fees and costs. In January 2010, we filed our answer. We disagree with
the plaintiffs allegations and claims, and intend to conduct a vigorous defense of the lawsuit.
In December 2009, the N.Y. Attorney Generals Staff served a subpoena on us. That subpoena calls
for production of documents and information relating to various aspects of our notebook computer
business, including products that offer graphics capabilities and/or potentially compete with
graphic processing units (GPUs). It also calls for production of all documents concerning our
notebook computer business that we previously produced to other U.S. and foreign antitrust agencies
in connection with other antitrust investigations. In March 2010, we reached an agreement with the
N.Y. Attorney Generals Staff to narrow the scope of our production. In April 2010, the plaintiff
filed a motion asking the District Court to adopt its proposed pretrial and trial schedule. Intel
opposed the motion and proposed an alternative schedule. The motion is pending before the District
Court. In June 2010, Intel certified its substantial compliance with the subpoena.
In June 2008, the U.S. Federal Trade Commission (FTC) announced a formal investigation into our
sales practices. In June 2009, the FTC staff asked for additional information and testimony by some
Intel witnesses. Settlement discussions were unsuccessful. In December 2009, three FTC Commissioners voted to issue an administrative complaint alleging that
we had violated Section 5 of the FTC Act by engaging in unfair methods of competition and unfair
acts or practices in markets for CPUs and GPUs. This administrative proceeding was assigned to
Chief Administrative Law Judge Chappell. Any initial decision rendered by Judge Chappell can be
appealed to the Commissioners by both the FTC staff supporting the complaint and by us. If the FTC
ultimately issues a decision adverse to us, the decision can be appealed to a Federal Circuit Court
of Appeal of our choosing. We disagree with the FTCs allegations and claims, and intend to conduct
a vigorous defense. In June 2010, Intel and lawyers for the FTC filed a joint motion to withdraw
the matter from adjudication until July 22, 2010 for the purpose of negotiating and finalizing a
proposed consent agreement that would resolve the administrative complaint issued by the FTC. The
FTC subsequently extended the withdrawal date to August 6, 2010. Any consent agreement is subject
to final approval by both Intel and a majority of the four FTC Commissioners hearing this matter.
26
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
In addition, at least 82 separate class actions
have been filed in the U.S. District Courts for the
Northern District of California, Southern District of California, District of Idaho, District of
Nebraska, District of New Mexico, District of Maine, and District of Delaware, as well as in
various California, Kansas, and Tennessee state courts. These actions generally repeat the
allegations made in a now-settled lawsuit filed against Intel by AMD in June 2005 in United States
District Court for the District of Delaware (AMD litigation). Like that AMD lawsuit, these class
action suits allege that Intel engaged in various actions in violation of the Sherman Act and other
laws, by, among other things, providing discounts and rebates to our manufacturer and distributor
customers conditioned on exclusive or near exclusive dealing that allegedly unfairly interfered
with AMDs ability to sell its microprocessors, interfering with certain AMD product launches, and
interfering with AMDs participation in certain industry standards-setting groups. The class
actions allege various consumer injuries, including that consumers in various states have been
injured by paying higher prices for computers containing our microprocessors. All of the federal
class actions and the Kansas and Tennessee state court class actions have been consolidated by the
Multidistrict Litigation Panel to the District of Delaware, and the
Court has appointed a Special Master to address issues in the
litigation as assigned by the Court. In January 2010, the plaintiffs in the
Delaware action filed a motion for sanctions for our failure to preserve evidence. This motion
largely copies a motion previously filed by AMD in the AMD litigation. The putative class in the
coordinated actions also moved for certification of a class of
members who purchased certain personal computers containing products
sold by Intel. On July 28, 2010, the Special Master issued a Report
and Recommendation denying the motion to certify a class. Under the
Courts rules, the plaintiffs must request review of this Report
and Recommendation by the District Judge or it will become the
Courts ruling. All
California class actions have been consolidated to the Superior Court of California in Santa Clara
County. The plaintiffs in the California actions have moved for class certification, which we are
in the process of opposing. At our request, the Court in the California actions has agreed to delay
ruling on this motion until after the Delaware Federal Court rules on the similar motion in the
coordinated actions. We dispute the class action claims and intend to defend the lawsuits
vigorously.
Antitrust Derivative Litigation and Related Matters
In February 2008, Martin Smilow filed a putative stockholder derivative action in the United States
District Court for the District of Delaware against members of our Board of Directors. The
complaint alleged generally that the Board allowed the company to violate antitrust and other laws,
as alleged in the AMD litigation and that those alleged Board-sanctioned activities harmed the
company. The complaint repeated many of the allegations made in the AMD litigation and referenced
various investigations by the EC, KFTC, and others. In February 2008, Evan Tobias filed a putative
stockholder derivative suit in the same court against the Board containing many of the same
allegations as the Smilow suit. In July 2008, the District Court ordered Smilow and Tobias to file
a single, consolidated complaint. An amended consolidated complaint was filed in August 2008. In
June 2009, the court granted the defendants motion to dismiss the plaintiffs consolidated
complaint, with prejudice. In July 2009, Smilow and the Rosenfeld Family Foundation made a demand
to inspect certain of our books and records pursuant to Section 220 of the Delaware General
Corporation Law, and in November 2009, Smilow and the Rosenfeld Family Foundation filed an action
in Delaware Chancery Court to enforce that demand.
In June 2008, Christine Del Gaizo, filed a putative stockholder derivative suit in the Santa Clara
County Superior Court against the Board, a former director of the Board, and six of our officers
containing many of the same allegations as the Smilow/Tobias stockholder derivative suit. In August
2008, the Santa Clara County Superior Court entered a stipulated order staying the Del Gaizo action
pending further order of the court.
In November 2009, Charles Gilman filed a putative stockholder derivative suit in the United States
District Court for the District of Delaware against certain current Intel Board members as well as
three former Board members. In December 2009, the Louisiana Municipal Police Employee Retirement
System (LMPERS) filed a putative stockholder derivative suit in the same court against the same
defendants. In January 2010, the District Court ordered Gilman and LMPERS to file a single,
consolidated complaint under the name In re Intel Corp. Derivative Litigation. An amended
consolidated complaint was filed in February 2010, which makes many of the same allegations raised
in the Smilow/Tobias and Del Gaizo suits, and additionally cites a number of excerpts from the ECs
decision, points to the settlement of the AMD litigation as supposed evidence of damage to Intel,
and incorporates by reference all of the allegations made in the lawsuit filed against us by the
State of New York and all of the allegations made in the administrative complaint action filed
against us by the FTC.
In March 2010, Alan Paris filed a putative stockholder derivative suit in Santa Clara County
Superior Court against certain current Intel Board members as well as three former Board members.
Pariss complaint makes many of the same allegations raised in In re Intel Corp. Derivative
Litigation.
In May 2010, we entered into a stipulation of settlement to resolve all of the foregoing
stockholder derivative litigation and related matters, except for the Del Gaizo lawsuit which we
intend to continue defending vigorously. The settlement was approved by the Delaware District Court
in July 2010. Pursuant to the Delaware District Courts scheduling order, we provided notice of the
settlement to Intel stockholders in June 2010. The settlement agreement did not significantly
impact our results of operations or cash flows.
27
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Lehman Matter
In November 2009, representatives of Lehman Brothers Holdings Inc. (Lehman) advised us informally
that the Lehman bankruptcy estate was considering a claim against us arising from a 2008 contract
between Intel and Lehman Brothers OTC Derivatives Inc. (Lehman OTC). Under the terms of the 2008
contract, Intel prepaid $1.0 billion to Lehman OTC, in exchange for which Lehman OTC was required
to purchase and deliver to Intel the number of shares of Intel common stock that could be purchased
for $1.0 billion, at the volume-weighted average price for the period August 26, 2008 to September
26, 2008. Lehman OTCs performance under the contract was secured by $1.0 billion of cash
collateral. Under the terms of the contract, Lehman OTC was obligated to deliver approximately 50
million shares of our common stock to us on September 29, 2008. Lehman failed to deliver any shares
of our common stock, and we foreclosed on the $1.0 billion collateral. No specific information has
been provided by Lehman regarding the nature or scope of the potential claims, other than that
Lehman contends it suffered damages ranging between $130 million to $380 million. In February 2010,
Lehman served a subpoena on us in connection with this transaction, but Lehman has not initiated
any action against us to date. We believe that we acted appropriately under our agreement with
Lehman OTC, and we intend to defend any claim to the contrary.
Frank T. Shum v. Intel Corporation, Jean-Marc Verdiell, and LightLogic, Inc.
We acquired LightLogic, Inc. in May 2001. Frank Shum has sued us, LightLogic, and LightLogics
founder, Jean-Marc Verdiell, claiming that much of LightLogics intellectual property is based on
alleged inventions that Shum conceived while he and Verdiell were partners at Radiance Design, Inc.
Shum has alleged claims for fraud, breach of fiduciary duty, fraudulent concealment, and breach of
contract. Shum also seeks alleged correction of inventorship of seven patents acquired by us as
part of the LightLogic acquisition. In January 2005, the U.S. District Court for the Northern
District of California denied Shums inventorship claim, and thereafter granted our motion for
summary judgment on Shums remaining claims. In August 2007, the United States Court of Appeals for
the Federal Circuit vacated the District Courts rulings and remanded the case for further
proceedings. In October 2008, the District Court granted our motion for summary judgment on Shums
claims for breach of fiduciary duty and fraudulent concealment, but denied our motion on Shums
remaining claims. A jury trial on Shums remaining claims took place in November and December 2008.
In pre-trial proceedings and at trial, Shum requested monetary damages against the defendants in
amounts ranging from $31 million to $931 million, and his final request to the jury was for as much
as $175 million. Following deliberations, the jury was unable to reach a verdict on most of the
claims. With respect to Shums claim that he is the proper inventor on certain LightLogic patents
now assigned to us, the jury agreed with Shum on some of those claims and was unable to reach a
verdict regarding the remaining claims. In April 2009, the court granted defendants motions for
judgment as a matter of law. Shum has appealed that ruling to the United States Court of Appeals
for the Federal Circuit. We have completed our appellate briefing and are awaiting notification of
the date for oral argument.
Note 24: Operating Segment Information
At the end of 2009, we reorganized our business to better align our major product groups around the
core competencies of Intel architecture and our manufacturing operations. After the reorganization,
our operating segments include the PC Client Group, Data Center Group, Embedded and Communications
Group, Digital Home Group, Ultra-Mobility Group, NAND Solutions Group, Wind River Software Group,
Software and Services Group, and Digital Health Group. Prior-period amounts have been adjusted
retrospectively to reflect the new organizational structure.
The Chief Operating Decision Maker (CODM) is our President and Chief Executive Officer. The CODM
allocates resources to and assesses the performance of each operating segment using information
about its revenue and operating income (loss).
Our PC Client Group and our Data Center Group are reportable operating segments. We also aggregate
and disclose the financial results of the following non-reportable operating segments, whose
product lines are based on Intel® architecture: Embedded and Communications Group,
Digital Home Group, and Ultra-Mobility Group. These non-reportable operating segments are
aggregated, as they have similar economic characteristics and their operations are similar in
nature. These aggregated operating segments do not meet the quantitative thresholds to qualify as
reportable operating segments; however, we have chosen to disclose the aggregation of these
non-reportable operating segments into the other Intel architecture operating segments category.
Revenue for our reportable and aggregated non-reportable operating segments is primarily related to
the following product lines:
|
|
|
PC Client Group. Includes microprocessors and related chipsets and
motherboards designed for the desktop (including high-end enthusiast PCs), notebook, and
netbook market segments; and wireless connectivity products. |
|
|
|
Data Center Group. Includes microprocessors and related chipsets and
motherboards designed for the server, workstation, and storage computing market segments;
and wired network connectivity products. |
|
|
|
Other Intel architecture operating segments. Includes microprocessors and
related chipsets for embedded applications and products designed for the ultra-mobile
market segment, which includes various handheld devices; and products for the consumer
electronics market segments. |
28
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Our NAND Solutions Group, Wind River Software Group, Software and Services Group, and Digital
Health Group operating segments do not meet the quantitative thresholds to qualify as reportable
segments and are included within the other operating segments category.
We have sales and marketing, manufacturing, finance, and administration groups. Expenses for these
groups are generally allocated to the operating segments, and the allocated expenses are included
in the operating results reported below.
In the second quarter of 2009, we incurred charges of $1.447 billion as a result of the fine from
the EC, see Note 23: Contingencies. This charge was included in the corporate category.
Additionally, the corporate category includes expenses and charges such as:
|
|
|
amounts included within restructuring and asset impairment charges; |
|
|
|
a portion of profit-dependent compensation and other expenses not allocated to
the operating segments; |
|
|
|
results of operations of seed businesses that support our initiatives; and |
|
|
|
acquisition-related costs, including amortization and any impairment of
acquisition-related intangibles and goodwill. |
The CODM does not evaluate operating segments using discrete asset information. Operating segments
do not record inter-segment revenue, and, accordingly, there is none to be reported. 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 as discussed above, the accounting policies for
segment reporting are the same as for Intel as a whole.
Segment information is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
|
June 26, |
|
|
June 27, |
|
(In Millions) | |
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PC Client Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Microprocessor revenue |
|
$ |
6,155 |
|
|
$ |
4,567 |
|
|
$ |
12,068 |
|
|
$ |
8,816 |
|
Chipset, motherboard, and other revenue |
|
|
1,684 |
|
|
|
1,432 |
|
|
|
3,445 |
|
|
|
2,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,839 |
|
|
|
5,999 |
|
|
|
15,513 |
|
|
|
11,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Center Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Microprocessor revenue |
|
|
1,797 |
|
|
|
1,208 |
|
|
|
3,349 |
|
|
|
2,220 |
|
Chipset, motherboard, and other revenue |
|
|
317 |
|
|
|
276 |
|
|
|
636 |
|
|
|
528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,114 |
|
|
|
1,484 |
|
|
|
3,985 |
|
|
|
2,748 |
|
Other Intel architecture operating segments |
|
|
417 |
|
|
|
328 |
|
|
|
792 |
|
|
|
654 |
|
Other operating segments |
|
|
386 |
|
|
|
172 |
|
|
|
755 |
|
|
|
321 |
|
Corporate |
|
|
9 |
|
|
|
41 |
|
|
|
19 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
10,765 |
|
|
$ |
8,024 |
|
|
$ |
21,064 |
|
|
$ |
15,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PC Client Group |
|
$ |
3,428 |
|
|
$ |
1,297 |
|
|
$ |
6,571 |
|
|
$ |
1,998 |
|
Data Center Group |
|
|
1,064 |
|
|
|
434 |
|
|
|
1,899 |
|
|
|
700 |
|
Other Intel architecture operating segments |
|
|
(18 |
) |
|
|
(60 |
) |
|
|
(47 |
) |
|
|
(136 |
) |
Other operating segments |
|
|
(21 |
) |
|
|
(35 |
) |
|
|
(42 |
) |
|
|
(188 |
) |
Corporate |
|
|
(472 |
) |
|
|
(1,648 |
) |
|
|
(952 |
) |
|
|
(1,739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
$ |
3,981 |
|
|
$ |
(12 |
) |
|
$ |
7,429 |
|
|
$ |
635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is
provided in addition to the accompanying consolidated condensed 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. |
|
|
|
|
Strategy. Our overall strategy. |
|
|
|
|
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. An analysis of our financial results comparing the three
and six months ended June 26, 2010 to the three and six months ended June 27, 2009. |
|
|
|
|
Business Outlook. Our expectations for selected financial items for the third
quarter of 2010 and the 2010 full year. |
|
|
|
|
Liquidity and Capital Resources. An 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. |
The various sections of this MD&A contain a number of forward-looking statements. Words such as
expects, goals, plans, believes, continues, may, will, 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, 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
the Business Outlook section (see also Risk Factors in Part II, Item 1A of this Form 10-Q). 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 July 30, 2010.
Overview
Our results of operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) |
|
Q2 2010 |
|
|
Q1 2010 |
|
|
Q2 2009 |
|
Net revenue |
|
$ |
10,765 |
|
|
$ |
10,299 |
|
|
$ |
8,024 |
|
Gross margin |
|
$ |
7,235 |
|
|
$ |
6,529 |
|
|
$ |
4,079 |
|
Operating income (loss) |
|
$ |
3,981 |
|
|
$ |
3,448 |
|
|
$ |
(12 |
) |
Net income (loss) |
|
$ |
2,887 |
|
|
$ |
2,442 |
|
|
$ |
(398 |
) |
Our financial results for the second quarter of 2010 were a result of a strong product mix with the
continued ramp of our new 32-nanometer microprocessor products, and continued declines in unit
cost. Our revenue growth continued and the second quarter out-performed seasonal patterns in each
of our geographic regions. Additionally, our second quarter results set quarterly records for
revenue of $10.8 billion, gross margin of 67%, operating income of $4.0 billion, and diluted
earnings per share of $0.51.
Our second quarter revenue of $10.8 billion increased 5% from the first quarter of 2010.
Microprocessor unit sales and microprocessor average selling prices were up slightly in the second
quarter compared to the first quarter due to strength in our server market segment and sales of our
new 32-nanometer notebook microprocessors. Demand from the enterprise and small business market
segments for richer configurations drove an improved mix in our server and PC business. We also
continue to see PC sales driven by consumer purchases, particularly notebooks.
In the second quarter, we built additional inventory as we ramped our new 32-nanometer products in
anticipation of a seasonally stronger second half of the year. We are comfortable with inventory
levels across the supply chain.
Our overall gross margin percentage for the second quarter was better than expected, setting a new
quarterly record. Compared to the first quarter, our second quarter gross margin percentage
increased due to lower platform (microprocessor and chipset) unit cost, higher platform revenue,
and lower start-up costs, partially offset by fewer sales of previously written-off inventory. Our
third quarter gross margin percentage is expected to be approximately flat to the second quarter,
with higher inventory write-offs of our microprocessor products not yet qualified for sale,
partially offset by higher platform revenue.
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Our process technology is, and will continue to be, a very important source of differentiation and
earnings power for the company. We continue to execute on our tick-tock technology development
cadence and have accelerated our 32-nanometer factory ramp. As a result of the accelerated ramp, we
have raised our 2010 capital spending outlook by $400 million, enabling us to meet the anticipated
demand of our new 32 nanometer process technology products based on our new microarchitecture, code
named Sandy Bridge, which we expect to introduce later in 2010.
From a financial condition perspective, we ended the second quarter of 2010 with an investment
portfolio of $17.8 billion, consisting of cash and cash equivalents, short-term investments, and
marketable debt instruments included in trading assets. The cash generating power of our business
was evident in the first half of 2010 with $7.6 billion of cash from operations. During the first
half of 2010, we returned $1.7 billion to stockholders through dividends, and in July, our Board of
Directors declared a dividend of $.1575 per common share to be paid in September.
Strategy
Our goal is to be the preeminent provider of semiconductor chips and platforms for the worldwide
digital economy. As part of our overall strategy to compete in each relevant market segment, we use
our core competencies in the design and manufacture of integrated circuits, as well as our
financial resources, global presence, brand recognition, and software development. We believe that
we have the scale, capacity, and global reach to establish new technologies and respond to
customers needs quickly.
Some of our key focus areas are listed below:
|
|
|
Customer Orientation. Our strategy focuses on developing our next generation of
products based on the needs and expectations of our customers. In turn, our products help
enable the design and development of new form factors and usage models for businesses and
consumers. We offer platforms that incorporate various components designed and configured
to work together to provide an optimized computing solution compared to components that are
used separately. |
|
|
|
|
Architecture and Platforms. We are focusing on improved energy-efficient
performance for computing and communications systems and devices. Improved energy-efficient
performance involves balancing improved performance with lower power consumption. We
continue to develop multi-core microprocessors with an increasing number of cores, which
enable improved multitasking and energy efficiency. In addition, to meet the demands of new
and evolving netbook, consumer electronics, and various embedded market segments, we offer
and are continuing to develop System on a Chip (SoC) products that are designed to provide
improved performance due to higher integration, lower power consumption, and smaller form
factors. |
|
|
|
|
Silicon and Manufacturing Technology Leadership. Our strategy for developing
microprocessors with improved performance is to synchronize the introduction of a new
microarchitecture with improvements in silicon process technology. We plan to introduce a
new microarchitecture approximately every two years and ramp the next generation of silicon
process technology in the intervening years. This coordinated schedule allows us to develop
and introduce new products based on a common microarchitecture quickly, without waiting for
the next generation of silicon process technology. We refer to this as our tick-tock
technology development cadence. In keeping with this cadence, we expect to introduce a new
microarchitecture using our 32nm process technology later this year. |
|
|
|
|
Strategic Investments. We make investments in companies around the world that
we believe will generate financial returns, further our strategic objectives, and support
our key business initiatives. Our investments, including those made through our Intel
Capital program, generally focus on investing in companies and initiatives to stimulate
growth in the digital economy, create new business opportunities for Intel, and expand
global markets for our products. Our current investments primarily focus on the following
areas: advancing flash memory products, enabling mobile wireless devices, advancing the
digital home, enhancing the digital enterprise, advancing high-performance communications
infrastructures, and developing the next generation of silicon process technologies. |
|
|
|
|
Business Environment and Software. We believe that we are well positioned in
the technology industry to help drive innovation, foster collaboration, and promote
industry standards that will yield innovation and improved technologies for users. We plan
to continue to cultivate new businesses and work to encourage the industry to offer
products that take advantage of the latest market trends and usage models. We frequently
participate in industry initiatives designed to discuss and agree upon technical
specifications and other aspects of technologies that could be adopted by standards-setting
organizations. Through our Software and Services Group, we help enable and advance the
computing ecosystem by providing development tools and support to help software developers
create software applications and operating systems that take advantage of our platforms.
Lastly, we believe that the software expertise of our Wind River Software Group will
expedite our growth strategy in the embedded and handheld market segments. |
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
We believe that the proliferation of the Internet has driven the need for greater performance in
PCs and servers. Older PCs are increasingly incapable of handling the tasks that businesses and
individual consumers demand, such as video streaming and editing,
web conferencing, online gaming, social networking, and other memory-intensive applications. As
these tasks become even more demanding and require more computing power, we believe that businesses
and individual consumers will need and want to buy new PCs. We also believe that increased Internet
traffic and the increasing use of cloud computing, in which a group of linked servers provide a
variety of applications and data to users over the Internet, create a need for greater server
infrastructure, including server products optimized for energy-efficient performance and
virtualization.
We believe that the trend of mobile microprocessor unit growth outpacing the growth in desktop
microprocessor units will continue and that the demand for mobile microprocessors will result in
the increased development of products with form factors and uses that require low-power
microprocessors. We also believe that these products will result in demand that is incremental to
that of microprocessors designed for notebook and desktop computers, as a growing number of
households have multiple devices for different computing functions. Our silicon and manufacturing
technology leadership allows us to develop low-power microprocessors for these and other new uses
and form factors. We believe that Intel® AtomTM processors give us the
ability to extend Intel® architecture and drive growth in new market segments,
including a growing number of products that require processors specifically designed for embedded
applications, handhelds, consumer electronics devices, tablets, and netbooks. We expect that our
Intel Atom Developer Program will spur new applications that run on products using Intel Atom
processors, which will expedite our growth strategy in these new market segments. The common
elements for products in these new market segments are low power consumption and the ability to
access the Internet.
We are also focusing on the development of a new highly scalable, many-core architecture aimed at
parallel processing, the simultaneous use of multiple cores to execute a computing task. This
architecture will initially be used as a software development platform for throughput computing
(the need for large amounts of computing performance consistently over a long period of time). Over
time, this architecture may be utilized in the development of products for scientific and
professional workstations as well as high-performance computing applications.
In addition, we offer, and are continuing to develop, advanced NAND flash memory products, focusing
on system-level solutions for Intel architecture platforms such as solid-state drives. In support
of our strategy to provide advanced flash memory products, we continue to focus on the development
of innovative products designed to address the needs of customers for reliable, non-volatile,
low-cost, high-density memory.
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 condensed 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 method investments,
net, or gains (losses) on other equity investments, net when we record impairments; |
|
|
|
|
the assessment of recoverability of long-lived assets, which impacts gross
margin or operating expenses when we record asset impairments or accelerate their
depreciation; |
|
|
|
|
the recognition and measurement of current and deferred income taxes (including
the measurement of uncertain tax positions), which impact our provision for taxes; and |
|
|
|
|
the valuation of inventory, which impacts gross margin. |
Below, we discuss these policies further, as well as the estimates and judgments involved.
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 $2.8 billion as
of June 26, 2010 ($3.4 billion as of December 26, 2009). The majority of this balance as of June
26, 2010 was concentrated in companies in the flash memory market segment. Our flash memory market
segment investments include our investment in IM Flash Technologies, LLC (IMFT) and IM Flash
Singapore, LLP (IMFS) of $1.6 billion ($1.6 billion as of December 26, 2009). For further
information, see Note 10: Non-Marketable Equity Investments in the Notes to Consolidated
Condensed Financial Statements of this Form 10-Q.
Our non-marketable equity investments are recorded using adjusted cost basis 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 condensed
balance sheets.
Non-marketable equity investments are inherently risky, and their success is dependent on product
development, market acceptance, operational efficiency, other key business factors, and the ability
of the investee companies to raise additional funds in financial markets that can be volatile. The
companies could fail, or not be able to raise additional funds when the funds are needed or they
may receive lower valuations, with less favorable investment terms than in 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 II, Item 1A of this
Form 10-Q.
We determine the fair value of our non-marketable equity investments quarterly for disclosure
purposes; however, the investments are recorded at fair value only if an impairment charge is
recognized. We determine the fair value of our non-marketable equity investments using the market
and income approaches. The market approach includes the use of financial metrics and ratios of
comparable public companies, such as projected revenues, earnings, and comparable performance
multiples. The selection of comparable companies requires management judgment and is based on a
number of factors, including comparable companies sizes, growth rates, industries, development
stages, and other relevant factors. The income approach includes the use of a discounted cash flow
model, which may include one or multiple discounted cash flow scenarios and requires the following
significant estimates for the investee: revenue, based on assumed market segment size and assumed
market segment share; expenses, capital spending, and other costs; and discount rates based on the
risk profile of comparable companies. Estimates of market segment size, market segment share,
expenses, capital spending, and other costs are developed by the investee and/or Intel using
historical data and available market data. The valuation of our non-marketable investments also
takes into account variables such as conditions reflected in the capital markets, recent financing
activities by the investees, the investees capital structure, and differences in seniority and
rights associated with the investees capital structure.
For non-marketable equity investments, the measurement of fair value requires significant judgment
and includes quantitative and qualitative analysis of identified events or circumstances that
impact the fair value of the investment, such as:
|
|
|
the investees revenue and earnings trends relative to pre-defined milestones
and overall business prospects; |
|
|
|
|
the technological feasibility of the investees products and technologies; |
|
|
|
|
the general market conditions in the investees industry or geographic area,
including adverse regulatory or economic changes; |
|
|
|
|
factors related to the investees ability to remain in business, such as the
investees liquidity, debt ratios, and the rate at which the investee is using its cash;
and |
|
|
|
|
the investees receipt of additional funding at a lower valuation. |
If the fair value of an investment is below our carrying value, we determine if 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 write down the
investment to its fair value. Impairments of non-marketable equity investments were $17 million in
the second quarter of 2010 ($63 million in the first half of 2010). Over the past 12 quarters,
including the second quarter of 2010, impairments of non-marketable equity investments ranged from
$11 million to $896 million per quarter. This range included impairments of $896 million during the
fourth quarter of 2008, primarily related to a $762 million impairment charge on our investment in
Clearwire Communications, LLC (Clearwire LLC).
33
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
IMFT/IMFS
IMFT and IMFS are variable interest entities that are designed to manufacture and sell NAND
products to Intel and Micron Technology, Inc. at manufacturing cost. We determine the fair value of
our investment in IMFT/IMFS using the income approach based on a weighted average of multiple
discounted cash flow scenarios of our NAND Solutions Group business, which requires the use of
unobservable inputs. Unobservable inputs that require us to make our most difficult and subjective
judgments are the estimates for projected revenue and discount rate. Changes in management
estimates for these unobservable inputs have the most significant effect on the fair value
determination. We have not had an other-than-temporary impairment on our investment in IMFT/IMFS.
It is reasonably possible that the estimates used in the fair value determination could change in
the near term, which could result in an impairment of our investment.
Long-Lived Assets
We assess the impairment of long-lived assets 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 will continue to be used 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 groupings carrying value is not recoverable through the related undiscounted
cash flows, the asset grouping is considered to be impaired. The impairment is measured by
comparing the difference between the asset groupings carrying value and its fair value. Fair value
is the price that would be received from selling an asset in an orderly transaction between market
participants at the measurement date. Long-lived assets such as goodwill; intangible assets; and
property, plant and equipment are considered non-financial assets, and are recorded at fair value
only if an impairment charge is recognized.
Impairments of long-lived assets 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. Over the past 12 quarters, including the second quarter of 2010,
impairments and accelerated depreciation of long-lived assets ranged from $10 million to $300
million per quarter.
Income Taxes
We must make estimates and judgments in determining income tax expense 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 likely, 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 a majority of the deferred tax assets recorded on our consolidated
condensed balance sheets. However, should there be a change in our ability to recover our deferred
tax assets, our tax provision would increase in the period in which we determined that the recovery
was not likely. Recovery of a portion of our deferred tax assets is impacted by managements plans
with respect to holding or disposing of certain investments; therefore, changes in managements
plans with respect to holding or disposing of investments could affect our future provision for
taxes.
34
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step
process. The first step is to evaluate the tax position for recognition by determining if 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. It is inherently difficult and subjective to
estimate such amounts, as we have to determine the probability of various possible outcomes. We
re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors
such as changes in facts or circumstances, changes in tax law, new audit activity, and effectively
settled issues. 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.
Inventory
The valuation of inventory requires us to estimate obsolete or excess inventory as well as
inventory that is not of saleable quality. The determination of obsolete or excess inventory
requires us to estimate the future demand for our products. 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. As of June 26, 2010, our work-in-process inventory totaled $1.6
billion and finished goods inventory totaled $1.3 billion. The demand forecast is included in the
development of our short-term manufacturing plans to enable consistency between inventory valuation
and build decisions. Product-specific facts and circumstances reviewed in the inventory valuation
process include a review of the customer base, the stage of the product life cycle of our products,
consumer confidence, and customer acceptance of our products, as well as an assessment of the
selling price in relation to the product cost. 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.
In order to determine what 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
of wafers 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, and therefore 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. Over the
past 12 quarters, excess capacity charges ranged from zero to $680 million per quarter.
Accounting Changes and Recent Accounting Standards
For a description of accounting changes and recent accounting standards, including the expected
dates of adoption and estimated effects, if any, on our consolidated condensed financial
statements, see Note 2: Accounting Changes and Note 3: Recent Accounting Standards in the Notes
to Consolidated Condensed Financial Statements of this Form 10-Q.
35
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations - Second Quarter of 2010 Compared to Second Quarter of 2009
The following table sets forth certain consolidated condensed statements of operations data as a
percentage of net revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 2010 |
|
|
Q2 2009 |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
(Dollars in Millions, Except Per Share Amounts) |
|
Dollars |
|
|
Revenue |
|
|
Dollars |
|
|
Revenue |
|
Net revenue |
|
$ |
10,765 |
|
|
|
100.0 |
% |
|
$ |
8,024 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
3,530 |
|
|
|
32.8 |
% |
|
|
3,945 |
|
|
|
49.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
7,235 |
|
|
|
67.2 |
% |
|
|
4,079 |
|
|
|
50.8 |
% |
Research and development |
|
|
1,666 |
|
|
|
15.5 |
% |
|
|
1,303 |
|
|
|
16.2 |
% |
Marketing, general and administrative |
|
|
1,584 |
|
|
|
14.7 |
% |
|
|
2,695 |
|
|
|
33.6 |
% |
Restructuring and asset impairment charges |
|
|
|
|
|
|
|
% |
|
|
91 |
|
|
|
1.1 |
% |
Amortization of acquisition-related intangibles |
|
|
4 |
|
|
|
|
% |
|
|
2 |
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
3,981 |
|
|
|
37.0 |
% |
|
|
(12 |
) |
|
|
(0.1 |
)% |
Gains (losses) on equity method investments, net |
|
|
76 |
|
|
|
0.7 |
% |
|
|
(44 |
) |
|
|
(0.6 |
)% |
Gains (losses) on other equity investments, net |
|
|
117 |
|
|
|
1.1 |
% |
|
|
(25 |
) |
|
|
(0.3 |
)% |
Interest and other, net |
|
|
11 |
|
|
|
0.1 |
% |
|
|
31 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
4,185 |
|
|
|
38.9 |
% |
|
|
(50 |
) |
|
|
(0.6 |
)% |
Provision for taxes |
|
|
1,298 |
|
|
|
12.1 |
% |
|
|
348 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,887 |
|
|
|
26.8 |
% |
|
$ |
(398 |
) |
|
|
(5.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
0.51 |
|
|
|
|
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth information of geographic regions for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 2010 |
|
|
Q2 2009 |
|
(Dollars In Millions) |
|
Revenue |
|
|
% of Total |
|
|
Revenue |
|
|
% of Total |
|
Asia-Pacific |
|
$ |
6,166 |
|
|
|
57 |
% |
|
$ |
4,409 |
|
|
|
55 |
% |
Americas |
|
|
2,173 |
|
|
|
20 |
% |
|
|
1,698 |
|
|
|
21 |
% |
Europe |
|
|
1,294 |
|
|
|
12 |
% |
|
|
1,153 |
|
|
|
14 |
% |
Japan |
|
|
1,132 |
|
|
|
11 |
% |
|
|
764 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,765 |
|
|
|
100 |
% |
|
$ |
8,024 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net revenue for Q2 2010 increased 34% compared to Q2 2009. The increase was due to
significantly higher microprocessor and chipset unit sales, as well as higher microprocessor
average selling prices, compared to Q2 2009. Revenue in the Japan, Asia-Pacific, Americas, and
Europe regions increased by 48%, 40%, 28%, and 12% respectively compared to Q2 2009.
Our overall gross margin dollars for Q2 2010 increased $3.2 billion, or 77%, compared to Q2 2009.
The increase was primarily due to significantly higher revenue, lower platform (microprocessor and
chipset) unit cost, excess capacity charges recorded in Q2 2009, and lower start-up costs. Our
overall gross margin percentage increased to 67.2% in Q2 2010 from 50.8% in Q2 2009. The
significant increase in the gross margin percentage was primarily attributable to the gross margin
percentage increase in the PC Client Group operating segment and, to a lesser extent, the gross
margin percentage increase in the Data Center Group operating segment. We derived a substantial
majority of our overall gross margin dollars in Q2 2010 and Q2 2009, from the sale of
microprocessors in the PC Client Group and Data Center Group operating segments. See Business
Outlook for a discussion of gross margin expectations.
36
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
PC Client Group
The revenue and operating income for the PC Client Group (PCCG) operating segment for Q2 2010 and
Q2 2009 were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
Q2 2010 |
|
|
Q2 2009 |
|
Microprocessor revenue |
|
$ |
6,155 |
|
|
$ |
4,567 |
|
Chipset, motherboard, and other revenue |
|
|
1,684 |
|
|
|
1,432 |
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
7,839 |
|
|
$ |
5,999 |
|
Operating income |
|
$ |
3,428 |
|
|
$ |
1,297 |
|
Net revenue for the PCCG operating segment increased by $1.8 billion, or 31%, in Q2 2010 compared
to Q2 2009. Microprocessors and chipsets within PCCG include those designed for the notebook,
netbook, and desktop computing market segments. Significantly higher notebook unit sales was the
primary driver of the increase in microprocessor revenue. To a lesser extent, higher desktop
microprocessor unit sales and higher notebook average selling prices also contributed to the
increase. The increase in chipset, motherboard, and other revenue was due to significantly higher
chipset unit sales.
Operating income increased by $2.1 billion in Q2 2010 compared to Q2 2009. The increase in
operating income was primarily due to significantly higher revenue. To a lesser extent, lower
platform (microprocessor and chipset) unit cost, excess capacity charges of approximately $315
million in Q2 2009 that were primarily related to microprocessors and chipsets, and approximately
$150 million of lower start-up costs in Q2 2010 compared to Q2 2009 contributed to the increase.
These increases to operating income were partially offset by higher operating expenses.
Data Center Group
The revenue and operating income for the Data Center Group (DCG) operating segment for Q2 2010 and
Q2 2009 were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
Q2 2010 |
|
|
Q2 2009 |
|
Microprocessor revenue |
|
$ |
1,797 |
|
|
$ |
1,208 |
|
Chipset, motherboard, and other revenue |
|
|
317 |
|
|
|
276 |
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
2,114 |
|
|
$ |
1,484 |
|
Operating income |
|
$ |
1,064 |
|
|
$ |
434 |
|
Net revenue for the DCG operating segment increased by $630 million, or 42%, in Q2 2010 compared to
Q2 2009. The increase in microprocessor revenue was due to significantly higher microprocessor unit
sales and higher microprocessor average selling prices. The increase in chipset, motherboard, and
other revenue was due to higher revenue from the sale of wired connectivity products and higher
chipset unit sales, partially offset by lower chipset average selling prices.
Operating income increased by $630 million in Q2 2010 compared to Q2 2009. The increase in
operating income was primarily due to significantly higher revenue. To a lesser extent, lower
start-up costs and lower chipset unit cost also contributed to the increase in operating income.
37
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Other Intel Architecture Operating Segments
The revenue and operating income for the other Intel architecture (Other IA) operating segments for
Q2 2010 and Q2 2009 were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
Q2 2010 |
|
|
Q2 2009 |
|
Net revenue |
|
$ |
417 |
|
|
$ |
328 |
|
Operating loss |
|
$ |
(18 |
) |
|
$ |
(60 |
) |
Net revenue for the Other IA operating segments increased by $89 million, or 27%, in Q2 2010
compared to Q2 2009. The increase was primarily due to higher revenue within the Embedded and
Communications Group (ECG) from significantly higher microprocessor and chipset unit sales,
partially offset by lower microprocessor average selling prices.
Operating loss for the Other IA operating segments decreased by $42 million in Q2 2010 compared to
Q2 2009. The operating loss decrease was primarily due to higher ECG revenue, partially offset by
higher ECG operating expenses.
Operating Expenses
Operating expenses for Q2 2010 and Q2 2009 were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
Q2 2010 |
|
|
Q2 2009 |
|
Research and development |
|
$ |
1,666 |
|
|
$ |
1,303 |
|
Marketing, general and administrative |
|
$ |
1,584 |
|
|
$ |
2,695 |
|
Restructuring and asset impairment charges |
|
$ |
|
|
|
$ |
91 |
|
Amortization of acquisition-related intangibles |
|
$ |
4 |
|
|
$ |
2 |
|
Research and Development. R&D spending increased by $363 million, or 28%, in Q2 2010 compared to
Q2 2009 primarily due to higher process development costs and higher profit-dependent compensation.
Marketing, General and Administrative. Marketing, general and administrative expenses decreased
$1.1 billion, or 41%, in Q2 2010 compared to Q2 2009 due to the Q2 2009 charge of $1.447 billion
incurred as a result of the fine imposed by the European Commission (EC). This decrease was
partially offset by higher advertising expenses, including cooperative advertising expenses, higher
profit-dependent compensation, and to a lesser extent, expenses related to our Wind River Software
Group operating segment.
R&D, combined with marketing, general and administrative expenses, were 30% of net revenue in Q2
2010 (50% of net revenue in Q2 2009).
Restructuring and Asset Impairment Charges. The following table summarizes restructuring and asset
impairment charges by program for Q2 2010 and Q2 2009:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
Q2 2010 |
|
|
Q2 2009 |
|
2009 restructuring program |
|
$ |
|
|
|
$ |
88 |
|
2006 efficiency program |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
Total restructuring and asset impairment charges |
|
$ |
|
|
|
$ |
91 |
|
|
|
|
|
|
|
|
For further information, see Note 16: Restructuring and Asset Impairment Charges in the Notes to
Consolidated Condensed Financial Statements of this Form 10-Q.
38
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Gains (Losses) on Equity Method Investments, Net
Gains (losses) on equity method investments, net were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
Q2 2010 |
|
|
Q2 2009 |
|
Equity method losses, net |
|
$ |
(9 |
) |
|
$ |
(41 |
) |
Impairment charges |
|
|
(6 |
) |
|
|
(3 |
) |
Other, net |
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) on equity method investments, net |
|
$ |
76 |
|
|
$ |
(44 |
) |
|
|
|
|
|
|
|
During the second quarter of 2010, we recognized a gain of $91 million on the sale of our ownership
interest in Numonyx B.V. For further information, see Note 10: Non-Marketable Equity Investment
in the Notes to Consolidated Condensed Financial Statements in this Form 10-Q. In addition, we
recognized lower equity method losses in Q2 2010 compared to Q2 2009. The two most significant
components of our equity method losses, net were Clearwire LLC ($18 million loss in Q2 2010 and $20
million loss in Q2 2009) and Numonyx ($29 million gain in Q2 2010 and $14 million loss in Q2 2009).
Gains (Losses) on Other Equity Investments, Net
Gains (losses) on other equity investments, net were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
Q2 2010 |
|
|
Q2 2009 |
|
Impairment charges |
|
$ |
(11 |
) |
|
$ |
(36 |
) |
Gains on sales, net |
|
|
20 |
|
|
|
9 |
|
Other, net |
|
|
108 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total gains (losses) on other equity investments, net |
|
$ |
117 |
|
|
$ |
(25 |
) |
|
|
|
|
|
|
|
We recognized higher gains on other equity transactions, lower impairment charges on our
non-marketable equity investments, and higher gains on sales in Q2 2010 compared to Q2 2009.
Other, net for Q2 2010 is primarily related to fair value gains on the equity interest in Micron
we received from the sale of our ownership interest in Numonyx and gains on equity options
established prior to the Numonyx sale that economically hedge a portion of our Micron equity
interest.
Interest and Other, Net
The components of interest and other, net were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
Q2 2010 |
|
|
Q2 2009 |
|
Interest income |
|
$ |
29 |
|
|
$ |
38 |
|
Other, net |
|
|
(18 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
Total interest and other, net |
|
$ |
11 |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
We recognized $20 million of fair value losses on our marketable debt instruments classified as
trading assets in Q2 2010 compared to $35 million of fair value gains in Q2 2009. In addition, we
recognized currency exchange rate losses in Q2 2009 due to euro exposure related to our
euro-denominated liability for the EC fine. Interest income was lower in Q2 2010 compared to Q2
2009 as a result of lower interest rates, partially offset by higher average investment balances.
39
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Provision for Taxes
Our provision for taxes and effective tax rate were as follows:
|
|
|
|
|
|
|
|
|
(Dollars in Millions) |
|
Q2 2010 |
|
|
Q2 2009 |
|
Income (loss) before taxes |
|
$ |
4,185 |
|
|
$ |
(50 |
) |
Provision for taxes |
|
$ |
1,298 |
|
|
$ |
348 |
|
Effective tax rate |
|
|
31.0 |
% |
|
|
(696.0 |
)% |
The EC fine incurred in the second quarter of 2009 is not tax deductible. Because there is no
reduction in our provision for taxes associated with the EC fine of $1.447 billion, it
significantly impacted our effective tax rate in Q2 2009. The impact of the EC fine was partially
offset by a higher percentage of estimated profits in lower tax jurisdictions in Q2 2009 as
compared to Q2 2010, as well as the reversal of previously accrued taxes related to settlements
that positively impacted the Q2 2009 rate.
Results of Operations First Half of 2010 Compared to First Half of 2009
The following table sets forth certain consolidated condensed statements of operations data as a
percentage of net revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD 2010 |
|
|
YTD 2009 |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
(Dollars in Millions, Except Per Share Amounts) |
|
Dollars |
|
|
Revenue |
|
|
Dollars |
|
|
Revenue |
|
Net revenue |
|
$ |
21,064 |
|
|
|
100.0 |
% |
|
$ |
15,169 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
7,300 |
|
|
|
34.7 |
% |
|
|
7,852 |
|
|
|
51.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
13,764 |
|
|
|
65.3 |
% |
|
|
7,317 |
|
|
|
48.2 |
% |
Research and development |
|
|
3,230 |
|
|
|
15.3 |
% |
|
|
2,620 |
|
|
|
17.2 |
% |
Marketing, general and administrative |
|
|
3,098 |
|
|
|
14.7 |
% |
|
|
3,893 |
|
|
|
25.7 |
% |
Restructuring and asset impairment charges |
|
|
|
|
|
|
|
% |
|
|
165 |
|
|
|
1.1 |
% |
Amortization of acquisition-related intangibles |
|
|
7 |
|
|
|
|
% |
|
|
4 |
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
7,429 |
|
|
|
35.3 |
% |
|
|
635 |
|
|
|
4.2 |
% |
Gains (losses) on equity method investments, net |
|
|
37 |
|
|
|
0.1 |
% |
|
|
(116 |
) |
|
|
(0.8 |
)% |
Gains (losses) on other equity investments, net |
|
|
125 |
|
|
|
0.6 |
% |
|
|
(66 |
) |
|
|
(0.4 |
)% |
Interest and other, net |
|
|
40 |
|
|
|
0.2 |
% |
|
|
126 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
7,631 |
|
|
|
36.2 |
% |
|
|
579 |
|
|
|
3.8 |
% |
Provision for taxes |
|
|
2,302 |
|
|
|
10.9 |
% |
|
|
348 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,329 |
|
|
|
25.3 |
% |
|
$ |
231 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.94 |
|
|
|
|
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth information of geographic regions for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD 2010 |
|
|
YTD 2009 |
|
(Dollars In Millions) |
|
Revenue |
|
|
% of Total |
|
|
Revenue |
|
|
% of Total |
|
Asia-Pacific |
|
$ |
12,054 |
|
|
|
57 |
% |
|
$ |
8,056 |
|
|
|
53 |
% |
Americas |
|
|
4,079 |
|
|
|
19 |
% |
|
|
3,208 |
|
|
|
21 |
% |
Europe |
|
|
2,698 |
|
|
|
13 |
% |
|
|
2,426 |
|
|
|
16 |
% |
Japan |
|
|
2,233 |
|
|
|
11 |
% |
|
|
1,479 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,064 |
|
|
|
100 |
% |
|
$ |
15,169 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net revenue for the first half of 2010 increased 39% compared to the first half of 2009. The
increase was due to significantly higher microprocessor and chipset unit sales, as well as higher
microprocessor average selling prices compared to the first half of 2009. Revenue in the Japan,
Asia-Pacific, Americas, and Europe regions increased by 51%, 50%, 27%, and 11% respectively
compared to the first half of 2009.
40
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Our overall gross margin dollars for the first half of 2010 increased $6.4 billion, or 88%,
compared to the first half of 2009. The increase was primarily due to significantly higher revenue.
To a lesser extent, excess capacity charges recorded in the first half of 2009 and lower platform
(microprocessor and chipset) unit cost contributed to the increase in gross margin dollars for the
first half of 2010 compared to the first half of 2009. Our overall gross margin percentage
increased to 65.3% in the first half of 2010 from 48.2% in the first half of 2009. The significant
increase in the gross margin percentage was primarily attributable to the gross margin percentage
increase in the PC Client Group operating segment and, to a lesser extent, gross margin percentage
increases in the Data Center Group and NAND Solutions Group operating segments. We derived a
substantial majority of our overall gross margin dollars in the first half of 2010, and most of our
overall gross margin dollars in the first half of 2009, from the sale of microprocessors in the PC
Client Group and Data Center Group operating segments. See Business Outlook for a discussion of
gross margin expectations.
PC Client Group
The revenue and operating income for the PC Client Group (PCCG) operating segment for the first
half of 2010 and the first half of 2009 were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
YTD 2010 |
|
|
YTD 2009 |
|
Microprocessor revenue |
|
$ |
12,068 |
|
|
$ |
8,816 |
|
Chipset, motherboard, and other revenue |
|
|
3,445 |
|
|
|
2,544 |
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
15,513 |
|
|
$ |
11,360 |
|
Operating income |
|
$ |
6,571 |
|
|
$ |
1,998 |
|
Net revenue for the PCCG operating segment increased by $4.2 billion, or 37%, in the first half of
2010 compared to the first half of 2009. Microprocessors and chipsets within PCCG include those
designed for the notebook, netbook, and desktop computing market segments. Significantly higher
notebook unit sales was the primary driver of the increase in microprocessor revenue. To a lesser
extent, higher desktop microprocessor unit sales and higher notebook average selling prices also
contributed to the increase. The increase in chipset, motherboard, and other revenue was due to
significantly higher chipset unit sales.
Operating income increased by $4.6 billion in the first half of 2010 compared to the first half of
2009. The increase in operating income was primarily due to significantly higher revenue. During
the first half of 2009, we recorded excess capacity charges of approximately $940 million,
primarily related to microprocessors and chipsets. Additionally, lower platform (microprocessor and
chipset) unit cost in the first half of 2010 contributed to the increase in operating income. These
increases were partially offset by higher operating expenses in the first half of 2010 compared to
the first half of 2009.
Data Center Group
The revenue and operating income for the Data Center Group (DCG) operating segment for the first
half of 2010 and the first half of 2009 were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
YTD 2010 |
|
|
YTD 2009 |
|
Microprocessor revenue |
|
$ |
3,349 |
|
|
$ |
2,220 |
|
Chipset, motherboard, and other revenue |
|
|
636 |
|
|
|
528 |
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
3,985 |
|
|
$ |
2,748 |
|
Operating income |
|
$ |
1,899 |
|
|
$ |
700 |
|
Net revenue for the DCG operating segment increased by $1.2 billion, or 45%, in the first half of
2010 compared to the first half of 2009. The increase in microprocessor revenue was due to
significantly higher microprocessor unit sales and higher microprocessor average selling prices.
The increase in chipset, motherboard, and other revenue was due to higher chipset unit sales and
higher revenue from the sale of wired connectivity products, partially offset by lower chipset
average selling prices.
Operating income increased by $1.2 billion in the first half of 2010 compared to the first half of
2009. The increase in operating income was due to significantly higher revenue and, to a lesser
extent, lower chipset unit cost.
41
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Other Intel Architecture Operating Segments
The revenue and operating income for the other Intel architecture (Other IA) operating segments for
the first half of 2010 and the first half of 2009 were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
YTD 2010 |
|
|
YTD 2009 |
|
Net revenue |
|
$ |
792 |
|
|
$ |
654 |
|
Operating loss |
|
$ |
(47 |
) |
|
$ |
(136 |
) |
Net revenue for the Other IA operating segments increased by $138 million, or 21%, in the first
half of 2010 compared to the first half of 2009. The increase was primarily due to higher revenue
within the Embedded and Communications Group (ECG) from significantly higher microprocessor and
chipset unit sales, partially offset by lower microprocessor average selling prices.
Operating loss for the Other IA operating segments decreased by $89 million in the first half of
2010 compared to the first half of 2009. The operating loss decrease was primarily due to higher
ECG revenue and lower ECG unit cost, partially offset by higher ECG operating expenses.
Operating Expenses
Operating expenses for the first half of 2010 and the first half of 2009 were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
YTD 2010 |
|
|
YTD 2009 |
|
Research and development |
|
$ |
3,230 |
|
|
$ |
2,620 |
|
Marketing, general and administrative |
|
$ |
3,098 |
|
|
$ |
3,893 |
|
Restructuring and asset impairment charges |
|
$ |
|
|
|
$ |
165 |
|
Amortization of acquisition-related intangibles |
|
$ |
7 |
|
|
$ |
4 |
|
Research and Development. R&D spending increased by $610 million, or 23%, in the first half of
2010 compared to the first half of 2009 primarily due to higher process development costs and
higher profit-dependent compensation.
Marketing, General and Administrative. Marketing, general and administrative expenses decreased
$795 million, or 20%, in the first half of 2010 compared to the first half of 2009 due to the Q2
2009 charge of $1.447 billion incurred as a result of the fine imposed by the EC. This decrease was
partially offset by higher advertising expenses, including cooperative advertising expenses, higher
profit-dependent compensation, and to a lesser extent, expenses related to our Wind River Software
Group operating segment.
R&D, combined with marketing, general and administrative expenses, were 30% of net revenue in the
first half of 2010 (43% of net revenue in the first half of 2009).
Restructuring and Asset Impairment Charges. The following table summarizes restructuring and asset
impairment charges by program for the first half of 2010 and the first half of 2009:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
YTD 2010 |
|
|
YTD 2009 |
|
2009 restructuring program |
|
$ |
|
|
|
$ |
149 |
|
2006 efficiency program |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
Total restructuring and asset impairment charges |
|
$ |
|
|
|
$ |
165 |
|
|
|
|
|
|
|
|
For further information, see Note 16: Restructuring and Asset Impairment Charges in the Notes to
Consolidated Condensed Financial Statements of this Form 10-Q.
42
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Gains (Losses) on Equity Method Investments, Net
Gains (losses) on equity method investments, net were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
YTD 2010 |
|
|
YTD 2009 |
|
Equity method losses, net |
|
$ |
(44 |
) |
|
$ |
(103 |
) |
Impairment charges |
|
|
(10 |
) |
|
|
(13 |
) |
Other, net |
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses) on equity method investments, net |
|
$ |
37 |
|
|
$ |
(116 |
) |
|
|
|
|
|
|
|
During the first half of 2010, we recognized a gain of $91 million on the sale of our ownership
interest in Numonyx. For further information, see Note 10: Non-Marketable Equity Investment in
the Notes to Consolidated Condensed Financial Statements in this Form 10-Q. In addition, we
recognized lower equity method losses in the first half of 2010 compared to the first half of 2009.
The two most significant components of our equity method losses, net were Clearwire LLC ($47
million loss in the first half of 2010 and $27 million loss in the first half of 2009) and Numonyx
($42 million gain in the first half of 2010 and $37 million loss in the first half of 2009).
Gains (Losses) on Other Equity Investments, Net
Gains (losses) on other equity investments, net were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
YTD 2010 |
|
|
YTD 2009 |
|
Impairment charges |
|
$ |
(53 |
) |
|
$ |
(105 |
) |
Gains on sales, net |
|
|
103 |
|
|
|
10 |
|
Other, net |
|
|
75 |
|
|
|
29 |
|
|
|
|
|
|
|
|
Total gains (losses) on other equity investments, net |
|
$ |
125 |
|
|
$ |
(66 |
) |
|
|
|
|
|
|
|
We recognized higher gains on sales, lower impairment charges on non-marketable equity investments,
and higher gains on other equity transactions in the first half of 2010 compared to the first half
of 2009. Net gains on equity investments in the first half of 2010 included a gain of $67 million
on the Q1 2010 sale of shares in Micron. Other, net for the first half of 2010 is primarily
related to fair value gains on the equity interest in Micron we received from the sale of our
ownership interest in Numonyx in Q2 2010 and gains on equity options established prior to the
Numonyx sale that economically hedge a portion of our Micron equity interest.
Interest and Other, Net
The components of interest and other, net were as follows:
|
|
|
|
|
|
|
|
|
(In Millions) |
|
YTD 2010 |
|
|
YTD 2009 |
|
Interest income |
|
$ |
55 |
|
|
$ |
110 |
|
Other, net |
|
|
(15 |
) |
|
|
16 |
|
|
|
|
|
|
|
|
Total interest and other, net |
|
$ |
40 |
|
|
$ |
126 |
|
|
|
|
|
|
|
|
We recognized $15 million of fair value losses on our marketable debt instruments classified as
trading assets in the first half of 2010 compared to $60 million of fair value gains in the first
half of 2009. Interest income was lower in the first half of 2010 compared to the first half of
2009 as a result of lower interest rates, partially offset by higher average investment balances.
The average interest rate earned during the first half of 2010 decreased by approximately 1.0
percentage point compared to the first half of 2009. In addition, we recognized currency exchange
rate losses in the first half of 2009 due to euro exposure related to our euro-denominated
liability for the EC fine.
43
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Provision for Taxes
Our provision for taxes and effective tax rate were as follows:
|
|
|
|
|
|
|
|
|
(Dollars in Millions) |
|
YTD 2010 |
|
|
YTD 2009 |
|
Income before taxes |
|
$ |
7,631 |
|
|
$ |
579 |
|
Provision for taxes |
|
$ |
2,302 |
|
|
$ |
348 |
|
Effective tax rate |
|
|
30.2 |
% |
|
|
60.1 |
% |
The EC fine incurred in the second quarter of 2009 is not tax deductible. Because there is no
reduction in our provision for taxes associated with the EC fine of $1.447 billion, it
significantly impacted our effective tax rate in the first half of 2009. The impact of the EC fine
was partially offset by a higher percentage of estimated profits in lower tax jurisdictions in the
first half of 2009 as compared to the first half of 2010, as well as the reversal of previously
accrued taxes related to settlements and effective settlements that positively impacted the rate in
the first half of 2009.
Business Outlook
Our future results of operations and the topics of other forward-looking statements contained in
this Form 10-Q, including this MD&A, involve a number of risks and uncertaintiesin particular:
|
|
|
changes in business and economic conditions; |
|
|
|
|
revenue and pricing; |
|
|
|
|
gross margin and costs; |
|
|
|
|
pending legal proceedings; |
|
|
|
|
our effective tax rate; |
|
|
|
|
marketing, general and administrative expenses; |
|
|
|
|
our goals and strategies; |
|
|
|
|
new product introductions; |
|
|
|
plans to cultivate new businesses; |
|
|
|
|
R&D expenses; |
|
|
|
|
divestitures, acquisitions, or similar transactions; |
|
|
|
|
net gains (losses) from equity investments; |
|
|
|
|
interest and other, net; |
|
|
|
|
capital spending; |
|
|
|
|
depreciation; and |
|
|
|
|
impairment of investments. |
In addition to the various important factors discussed above, a number of other important factors
could cause actual results to differ materially from our expectations. See the risks described in
Risk Factors in Part II, Item 1A of this Form 10-Q.
Our expectations for the remainder of 2010 are as follows:
Q3 2010
|
|
|
Revenue: $11.6 billion, plus or minus $400 million. |
|
|
|
|
Gross margin percentage: 67% plus or minus a couple percentage points. |
|
|
|
|
Depreciation: approximately $1.1 billion. |
|
|
|
|
Research and development plus marketing, general and administrative expenses:
approximately $3.2 billion. |
|
|
|
|
Net gains (losses) from equity method investments, gains (losses) on other
equity investments, and interest and other: net gain of approximately $175 million. |
Full Year 2010
|
|
|
Gross margin percentage: 66%, plus or minus a couple percentage points. |
|
|
|
|
Depreciation: approximately $4.4 billion, plus or minus $100 million. |
|
|
|
|
Research and development plus marketing, general and administrative expenses:
$12.7 billion, plus or minus $100 million. |
|
|
|
|
Research and development spending: approximately $6.6 billion. |
|
|
|
|
Capital spending: $5.2 billion, plus or minus $200 million. |
|
|
|
|
Tax rate: approximately 32% for the third and fourth quarters. The estimated
effective tax rate is based on tax law in effect as of June 26, 2010 and expected income. |
44
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Status of Business Outlook
We expect that our corporate representatives will, from time to time, meet privately with
investors, investment analysts, the media, and others, and may reiterate the forward-looking
statements contained in the Business Outlook section and elsewhere in this Form 10-Q, including
any such statements that are incorporated by reference in this Form 10-Q. At the same time, we will
keep this Form 10-Q and our most current business outlook publicly available on our Investor
Relations web site at www.intc.com. The public can continue to rely on the business outlook
published on the web site as representing our current expectations on matters covered, unless we
publish a notice stating otherwise. The statements in the Business Outlook section and other
forward-looking statements in this Form 10-Q are subject to revision during the course of the year
in our quarterly earnings releases and SEC filings and at other times.
From the close of business on August 27, 2010 until our quarterly earnings release is published,
presently scheduled for October 12, 2010, we will observe a quiet period. During the quiet
period, the Business Outlook section and other forward-looking statements first published in our
Form 8-K filed on July 13, 2010 and updated in our Form 8-K filed on July 16, 2010, as reiterated
or updated as applicable in this Form 10-Q, 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.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
June 26, |
|
|
Dec. 26, |
|
(Dollars in Millions) |
|
2010 |
|
|
2009 |
|
Cash and cash equivalents, marketable debt instruments
included in trading assets, and short-term investments |
|
$ |
17,772 |
|
|
$ |
13,920 |
|
Loans receivable and other long-term investments |
|
$ |
4,709 |
|
|
$ |
4,528 |
|
Short-term and long-term debt |
|
$ |
2,273 |
|
|
$ |
2,221 |
|
Debt as % of stockholders equity |
|
|
5.0 |
% |
|
|
5.3 |
% |
In summary, our cash flows were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 26, |
|
|
June 27, |
|
(In Millions) |
|
2010 |
|
|
2009 |
|
Net cash provided by operating activities |
|
$ |
7,565 |
|
|
$ |
3,762 |
|
Net cash used for investing activities |
|
|
(4,642 |
) |
|
|
(1,816 |
) |
Net cash used for financing activities |
|
|
(1,396 |
) |
|
|
(1,470 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
1,527 |
|
|
$ |
476 |
|
|
|
|
|
|
|
|
Operating Activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes
in assets and liabilities.
Cash from operations for the first half of 2010 was $7.6 billion, an increase of $3.8 billion
compared to the first half of 2009 due to higher net income, partially offset by adjustments for
non-cash items. Income taxes paid, net of refunds in the first half of 2010 compared to the first
half of 2009 were $2.1 billion higher on higher income before taxes in 2010.
Changes in assets and liabilities as of June 26, 2010 compared to December 26, 2009 included the
following:
|
|
|
Accrued compensation and benefits decreased due to payout of 2009 profit-dependent
compensation. |
|
|
|
|
Inventory increased due to higher microprocessor inventory. |
For the first half of 2010, our two largest customers accounted for 38% of net revenue (39% for the
first half of 2009) with one of those customers accounting for 21% of our net revenue, and another
customer accounting for 17% of our net revenue. These two largest customers accounted for 41% of
net accounts receivable at June 26, 2010 and December 26, 2009.
45
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Investing Activities
The increase in cash used for investing activities in the first half of 2010, compared to the first
half of 2009, was due to an increase in net purchases of trading assets and available-for-sale
investments. These increases were partially offset by a decrease in capital expenditures due to the
timing of the ramp of our latest silicon process technology.
Financing Activities
The decrease in cash used for financing activities in the first half of 2010, compared to the first
half of 2009, was primarily due to an increase in proceeds from sales of shares through employee
equity incentive plans, an increase in short-term debt (drafts payable) in the first half of 2010
compared to a decrease in short-term debt (drafts payable) in the first half of 2009, and proceeds
from government grants. These increases were partially offset by higher dividend payments and an
increase in repurchases and retirement of common stock.
Liquidity
Cash generated by operations is used as our primary source of liquidity. As of June 26, 2010, cash
and cash equivalents, marketable debt instruments included in trading assets, and short-term
investments totaled $17.8 billion. In addition to the $17.8 billion, we have $4.7 billion in loans
receivable and other long-term investments that we include when assessing our investment portfolio.
The credit quality of our investment portfolio remains high, and we continue to be able to invest
in high-credit-quality investments. Substantially all of our investments in debt instruments are
with A/A2 or better rated issuers, and a substantial majority of the issuers are rated AA-/Aa3 or
better.
Our commercial paper program provides another potential source of liquidity. We have an ongoing
authorization from our Board of Directors to borrow up to $3.0 billion, including through the
issuance of commercial paper. Maximum borrowings under our commercial paper program during the
first half of 2010 were $150 million, although no commercial paper remained outstanding as of June
26, 2010. Our commercial paper was rated A-1+ by Standard & Poors and P-1 by Moodys as of June
26, 2010. We also have an automatic shelf registration statement on file with the SEC pursuant to
which we may offer an unspecified amount of debt, equity, and other securities.
We believe that we have the financial resources needed to meet business requirements for the next
12 months, including capital expenditures for worldwide manufacturing and assembly and test,
working capital requirements, and potential dividends, common stock repurchases, and acquisitions
or strategic investments.
Fair Value of Financial Instruments
Fair value is the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. When
determining fair value, we consider the principal or most advantageous market in which we would
transact, and we consider assumptions that market participants would use when pricing the asset or
liability. See Note 4: Fair Value in the Notes to Consolidated Condensed Financial Statements of
this Form 10-Q.
Credit risk is factored into the valuation of financial instruments that we measure and record at
fair value on a recurring basis. When fair value is determined using pricing models, such as a
discounted cash flow model, the issuers credit risk and/or Intels credit risk is factored into
the calculation of the fair value, as appropriate.
46
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Marketable Debt Instruments
As of June 26, 2010, our assets measured and recorded at fair value on a recurring basis included
$21.5 billion of marketable debt instruments. Of these instruments, $2.0 billion was classified as
Level 1, $18.9 billion as Level 2, and $573 million as Level 3.
Our balance of marketable debt instruments that are measured and recorded at fair value on a
recurring basis and classified as Level 1 was classified as such due to the usage of observable
market prices for identical securities that are traded in active markets. Management judgment was
required to determine the levels for the frequency of transactions that should be met for a market
to be considered active. Our assessment of an active market for our marketable debt instruments
generally takes into consideration activity of each individual instrument, including the number of
days each individual instrument trades.
Of the $18.9 billion balance of marketable debt instruments measured and recorded at fair value on
a recurring basis and classified as Level 2, approximately 55% of the balance was classified as
Level 2 due to the usage of a discounted cash flow model and approximately 45% due to the usage of
non-binding market consensus prices that are 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 were classified as such due to the lack of observable market data to
corroborate either the non-binding market consensus prices or the non-binding broker quotes. When
observable market data is not available, we corroborate the non-binding market consensus prices and
non-binding broker quotes using unobservable data, if available. All of our investments in
asset-backed securities were classified as Level 3, and substantially all of them were valued using
non-binding market consensus prices that we were not able to corroborate with observable market
data due to the lack of transparency in the market for asset-backed securities.
Equity Securities
As of June 26, 2010, our portfolio of assets measured and recorded at fair value on a recurring
basis included $1.6 billion of marketable equity securities (including marketable equity securities
receivable). Of these securities, $783 million was 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 activity during each
week of the one-month period prior to the valuation date for individual securities, including the
number of days individual equity securities trade and the average weekly trading volume in relation
to the total outstanding shares of that security. The remaining marketable equity securities of
$767 million were classified as Level 2 because their valuations were either based on quoted prices
for identical securities in less active markets or adjusted for security-specific restrictions.
47
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information in this section should be read in connection with the information on financial
market risk related to changes in non-U.S. currency exchange rates and changes in interest rates in
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report
on Form 10-K for the year ended December 26, 2009. All of the potential changes noted below are
based on sensitivity analyses performed on our financial positions as of June 26, 2010 and December
26, 2009. Actual results may differ materially.
Equity Prices
Our marketable equity investments include marketable equity securities (including marketable equity
securities receivable) and equity derivative instruments such as warrants and options. To the
extent that our marketable equity securities have strategic value, we typically do not attempt to
reduce or eliminate our equity market exposure through hedging activities; however, for our
investments in strategic equity derivative instruments, including warrants, we may enter into
transactions to reduce or eliminate the equity market risks. For securities that we no longer
consider strategic, we evaluate legal, market, and economic factors in our decision on the timing
of disposal and whether it is possible and appropriate to hedge the equity market risk.
As of June 26, 2010, the fair value of our marketable equity investments and our equity derivative
instruments, including hedging positions, was $1.6 billion ($805 million as of December 26, 2009).
Our marketable equity investments include our investments in Micron and Clearwire Corporation,
carried at a fair market value of $628 million and $282 million, respectively, as of June 26, 2010.
To determine reasonably possible decreases in the market value of our marketable equity
investments, we analyzed the expected market price sensitivity of our marketable equity investment
portfolio. Assuming a loss of 50% 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 $565 million, based on the value as of June 26, 2010 (a decrease in value of
approximately $405 million, based on the value as of December 26, 2009 using an assumed loss of
50%).
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 being able 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 equity investments, excluding investments
accounted for under the equity method, had a carrying amount of $860 million as of June 26, 2010
($939 million as of December 26, 2009). As of June 26, 2010, the carrying amount of our
non-marketable equity method investments was $1.9 billion ($2.5 billion as of December 26, 2009). A
substantial majority of this balance as of June 26, 2010 was concentrated in companies in the flash
memory market segment. Our flash memory market segment investments include our investment of $1.6
billion in IMFT/IMFS ($1.6 billion as of December 26, 2009). Our flash memory market segment
investments as of December 26, 2009 also included an investment in Numonyx of $453 million, which
was sold in the second quarter of 2010. For further information, see Note 10: Non-Marketable
Equity Investments in the Notes to Consolidated Condensed Financial Statements of this Form
10-Q.
48
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on managements evaluation (with the participation of our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO)), as of the end of the period covered by this report, our CEO and CFO
have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective
to provide reasonable assurance that information required to be disclosed by us in reports that we
file or submit under the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in Securities and Exchange Commission rules and forms, and is accumulated
and communicated to management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this
report that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls or our
internal control over financial reporting will prevent or detect all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that the control systems objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, 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 because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
49
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 23: Contingencies in the Notes to Consolidated
Condensed Financial Statements of this Form 10-Q.
ITEM 1A. RISK FACTORS
We describe our business risk factors below. This description includes any material changes to and
supersedes the description of the risk factors associated with our business previously disclosed in
Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 26, 2009.
Fluctuations in demand for our products may harm our financial results and are difficult to
forecast.
If demand for our products fluctuates, our
revenue and profitability could be harmed. Important factors that could cause demand for our
products to fluctuate include:
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changes in business and economic conditions, including downturns in the
semiconductor industry and/or the overall economy; |
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changes in consumer confidence caused by changes in market conditions,
including changes in the credit market, expectations for inflation, unemployment levels,
and energy prices; |
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changes in the level of customers components inventories; |
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competitive pressures, including pricing pressures, from companies that have
competing products, chip architectures, manufacturing technologies, and marketing programs; |
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changes in customer product needs; |
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strategic actions taken by our competitors; and |
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market acceptance of our products. |
If product demand decreases, our manufacturing or assembly and test capacity could be
underutilized, and we may be required to record an impairment on our long-lived assets, including
facilities and equipment as well as intangible assets, which would increase our expenses. In
addition, 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 have a negative
impact on our gross margin. Factory-planning decisions may shorten the useful lives of long-lived
assets, including facilities and equipment, and cause us to accelerate depreciation. In the long
term, if product demand increases, we may not be able to add manufacturing or assembly and test
capacity fast enough to meet market demand. These changes in demand for our products, and changes
in our customers product needs, could have a variety of negative effects on our competitive
position and our financial results, and, in certain cases, may reduce our revenue, increase our
costs, lower our gross margin percentage, or require us to recognize impairments of our assets.
Litigation or regulatory proceedings could harm our business.
We may be subject to legal claims or regulatory matters involving stockholder, consumer,
competition, and other issues on a global basis. As described in Note 23: Contingencies in the
Notes to Consolidated Condensed Financial Statements of this Form 10-Q, we are currently engaged in
a number of litigation and regulatory matters, particularly with respect to competition. Litigation
and regulatory proceedings are subject to inherent uncertainties, and unfavorable rulings could
occur. An unfavorable ruling could include monetary damages or, in cases for which injunctive
relief is sought, an injunction prohibiting us from manufacturing or selling one or more products,
precluding particular business practices, or requiring other remedies, such as compulsory licensing
of intellectual property. If we were to receive an unfavorable ruling in a matter, our business and
results of operations could be materially harmed.
The semiconductor industry and our operations are characterized by a high percentage of costs that
are fixed or difficult to reduce in the short term, and by product demand that is highly variable
and subject to significant downturns that may harm our business, results of operations, and
financial condition.
The semiconductor industry and our operations are characterized by high costs, such as those
related to facility construction and equipment, R&D, and employment and training of a highly
skilled workforce, that are either fixed or difficult to reduce in the short term. At the same
time, demand for our products is highly variable and there have been downturns, often in connection
with maturing product cycles as well as downturns in general economic market conditions. These
downturns have been characterized by reduced product demand, manufacturing overcapacity and
resulting excess capacity charges, high inventory levels, and lower average selling prices. The
combination of these factors may cause our revenue, gross margin, cash flow, and profitability to
vary significantly in both the short and long term.
50
We operate in intensely competitive industries, and our failure to respond quickly to technological
developments and incorporate new features into our products could harm our ability to compete.
We operate in intensely competitive industries that experience rapid technological developments,
changes in industry standards, changes in customer requirements, and frequent new product
introductions and improvements. If we are unable to respond quickly and successfully to these
developments, we may lose our competitive position, and our products or technologies may become
uncompetitive or obsolete. To compete successfully, we must maintain a successful R&D effort,
develop new products and production processes, and improve our existing products and processes at
the same pace or ahead of our competitors. Our R&D efforts are aimed at solving increasingly
complex problems, and we do not expect that all of our projects will be successful. If our R&D
efforts are unsuccessful, our future results of operations could be materially harmed. We may not
be able to develop and market these new products successfully, the products we invest in and
develop may not be well received by customers, and products developed and new technologies offered
by others may affect demand for our products. These types of events could have a variety of
negative effects on our competitive position and our financial results, such as reducing our
revenue, increasing our costs, lowering our gross margin percentage, and requiring us to recognize
impairments on our assets.
We invest in companies for strategic reasons and may not realize a return on our investments.
We make investments in companies around the world to further our strategic objectives and support
our key business initiatives. Such investments include equity or debt instruments of public or
private companies, and many of these instruments are non-marketable at the time of our initial
investment. These companies 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 success of these companies is dependent on product development, market acceptance, operational
efficiency, and other key business factors. The companies in which we invest may fail because they
may not be able to secure additional funding, obtain favorable investment terms for future
financings, or take advantage of liquidity events such as public offerings, mergers, and private
sales. If any of these private companies fail, we could lose all or part of our investment in that
company. If we determine that an other-than-temporary decline in the fair value exists for an
equity or debt investment in a public or private company in which we have invested, we write down
the investment to its fair value and recognize the related write-down as an investment loss. We
have significant investments in companies in the flash memory market segment, and declines in this
market segment or changes in managements plans with respect to our investments in this market
segment could result in significant impairment charges, impacting gains (losses) on equity method
investments and gains (losses) on other equity investments.
Furthermore, when the strategic objectives of an investment have been achieved, or if the
investment or business diverges from our strategic objectives, we may decide to dispose of the
investment. Our non-marketable equity investments in private companies are not liquid, and we may
not be able to dispose of these investments on favorable terms or at all. The occurrence of any of
these events could harm our results. Additionally, for cases in which we are required under equity
method accounting to recognize a proportionate share of another companys income or loss, such
income or loss may impact our earnings. Gains or losses from equity securities could vary from
expectations depending on gains or losses realized on the sale or exchange of securities, gains or
losses from equity method investments, and impairment charges related to debt instruments as well
as equity and other investments.
Our results of operations could vary as a result of the methods, estimates, and judgments that we
use in applying our accounting policies.
The methods, estimates, and judgments that we use in applying our accounting policies have a
significant impact on our results of operations (see Critical Accounting Estimates in Part I,
Item 2 of this Form 10-Q). Such methods, estimates, and judgments are, by their nature, subject to
substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to
change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments
could significantly affect our results of operations.
Fluctuations in the mix of products sold may harm our financial results.
Because of the wide price differences among and within notebook, netbook, desktop, and server
microprocessors, the mix and types of performance capabilities of microprocessors sold affect the
average selling price of our products and have a substantial impact on our revenue and gross
margin. Our financial results also depend in part on the mix of other products that we sell, such
as chipsets, flash memory, and other semiconductor products. In addition, more recently introduced
products tend to have higher associated costs because of initial overall development and production
ramp. Fluctuations in the mix and types of our products may also affect the extent to which we are
able to recover the fixed costs and investments associated with a particular product, and as a
result can harm our financial results.
51
Our global operations subject us to risks that may harm our results of operations and financial
condition.
We have sales offices, R&D, manufacturing, and assembly and test facilities in many countries, and
as a result, we are subject to risks that may limit our ability to manufacture, assemble and test,
design, develop, or sell products in particular countries, which could, in turn, harm our results
of operations and financial condition, including:
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security concerns, such as armed conflict and civil or military unrest, crime,
political instability, and terrorist activity; |
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health concerns; |
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natural disasters; |
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inefficient and limited infrastructure and disruptions, such as large-scale
outages or interruptions of service from utilities, transportation, or telecommunications
providers and supply chain interruptions; |
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differing employment practices and labor issues; |
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local business and cultural factors that differ from our normal standards and
practices, including business practices that we are prohibited from engaging in by the
Foreign Corrupt Practices Act and other anticorruption laws and regulations; |
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regulatory requirements and prohibitions that differ between jurisdictions; and |
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restrictions on our operations by governments seeking to support local
industries, nationalization of our operations, and restrictions on our ability to
repatriate earnings. |
In addition, although substantially all of our products are sold in U.S. dollars, we incur a
significant amount of certain types of expenses, such as payroll, utilities, tax, and marketing
expenses, as well as conduct certain investing and financing activities, in local currencies. Our
hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate
movements, and therefore fluctuations in exchange rates could harm our results and financial
condition. In addition, changes in tariff and import regulations and in U.S. and non-U.S. monetary
policies may harm our results and financial condition by increasing our expenses and reducing our
revenue. Varying tax rates in different jurisdictions could harm our results of operations and
financial condition by increasing our overall tax rate.
We maintain a program of insurance coverage for various types of property, casualty, and other
risks. We place our insurance coverage with various carriers in numerous jurisdictions. However,
there is a risk that one or more of our insurance providers may be unable to pay a claim. The types
and amounts of insurance that we obtain vary from time to time and from location to location,
depending on availability, cost, and our decisions with respect to risk retention. The policies are
subject to deductibles and exclusions that result in our retention of a level of risk on a
self-insurance basis. Losses not covered by insurance may be substantial and may increase our
expenses, which could harm our results of operations and financial condition.
Failure to meet our production targets, resulting in undersupply or oversupply of products, may
harm our business and results of operations.
Production of integrated circuits is a complex process. Disruptions in this process can result from
interruptions in our processes, errors, and difficulties in our development and implementation of
new processes; defects in materials; disruptions in our supply of materials or resources; and
disruptions at our fabrication and assembly and test facilities due to, for example, accidents,
maintenance issues, or unsafe working conditionsall of which could affect the timing of production
ramps and yields. We may not be successful or efficient in developing or implementing new
production processes. The occurrence of any of the foregoing may result in our failure to meet or
increase production as desired, resulting in higher costs or substantial decreases in yields, which
could affect our ability to produce sufficient volume to meet specific product demand. The
unavailability or reduced availability of certain products could make it more difficult to
implement our platform strategy. We may also experience increases in yields. A substantial increase
in yields could result in higher inventory levels and the possibility of resulting excess capacity
charges as we slow production to reduce inventory levels. The occurrence of any of these events
could harm our business and results of operations.
We may have difficulties obtaining the resources or products we need for manufacturing, assembling
and testing our products, or operating other aspects of our business, which could harm our ability
to meet demand for our products and may increase our costs.
We have thousands of suppliers providing various materials that we use in the production of our
products and other aspects of our business, and we seek, where possible, to have several sources of
supply for all of those materials. However, we may rely on a single or a limited number of
suppliers, or upon suppliers in a single country, for these materials. The inability of such
suppliers to deliver adequate supplies of production materials or other supplies could disrupt our
production processes or could make it more difficult for us to implement our business strategy. In
addition, production could be disrupted by the unavailability of the resources used in production,
such as water, silicon, electricity, and gases. Future environmental regulations could restrict the
supply or increase the cost of certain of the materials that we currently use in our business. The
unavailability or reduced availability of the materials or resources that we use in our business
may require us to reduce production of products or may require us to incur additional costs in
order to obtain an adequate supply of those materials or resources. The occurrence of any of these
events could harm our business and results of operations.
52
Costs related to product defects and errata may harm our results of operations and business.
Costs associated with unexpected product defects and errata (deviations from published
specifications) due to, for example, unanticipated problems in our manufacturing processes,
include:
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writing off the value of inventory of defective products; |
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disposing of defective products that cannot be fixed; |
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recalling defective products that have been shipped to customers; |
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providing product replacements for, or modifications to, defective
products; and/or |
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defending against litigation related to defective products. |
These costs could be substantial and may therefore increase our expenses and lower our gross
margin. In addition, our reputation with our customers or users of our products could be damaged as
a result of such product defects and errata, and the demand for our products could be reduced.
These factors could harm our financial results and the prospects for our business.
We may be subject to claims of infringement of third-party intellectual property rights, which
could harm our business.
Third parties may assert against us or our customers alleged patent, copyright, trademark, or other
intellectual property rights to technologies that are important to our business. We are currently
engaged in a number of litigation matters involving intellectual property rights. We may be subject
to intellectual property infringement claims from certain individuals and companies, including those who have
acquired patent portfolios for the sole purpose of asserting such claims against other companies.
Any claims that our products or processes infringe the intellectual property rights of others,
regardless of the merit or resolution of such claims, could cause us to incur significant costs in
responding to, defending, and resolving such claims, and may divert the efforts and attention of
our management and technical personnel from our business. As a result of such intellectual property
infringement claims, we could be required or otherwise decide that it is appropriate to:
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pay third-party infringement claims; |
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discontinue manufacturing, using, or selling particular products subject to
infringement claims; |
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discontinue using the technology or processes subject to infringement claims; |
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develop other technology not subject to infringement claims, which could be
time-consuming and costly or may not be possible; and/or |
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license technology from the third party claiming infringement, which license
may not be available on commercially reasonable terms. |
The occurrence of any of the foregoing could result in unexpected expenses or require us to
recognize an impairment of our assets, which would reduce the value of our assets and increase
expenses. In addition, if we alter or discontinue our production of affected items, our revenue
could be harmed.
We may not be able to enforce or protect our intellectual property rights, which may harm our
ability to compete and harm our business.
Our ability to enforce our patents, copyrights, software licenses, and other intellectual property
rights is subject to general litigation risks, as well as uncertainty as to the enforceability of
our intellectual property rights in various countries. When we seek to enforce our rights, we are
often subject to claims that the intellectual property right is invalid, is otherwise not
enforceable, or is licensed to the party against whom we are asserting a claim. In addition, our
assertion of intellectual property rights often results in the other party seeking to assert
alleged intellectual property rights of its own or assert other claims against us, which could harm
our business. If we are not ultimately successful in defending ourselves against these claims in
litigation, we may not be able to sell a particular product or family of products due to an
injunction, or we may have to pay damages that could, in turn, harm our results of operations. In
addition, governments may adopt regulations, and governments or courts may render decisions,
requiring compulsory licensing of intellectual property to others, or governments may require that
products meet specified standards that serve to favor local companies. Our inability to enforce our
intellectual property rights under these circumstances may harm our competitive position and our
business.
We may be subject to intellectual property theft or misuse, which could result in third-party
claims and harm our business and results of operations.
We regularly face attempts by others to gain unauthorized access through the Internet to our
information technology systems by, for example, masquerading as authorized users or surreptitious
introduction of software. These attempts, which might be the result of industrial or other
espionage, or actions by hackers seeking to harm the company, its products, or end users, are
sometimes successful. One sophisticated incident occurred in January 2010 around the same time as
the publicized security incident reported by Google. We seek to detect and investigate these
security incidents and to prevent their recurrence, but in some cases we might be unaware of an
incident or its magnitude and effects. The theft and/or unauthorized use or publication of our
trade secrets and other confidential business information as a result of such an incident could
adversely affect our competitive position and reduce marketplace acceptance of our products; the
value of our investment in R&D, product development, and marketing could be reduced; and third
parties might assert against us or our customers claims related to resulting losses of confidential
or proprietary information or end-user data and/or system reliability. Our business could be
subject to significant disruption, and we could suffer monetary and other losses, including the
cost of product recalls and returns and reputational harm, in the event of such incidents and
claims.
53
Our licenses with other companies and our participation in industry initiatives may allow other
companies, including our competitors, to use our patent rights.
Companies in the semiconductor industry often rely on the ability to license patents from each
other in order to compete. Many of our competitors have broad licenses or cross-licenses with us,
and under current case law, some of the licenses may permit these competitors to pass our patent
rights on to others. If one of these licensees becomes a foundry, our competitors might be able to
avoid our patent rights in manufacturing competing products. In addition, our participation in
industry initiatives may require us to license our patents to other companies that adopt certain
industry standards or specifications, even when such organizations do not adopt standards or
specifications proposed by us. As a result, our patents implicated by our participation in industry
initiatives might not be available for us to enforce against others who might otherwise be deemed
to be infringing those patents, our costs of enforcing our licenses or protecting our patents may
increase, and the value of our intellectual property may be impaired.
Decisions about the scope of operations of our business could affect our results of operations and
financial condition.
Changes in the business environment could lead to changes in our decisions about the scope of
operations of our business, and these changes could result in restructuring and asset impairment
charges. Factors that could cause actual results to differ materially from our expectations with
regard to changing the scope of our operations include:
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timing and execution of plans and programs that may be subject to local labor
law requirements, including consultation with appropriate work councils; |
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changes in assumptions related to severance and postretirement costs; |
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future divestitures; |
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new business initiatives and changes in product roadmap, development, and
manufacturing; |
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changes in employment levels and turnover rates; |
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changes in product demand and the business environment; and |
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changes in the fair value of certain long-lived assets. |
Our acquisitions, divestitures, and other transactions could disrupt our ongoing business and harm
our results of operations.
In pursuing our business strategy, we routinely conduct discussions, evaluate opportunities, and
enter into agreements regarding possible investments, acquisitions, divestitures, and other
transactions, such as joint ventures. Acquisitions and other transactions involve significant
challenges and risks, including risks that:
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we may not be able to identify suitable opportunities at terms acceptable to
us; |
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the transaction may not advance our business strategy; |
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we may not realize a satisfactory return on the investment we make; |
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we may not be able to retain key personnel of the acquired business; or |
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we may experience difficulty in integrating new employees, business systems,
and technology. |
When we decide to sell assets or a business, we may encounter difficulty in finding or completing
divestiture opportunities or alternative exit strategies on acceptable terms in a timely manner,
and the agreed terms and financing arrangements could be renegotiated due to changes in business or
market conditions. These circumstances could delay the accomplishment of our strategic objectives
or cause us to incur additional expenses with respect to businesses that we want to dispose of, or
we may dispose of 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:
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failure to obtain required regulatory or other approvals; |
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intellectual property or other litigation; |
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difficulties that we or other parties may encounter in obtaining financing for
the transaction; or |
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other factors. |
Further, acquisitions, divestitures, and other transactions require substantial management
resources and have the potential to divert our attention from our existing business. These factors
could harm our business and results of operations.
In order to compete, we must attract, retain, and motivate key employees, and our failure to do so
could harm our results of operations.
In order to compete, 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 in the
semiconductor industry can be intense. To help attract, retain, and motivate qualified employees,
we use share-based incentive awards such as employee stock options and non-vested share units
(restricted stock units). If the value of such stock awards does not appreciate as measured by the
performance of the price of our common stock, or if our share-based compensation otherwise ceases
to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be
weakened, which could harm our results of operations.
54
Our failure to comply with applicable environmental laws and regulations worldwide could harm our
business and results of operations.
The manufacturing and assembling and testing 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 any of
those applicable laws or regulations could result in:
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regulatory penalties, fines, and legal liabilities; |
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suspension of production; |
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alteration of our fabrication and assembly and test processes; and |
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curtailment of our operations or sales. |
In addition, our failure to manage the use, transportation, emissions, discharge, storage,
recycling, or disposal of hazardous materials could subject us to increased costs or future
liabilities. Existing and future environmental laws and regulations could also require us to
acquire pollution abatement or remediation equipment, modify our product designs, or incur other
expenses associated with such laws and regulations. Many new materials that we are evaluating for
use in our operations may be subject to regulation under existing or future environmental laws and
regulations that may restrict our use of one or more of such materials in our manufacturing,
assembly and test processes, or products. Any of these restrictions could harm our business and
results of operations by increasing our expenses or requiring us to alter our manufacturing and
assembly and test processes.
Climate change poses both regulatory and physical risks that could harm our results of operations
or affect the way we conduct our business.
In addition to the possible direct economic impact that climate change could have on us, climate
change mitigation programs and regulations can increase our costs. For example, the cost of
perfluorocompounds (PFCs), a gas that we use in our manufacturing, could increase over time under
some climate-change-focused emissions trading programs that may be imposed by government
regulation. If the use of PFCs is prohibited, we would need to obtain substitute materials that may
cost more or be less available for our manufacturing operations. In addition, air quality permit
requirements for our manufacturing operations could become more burdensome and cause delays in our
ability to modify our facilities. We also see the potential for higher energy costs driven by
climate change regulations. Our costs could increase if utility companies pass on their costs, such
as those associated with carbon taxes, emission cap and trade programs, or renewable portfolio
standards. While we maintain business recovery plans that are intended to allow us to recover from
natural disasters or other events that can be disruptive to our business, we cannot be sure that
our plans will fully protect us from all such disasters or events. Many of our operations are
located in semi-arid regions, such as Israel and the southwestern U.S. Some scenarios predict that
these regions may become even more vulnerable to prolonged droughts due to climate change.
Changes in our effective tax rate may harm our results of operations.
A number of factors may increase our future effective tax rates, including:
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the jurisdictions in which profits are determined to be earned and taxed; |
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the resolution of issues arising from tax audits with various tax authorities; |
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changes in the valuation of our deferred tax assets and liabilities, and
changes in deferred tax valuation allowances; |
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adjustments to income taxes upon finalization of various tax returns; |
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increases in expenses not deductible for tax purposes, including write-offs of
acquired in-process research and development and impairments of goodwill in connection with
acquisitions; |
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changes in available tax credits; |
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changes in tax laws or the interpretation of such tax laws, including proposals
in the U.S. to change the taxation of foreign income and expenses; |
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changes in U.S. generally accepted accounting principles; and |
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our decision to repatriate non-U.S. earnings for which we have not previously
provided for U.S. taxes. |
Any significant increase in our future effective tax rates could reduce net income for future
periods.
Interest and other, net could be harmed by macroeconomic and other factors.
Factors that could cause interest and other, net in our consolidated condensed statements of
operations to fluctuate include:
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fixed-income, equity, and credit market volatility; |
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fluctuations in foreign currency exchange rates; |
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fluctuations in interest rates; |
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changes in the credit standing of financial instrument counterparties; |
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changes in our cash and investment balances; and |
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changes in our hedge accounting treatment. |
55
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
We have an ongoing authorization, amended in November 2005, from our Board of Directors to
repurchase up to $25 billion in shares of our common stock in open market or negotiated
transactions. As of June 26, 2010, $5.7 billion remained available for repurchase under the
existing repurchase authorization.
We did not make any common stock repurchases under our authorized plan during the first half of
2010.
For the majority of restricted stock units granted, the number of shares issued on the date the
restricted stock units vest is net of the minimum statutory withholding requirements that we pay in
cash to the appropriate taxing authorities on behalf of our employees.
Although these withheld shares are not issued or considered common stock repurchases under our
authorized plan, they are treated as common stock repurchases in our financial statements, as they
reduce the number of shares that would have been issued upon vesting.
56
ITEM 6. EXHIBITS
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Incorporated by Reference |
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Filed or |
Exhibit |
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Filing |
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Furnished |
Number |
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Exhibit Description |
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Form |
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File Number |
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Exhibit |
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Date |
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Herewith |
3.1
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Intel Corporation
Third Restated
Certificate of
Incorporation of
Intel
Corporation
dated May
17, 2006
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8-K
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000-06217
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3.1 |
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5/22/06 |
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3.2
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Intel Corporation
Bylaws, as amended
on May 19, 2009
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8-K
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000-06217
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3.1 |
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5/22/09 |
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10.1
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Intel Corporation
Non-Employee
Director Restricted
Stock Unit
Agreement under the
2006 Equity
Incentive Plan (for
RSUs granted after
July 1, 2010 under
the OSU program)
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X |
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12.1
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Statement Setting
Forth the
Computation
of Ratios of
Earnings to Fixed
Charges
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X |
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31.1
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Certification of
Chief Executive
Officer
pursuant to
Rule 13a-14(a) of
the
Securities
Exchange Act of
1934, as
amended (the
Exchange Act)
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X |
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31.2
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Certification of
Chief Financial
Officer
and Principal
Accounting
Officer
pursuant to
Rule 13a-14(a) of
the
Exchange Act
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X |
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32.1
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Certification of
the Chief
Executive
Officer and
the Chief Financial
Officer
and Principal
Accounting
Officer
pursuant to
Rule 13a-14(b) of
the
Exchange Act
and 18 U.S.C.
Section 1350,
as adopted
pursuant to Section
906 of
the
Sarbanes-Oxley Act
of 2002
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X |
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101.INS
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XBRL Instance Document
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X |
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101.SCH
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XBRL Taxonomy Extension Schema Document
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X |
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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X |
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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X |
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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X |
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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X |
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Intel, Intel logo, Intel Inside, Intel Atom, Celeron, Intel Centrino, Intel Core, Intel vPro, Intel
Xeon, Itanium, Moblin, and Pentium are trademarks of Intel Corporation in the U.S. and other
countries. |
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*Other names and brands may be claimed as the property of others. |
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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INTEL CORPORATION
(Registrant)
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Date: July 30, 2010 |
By: |
/s/ Stacy J. Smith
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Stacy J. Smith |
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Senior Vice President, Chief Financial Officer,
and Principal Accounting Officer |
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58