10-K 1 d424446d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 29, 2012.

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                    .

Commission File Number 000-06217

 

 

LOGO

INTEL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   94-1672743

State or other jurisdiction of

incorporation or organization

 

(I.R.S. Employer

Identification No.)

2200 Mission College Boulevard, Santa Clara, California   95054-1549
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (408) 765-8080

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common stock, $0.001 par value   The NASDAQ Global Select Market*

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x  No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x  No ¨

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 x  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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.

 

Large accelerated filer  x   Accelerated filer  ¨    Non-accelerated filer  ¨   Smaller reporting company  ¨
     (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ¨  No x

Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2012, based upon the closing price of the common stock as reported by The NASDAQ Global Select Market* on such date, was

$133.5 billion

4,946 million shares of common stock outstanding as of February 8, 2013

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement related to its 2013 Annual Stockholders’ Meeting to be filed subsequently—Part III of this Form 10-K.

 

 

 


Table of Contents

 

INTEL CORPORATION

 

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 29, 2012

INDEX

 

      Page  
PART I   
Item 1.  

Business

     1   
Item 1A.  

Risk Factors

     14   
Item 1B.  

Unresolved Staff Comments

     20   
Item 2.  

Properties

     20   
Item 3.  

Legal Proceedings

     20   
Item 4.  

Mine Safety Disclosures

     20   
PART II   
Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     21   
Item 6.  

Selected Financial Data

     23   
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

     41   
Item 8.  

Financial Statements and Supplementary Data

     43   
Item 9.  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     98   
Item 9A.  

Controls and Procedures

     98   
Item 9B.  

Other Information

     98   
PART III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     99   
Item 11.  

Executive Compensation

     99   
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     99   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     99   
Item 14.  

Principal Accounting Fees and Services

     99   
PART IV   
Item 15.  

Exhibits, Financial Statement Schedules

     100   


Table of Contents

 

PART I

 

 

ITEM 1. BUSINESS

Company Overview

We design and manufacture advanced integrated digital technology platforms. A platform consists of a microprocessor and chipset, and may be enhanced by additional hardware, software, and services. We sell these platforms primarily to original equipment manufacturers (OEMs), original design manufacturers (ODMs), and industrial and communications equipment manufacturers in the computing and communications industries. Our platforms are used in a wide range of applications, such as PCs (including Ultrabook, detachable, and convertible systems), servers, tablets, smartphones, automobiles, automated factory systems, and medical devices. We also develop and sell software and services primarily focused on security and technology integration. We were incorporated in California in 1968 and reincorporated in Delaware in 1989.

Company Strategy

Our goal is to be the preeminent computing solutions company that powers the worldwide digital economy. Over time the number of devices connected to the Internet and each other has grown from hundreds of millions to billions, and the variety of devices also continues to increase. The combination of the proliferation of mobile devices connecting to the Internet and a build-out of the cloud infrastructure that supports these devices is driving fundamental changes in the computing industry. As a result, we are transforming our primary focus from the design and manufacture of semiconductor chips for PCs and servers to the delivery of solutions consisting of hardware and software platforms and supporting services across a wide range of computing devices. Examples of these solutions can be seen across the computing continuum, from the teraflops of operations per second for high performance computing (HPC) to the milliwatts of energy-consumed by an embedded application. Additionally, computing is becoming an increasingly engaging, mobile, and personal experience. End users value consistency across devices that connect seamlessly and securely to the Internet and to each other. We enable this experience by innovating around energy-efficient performance, connectivity, and security.

To succeed in this changing computing environment, we have the following key objectives:

 

strive to ensure that Intel® technology remains the best choice for the PC as well as cloud computing and the data center;

 

maximize and extend our manufacturing technology leadership;

 

expand platforms into adjacent market segments to bring compelling new System-on-Chip (SoC) solutions and user experiences to mobile form factors including smartphones and tablets, as well as embedded and microserver applications;

 

develop platforms that enable devices that connect to the Internet and to each other to create a continuum of personal user and computing experiences thereby offering consumers a set of secure, consistent, engaging, and personalized computing experiences; and

 

positively impact the world through our actions and the application of our energy-efficient technology.

We use our core assets to meet these objectives. Our core assets include our silicon and process technology, our architecture and platforms, our global presence, our strong relationships across the industry, and our brand recognition. We believe that applying these core assets to our key focus areas provides us with the scale, capacity, and global reach to establish new technologies and respond to customers’ needs quickly. Our core assets and key focus areas include the following:

 

 

Silicon and Manufacturing Technology Leadership.  We have long been a leader in silicon process technology and manufacturing, and we aim to continue our lead through investment and innovation in this critical area. We drive a regular two-year upgrade cycle—introducing a new microarchitecture approximately every two years and ramping the next generation of silicon process technology in the intervening years. We refer to this as our “tick-tock” technology development cadence. With our continued focus on silicon and manufacturing technology leadership, we entered into a series of agreements during the third quarter of 2012 with ASML Holding N.V. These agreements are intended to accelerate the development of 450-millimeter (450mm) wafer technology and extreme ultraviolet lithography (EUV). We expect larger silicon wafers and enhanced lithography technologies with EUV to allow Moore’s Law to continue. Moore’s Law predicted that transistor density on integrated circuits would double about every two years. As part of these agreements, we made a $3.2 billion equity investment in ASML during 2012. We aim to have the best process technology, and unlike many semiconductor companies, we primarily manufacture our products in our own facilities. This in-house manufacturing capability allows us to optimize performance, shorten our time to market, and scale new products more rapidly. We believe this competitive advantage will be extended in the future as the costs to build leading-edge fabrication facilities increase, and as fewer semiconductor companies will be able to combine platform design and manufacturing.

 

 

1


Table of Contents
 

Architecture and Platforms.  We are developing a wide range of solutions for devices that span the computing continuum and allow for computing experiences from PCs (including Ultrabook, detachable, and convertible systems), tablets, and smartphones to in-vehicle infotainment systems and beyond. We believe that users want consistent computing experiences and interoperable devices and that users and developers value consistency of architecture, which provides a common framework that allows for shortened time to market, with the ability to leverage technologies across multiple form factors. We believe that we can meet the needs of users and developers to offer computing solutions across the computing continuum through our partnership with the industry on open, standards-based platform innovation around Intel® architecture. We continue to invest in improving Intel architecture to deliver increased value to our customers and expand the capabilities of the architecture in adjacent market segments. For example, we focus on delivering improved energy-efficient performance, which involves balancing higher performance with lower power consumption. In addition, we are focusing on perceptual computing, which brings exciting user experiences through devices that sense and perceive the user’s actions.

 

Software and Services.  We offer software and services that provide security solutions through a combination of hardware and software for consumer, mobile, and corporate environments designed to protect systems from malicious virus attacks as well as loss of data. Additionally, we seek to 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. We seek to expedite growth in various market segments, such as the embedded market segment, through our software offerings. We continue to collaborate with companies to develop software platforms optimized for our Intel processors and that support multiple hardware architectures and operating systems.

 

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 user experiences, form factors, and usage models for businesses and consumers. We offer platforms that

   

incorporate various components and capabilities designed and configured to work together to provide an optimized solution that customers can easily integrate in their end products. Additionally, we promote industry standards that we believe will yield innovation and improved technologies for users.

 

Strategic Investments.  We make investments in companies around the world that we believe will further our strategic objectives, support our key business initiatives, and generate financial returns. Our investments—including those made through our Intel Capital program—generally focus on investing in companies and initiatives that we believe will stimulate growth in the digital economy, create new business opportunities for Intel, and expand global markets for our products. Additionally, we plan to continue to purchase and license intellectual property to support our current and expanding business.

 

Stewardship.  We are committed to developing energy-efficient technology solutions that can be used to address major global problems while reducing our environmental impact. We are also committed to helping transform education globally through our technology, program, and policy leadership, as well as through funding by means of the Intel Foundation. In addition, we strive to cultivate a work environment in which engaged, energized employees can thrive in their jobs and in their communities.

Our continued investment in developing our assets and execution in key focus areas is intended to help strengthen our competitive position as we enter and expand into adjacent market segments, such as smartphones and tablets. These market segments change rapidly, and we need to adapt to this environment. A key characteristic of these adjacent market segments is low power consumption based on SoC products. We are making significant investments in this area with the accelerated development of our SoC solutions based on the Intel® Atom microarchitecture. Additionally, we are building mobile reference designs to help the adoption of Intel architecture in these adjacent market segments. Examples include our smartphone reference designs, which were launched by multiple global partners in 2012. We also believe that increased Internet traffic and the increased use of mobile and cloud computing create a need for an improved server infrastructure, including server products optimized for energy-efficient performance.

 

 

2


Table of Contents

Business Organization

As of December 29, 2012, we managed our business through the following operating segments:

 

LOGO

 

For a description of our operating segments, see “Note 28: Operating Segment and Geographic Information,” in Part II, Item 8 of this Form 10-K.

Products

Platforms

We offer platforms that incorporate various components and technologies, including a microprocessor and chipset, or stand-alone SoC. Additionally, a platform may be enhanced by additional hardware, software, and services.

A microprocessor—the central processing unit (CPU) of a computer system—processes system data and controls other devices in the system. We offer microprocessors with one or multiple processor cores. Multi-core microprocessors can enable improved multitasking and energy-efficient performance by distributing computing tasks across two or more cores. Our 2nd, 3rd, and expected-to-be-released 4th generation Intel® Core (formerly code-named Haswell) processor families integrate graphics functionality onto the processor die. In contrast, some of our previous-generation processors incorporated a separate graphics chip inside the processor package. We also offer graphics functionality as part of a separate chipset outside the processor package. Processor packages may also integrate a memory controller.

A chipset sends data between the microprocessor and input, display, and storage devices, such as the keyboard, mouse, monitor, hard drive or solid-state drive, and optical disc drives. Chipsets extend the audio, video, and other capabilities of many systems and perform essential logic functions, such as balancing the performance of the system and removing bottlenecks. Some chipsets may also include graphics functionality or a memory controller, for use with our microprocessors that do not integrate those system components.

We offer and continue to develop SoC products that integrate our core processing functions with other system components, such as graphics, audio, and video, onto a single chip. SoC products are designed to reduce total cost of ownership, provide improved performance due to higher integration and lower power consumption, and enable smaller form factors such as smartphones and tablets.

We also offer features designed to improve our platform capabilities. For example, we offer Intel® vPro technology, a computer hardware-based security technology for the notebook and desktop market segments. This technology is designed to provide businesses with increased manageability, upgradeability, energy-efficient performance, and security while lowering the total cost of ownership.

 

 

3


Table of Contents

We offer a range of platforms based upon the following microprocessors:

 

LOGO

 

McAfee

In 2011, we acquired McAfee, Inc. with the objective of improving the overall security of our platforms. McAfee offers software products that provide security solutions designed to protect systems in consumer, mobile, and corporate environments from malicious virus attacks as well as loss of data. McAfee’s products include software solutions for end-point security, network and content security, risk and compliance, and consumer and mobile security.

Phone Components

In addition to our Intel Atom processor-based products for the smartphone market segment, we offer components and platforms for mobile phones and connected devices. Our acquisition of the Wireless Solutions (WLS) business of

Infineon Technologies AG in 2011 has enabled us to offer a variety of mobile phone components, including baseband processors, radio frequency transceivers, and power management integrated circuits. We also offer comprehensive mobile phone platforms, including Bluetooth* wireless technology and Global Positioning Systems (GPS) receivers, software solutions, customization, and essential interoperability tests. Our mobile phone solutions based on multiple industry standards help enable mobile voice and high-speed data communications for a broad range of devices around the world.

Non-Volatile Memory Solutions

We offer NAND flash memory products primarily used in solid-state drives (SSDs). Our NAND flash memory products are manufactured by IM Flash Technologies, LLC (IMFT).

 

 

4


Table of Contents

Products and Product Strategy by Operating Segment

Our PC Client Group operating segment offers products that are incorporated in notebook (including Ultrabook, detachable, and convertible systems) and desktop computers for consumers and businesses. In 2012 we introduced the 3rd generation Intel® Core processor family for use in notebook and desktop computers. These processors use 22-nanometer (nm) transistors and our Tri-Gate transistor processor technology. Our Tri-Gate transistor technology extends Moore’s Law and is the world’s first 3-D Tri-Gate transistor on a production technology. These enhancements in combination can provide significant power savings and performance gains when compared to previous-generation technologies.

Notebook

Our strategy for the notebook computing market segment is to offer notebook PC technologies designed to improve performance, battery life, wireless connectivity, manageability and security, as well as to allow for the design of smaller, lighter, and thinner form factors. Additionally, we are collaborating with others in the industry to integrate a touch-based interface and recognition features based on voice and gesture. In 2013, we expect to introduce our 4th generation Intel® Core processor family. We believe these processors will continue to deliver increasing levels of graphics performance and provide OEMs and end users with more choice in selecting processors with more processor cores, graphics performance, or both.

In addition to offering notebook PC technologies, we have worked with our customers to help them develop a new class of personal computing devices that includes Ultrabook, detachable, and convertible systems. These computers combine the energy-efficient performance and capabilities of today’s notebooks and tablets with enhanced graphics and perceptual computing features in a thin, light, and customizable form factor that is highly responsive and secure, and that can seamlessly connect to the Internet and other enabled devices. We believe the renewed innovation in the PC industry that we fostered with Ultrabook systems and expanded to other thin and light form factors will continue to blur the lines between tablets and notebooks so a consumer does not have to choose between the two.

Desktop

Our strategy for the desktop computing market segment is to offer products that provide increased manageability, security, and energy-efficient performance while lowering total cost of ownership for businesses. The desktop computing market segment includes all-in-one desktop products, which combine traditionally separate desktop components into one form factor. Additionally, all-in-one computers have transformed into adaptable and flexible form factors that offer users increased customization and ease of use. For desktop consumers, we also focus on the design of products for high-end enthusiast PCs and mainstream PCs with rich audio and video capabilities.

Our Data Center Group operating segment offers products designed to provide leading performance, energy efficiency, and virtualization technology for server, workstation, and storage platforms. We are also increasing our focus on products designed for high-performance computing, mission-critical computing, and cloud computing services. The cloud computing market segment refers to servers and other products that enable on-demand network access to a shared pool of configurable software, services, and computing devices. Such products include the introduction in 2012 of our many-core Intel® Xeon Phi coprocessor with 60 or more high-performance, low-power Intel processor cores, as well as our server platform that incorporates our 32nm Intel® Xeon® processors supporting as many as 10 cores for server platforms. The Intel Xeon Phi coprocessors are positioned to boost the power of the world’s most advanced supercomputers, allowing for trillions of calculations per second, while the 32nm Intel Xeon processors provide faster throughput for cloud computing-based services. In the data storage market segment, we introduced 64-bit Intel Atom microarchitecture-based SoC solutions to focus on the emerging market for highly dense, low-power server configurations. These products allow server rack space optimization and reduced energy costs with microservers that require less than 10 watts per server node.

Our other Intel architecture operating segments offer products designed to be used in the mobile communications, embedded, netbook, tablet, and smartphone market segments.

 

Our strategy for the mobile communications market segment, addressed by our Intel Mobile Communications (IMC) group, is to offer a portfolio of phone components that covers a broad range of wireless connectivity options by combining Intel® WiFi technology with our 2G and 3G technologies, while continuing our efforts to accelerate industry adoption of 4G LTE. These products feature low power consumption, innovative designs, and multi-standard platform solutions.

 

Our strategy for the embedded market segment, addressed by our Intelligent Systems Group (ISG), is to drive Intel architecture as a solution for embedded applications by delivering long life-cycle support, software and architectural scalability, and platform integration.

 

Our strategy for the tablet market segment is to offer Intel architecture solutions optimized for multiple operating systems and application ecosystems, such as our recent introduction of a platform for tablets that incorporates the Intel Atom processor. We are accelerating the process technology development for our Intel Atom processor product line to deliver increased battery life, performance, and feature integration.

 

Our strategy for the smartphone device market segment is to offer Intel Atom microarchitecture-based products that enable smartphones to deliver innovative content and services. Such products include the introduction of a new platform for smartphones that incorporates the Intel Atom processor, which is designed to deliver increased performance and system responsiveness while also enabling longer battery life. Additionally, we engage with and enable the supplier ecosystem by providing

 

 

5


Table of Contents
   

reference designs that showcase the advantages of Intel architecture in smartphone devices.

Our software and services operating segments seek to create differentiated user experiences on Intel-based platforms. We differentiate by combining Intel platform features and enhanced software and services. Our three primary initiatives are:

 

enabling platforms that can be used across multiple

   

operating systems, applications, and services across all Intel products;

 

optimizing features and performance by enabling the software ecosystem to quickly take advantage of new platform features and capabilities; and

 

delivering comprehensive solutions by using software, services, and hardware to enable a more secure online experience, such as our McAfee DeepSAFE* technology platform, which provides additional security below the operating system of the platform.

 

 

Revenue by Major Operating Segment

Net revenue for the PC Client Group (PCCG) operating segment, the Data Center Group (DCG) operating segment, the other Intel architecture (Other IA) operating segments, and the software and services (SSG) operating segments is presented as a percentage of our consolidated net revenue. Other IA includes IMC, ISG, the Netbook Group, the Tablet Group, the Phone Group, and the Service Provider Group operating segments. SSG includes McAfee, the Wind River Software Group, and the Software and Services Group operating segments. All Other consists primarily of revenue from the Non-Volatile Memory Solutions Group.

Percentage of Revenue by Major Operating Segment

(Dollars in Millions)

 

LOGO

Revenue from sales of platforms presented as a percentage of our consolidated net revenue was as follows:

Percentage of Revenue by Principal Product from Reportable Segments

(Dollars in Millions)

 

LOGO

 

6


Table of Contents

Competition

The computing industry is evolving and as a result, so is our competitive landscape. Our platforms, based on Intel® architecture, are positioned to compete across the spectrum of Internet-connected computing devices, from the lowest-power portable devices to the most powerful data center servers. New competitors are joining traditional competitors in our core PC and server business areas where we are a leading provider, while we face incumbent competitors in the adjacent market segments that we are pursuing, such as smartphones and tablets. Competitors include Advanced Micro Devices, Inc. (AMD), International Business Machines (IBM), Oracle Corporation, as well as ARM* architecture licensees from ARM Limited, such as QUALCOMM Incorporated, NVIDIA Corporation, Samsung Electronics Co., Ltd. and Texas Instruments Incorporated. The primary competitor for our McAfee family of security products and services is Symantec Corporation.

We face emerging business model competitors from OEMs that choose to vertically integrate their own proprietary semiconductor and software assets to some degree, such as Apple Inc. and Samsung. In doing so, these OEMs may be attempting to offer greater differentiation in their products and increase their share of the profits for each finished product they sell. Unforeseen competitor acquisitions, collaborations or licensing scenarios (including injunctions or other litigation outcomes) could also have a significant impact on our competitive position.

Our products primarily compete based on performance, energy efficiency, integration, innovative design, features, price, quality, reliability, brand recognition and availability. One of our important competitive advantages is the combination of our network of manufacturing, assembly and test facilities with our global architecture design teams. This network enables us to have more direct control over our processes, quality control, product cost, production timing, performance and manufacturing yield. The increased cost of constructing new fabrication facilities supporting smaller transistor geometries and larger wafers has led to a smaller pool of companies that can afford to build and equip leading-edge manufacturing facilities. Most of our competitors rely on third-party foundries and subcontractors such as Taiwan Semiconductor Manufacturing Company, Ltd. or GlobalFoundries Inc. for their manufacturing and assembly and test needs, creating, among other risks, the potential for supply constraints and limited process technology differentiation between competitors using the same foundry.

Manufacturing and Assembly and Test

As of December 29, 2012, 56% of our wafer fabrication, including microprocessors and chipsets, was conducted within the U.S. at our facilities in New Mexico, Arizona, Oregon, and Massachusetts. The remaining 44% of our wafer fabrication was conducted outside the U.S. at our facilities in Ireland, China, and Israel. Wafer fabrication conducted within and outside the U.S. is impacted by the timing of a facility’s transition to a newer process technology, as well as a facility’s capacity utilization.

 

 

As of December 29, 2012, we primarily manufactured our products in wafer fabrication facilities at the following locations:

 

Products

 

Wafer Size

 

Process Technology

 

Locations

Microprocessors

  300mm   22nm   Israel, Arizona, Oregon

Microprocessors

  300mm   32nm   New Mexico

Microprocessors

  300mm   45nm   New Mexico

Chipsets and microprocessors

  300mm   65nm   China, Arizona, Ireland

Other products and chipsets

  300mm   90nm   Ireland

Chipsets and microprocessors

  200mm   130nm   Massachusetts

 

As of December 29, 2012, most of our microprocessors were manufactured on 300mm wafers using our 22nm and 32nm process technology. As we move to each succeeding generation of manufacturing process technology, we incur significant start-up costs to prepare each factory for manufacturing. However, continuing to advance our process technology provides benefits that we believe justify these costs. The benefits of moving to each succeeding generation of manufacturing process technology can include using less space per transistor, reducing heat output from each

transistor, and increasing the number of integrated features on each chip. These advancements can result in microprocessors that are higher performing, consume less power, and cost less to manufacture. In addition, with each shift to a new process technology, we are able to produce more microprocessors per square foot of our wafer fabrication facilities. The costs to develop our process technology are significantly less than adding capacity by building additional wafer fabrication facilities using older process technology.

 

 

7


Table of Contents

We use third-party manufacturing companies (foundries) to manufacture wafers for certain components, including networking and communications products. In addition, we primarily use subcontractors to manufacture board-level products and systems, and smartphones. We purchase certain communications networking products and mobile phone components from external vendors primarily in the Asia-Pacific region.

Following the manufacturing process, the majority of our components are subject to assembly and test. We perform our components assembly and test at facilities in Malaysia, China, Costa Rica, and Vietnam. To augment capacity, we use subcontractors to perform assembly of certain products, primarily chipsets and networking and communications products. In addition, we use subcontractors to perform assembly and test of our mobile phone components.

Our NAND flash memory products are manufactured by IMFT and Micron Technology, Inc. using 20nm, 25nm, or 34nm process technology, and assembly and test of these products is performed by Micron and other external subcontractors. For further information, see “Note 10: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.

Our employment practices are consistent with, and we expect our suppliers and subcontractors to abide by, local country law. In addition, we impose a minimum employee age requirement as well as progressive Environmental, Health, and Safety (EHS) requirements, regardless of local law.

We have thousands of suppliers, including subcontractors, providing our various materials and service needs. We set expectations for supplier performance and reinforce those expectations with periodic assessments. We communicate those expectations to our suppliers regularly and work with them to implement improvements when necessary. Where possible, we seek to have several sources of supply for all of these materials and resources, but we may rely on a single or limited number of suppliers, or upon suppliers in a single country. In those cases, we develop and implement plans and actions to reduce the exposure that would result from a disruption in supply. We have entered into long-term contracts with certain suppliers to ensure a portion of our silicon supply.

Our products are typically manufactured at multiple Intel facilities around the world or by subcontractors. However, some products are manufactured in only one Intel or subcontractor facility, and we seek to implement action plans to reduce the exposure that would result from a disruption at any such facility. See “Risk Factors” in Part I, Item 1A of this Form 10-K.

Research and Development

We are committed to investing in world-class technology development, particularly in the design and manufacture of integrated circuits. Research and development (R&D) expenditures were $10.1 billion in 2012 ($8.4 billion in 2011 and $6.6 billion in 2010).

Our R&D activities are directed toward developing the technology innovations that we believe will deliver our next generation of products, which will in turn enable new form factors and usage models for businesses and consumers. Our R&D activities range from designing and developing new products and manufacturing processes to researching future technologies and products.

As part of our R&D efforts, we plan to introduce a new microarchitecture for our notebook, Ultrabook system, and Intel Xeon processors approximately every two years and ramp the next generation of silicon process technology in the intervening years. We refer to this as our “tick-tock” technology development cadence as subsequently illustrated. In 2012, we started manufacturing products with our 4th generation Intel® Core microarchitecture, a new microarchitecture using our existing 22nm three-dimensional Tri-Gate transistor process technology (22nm process technology). We are currently developing 14nm process technology, our next-generation process technology, and expect to begin manufacturing products using that technology in 2013. Our leadership in silicon technology has enabled us to make Moore’s Law a reality.

 

 

8


Table of Contents

 

LOGO

 

Our leadership in silicon technology has also helped expand on the advances anticipated by Moore’s Law by bringing new capabilities into silicon and producing new products optimized for a wider variety of applications. We have accelerated the Intel Atom processor-based SoC roadmap for smartphones, tablets, and other devices, from 32nm through 22nm to 14nm. We intend that Intel Atom processors will eventually be on the same process technology as our leading-edge products for both smartphones and tablets. We expect that this acceleration will result in a significant reduction in transistor leakage, lower active power, and an increase in transistor density to enable more powerful smartphones and tablets with more features and longer battery life.

We focus our R&D efforts on advanced computing technologies, developing new microarchitectures, advancing our silicon manufacturing process technology, delivering the next generation of microprocessors and chipsets, improving our platform initiatives, and developing software solutions and tools. Our R&D efforts are intended to enable new levels of performance and address areas such as energy efficiency, security, scalability for multi-core architectures, system manageability, and ease of use. We continue to make significant R&D investments in the development of SoCs to enable growth in areas such as smartphones, tablets, and embedded applications. For example, we continue to build smartphone and tablet reference designs to showcase the benefits of Intel architecture. In addition, we continue to make significant investments in wireless technologies, graphics, and HPC.

Our R&D model is based on a global organization that emphasizes a collaborative approach to identifying and developing new technologies, leading standards initiatives, and influencing regulatory policies to accelerate the adoption of new technologies, including joint pathfinding conducted between researchers at Intel Labs and our business groups. We centrally manage key cross-business group product initiatives to align and prioritize our R&D activities across these groups. In addition, we may augment our R&D activities by investing in companies or entering into agreements with companies that have similar R&D focus areas, as well as directly purchasing or licensing technology applicable to our R&D initiatives. An example of augmenting our R&D activities is the series of agreements we entered into in the third quarter of 2012 with ASML. These agreements, in which Intel purchased ASML securities and agreed to provide R&D funding over five years, are intended to accelerate the development of 450mm wafer technology and EUV lithography. Additionally, in the second quarter of 2012 we entered into agreements with Micron to modify our joint venture relationship, extending Intel and Micron’s NAND joint development program and expanding it to include emerging memory technologies. For further information, see “Note 6: Available-for-Sale Investments and Cash Equivalents” and “Note 10: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.

Employees

As of December 29, 2012, we had 105,000 employees worldwide (100,100 as of December 31, 2011), with approximately 51% of those employees located in the U.S. (52% as of December 31, 2011).

 

 

9


Table of Contents

Sales and Marketing

Customers

We sell our products primarily to OEMs and ODMs. ODMs provide design and/or manufacturing services to branded and unbranded private-label resellers. In addition, we sell our products to other manufacturers, including makers of a wide range of industrial and communications equipment. Our customers also include those who buy PC components and our other products through distributor, reseller, retail, and OEM channels throughout the world.

Our worldwide reseller sales channel consists of thousands of indirect customers—systems builders that purchase Intel microprocessors and other products from our distributors. We have a boxed processor program that allows distributors to sell our microprocessors in small quantities to these systems-builder customers; boxed processors are also available in direct retail outlets.

In 2012, Hewlett-Packard Company accounted for 18% of our net revenue (19% in 2011 and 21% in 2010), Dell Inc. accounted for 14% of our net revenue (15% in 2011 and 17% in 2010), and Lenovo Group Limited accounted for 11% of our net revenue (9% in 2011 and 8% in 2010). No other customer accounted for more than 10% of our net revenue during such periods. For information about revenue and operating income by operating segment, and revenue from unaffiliated customers by country, see “Note 28: Operating Segment and Geographic Information” in Part II, Item 8 of this Form 10-K.

Sales Arrangements

Our products are sold through sales offices throughout the world. Sales of our products are typically made via purchase order acknowledgments that contain standard terms and conditions covering matters such as pricing, payment terms, and warranties, as well as indemnities for issues specific to our products, such as patent and copyright indemnities. From time to time, we may enter into additional agreements with customers covering, for example, changes from our standard terms and conditions, new product development and marketing, private-label branding, and other matters. Most of our sales are made using electronic and web-based processes that allow the customer to review inventory availability and track the progress of specific goods ordered. Pricing on particular products may vary based on volumes ordered and other factors. We also offer discounts, rebates, and other incentives to customers to increase acceptance of our products and technology.

Our products are typically shipped under terms that transfer title to the customer, even in arrangements for which the recognition of revenue and related cost of sales is deferred. Our standard terms and conditions of sale typically provide that payment is due at a later date, generally 30 days after shipment or delivery. Our credit department sets accounts receivable and shipping limits for individual customers to control credit risk to Intel arising from outstanding account balances. We assess credit risk through quantitative and qualitative analysis, and from this analysis, we establish credit limits and determine whether we will use one or more credit support devices, such as a parent guarantee or standby letter of credit, or credit insurance. Credit losses may still be incurred due to bankruptcy, fraud, or other failure of the customer to pay. For information about our allowance for doubtful receivables, see “Schedule II—Valuation and Qualifying Accounts” in Part IV of this Form 10-K.

Most of our sales to distributors are made under agreements allowing for price protection on unsold merchandise and a right of return on stipulated quantities of unsold merchandise. Under the price protection program, we give distributors credits for the difference between the original price paid and the current price that we offer. On most products, there is no contractual limit on the amount of price protection, nor is there a limit on the time horizon under which price protection is granted. The right of return granted generally consists of a stock rotation program in which distributors are able to exchange certain products based on the number of qualified purchases made by the distributor. We have the option to grant credit for, repair, or replace defective products, and there is no contractual limit on the amount of credit that may be granted to a distributor for defective products.

Distribution

Distributors typically handle a wide variety of products, including those that compete with our products, and fill orders for many customers. We also utilize third-party sales representatives who generally do not offer directly competitive products but may carry complementary items manufactured by others. Sales representatives do not maintain a product inventory; instead, their customers place orders directly with us or through distributors. We have several distribution warehouses that are located in proximity to key customers.

 

 

10


Table of Contents

Backlog

Over time, our larger customers have generally moved to lean-inventory or just-in-time operations rather than maintaining larger inventories of our products. We have arrangements with these customers to seek to quickly fill orders from regional warehouses. As a result, our manufacturing production is based on estimates and advance non-binding commitments from customers as to future purchases. Our order backlog as of any particular date is a mix of these commitments and specific firm orders that are primarily made pursuant to standard purchase orders for delivery of products. Only a small portion of our orders is non-cancelable, and the dollar amount associated with the non-cancelable portion is not significant.

Seasonal Trends

Historically, our platform sales have been higher in the second half of the year than in the first half of the year, accelerating in the third quarter and peaking in the fourth quarter; however, our sales have not followed this trend over the past two years.

Marketing

Our corporate marketing objectives are to build a strong, well-known Intel corporate brand that connects with businesses and consumers, and to offer a limited number of meaningful and valuable brands in our portfolio to aid businesses and consumers in making informed choices about technology purchases. The Intel® Core processor family and the Intel® Atom, Intel® Pentium®, Intel® Xeon®, Intel® Xeon Phi and Intel® Itanium® trademarks make up our processor brands.

We promote brand awareness and generate demand through our own direct marketing as well as through co-marketing programs. Our direct marketing activities include television, print, and Internet advertising, as well as press relations and social media, consumer and trade events, and industry and consumer communications. We market to consumer and business audiences, and focus on building awareness and generating demand for new form factors such as Ultrabook systems, and for increased performance, improved energy efficiency, and other capabilities such as Internet connectivity and security.

Purchases by customers often allow them to participate in cooperative advertising and marketing programs such as the Intel Inside® Program. This program broadens the reach of our brands beyond the scope of our own direct marketing. Through the Intel Inside® Program, certain customers are licensed to place Intel logos on computing devices containing our microprocessors and processor technologies, and to use

our brands in their marketing activities. The program includes a market development component that accrues funds based on purchases and partially reimburses the OEMs for marketing activities for products featuring Intel brands, subject to the OEMs meeting defined criteria. These marketing activities primarily include television, print, and Internet marketing. We have also entered into joint marketing arrangements with certain customers.

Intellectual Property Rights and Licensing

Intellectual property (IP) that applies to our products and services includes patents, copyrights, trade secrets, trademarks, and maskwork rights. We maintain a program to protect our investment in technology by attempting to ensure respect for our IP. The extent of the legal protection given to different types of IP varies under different countries’ legal systems. We intend to license our IP where we can obtain adequate consideration. See “Competition” earlier in this section, “Risk Factors” in Part I, Item 1A, and “Note 27: Contingencies” in Part II, Item 8 of this Form 10-K.

We have obtained patents in the U.S. and other countries. While our patents are an important element of our success, our business as a whole is not significantly dependent on any one patent. Because of the fast pace of innovation and product development, and the comparative pace of governments’ patenting processes, our products are often obsolete before the patents related to them expire; in some cases, our products may be obsolete before the patents related to them are granted. As we expand our products into new industries, we also seek to extend our patent development efforts to patent such products. In addition to developing patents based on our own research and development efforts, we purchase patents from third parties to supplement our patent portfolio. Established competitors in existing and new industries, as well as companies that purchase and enforce patents and other IP, may already have patents covering similar products. There is no assurance that we will be able to obtain patents covering our own products, or that we will be able to obtain licenses from other companies on favorable terms or at all.

The software that we distribute, including software embedded in our component-level and platform products, is entitled to copyright and other IP protection. To distinguish our products from our competitors’ products, we have obtained trademarks and trade names for our products, and we maintain cooperative advertising programs with customers to promote our brands and to identify products containing genuine Intel components. We also protect details about our processes, products, and strategies as trade secrets, keeping confidential the information that we believe provides us with a competitive advantage.

 

 

11


Table of Contents

In the first quarter of 2011, we entered into a long-term patent cross-license agreement with NVIDIA. Under the agreement, we received a license to all of NVIDIA’s patents with a capture period that runs through March 2017 while NVIDIA products are licensed under our patents with the same capture period, subject to exclusions for x86 products, certain chipsets, and certain flash memory technology products.

Compliance with Environmental, Health, and Safety Regulations

Our compliance efforts focus on monitoring regulatory and resource trends and setting company-wide performance targets for key resources and emissions. These targets address several parameters, including product design; chemical, energy, and water use; waste recycling; the source of certain minerals used in our products; climate change; and emissions.

As a company, we focus on reducing natural resource use, the solid and chemical waste by-products of our manufacturing processes, and the environmental impact of our products. We currently use a variety of materials in our manufacturing process that have the potential to adversely impact the environment and are subject to a variety of EHS laws and regulations. Over the past several years, we have significantly reduced the use of lead and halogenated flame retardants in our products and manufacturing processes.

We work with the U.S. Environmental Protection Agency (EPA), non-governmental organizations (NGOs), OEMs, and retailers to help manage e-waste (including electronic products nearing the end of their useful lives) and to promote recycling. The European Union requires producers of certain electrical and electronic equipment to develop programs that let consumers return products for recycling. Many states in the U.S. have similar e-waste take-back laws. Although these laws are typically targeted at the end electronic product and not the component products that we manufacture, the inconsistency of many e-waste take-back laws and the lack of local e-waste management options in many areas pose a challenge for our compliance efforts.

We are an industry leader in our efforts to build ethical sourcing of minerals for our products, including “conflict minerals” coming out of central Africa. In 2013, Intel will continue to work to establish a “conflict-free” supply chain for our company and our industry. In 2012, Intel verified, after reasonable inquiry, that the tantalum we use in our microprocessors is “conflict-free,” and our goal for the end of 2013 is to manufacture the world’s first verified, “conflict-free” microprocessor.

We seek to reduce our global greenhouse gas emissions by investing in energy conservation projects in our factories and working with suppliers to improve energy efficiency. We take a holistic approach to power management, addressing the

challenge at the silicon, package, circuit, micro-architecture, macro architecture, platform, and software levels. We recognize that climate change may cause general economic risk. For further information on the risks of climate change, see “Risk Factors” in Part I, Item 1A of this Form 10-K. We see a potential for higher energy costs driven by climate change regulations. This could include items applied to utility companies that are passed along to customers, such as carbon taxes or costs associated with obtaining permits for our U.S. manufacturing operations, emission cap and trade programs, or renewable portfolio standards.

We are committed to sustainability and take a leadership position in promoting voluntary environmental initiatives and working proactively with governments, environmental groups, and industry to promote global environmental sustainability. We believe that technology will be fundamental to finding solutions to the world’s environmental challenges, and we are joining forces with industry, business, and governments to find and promote ways that technology can be used as a tool to combat climate change.

We have been purchasing wind power and other forms of renewable energy at some of our major sites for several years. We purchase renewable energy certificates under a multi-year contract. This purchase has placed Intel at the top of the EPA’s Green Power Partnership for the past four years and is intended to help stimulate the market for green power, leading to additional generating capacity and, ultimately, lower costs.

Distribution of Company Information

Our Internet address is www.intel.com. We publish voluntary reports on our web site that outline our performance with respect to corporate responsibility, including EHS compliance.

We use our Investor Relations web site, www.intc.com, as a routine channel for distribution of important information, including news releases, analyst presentations, and financial information. We post filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC), including our annual and quarterly reports on Forms 10-K and 10-Q and current reports on Form 8-K; our proxy statements; and any amendments to those reports or statements. All such postings and filings are available on our Investor Relations web site free of charge. In addition, our Investor Relations web site allows interested persons to sign up to automatically receive e-mail alerts when we post news releases and financial information. The SEC’s web site, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The content on any web site referred to in this Form 10-K is not incorporated by reference in this Form 10-K unless expressly noted.

 

 

12


Table of Contents

Executive Officers of the Registrant

The following sets forth certain information with regard to our executive officers as of February 19, 2013 (ages are as of December 29, 2012):

 

Andy D. Bryant, age 62
 2012 – present,   Chairman of the Board
 2011 – 2012,  

Vice Chairman of the Board, Executive VP,

Technology, Manufacturing and Enterprise

Services, Chief Administrative Officer

2009 – 2011,  

Executive VP, Technology, Manufacturing,

and Enterprise Services, Chief Administrative Officer

2007 – 2009,  

Executive VP, Finance and Enterprise

Services, Chief Administrative Officer

2001 – 2007,   Executive VP, Chief Financial and Enterprise Services Officer

Member of Intel Corporation Board of Directors

Member of Columbia Sportswear Company Board of Directors

Member of McKesson Corporation Board of Directors

Joined Intel 1981

William M. Holt, age 60
2013 – present,  

Executive VP, GM, Technology and

Manufacturing Group

2006 – 2013,  

Senior VP, GM, Technology and

Manufacturing Group

2005 – 2006,  

VP, Co-GM, Technology and

Manufacturing Group

Joined Intel 1974

Renee J. James, age 48
2012 – present,  

Executive VP, GM, Software and Services

Group

2005 – 2012,  

Senior VP, GM, Software and

Services Group

2002 – 2005,   VP, Developer Programs

Member of VMware, Inc. Board of Directors

Member of Vodafone Group plc Board of Directors

Joined Intel 1988

Thomas M. Kilroy, age 55
2013 – present,   Executive VP, GM, Sales and Marketing Group
2010 – 2013,   Senior VP, GM, Sales and Marketing Group
2009 – 2010,   VP, GM, Sales and Marketing Group
2005 – 2009,   VP, GM, Digital Enterprise Group

Joined Intel 1990

Brian M. Krzanich, age 52
2012 – present,   Executive VP, Chief Operating Officer
2010 – 2012,  

Senior VP, GM, Manufacturing and

Supply Chain

2006 – 2010,   VP, GM, Assembly and Test

Joined Intel 1982

A. Douglas Melamed, age 67
2009 – present,   Senior VP, General Counsel
2001 – 2009,  

Partner, Wilmer Cutler Pickering Hale

and Dorr LLP

Joined Intel 2009

Paul S. Otellini, age 62
2005 – present,   President, Chief Executive Officer

Member of Intel Corporation Board of Directors

Member of Google, Inc. Board of Directors

Joined Intel 1974

David Perlmutter, age 59
2012 – present,   Executive VP, GM, Intel Architecture Group, Chief Product Officer
2009 – 2012,   Executive VP, GM, Intel Architecture Group
2007 – 2009,   Executive VP, GM, Mobility Group
2005 – 2007,   Senior VP, GM, Mobility Group

Joined Intel 1980

Stacy J. Smith, age 50
2012 – present,  

Executive VP, Chief Financial Officer,

Director of Corporate Strategy

2010 – 2012,   Senior VP, Chief Financial Officer
2007 – 2010,   VP, Chief Financial Officer
2006 – 2007,   VP, Assistant Chief Financial Officer
2004 – 2006,  

VP, Finance and Enterprise Services,

Chief Information Officer

Member of Autodesk, Inc. Board of Directors

Member of Gevo, Inc. Board of Directors

Joined Intel 1988

Arvind Sodhani, age 58
2007 – present,  

Executive VP of Intel, President of Intel

Capital

2005 – 2007,   Senior VP of Intel, President of Intel Capital

Member of SMART Technologies, Inc. Board of Directors

Joined Intel 1981

 

 

13


Table of Contents
ITEM 1A. RISK FACTORS

Changes in product demand may harm our financial results and are hard to predict.

If product demand decreases, our revenue and profit could be harmed. Important factors that could cause demand for our products to decrease include changes in:

 

business conditions, including downturns in the computing industry, regional economies, and the overall economy;

 

consumer confidence or income levels caused by changes in market conditions, including changes in government borrowing, taxation, or spending policies; the credit market; or expected inflation, employment, and energy or other commodity prices;

 

the level of customers’ inventories;

 

competitive and pricing pressures, including actions taken by competitors;

 

customer product needs;

 

market acceptance of our products and maturing product cycles; and

 

the technology supply chain, including supply constraints caused by natural disasters or other events.

Our operations have high costs—including costs 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. If product demand decreases or we fail to forecast demand accurately, we could be required to write off inventory or record excess capacity charges, which would lower our gross margin. Our manufacturing or assembly and test capacity could be underutilized, and we may be required to write down our long-lived assets, which would increase our expenses. Factory-planning decisions may shorten the useful lives of facilities and equipment and cause us to accelerate depreciation. If product demand increases, we may be unable to add capacity fast enough to meet market demand. These changes in product demand, and changes in our customers’ product needs, could negatively affect our competitive position and may reduce our revenue, increase our costs, lower our gross margin percentage, or require us to write down our assets.

We operate in highly competitive industries, and our failure to anticipate and respond to technological and market developments could harm our ability to compete.

We operate in highly competitive industries that experience rapid technological and market developments, changes in industry standards, changes in customer needs, and frequent product introductions and improvements. If we are unable to

anticipate and respond to these developments, we may weaken our competitive position, and our products or technologies may be uncompetitive or obsolete. As computing market segments emerge, such as smartphones, tablets, and consumer electronics devices, we face new sources of competition and customers with different needs than customers in our PC business. Some of our competitors in these market segments are pursuing a vertical integration strategy, incorporating their SoC solutions into the smartphones and tablets they offer, which could make it less likely that they will adopt our SoC solutions. To be successful, we need to cultivate new industry relationships in these market segments. As the number and variety of Internet-connected devices increase, we need to improve the cost, connectivity, energy efficiency, and security of our platforms to succeed in these market segments. And we need to expand our software capabilities to provide customers with comprehensive computing solutions.

To compete successfully, we must maintain a successful R&D effort, develop new products and production processes, and improve our existing products and processes ahead of competitors. Our R&D efforts are critical to our success and are aimed at solving complex problems, and we do not expect all of our projects to be successful. We may be unable to develop and market new products successfully, and the products we invest in and develop may not be well received by customers. Additionally, the products and technologies offered by others may affect demand for our products. These types of events could negatively affect our competitive position and may reduce revenue, increase costs, lower gross margin percentage, or require us to impair our assets.

Changes in the mix of products sold may harm our financial results.

Because of the wide price differences of platform average selling prices among our data center, PC client, and other Intel architecture platforms, a change in the mix of platforms among these market segments may impact our revenue and gross margin. For example, our PC client platforms that are incorporated in notebook and desktop computers tend to have lower average selling prices and gross margin than our data center platforms that are incorporated in servers, workstations and storage products. Therefore, if there is less demand for our data center platforms, and a resulting mix shift to our PC client platforms, our gross margins and revenue would decrease. Also, more recently introduced products tend to have higher costs because of initial development costs and lower production volumes relative to the previous product generation, which can impact gross margin.

 

 

14


Table of Contents

Our global operations subject us to risks that may harm our results of operations and financial condition.

We have sales offices, R&D, manufacturing, assembly and test facilities, and other facilities in many countries, and some business activities may be concentrated in one or more geographic areas. As a result, our ability to manufacture, assemble and test, design, develop, or sell products may be affected by:

 

security concerns, such as armed conflict and civil or military unrest, crime, political instability, and terrorist activity;

 

natural disasters and health concerns;

 

inefficient and limited infrastructure and disruptions, such as supply chain interruptions and large-scale outages or interruptions of service from utilities, transportation, or telecommunications providers;

 

restrictions on our operations by governments seeking to support local industries, nationalization of our operations, and restrictions on our ability to repatriate earnings;

 

differing employment practices and labor issues; and

 

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 (FCPA) and other anti-corruption laws and regulations.

Legal and regulatory requirements differ among jurisdictions worldwide. Violations of these laws and regulations could result in fines; criminal sanctions against us, our officers, or our employees; prohibitions on the conduct of our business; and damage to our reputation. Although we have policies, controls, and procedures designed to ensure compliance with these laws, our employees, contractors, or agents may violate our policies.

Although most of our sales occur in U.S. dollars, expenses such as payroll, utilities, tax, and marketing expenses may be paid in local currencies. We also conduct certain investing and financing activities in local currencies. Our hedging programs reduce, but do not eliminate, the impact of currency exchange rate movements; therefore, changes in exchange rates could harm our results of operations and financial condition. Changes in tariff and import regulations and in U.S. and non-U.S. monetary policies may harm our results of operations and financial condition by increasing our expenses and reducing revenue. Differing tax rates in various jurisdictions could harm our results of operations and financial condition by increasing our overall tax rate.

We maintain a program of insurance coverage for a variety of property, casualty, and other risks. We place our insurance coverage with multiple carriers in numerous jurisdictions. However, one or more of our insurance providers may be

unable or unwilling to pay a claim. The types and amounts of insurance we obtain vary depending on availability, cost, and decisions with respect to risk retention. The policies have deductibles and exclusions that result in us retaining a level of self-insurance. Losses not covered by insurance may be large, 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 errors; 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 accidents, maintenance issues, or unsafe working conditions—all 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. Production issues may result in our failure to meet or increase production as desired, resulting in higher costs or large decreases in yields, which could affect our ability to produce sufficient volume to meet product demand. The unavailability or reduced availability of products could make it more difficult to deliver computing platforms. The occurrence 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 and increase our costs.

We have thousands of suppliers providing materials that we use in production and other aspects of our business, and where possible, we seek 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 location, for these materials. The inability of suppliers to deliver adequate supplies of production materials or other supplies could disrupt our production processes or make it more difficult for us to implement our business strategy. Production could be disrupted by the unavailability of resources used in production, such as water, silicon, electricity, gases, and other materials. Future environmental regulations could restrict the supply or increase the cost of materials that we use in our business and make it more difficult to obtain permits to build or modify manufacturing capacity to meet demand. The unavailability or reduced availability of materials or resources may require us to reduce production or incur additional costs. The occurrence of these events could harm our business and results of operations.

 

 

15


Table of Contents

Costs related to product defects and errata may harm our results of operations and business.

Costs of product defects and errata (deviations from published specifications) due to, for example, problems in our design and manufacturing processes, could include:

 

writing off the value of inventory;

 

disposing of products that cannot be fixed;

 

recalling products that have been shipped;

 

providing product replacements or modifications; and

 

defending against litigation.

These costs could be large and may increase expenses and lower gross margin. Our reputation with customers or end users could be damaged as a result of product defects and errata, and product demand could be reduced. The announcement of product defects and errata could cause customers to purchase products from competitors as a result of possible shortages of Intel components or for other reasons. These factors could harm our business and financial results.

Third parties might attempt to breach our network security and our products and services, which could damage our reputation and financial results.

We regularly face attempts by others to gain unauthorized access through the Internet or to introduce malicious software to our IT systems. Additionally, malicious hackers may attempt to gain unauthorized access and corrupt the processes of hardware and software products that we manufacture and services we provide. These attempts might be the result of industrial or other espionage or actions by hackers seeking to harm our company, our products and services, or users of our products and services. Due to the widespread use of our products and due to the high profile of our McAfee subsidiary, we or our products and services are a frequent target of computer hackers and organizations that intend to sabotage, take control of, or otherwise corrupt our manufacturing or other processes, products and services. We are also a target of malicious attackers who attempt to gain access to our network or data centers or those of our customers or end users, steal proprietary information related to our business, products, employees and customers, or interrupt our systems and services or those of our customers or others. We believe such attempts are increasing in number and in technical sophistication. These attacks are sometimes successful; and in some instances we, our customers and the users of our products and services might be unaware of an incident or its magnitude and effects. We seek to detect and investigate such attempts and incidents and to prevent their recurrence where practicable through changes to our internal processes and tools and/or changes or patches to our products and services, but in some cases preventive and remedial action might not be successful. Such attacks,

whether successful or unsuccessful, could result in our incurring costs related to, for example, rebuilding internal systems, reduced inventory value, providing modifications to our products and services, defending against litigation, responding to regulatory inquiries or actions, paying damages, or taking other remedial steps with respect to third parties. Publicity about vulnerabilities and attempted or successful incursions could damage our reputation with customers or users and reduce demand for our products and services.

We may be subject to theft, loss or misuse of personal data about us or our customers or other third parties, which could increase our expenses, damage our reputation or result in litigation.

Global privacy legislation, enforcement, and policy activity are rapidly expanding and creating a complex compliance environment. The theft, loss, or misuse of personal data collected, used, stored, or transferred by us to run our business could result in increased security costs or costs related to defending legal claims. Costs to comply with and implement privacy-related and data protection measures could be significant. Our failure to comply with federal, state, or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others.

Third parties may claim infringement of IP rights, which could harm our business.

We may face IP rights infringement claims from individuals and companies, including those who have acquired patent portfolios to assert claims against other companies. We are engaged in a number of litigation matters involving IP rights. Claims that our products or processes infringe the IP rights of others could cause us to incur large costs to respond to, defend, and resolve the claims, and they may divert the efforts and attention of management and technical personnel. As a result of IP rights infringement claims, we could:

 

pay infringement claims;

 

stop manufacturing, using, or selling products or technology subject to infringement claims;

 

develop other products or technology not subject to infringement claims, which could be time-consuming, costly or impossible; or

 

license technology from the party claiming infringement, which license may not be available on commercially reasonable terms.

These actions could harm our competitive position, result in expenses, or require us to impair our assets. If we alter or stop production of affected items, our revenue could be harmed.

 

 

16


Table of Contents

We may be unable to enforce or protect our IP rights, which may harm our ability to compete and may harm our business.

Our ability to enforce our patents, copyrights, software licenses, and other IP rights is subject to general litigation risks, as well as uncertainty as to the enforceability of our IP rights in various countries. When we seek to enforce our rights, we are often subject to claims that the IP rights are invalid, not enforceable, or licensed to the opposing party. Our assertion of IP rights often results in the other party seeking to assert claims against us, which could harm our business. Governments may adopt regulations—and governments or courts may render decisions—requiring compulsory licensing of IP rights, or governments may require products to meet standards that serve to favor local companies. Our inability to enforce our IP rights under these circumstances may harm our competitive position and business.

We may be subject to IP theft or misuse, which could result in claims against us and harm our business and results of operations.

The theft or unauthorized use or publication of our trade secrets and other confidential business information could harm our competitive position and reduce acceptance of our products; the value of our investment in R&D, product development, and marketing could be reduced; and third parties might make claims against us related to losses of confidential or proprietary information or end-user data, or system reliability. These incidents and claims could severely disrupt our business, and we could suffer losses, including the cost of product recalls and returns and reputational harm.

Our licenses with other companies and participation in industry initiatives may allow competitors to use our patent rights.

Companies in the computing industry often bilaterally license patents between each other to settle disputes or as part of business agreements between them. Our competitors may have licenses to our patents, and under current case law, some of the licenses may permit these competitors to pass our patent rights on to others under some circumstances. Our participation in industry standards organizations or with other industry initiatives may require us to license our patents to companies that adopt industry-standard specifications. Depending on the rules of the organization, we might have to grant these licenses to our patents for little or no cost, and as a result, we may be unable to enforce certain patents against others, our costs of enforcing our licenses or protecting our patents may increase, and the value of our IP rights may be impaired.

Litigation or regulatory proceedings could harm our business.

We may face legal claims or regulatory matters involving stockholder, consumer, competition, and other issues on a global basis. As described in “Note 27: Contingencies” in Part II, Item 8 of this Form 10-K, we are engaged in a number of litigation and regulatory matters. Litigation and regulatory proceedings are inherently uncertain, and adverse rulings

could occur, including monetary damages, or an injunction stopping us from manufacturing or selling products, engaging in business practices, or requiring other remedies, such as compulsory licensing of patents.

We face risks related to sales through distributors and other third parties.

We sell a portion of our products through third parties such as distributors, value-added resellers, OEMs, Internet service providers, and channel partners (collectively referred to as distributors). Using third parties for distribution exposes us to many risks, including competitive pressure, concentration, credit risk, and compliance risks. Distributors may sell products that compete with our products, and we may need to provide financial and other incentives to focus distributors on the sale of our products. We may rely on one or more key distributors for a product, and the loss of these distributors could reduce our revenue. Distributors may face financial difficulties, including bankruptcy, which could harm our collection of accounts receivable and financial results. Violations of FCPA or similar laws by distributors or other third-party intermediaries could have a material impact on our business. Failing to manage risks related to our use of distributors may reduce sales, increase expenses, and weaken our competitive position.

We face risks related to sales to government entities.

We derive a portion of our revenue from sales to government entities and their respective agencies. Government demand and payment for our products may be affected by public sector budgetary cycles and funding authorizations. Government contracts are subject to oversight, including special rules on accounting, expenses, reviews, and security. Failing to comply with these rules could result in civil and criminal penalties and sanctions, including termination of contracts, fines and suspensions, or debarment from future government business.

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 key business initiatives. These 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. Companies range from early-stage companies that are still defining their strategic direction to more mature companies with established revenue streams and business models. The companies in which we invest may fail because they are unable to secure additional funding, obtain favorable terms for future financings, or participate in liquidity events such as public offerings, mergers, and private sales. If any of these companies fail, we could lose all or part of our investment. If we determine that an other-than-temporary decline in the fair value exists for an investment, we write down the investment to its fair value and recognize a loss, impacting gains (losses) on equity investments, net. The majority of our marketable equity security portfolio balance is concentrated in ASML, and declines in the value of our ASML holdings could result in impairment charges, impacting gains (losses) on equity investments, net.

 

 

17


Table of Contents

Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying accounting policies.

The methods, estimates, and judgments that we use in applying accounting policies have a large impact on our results of operations. For more information, see “Critical Accounting Estimates” in Part II, Item 7 of this Form 10-K. These methods, estimates, and judgments are subject to large risks, uncertainties, and assumptions, and changes could affect our results of operations.

Changes in our effective tax rate may harm our results of operations.

A number of factors may increase our effective tax rates, which could reduce our net income, including:

 

the jurisdictions in which profits are determined to be earned and taxed;

 

the resolution of issues arising from tax audits;

 

changes in the valuation of our deferred tax assets and liabilities, and in deferred tax valuation allowances;

 

adjustments to income taxes upon finalization of tax returns;

 

increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairments of goodwill;

 

changes in available tax credits;

 

changes in tax laws or their interpretation, including changes in the U.S. to the taxation of non-U.S income and expenses;

 

changes in U.S. generally accepted accounting principles; and

 

our decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes.

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 the scope of our operations, resulting in restructuring and asset impairment charges. Factors that could affect our results of operations and financial condition due to a change in the scope of our operations include:

 

timing and execution of plans and programs subject to local labor law requirements, including consultation with work councils;

 

changes in assumptions related to severance and postretirement costs;

 

divestitures;

 

new business initiatives and changes in product roadmap, development, and manufacturing;

 

changes in employment levels and turnover rates;

 

changes in product demand and the business environment; and

 

changes in the fair value of 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 for possible investments, acquisitions, divestitures, and other transactions, such as joint ventures. Acquisitions and other transactions involve large challenges and risks, including risks that:

 

we may be unable to identify opportunities on terms acceptable to us;

 

the transaction may not advance our business strategy;

 

we may not realize a satisfactory return;

 

we may be unable to retain key personnel;

 

we may experience difficulty in integrating new employees, business systems, and technology;

 

acquired businesses may not have adequate controls, processes, and procedures to ensure compliance with laws and regulations, and our due diligence process may not identify compliance issues or other liabilities;

 

we may have difficulty entering new market segments; or

 

we may be unable to retain the customers and partners of acquired businesses.

When we decide to sell assets or a business, we may have difficulty selling on acceptable terms in a timely manner, and the agreed-upon terms and financing arrangements could be renegotiated due to changes in business or market conditions. These circumstances could delay the achievement of our strategic objectives or cause us to incur added expense, or we may sell a business at a price or on terms that are less favorable than we had anticipated, resulting in a loss on the transaction.

If we do enter into agreements with respect to acquisitions, divestitures, or other transactions, we may fail to complete them due to factors such as:

 

failure to obtain regulatory or other approvals;

 

IP disputes or other litigation; or

 

difficulties obtaining financing for the transaction.

 

 

18


Table of Contents

Our failure to comply with environmental laws and regulations could harm our business and results of operations.

The manufacturing and assembly and test of our products require the use of hazardous materials that are subject to a broad array of EHS laws and regulations. Our failure to comply with these laws or regulations could result in:

 

regulatory penalties, fines, and legal liabilities;

 

suspension of production;

 

alteration of our fabrication and assembly and test processes; and

 

restrictions on our operations or sales.

Our failure to manage the use, transportation, emissions, discharge, storage, recycling, or disposal of hazardous materials could lead to increased costs or future liabilities. Environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify product designs, or incur other expenses. Many new materials that we are evaluating for use in our operations may be subject to regulation under environmental laws and regulations. These restrictions could harm our business and results of operations by increasing our expenses or requiring us to alter manufacturing and assembly and test processes.

Climate change poses both regulatory and physical risks that could harm our results of operations and affect the way we conduct 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. The cost of perfluorocompounds (PFCs)—a gas that we use in manufacturing—could increase under some climate-change-focused emissions trading programs that may be imposed through 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. Air-quality permit requirements for our manufacturing operations could become more burdensome and cause delays in our ability to modify or build additional manufacturing capacity. Under recently adopted greenhouse gas regulations in the U.S., many of our manufacturing facilities have become “major” sources under the Clean Air Act. At a minimum, this change in status results in some uncertainty as the EPA adopts guidance on its greenhouse gas regulations. Due to the dynamic nature of our operations, these regulations will likely result in increased costs for our U.S. operations. These cost increases could be associated with new air pollution control requirements, and increased or new monitoring, recordkeeping, and reporting of greenhouse gas emissions. We also see the potential for higher energy costs driven by

climate change regulations. 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.

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. Our current Chief Executive Officer (CEO) plans to retire in May 2013, and the Board of Directors is working to choose a successor. The succession and transition process may have a direct or indirect effect on business and operations. In connection with the appointment of the new CEO, we will seek to retain our executive management team (some of whom are being considered for the CEO position), and keep employees focused on achieving our strategic goals and objectives. 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.

A number of factors could lower interest and other, net, harming our results of operations.

Factors that could lower interest and other, net in our consolidated statements of income include changes in fixed-income, equity, and credit markets; foreign currency exchange rates; interest rates; credit standing of financial instrument counterparties; our cash and investment balances; and our indebtedness.

 

 

19


Table of Contents
ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2. PROPERTIES

As of December 29, 2012, our major facilities consisted of:

 

                                         

(Square Feet in Millions)

  United
States
    Other
Countries
    Total  

Owned facilities

    28.5       16.5       45.0  

Leased facilities

    2.6       5.2       7.8  
   

 

 

   

 

 

   

 

 

 

Total facilities

    31.1       21.7       52.8  
   

 

 

   

 

 

   

 

 

 

 

 

1 

Leases on portions of the land used for these facilities expire on varying dates through 2062.

 

2 

Leases expire on varying dates through 2028 and generally include renewals at our option.

Our principal executive offices are located in the U.S. The majority of our wafer fabrication activities are also located in the U.S. In addition to our current facilities, we are building a development fabrication facility in Oregon that is scheduled for R&D start-up in 2013, as well as a leading-edge technology, large-scale fabrication facility in Arizona. We expect construction of the Arizona building to be completed in 2013. We expect that these new facilities will allow us to widen our process technology lead. These new facilities are expected to support incremental opportunities in unit growth and product mix. Outside the U.S., we have wafer fabrication at our facilities in Ireland, China, and Israel. Our assembly and test facilities are located in Malaysia, China, Costa Rica, and Vietnam. In addition, we have sales and marketing offices worldwide that are generally located near major concentrations of customers.

We believe that the facilities described above are suitable and adequate for our present purposes and that the productive capacity in our facilities is substantially being utilized or we have plans to utilize it.

We do not identify or allocate assets by operating segment. For information on net property, plant and equipment by country, see “Note 28: Operating Segment and Geographic Information” in Part II, Item 8 of this Form 10-K.

 

ITEM 3. LEGAL PROCEEDINGS

For a discussion of legal proceedings, see “Note 27: Contingencies” in Part II, Item 8 of this Form 10-K.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

20


Table of Contents

 

PART II

 

 

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Information regarding the principal U.S. market in which Intel common stock is traded, including the market price range of Intel common stock and dividend information, can be found in “Financial Information by Quarter (Unaudited)” in Part II, Item 8 of this Form 10-K.

As of February 8, 2013, there were approximately 150,000 registered holders of record of Intel’s common stock. A substantially greater number of holders of Intel common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.

Issuer Purchases of Equity Securities

We have an ongoing authorization, since October 2005, as amended, from our Board of Directors to repurchase up to $45 billion in shares of our common stock in open market purchases or negotiated transactions. As of December 29, 2012, $5.3 billion remained available for repurchase under the existing repurchase authorization limit.

Common stock repurchase activity under our authorized, publicly announced plan in each quarter of 2012 was as follows (in millions, except per share amounts):

 

                                         

Period

  Total Number of
Shares Purchased
    Average Price
Paid Per Share
    Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
 

January 1, 2012 – March 31, 2012

    56.9     $ 26.36     $ 8,598  

April 1, 2012 – June 30, 2012

    40.6     $ 27.10     $ 7,497  

July 1, 2012 – September 29, 2012

    46.4     $ 25.10     $ 6,332  

September 30, 2012 – December 29, 2012

    47.1     $ 21.23     $ 5,332  
   

 

 

     

Total

    191.0     $ 24.95    
   

 

 

     

Common stock repurchase activity under our authorized, publicly announced plan during the fourth quarter of 2012 was as follows (in millions, except per share amounts):

 

                                         

Period

  Total Number of
Shares Purchased
    Average Price
Paid Per Share
    Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
 

September 30, 2012 – October 27, 2012

    14.5     $ 21.98     $ 6,013  

October 28, 2012 – November 24, 2012

    13.2     $ 21.33     $ 5,732  

November 25, 2012 – December 29, 2012

    19.4     $ 20.60     $ 5,332  
   

 

 

     

Total

    47.1     $ 21.23    
   

 

 

     

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 and are not included in the common stock repurchase totals in the preceding table, they are treated as common stock repurchases in our consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting. For further discussion, see “Note 23: Common Stock Repurchases” in Part II, Item 8 of this Form 10-K.

 

21


Table of Contents

Stock Performance Graph

The line graph that follows compares the cumulative total stockholder return on our common stock with the cumulative total return of the Dow Jones U.S. Technology Index* and the Standard & Poor’s S&P 500* Index for the five years ended December 29, 2012. The graph and table assume that $100 was invested on December 28, 2007 (the last day of trading for the fiscal year ended December 29, 2007) in each of our common stock, the Dow Jones U.S. Technology Index, and the S&P 500 Index, and that all dividends were reinvested. Cumulative total stockholder returns for our common stock, the Dow Jones U.S. Technology Index, and the S&P 500 Index are based on our fiscal year.

Comparison of Five-Year Cumulative Return for Intel,

the Dow Jones U.S. Technology Index*, and the S&P 500* Index

 

LOGO

 

                                                                                   
     2007     2008     2009     2010     2011     2012  

Intel Corporation

  $ 100     $ 54     $ 81     $ 85     $ 104     $ 89  

Dow Jones U.S. Technology Index

  $ 100     $ 55     $ 94     $ 105     $ 105     $ 115  

S&P 500 Index

  $ 100     $ 60     $ 80     $ 91     $ 93     $ 106  

 

22


Table of Contents
ITEM 6. SELECTED FINANCIAL DATA

 

                                                                     

(In Millions, Except Per Share Amounts and
Percentages)

  2012     2011     2010     2009     2008  

Net revenue

  $ 53,341     $ 53,999     $ 43,623     $ 35,127     $ 37,586  

Gross margin

  $ 33,151     $ 33,757     $ 28,491     $ 19,561     $ 20,844  

Gross margin percentage

    62.1     62.5     65.3     55.7     55.5

Research and development (R&D)

  $ 10,148     $ 8,350     $ 6,576     $ 5,653     $ 5,722  

Marketing, general and administrative (MG&A)

  $ 8,057     $ 7,670     $ 6,309     $ 7,931     $ 5,452  

R&D and MG&A as percentage of revenue

    34.1     29.7     29.5     38.7     29.7

Operating income

  $ 14,638     $ 17,477     $ 15,588     $ 5,711     $ 8,954  

Net income

  $ 11,005     $ 12,942     $ 11,464     $ 4,369     $ 5,292  

Earnings per common share

         

Basic

  $ 2.20     $ 2.46     $ 2.06     $ 0.79     $ 0.93  

Diluted

  $ 2.13     $ 2.39     $ 2.01     $ 0.77     $ 0.92  

Weighted average diluted common shares outstanding

    5,160       5,411       5,696       5,645       5,748  

Dividends per common share

         

Declared

  $ 0.87     $ 0.7824     $ 0.63     $ 0.56     $ 0.5475  

Paid

  $ 0.87     $ 0.7824     $ 0.63     $ 0.56     $ 0.5475  

Net cash provided by operating activities

  $ 18,884     $ 20,963     $ 16,692     $ 11,170     $ 10,926  

Additions to property, plant and equipment

  $ 11,027     $ 10,764     $ 5,207     $ 4,515     $ 5,197  

Repurchase of common stock

  $ 5,110     $ 14,340     $ 1,736     $ 1,762     $ 7,195  

Payment of dividends to stockholders

  $ 4,350     $ 4,127     $ 3,503     $ 3,108     $ 3,100  
 
           

(Dollars in Millions)

  Dec. 29, 2012     Dec. 31, 2011     Dec. 25, 2010     Dec. 26, 2009     Dec. 27, 2008  

Property, plant and equipment, net

  $ 27,983     $ 23,627     $ 17,899     $ 17,225     $ 17,574   

Total assets

  $ 84,351     $ 71,119     $ 63,186     $ 53,095     $ 50,472  

Long-term debt

  $ 13,136     $ 7,084     $ 2,077     $ 2,049     $ 1,185  

Stockholders’ equity

  $ 51,203     $ 45,911     $ 49,430     $ 41,704     $ 39,546  

Employees (in thousands)

    105.0       100.1       82.5       79.8       83.9  

In 2011, we acquired McAfee and the WLS business of Infineon, which operates as IMC. For further information, see “Note 13: Acquisitions” in Part II, Item 8 of this Form 10-K.

 

23


Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

 

Overview.  Discussion of our business and overall analysis of financial and other highlights affecting the company in order to provide context for the remainder of MD&A.

 

Critical Accounting Estimates.  Accounting estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

 

Results of Operations.  An analysis of our financial results comparing 2012 to 2011 and comparing 2011 to 2010.

 

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.

 

Contractual Obligations and Off-Balance-Sheet Arrangements.  Overview of contractual obligations, contingent liabilities, commitments, and off-balance-sheet arrangements outstanding as of December 29, 2012, including expected payment schedule.

The various sections of this MD&A contain a number of forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “should,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in “Risk Factors” in Part I, Item 1A of this Form 10-K. Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of February 19, 2013.

 

 

24


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Overview

Our results of operations were as follows:

 

                                                                                   
     Three Months Ended     Twelve Months Ended  

(Dollars in Millions)

  Dec. 29,
2012
    Sept. 29,
2012
    Change     Dec. 29,
2012
    Dec. 31,
2011
    Change  

Net revenue

  $ 13,477     $ 13,457     $ 20     $ 53,341     $ 53,999     $ (658

Gross margin

  $ 7,817     $ 8,515     $ (698   $ 33,151     $ 33,757     $ (606

Gross margin percentage

    58.0     63.3     (5.3 )%      62.1     62.5     (0.4 )% 

Operating income

  $ 3,155     $ 3,841     $ (686   $ 14,638     $ 17,477     $ (2,839

Net income

  $ 2,468     $ 2,972     $ (504   $ 11,005     $ 12,942     $ (1,937

Diluted earnings per common share

  $ 0.48     $ 0.58     $ (0.10   $ 2.13     $ 2.39     $ (0.26

 

Our revenue for 2012 was down 1% from 2011 and lower than we expected at the start of the year. Worldwide gross domestic product growth was less than expected as we entered 2012, and PC Client Group revenue was negatively impacted by the growth of tablets as these devices compete with PCs for consumer sales. Data Center Group revenue grew 6% in 2012 as a richer mix of products and significant growth in the Internet cloud segment was partially offset by weakness in the enterprise market segment. Our gross margin percentage for 2012 was flat compared to 2011 as higher excess capacity charges and higher platform unit costs were offset by lower start-up costs and no impact in 2012 for the Intel® 6 Series Express Chipset design issue.

Our fourth quarter revenue of $13.5 billion was flat from the third quarter of 2012. Historically, our revenue generally has increased in the fourth quarter. However, softness in PC demand and continued decline of inventory in the PC supply chain as OEMs reduce inventory on older-generation products negatively impacted our results for the fourth quarter. The decline in our gross margin percentage in the fourth quarter was driven by excess capacity charges as we responded to lower demand by bringing down inventory levels and redirecting capital resources to our 14nm process technology. Our gross margin was also negatively impacted by higher inventory reserves on production of our next-generation microarchitecture products, code-named Haswell, which we expect to qualify for sale in the first quarter of 2013.

During 2012 we made significant product introductions across all our businesses, including PC client, servers, smartphones and tablets, and extended our manufacturing and process technology leadership. We launched our next-generation server-based products, the Intel Xeon processor E5 family, which provides higher performance and better energy-efficiency than prior-generation products. In 2012 we continued to extend our process technology leadership with the introduction of our 22nm process technology products that utilize three-dimensional Tri-Gate transistor technology. These products also improve performance and energy efficiency compared to prior generation products and helped

us accelerate our Ultrabook strategy. In 2012 we entered the smartphone market segment with six mobile phone providers launching the first Intel architecture-based smartphones. We are also expanding in the tablet market segment with designs based on Android* and Windows* operating systems currently shipping.

In a challenging environment our business continues to produce significant cash from operations, generating $18.9 billion in 2012. We returned $4.4 billion to stockholders through dividends and repurchased $4.8 billion of common stock through our common stock repurchase program. In addition, we purchased $11.0 billion in capital assets as we continue to make significant investments to extend our manufacturing leadership. During the third quarter of 2012, we also entered into a series of agreements with ASML intended to accelerate the development of 450-millimeter (mm) wafer technology and extreme ultra-violet (EUV) lithography. The agreements included Intel’s purchase of ASML equity securities totaling $3.2 billion. We also took advantage of the low interest rate environment in 2012 and issued $6.2 billion of senior notes. From a financial condition perspective, we ended the year with an investment portfolio of $18.2 billion, which consisted of cash and cash equivalents, short-term investments, and trading assets. In January 2013, the Board of Directors declared a cash dividend of $0.225 per common share for the first quarter of 2013.

As we look into 2013, we expect revenue to grow in the low single digits with particular strength in our server market segment. We believe the renewed innovation in the PC industry that we fostered with Ultrabook systems and expanded to other thin and light form factors, will blur the lines between tablets and notebooks and provide growth opportunities in 2013. We also expect to launch new SoCs for smartphones and tablets, based on our 22nm process technology. In 2013, we expect an increase in capital expenditures primarily driven by beginning construction of a 450mm development facility as we progress toward manufacturing with 450mm wafer technology later in the decade.

 

 

25


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Our Business Outlook for the first quarter and full-year 2013 includes, where applicable, our current expectations for revenue, gross margin percentage, spending (R&D plus MG&A), and capital expenditures. We will keep our most current Business Outlook publicly available on our Investor Relations web site www.intc.com. This Business Outlook is not incorporated by reference into this Form 10-K. We expect that our corporate representatives will, from time to time, meet publicly or privately with investors and others, and may reiterate the forward-looking statements contained in Business Outlook or in this Form 10-K. 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 Business Outlook and forward-looking statements in this Form 10-K are subject to revision during the course of the year in our quarterly earnings releases and SEC filings and at other times.

The forward-looking statements in Business Outlook will be effective through the close of business on March 15, 2013 unless updated earlier. From the close of business on March 15, 2013 until our quarterly earnings release is published, currently scheduled for April 16, 2013, we will observe a “quiet period.” During the quiet period, Business Outlook and other forward-looking statements first published in our Form 8-K filed on January 17, 2013, and other forward-looking statements disclosed in the company’s news releases and filings with the SEC, as reiterated or updated as applicable in this Form 10-K, should be considered historical, speaking as of prior to the quiet period only and not subject to update. During the quiet period, our representatives will not comment on our Business Outlook or our financial results or expectations. The exact timing and duration of the routine quiet period, and any others that we utilize from time to time, may vary at our discretion.

Critical Accounting Estimates

The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:

 

the valuation of non-marketable equity investments and the determination of other-than-temporary impairments, which impact gains (losses) on equity investments, net when we record impairments;

 

the assessment of recoverability of long-lived assets (property, plant and equipment; goodwill; and identified intangibles), which impacts gross margin or operating expenses when we record asset impairments or accelerate their depreciation or amortization;

 

the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes;

 

the valuation of inventory, which impacts gross margin; and

 

the recognition and measurement of loss contingencies, which impact gross margin or operating expenses when we recognize a loss contingency, revise the estimate for a loss contingency, or record an asset impairment.

In the following section, we discuss these policies further, as well as the estimates and judgments involved.

Non-Marketable Equity Investments

We regularly invest in non-marketable equity instruments of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business models. The carrying value of our non-marketable equity investment portfolio, excluding equity derivatives, totaled $2.2 billion as of December 29, 2012 ($2.8 billion as of December 31, 2011).

Our non-marketable equity investments are recorded using the cost method or the equity method of accounting, depending on the facts and circumstances of each investment. Our non-marketable equity investments are classified within other long-term assets on the consolidated balance sheets.

Non-marketable equity investments are inherently risky, and their success depends on product development, market acceptance, operational efficiency, the ability of the investee companies to raise additional funds in financial markets that can be volatile, and other key business factors. The companies could fail or not be able to raise additional funds when needed, or they may receive lower valuations with less favorable investment terms than previous financings. These events could cause our investments to become impaired. In addition, financial market volatility could negatively affect our ability to realize value in our investments through liquidity events such as initial public offerings, mergers, and private sales. For further information about our investment portfolio risks, see “Risk Factors” in Part I, Item 1A of this Form 10-K.

 

 

26


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

We determine the fair value of our non-marketable equity investments portfolio quarterly for 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 relevant factors, including comparable companies’ sizes, growth rates, industries, and development stages. 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; expenses, capital spending, and other costs; and discount rates based on the risk profile of comparable companies. Estimates of revenue, expenses, capital spending, and other costs are developed using available market, historical, and forecast data. The valuation of our 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 structures, the terms of the investees’ issued interests, and the lack of marketability of the investments.

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 investee’s revenue and earnings trends relative to pre-defined milestones and overall business prospects;

 

the technological feasibility of the investee’s products and technologies;

 

the general market conditions in the investee’s industry or geographic area, including adverse regulatory and economic changes;

 

factors related to the investee’s ability to remain in business, such as the investee’s liquidity, debt ratios, and the rate at which the investee is using its cash; and

 

the investee’s receipt of additional funding at a lower valuation.

If the fair value of an investment is below our carrying value, we determine whether the investment is other-than-temporarily impaired based on our quantitative and qualitative analysis, which includes assessing the severity and duration of the impairment and the likelihood of recovery before disposal. If the investment is considered to be other-than-temporarily impaired, we write down the investment to its fair value. Impairments of non-marketable equity investments were $104 million in 2012. Over the past 12 quarters, including the fourth quarter of 2012, impairments of non- marketable equity investments ranged from $8 million to $59 million per quarter.

Long-Lived Assets

Property, Plant and Equipment

We assess property, plant and equipment for impairment when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. We measure the recoverability of assets that we will continue to use in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows. If an asset grouping’s carrying value is not recoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. We measure the impairment by comparing the difference between the asset grouping’s carrying value and its fair value. Property, plant and equipment is considered a non-financial asset and is recorded at fair value only if an impairment charge is recognized.

Impairments are determined for groups of assets related to the lowest level of identifiable independent cash flows. Due to our asset usage model and the interchangeable nature of our semiconductor manufacturing capacity, we must make subjective judgments in determining the independent cash flows that can be related to specific asset groupings. In addition, as we make manufacturing process conversions and other factory planning decisions, we must make subjective judgments regarding the remaining useful lives of assets, primarily process-specific semiconductor manufacturing tools and building improvements. When we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of depreciation over the assets’ new, shorter useful lives. Over the past 12 quarters, including the fourth quarter of 2012, impairments and accelerated depreciation of property, plant and equipment ranged from zero to $36 million per quarter.

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill is allocated to our reporting units based on relative fair value of the future benefit of the purchased operations to our existing business units as well as the acquired business unit. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. Our reporting units are consistent with the operating segments identified in “Note 28: Operating Segment and Geographic Information” in Part II, Item 8 of this Form 10-K.

 

 

27


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

We perform an annual impairment assessment in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is not considered impaired and we are not required to perform the two-step goodwill impairment test. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit.

For reporting units in which the impairment assessment concludes that it is more likely than not that the fair value is less than its carrying value, we perform the first step of the goodwill impairment test, which compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform additional testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the goodwill impairment test to determine the implied fair value of the reporting unit’s goodwill. If we determine during this second step that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, we record an impairment loss equal to the difference.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. Our goodwill impairment test uses a weighting of the income method and the market method to estimate the reporting unit’s fair value. The income method is based on a discounted future cash flow approach that uses the following reporting unit estimates: revenue, based on assumed market segment growth rates and our assumed market segment share; estimated costs; and appropriate discount rates based on the reporting units’ weighted average cost of capital as determined by considering the observable weighted average cost of capital of comparable companies. Our estimates of market segment growth, our market segment share, and costs are based on historical data, various internal estimates, and a variety of external sources. These estimates are developed as part of our routine long-range planning process. The same estimates are also used in planning for our long-term manufacturing and assembly and test capacity needs as part of our capital budgeting process, and for long-term and short-term business planning and forecasting. We test the reasonableness of the inputs and outcomes of our discounted cash flow analysis against available comparable market data. The market method is based on financial multiples of comparable companies and applies a control premium. The reporting unit’s carrying value represents the assignment of various assets and liabilities, excluding certain corporate assets and liabilities, such as cash, investments, and debt.

For the annual impairment assessment in 2012, we determined that for each of our reporting units with significant amounts of goodwill, it was more likely than not that the fair value of the reporting units exceeded the carrying value. As a result, we concluded that performing the first step of the goodwill impairment test was not necessary for those reporting units. During the fourth quarter of each of the prior three fiscal years, we completed our annual impairment assessments and concluded that goodwill was not impaired in any of these years.

Identified Intangibles

We make judgments about the recoverability of purchased finite-lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of finite-lived intangible assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows that the asset is expected to generate. We perform an annual impairment assessment in the fourth quarter of each year for indefinite-lived intangible assets, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the carrying value of the assets may not be recoverable. Recoverability of indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If we determine that an individual asset is impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

The assumptions and estimates used to determine future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for specific product lines. Based on our impairment reviews of our intangible assets, we recognized impairment charges of $21 million in 2012, $10 million in 2011, and no impairment charges in 2010.

Income Taxes

We must make estimates and judgments in determining the provision for taxes for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes in these estimates may result in an increase or decrease to our tax provision in a subsequent period.

 

 

28


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

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 the deferred tax assets recorded on our consolidated balance sheets. However, should a change occur in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determined that the recovery was not likely. Recovery of a portion of our deferred tax assets is impacted by management’s plans with respect to holding or disposing of certain investments; therefore, changes in management’s plans with respect to holding or disposing of investments could affect our future provision for taxes.

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 whether the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. 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 December 29, 2012, we had total work-in-process inventory of $2.2 billion and total finished goods inventory of $2.0 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 our 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.

To determine which costs can be included in the valuation of inventory, we must determine normal capacity at our manufacturing and assembly and test facilities, based on historical loadings compared to total available capacity. If the factory loadings are below the established normal capacity level, a portion of our manufacturing overhead costs would not be included in the cost of inventory; therefore, it would be recognized as cost of sales in that period, which would negatively impact our gross margin. We refer to these costs as excess capacity charges. In the fourth quarter of 2012, excess capacity charges were $480 million. In the previous 11 quarters, excess capacity charges were less than $50 million in each quarter.

Loss Contingencies

We are subject to various legal and administrative proceedings and asserted and potential claims as well as accruals related to repair or replacement of parts in connection with product errata, and product warranties and potential asset impairments (loss contingencies) that arise in the ordinary course of business. An estimated loss from such contingencies is recognized as a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a loss contingency is required if there is at least a reasonable possibility that a material loss has been incurred. The outcomes of legal and administrative proceedings and claims, and the estimation of product warranties and asset impairments, are subject to significant uncertainty. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. With respect to estimating the losses associated with repairing and replacing parts in connection with product errata, we make judgments with respect to customer return rates, costs to repair or replace parts, and where the product is in our customer’s manufacturing process. At least quarterly, we review the status of each significant matter, and we may revise our estimates. These revisions could have a material impact on our results of operations and financial position.

Accounting Changes

For a description of accounting changes, see “Note 3: Accounting Changes.”

 

 

29


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Results of Operations

The following table sets forth certain consolidated statements of income data as a percentage of net revenue for the periods indicated:

 

                                                                                   
     2012     2011     2010  

(Dollars in Millions, Except Per Share Amounts)

  Dollars     % of Net
Revenue
    Dollars     % of Net
Revenue
    Dollars     % of Net
Revenue
 

Net revenue

  $ 53,341       100.0   $ 53,999       100.0   $ 43,623       100.0

Cost of sales

    20,190       37.9     20,242       37.5     15,132       34.7
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    33,151       62.1     33,757       62.5     28,491       65.3
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

    10,148       19.0     8,350       15.4     6,576       15.1

Marketing, general and administrative

    8,057       15.1     7,670       14.2     6,309       14.5

Amortization of acquisition-related intangibles

    308       0.6     260       0.5     18      
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    14,638       27.4     17,477       32.4     15,588       35.7

Gains (losses) on equity investments, net

    141       0.3     112       0.2     348       0.8

Interest and other, net

    94       0.2     192       0.3     109       0.3
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    14,873       27.9     17,781       32.9     16,045       36.8

Provision for taxes

    3,868       7.3     4,839       8.9     4,581       10.5
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 11,005       20.6   $ 12,942       24.0   $ 11,464       26.3
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

  $ 2.13       $ 2.39       $ 2.01    
   

 

 

     

 

 

     

 

 

   

 

Our net revenue for 2012, which included 52 weeks, decreased by $658 million, or 1%, compared to 2011, which included 53 weeks. PC Client Group and Data Center Group platform volume decreased 1% while average selling prices were unchanged. Additionally, lower IMC average selling prices and lower netbook platform volume contributed to the decrease. These decreases were partially offset by our McAfee operating segment, which we acquired in the first quarter of 2011. McAfee contributed $469 million of additional revenue in 2012 compared to 2011.

Our overall gross margin dollars for 2012 decreased by $606 million, or 2%, compared to 2011. The decrease was due in large part to approximately $490 million of excess capacity charges, as well as lower PC Client Group and Data Center Group platform revenue. To a lesser extent, higher PC Client Group and Data Center Group platform unit costs as well as lower netbook and IMC revenue contributed to the decrease. The decrease was partially offset by approximately $645 million of lower start-up costs as we transition from our 22nm process technology to R&D of our next-generation 14nm process technology, as well as $422 million of charges recorded in 2011 to repair and replace materials and systems impacted by a design issue related to our Intel 6 Series Express Chipset family. The decrease was also partially offset by the two additional months of results from our acquisition of McAfee, which occurred on February 28, 2011, contributing approximately $334 million of additional gross margin dollars in 2012 compared to 2011. The amortization of acquisition-related intangibles resulted in a $557 million

reduction to our overall gross margin dollars in 2012, compared to $482 million in 2011, primarily due to acquisitions completed in the first quarter of 2011.

Our overall gross margin percentage in 2012 was flat from 2011 as higher excess capacity charges and higher PC Client Group and Data Center Group platform unit costs in 2012 were offset by lower start-up costs and no impact in 2012 for the Intel 6 Series Express Chipset design issue. We derived a substantial majority of our overall gross margin dollars in 2012 and 2011 from the sale of platforms in the PC Client Group and Data Center Group operating segments.

Our net revenue for 2011, which included 53 weeks, increased $10.4 billion, or 24%, compared to 2010, which included 52 weeks. PC Client Group and Data Center Group platform revenue increased $6.3 billion on 8% higher average selling prices and 7% higher unit sales. Additionally, $3.6 billion of the increase in revenue was due to acquisitions completed in the first quarter of 2011 (primarily IMC and McAfee).

Our overall gross margin dollars for 2011 increased $5.3 billion, or 18%, compared to 2010, primarily reflecting higher revenue from our existing business and our acquisitions as discussed previously. The increase was partially offset by approximately $1.0 billion of higher start-up costs compared to 2010. The amortization of acquisition-related intangibles resulted in a $482 million reduction to our overall gross margin dollars in 2011, compared to $65 million in 2010, primarily due to the acquisitions in the first quarter of 2011.

 

 

30


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Our overall gross margin percentage decreased to 62.5% in 2011 from 65.3% in 2010. The decrease in gross margin percentage was primarily attributable to the gross margin percentage decrease in the PC Client Group and, to a lesser extent, the gross margin percentage decrease in the other Intel architecture operating segments. We derived a substantial majority of our overall gross margin dollars in 2011 and most of our gross margin dollars in 2010 from the sale of platforms in the PC Client Group and Data Center Group operating segments.

PC Client Group

The revenue and operating income for the PC Client Group for the three years ended December 29, 2012 were as follows:

 

                                         

(In Millions)

  2012     2011     2010  

Net revenue

  $ 34,274     $ 35,406     $ 30,327  

Operating income

  $ 13,053     $ 14,793     $ 12,971  

Net revenue for the PCCG operating segment decreased by $1.1 billion, or 3%, in 2012 compared to 2011. PCCG revenue was negatively impacted by the growth of tablets as these devices compete with PCs for consumer sales. Platform average selling prices and unit sales decreased 2% and 1%, respectively. The decrease was driven by 6% lower notebook platform average selling prices and 5% lower desktop platform volume. These decreases were partially offset by a 4% increase in desktop platform average selling prices and a 2% increase in notebook platform volume.

Operating income decreased by $1.7 billion, or 12%, in 2012 compared to 2011 driven by $649 million of lower gross margin and $1.1 billion of higher operating expenses. The

decrease in gross margin was primarily due to lower platform revenue. Additionally, approximately $455 million of higher excess capacity charges and higher platform unit costs contributed to the decrease. These decreases were partially offset by approximately $785 million of lower start-up costs as we transition from manufacturing start-up costs related to our 22nm process technology to R&D of our next-generation 14nm process technology. Additionally, the first half of 2011 included $422 million of charges recorded to repair and replace materials and systems impacted by a design issue related to our Intel 6 Series Express Chipset family.

Net revenue for the PCCG operating segment increased by $5.1 billion, or 17%, in 2011 compared to 2010. Platform average selling prices and unit sales increased 8% and 7%, respectively. The increase in revenue was due to notebook platform unit sales and notebook platform average selling prices, which both increased 9%. To a lesser extent, an increase in desktop platform average selling prices of 6% and an increase in desktop platform unit sales of 4% also contributed to the increase. In addition to the extra work week in 2011, our client business benefited from rising incomes that increased the affordability of PCs in emerging markets. We also saw an increase in revenue as demand increased in the enterprise and emerging markets for higher performance and more energy-efficient computing.

Operating income increased by $1.8 billion in 2011 compared to 2010 as the gross margin increase of $2.4 billion was partially offset by $584 million of higher operating expenses. The increase in gross margin was primarily due to higher platform revenue partially offset by approximately $960 million of higher start-up costs as we transitioned into production using our 22nm process technology. Higher platform unit costs and inventory write-offs as compared to 2010 also contributed to the offset.

 

 

31


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Data Center Group

The revenue and operating income for the Data Center Group for the three years ended December 29, 2012 were as follows:

 

                                         

(In Millions)

  2012     2011     2010  

Net revenue

  $ 10,741     $ 10,129     $ 8,693  

Operating income

  $ 5,073     $ 5,100     $ 4,388  

Net revenue for the DCG operating segment increased by $612 million, or 6%, in 2012 compared to 2011. The increase in revenue was due to 6% higher platform average selling prices, slightly offset by 1% lower platform volume. Our platform average selling prices benefited from a richer mix of products sold. In 2012, our server business continued to benefit from significant growth in the Internet cloud segment offset by weakness in the enterprise server market segment.

Operating income decreased by $27 million in 2012 compared to 2011 as $360 million of higher gross margin was more than offset by $387 million of higher operating expenses. The increase in gross margin was primarily due to higher platform revenue.

Net revenue for the DCG operating segment increased by $1.4 billion, or 17%, in 2011 compared to 2010. The increase in revenue was due to a 12% increase in platform unit sales. Our server business benefited from growth in the number of devices that compute and connect to the Internet, driving the build-out of the cloud infrastructure. Additionally, platform average selling prices increased 3% due to an increased demand for higher-performance computing.

Operating income increased by $712 million in 2011 compared to 2010 as the gross margin increase of $1.2 billion was partially offset by $487 million of higher operating expenses. The increase in gross margin was primarily due to higher platform revenue.

Other Intel Architecture Operating Segments

The revenue and operating income (loss) for the other Intel architecture operating segments, including the Intelligent Systems Group, Intel Mobile Communications, the Netbook Group, the Tablet Group, the Phone Group, and the Service Provider Group for the three years ended December 29, 2012 were as follows:

 

                                         

(In Millions)

  2012     2011     2010  

Net revenue

  $ 4,378     $ 5,005     $ 3,055  

Operating income (loss)

  $ (1,377   $ (577   $ 270  

Net revenue for the Other IA operating segments decreased by $627 million, or 13%, in 2012 compared to 2011. The decrease was primarily due to lower IMC average selling prices and lower netbook platform volume. To a lesser extent, lower netbook platform average selling prices contributed to the decrease. These decreases were partially offset by higher ISG platform average selling prices.

Operating results for the Other IA operating segments decreased by $800 million from an operating loss of $577 million in 2011 to an operating loss of $1.4 billion in 2012. The decline in operating results was primarily due to lower netbook revenue and higher operating expenses in the Other IA operating segments. Additionally, lower IMC revenue was largely offset by lower IMC unit cost.

Net revenue for the Other IA operating segments increased by $2.0 billion, or 64%, in 2011 compared to 2010. The increase was primarily due to IMC revenue, an operating segment formed from the acquisition of the WLS business of Infineon in the first quarter of 2011. To a lesser extent, higher ISG platform unit sales also contributed to the increase. These increases were partially offset by lower netbook platform unit sales.

Operating results for the Other IA operating segments decreased by $847 million from an operating income of $270 million in 2010 to an operating loss of $577 million in 2011. The decline in operating results was primarily due to higher operating expenses within each of the Other IA operating segments, partially offset by higher revenue.

 

 

32


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Software and Services Operating Segments

The revenue and operating income (loss) for the SSG operating segments, including McAfee, the Wind River Software Group, and the Software and Services Group, for the three years ended December 29, 2012 were as follows:

 

                                         

(In Millions)

  2012     2011     2010  

Net revenue

  $ 2,381     $ 1,870     $ 264  

Operating income (loss)

  $ (11   $ (32   $ (175

Net revenue for the SSG operating segments increased by $511 million in 2012 compared to 2011. The increase was primarily due to two months of incremental revenue from McAfee of $469 million. McAfee was acquired on February 28, 2011.

The operating loss for the SSG operating segments decreased by $21 million in 2012 compared to 2011. The decrease in operating loss was primarily due to higher McAfee revenue, partially offset by higher McAfee operating expenses.

Net revenue for the SSG operating segments increased by $1.6 billion in 2011 compared to 2010. The increase was due to revenue from McAfee, which was acquired on February 28, 2011. Due to the revaluation of McAfee’s historic deferred revenue to fair value at the time of acquisition, we excluded $204 million of revenue that would have been reported in 2011 if McAfee’s deferred revenue had not been written down due to the acquisition.

The operating loss for the SSG operating segments decreased by $143 million in 2011 compared to 2010. The decrease was due to higher revenue, partially offset by higher operating expenses across each of the SSG operating segments. Due to the revaluation of McAfee’s historic deferred revenue to fair value at the time of acquisition, we excluded revenue and associated costs that would have increased operating results by $190 million in 2011.

 

 

Operating Expenses

Operating expenses for the three years ended December 29, 2012 were as follows:

 

                                         

(Dollars In Millions)

  2012     2011     2010  

Research and development

  $ 10,148     $ 8,350     $ 6,576  

Marketing, general and administrative

  $ 8,057     $ 7,670     $ 6,309  

R&D and MG&A as percentage of net revenue

    34     30     30

Amortization of acquisition-related intangibles

  $ 308     $ 260     $ 18  

 

Research and Development.  R&D spending increased by $1.8 billion, or 22%, in 2012 compared to 2011, and increased by $1.8 billion, or 27%, in 2011 compared to 2010. The increase in 2012 compared to 2011 was driven by increased investments in our products for smartphones, tablets, Ultrabook systems, and data centers. Additionally, R&D spending increased due to higher process development costs for our next-generation 14nm process technology, higher compensation expenses mainly due to annual salary increases, the full first quarter expenses of IMC and McAfee in 2012 (both acquired in the first quarter of 2011), and higher costs related to the development of 450mm wafer technology. The increase in 2011 compared to 2010 was primarily due to the expenses of McAfee and IMC, and to higher compensation expenses based on an increase in the number of employees. In addition, lower overall process development costs due to the transition to manufacturing start-up costs related to our 22nm process technology were mostly offset by higher process development costs due to R&D of our next-generation 14nm process technology.

Marketing, General and Administrative.  Marketing, general and administrative expenses increased by $387 million, or 5%, in 2012 compared to 2011, and increased by $1.4 billion, or 22%, in 2011 compared to 2010. The increase in 2012 compared to 2011 was primarily due to the full first quarter expenses of McAfee in 2012 and higher compensation expenses mainly due to annual salary increases as well as an increase in the number of employees. The increase in 2011 compared to 2010 was primarily due to the expenses of McAfee and IMC, higher compensation expenses based on an increase in the number of employees, and higher advertising expenses (including cooperative advertising expenses).

Amortization of Acquisition-Related Intangibles.  The increase in 2012 compared to 2011 of $48 million was primarily due to the full year of amortization of intangibles in 2012 related to the acquisitions of McAfee and the WLS business of Infineon, both completed in the first quarter of 2011. The increase in 2011 compared to 2010 of $242 million was primarily due to the amortization of intangibles related to the acquisitions of McAfee and the WLS business of Infineon in 2011. For further information, see “Note 13: Acquisitions” and “Note 16: Identified Intangible Assets” in Part II, Item 8 of this Form 10-K.

 

 

33


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Share-Based Compensation

Share-based compensation totaled $1.1 billion in 2012 ($1.1 billion in 2011 and $917 million in 2010). Share-based compensation was included in cost of sales and operating expenses.

As of December 29, 2012, unrecognized share-based compensation costs and the weighted average periods over which the costs are expected to be recognized were as follows:

 

                           

(Dollars in Millions)

  Unrecognized
Share-Based
Compensation
Costs
    Weighted
Average
Period
 

Stock options

  $ 96       1.0 years   

Restricted stock units

  $ 1,523       1.3 years   

As of December 29, 2012, there was $13 million in unrecognized share-based compensation costs related to the rights to acquire common stock under our stock purchase plan. We expect to recognize those costs over a period of approximately one and a half months.

Gains (Losses) on Equity Investments and Interest and Other

Gains (losses) on equity investments, net and interest and other, net for the three years ended December 29, 2012 were as follows:

 

                                         

(In Millions)

  2012     2011     2010  

Gains (losses) on equity investments, net

  $ 141     $ 112     $ 348  

Interest and other, net

  $ 94     $ 192     $ 109  

Net gains on equity investments were higher in 2012 compared to 2011 due to lower equity method losses and higher gains on third-party merger transactions, partially offset by lower gains on sales of equity investments. We recognized lower net gains on equity investments in 2011 compared to 2010 due to lower gains on sales of equity investments, higher equity method losses, and lower gains on third-party merger transactions.

Net gains on equity investments for 2011 included a gain of $150 million on the sale of shares in VMware, Inc. During 2010, we recognized a gain of $181 million on the initial public offering of SMART Technologies, Inc. and the subsequent partial sale of our shares in the secondary offering. We also recognized a gain of $91 million on the sale of our ownership interest in Numonyx B.V., and a gain of $67 million on the sale of shares in Micron Technology, Inc. in 2010. Our share of equity method investee losses recognized in 2011 and 2010 was primarily related to Clearwire Communications, LLC (Clearwire LLC) ($145 million and $116 million, respectively). Our share of equity method investee losses recognized in 2011 reduced our carrying value in Clearwire LLC to zero. We do not expect to recognize additional equity method losses for Clearwire LLC in the future.

Interest and other, net decreased in 2012 compared to 2011, primarily due to a $164 million gain recognized upon formation of the Intel-GE Care Innovations, LLC (Care Innovations) joint venture during the first quarter of 2011 and higher interest expense in 2012. This decrease was partially offset by proceeds received from an insurance claim in the second quarter of 2012 related to the floods in Thailand.

Interest and other, net increased in 2011 compared to 2010. The $164 million gain recognized upon formation of Care Innovations during 2011 was partially offset by the recognition of $41 million of interest expense in 2011 compared to zero in 2010 and lower interest income in 2011 compared to 2010 as a result of lower average investment balances. We recognized interest expense during 2011 as the amount of interest incurred began to exceed the amount we were able to capitalize upon the issuance of $5.0 billion aggregate principal of senior unsecured notes in the third quarter of 2011.

 

 

34


Table of Contents

MANAGEMENT’S 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)

  2012     2011     2010  

Income before taxes

  $ 14,873     $ 17,781     $ 16,045  

Provision for taxes

  $ 3,868     $ 4,839     $ 4,581  

Effective tax rate

    26.0     27.2     28.6

We generated a higher percentage of our profits from lower tax jurisdictions in 2012 compared to 2011, positively impacting our effective tax rate for 2012. This impact was partially offset by a U.S. research and development tax credit that was not reinstated in 2012.

The U.S. research and development tax credit was reenacted in January 2013 retroactive to the beginning of 2012. The full year 2012 impact of the U.S. federal research and development tax credit will be recognized in the first quarter 2013 financial statements and is expected to have a significant positive impact on the first quarter of 2013 effective tax rate.

We generated a higher percentage of our profits from lower tax jurisdictions in 2011 compared to 2010, positively impacting our effective tax rate for 2011.

 

 

Liquidity and Capital Resources

 

                           

(Dollars in Millions)

  Dec. 29,
2012
    Dec. 31,
2011
 

Cash and cash equivalents, short-term investments, and marketable debt instruments included in trading assets

  $ 18,162     $ 14,837  

Loans receivable and other long-term investments

  $ 1,472     $ 1,769  

Short-term and long-term debt

  $ 13,448     $ 7,331  

Debt as percentage of stockholders’ equity

    26.3     16.0

 

35


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Sources and Uses of Cash

(In Millions)

 

LOGO

In summary, our cash flows were as follows:

 

                                         

(In Millions)

  2012     2011     2010  

Net cash provided by operating activities

  $ 18,884     $ 20,963     $ 16,692  

Net cash used for investing activities

    (14,060     (10,301     (10,539

Net cash used for financing activities

    (1,408     (11,100     (4,642

Effect of exchange rate fluctuations on cash and cash equivalents

    (3     5        
   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  $ 3,413     $ (433   $ 1,511  
   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Operating Activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.

For 2012 compared to 2011, the $2.1 billion decrease in cash provided by operating activities was due to lower net income and changes in our working capital, partially offset by adjustments for non-cash items. The adjustments for non-cash items were higher due primarily to higher depreciation in 2012 compared to 2011, partially offset by increases in non-acquisition-related deferred tax liabilities as of December 31, 2011 compared to December 25, 2010.

Changes in assets and liabilities as of December 29, 2012 compared to December 31, 2011 included higher inventories on the ramp of 3rd generation Intel® Core processor family products, partially offset by a significant reduction in older-generation products.

For 2012, our three largest customers accounted for 43% of our net revenue (43% in 2011 and 46% in 2010), with Hewlett-Packard Company accounting for 18% of our net revenue (19% in 2011 and 21% in 2010), Dell accounting for 14% of our net revenue (15% in 2011 and 17% in 2010), and Lenovo accounting for 11% of our net revenue (9% in 2011 and 8% in 2010). These three customers accounted for 33% of our accounts receivable as of December 29, 2012 (36% as of December 31, 2011).

For 2011 compared to 2010, the $4.3 billion increase in cash provided by operating activities was due to adjustments for non-cash items and higher net income. The adjustments for non-cash items were higher for 2011 compared to 2010, primarily due to higher depreciation and amortization of intangibles, as well as increases in non-acquisition-related deferred tax liabilities as of December 31, 2011 compared to December 25, 2010. Income taxes paid, net of refunds, in 2011 compared to 2010 were $1.3 billion lower, largely due to the tax benefit of depreciating 100% of assets placed in service in the U.S. in 2011.

Investing Activities

Investing cash flows consist primarily of capital expenditures; investment purchases, sales, maturities, and disposals; as well as cash used for acquisitions.

The increase in cash used for investing activities in 2012 compared to 2011 was primarily due to net purchases of available-for-sale investments and trading assets in 2012, as compared to net maturities and sales of available-for-sale

investments and trading assets in 2011, partially offset by a decrease in cash paid for acquisitions. Net purchases of available-for-sale investments in 2012 included our purchase of $3.2 billion of equity securities in ASML during the third quarter of 2012. Our capital expenditures were $11.0 billion in 2012 ($10.8 billion in 2011 and $5.2 billion in 2010).

Cash used for investing activities decreased slightly in 2011 compared to 2010. A decrease due to net maturities and sales of available-for-sale investments in 2011 as compared to net purchases of available-for-sale investments in 2010 was offset by higher cash paid for acquisitions, of which the substantial majority was for our acquisition of McAfee in the first quarter of 2011, and an increase in capital expenditures. The significant increase in capital expenditures in 2011 compared to 2010 was due to the expansion of our network of fabrication facilities to include an additional large-scale fabrication facility, as well as bringing our 22nm process technology manufacturing capacity online.

Financing Activities

Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of long-term debt, and proceeds from the sale of shares through employee equity incentive plans.

The decrease in cash used for financing activities in 2012, compared to 2011, was primarily due to fewer repurchases of common stock under our authorized common stock repurchase program and, to a lesser extent, the issuance of a higher amount of long-term debt in 2012 compared to 2011. We have an ongoing authorization, since October 2005, as amended, from our Board of Directors to repurchase up to $45 billion in shares of our common stock in the open market or negotiated transactions. During 2012, we repurchased $4.8 billion of common stock under our authorized common stock repurchase program compared to $14.1 billion in 2011. As of December 29, 2012, $5.3 billion remained available for repurchase under the existing repurchase authorization limit. We base our level of common stock repurchases on internal cash management decisions, and this level may fluctuate. Proceeds from the sale of shares through employee equity incentive plans totaled $2.1 billion in 2012 compared to $2.0 billion in 2011. Our total dividend payments were $4.4 billion in 2012 compared to $4.1 billion in 2011 as a result of an increase in quarterly cash dividends per common share. We have paid a cash dividend in each of the past 81 quarters. In January 2013, our Board of Directors declared a cash dividend of $0.225 per common share for the first quarter of 2013. The dividend is payable on March 1, 2013 to stockholders of record on February 7, 2013.

 

 

37


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

The increase in cash used in financing activities in 2011 compared to 2010 was primarily due to higher repurchases of common stock under our authorized common stock repurchase program, partially offset by the issuance of long-term debt in 2011 and higher proceeds from the sale of shares through employee equity incentive plans.

Liquidity

Cash generated by operations is our primary source of liquidity. We maintain a diverse investment portfolio that we continually analyze based on issuer, industry, and country. As of December 29, 2012, cash and cash equivalents, short-term investments, and marketable debt instruments included in trading assets totaled $18.2 billion ($14.8 billion as of December 31, 2011). In addition to the $18.2 billion, we have $1.5 billion in loans receivable and other long-term investments that we include when assessing our investment portfolio. Substantially all of our investments in debt instruments are in A/A2 or better rated issuances, and the majority of the issuances 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 2012 were $500 million, although no commercial paper remained outstanding as of December 29, 2012. Our commercial paper was rated A-1+ by Standard & Poor’s and P-1 by Moody’s as of December 29, 2012. 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. In the fourth quarter of 2012, we utilized this shelf registration statement and issued $6.2 billion aggregate principal amount of senior unsecured notes. These notes were issued for general corporate purposes and to repurchase shares of our common stock pursuant to our authorized common stock repurchase program. For further information on the terms of the notes, see “Note 19: Borrowings” in Part II, Item 8 of this Form 10-K.

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

When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions, such as an obligor’s credit risk, that market participants would use when pricing the asset or liability. For further information, see “Fair Value” in “Note 2: Accounting Policies” in Part II, Item 8 of this Form 10-K.

Marketable Debt Instruments

As of December 29, 2012, our assets measured and recorded at fair value on a recurring basis included $15.3 billion of marketable debt instruments. Of these instruments, $5.2 billion was classified as Level 1, $10.0 billion as Level 2, and $126 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 use of observable market prices for identical securities that are traded in active markets. We evaluate security-specific market data when determining whether the market for a debt security is active.

Of the $10.0 billion of marketable debt instruments measured and recorded at fair value on a recurring basis and classified as Level 2, approximately 60% was classified as Level 2 due to the use of a discounted cash flow model, and approximately 40% was classified as such due to the use of non-binding market consensus prices that were corroborated with observable market data.

Our marketable debt instruments that are measured and recorded at fair value on a recurring basis and classified as Level 3 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 our fair value measurements using non-binding market consensus prices and non-binding broker quotes from a second source.

Loans Receivable and Reverse Repurchase Agreements

As of December 29, 2012, our assets measured and recorded at fair value on a recurring basis included $780 million of loans receivable and $2.8 billion of reverse repurchase agreements. All of these investments were classified as Level 2, as the fair value is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data.

 

 

38


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Marketable Equity Securities

As of December 29, 2012, our assets measured and recorded at fair value on a recurring basis included $4.4 billion of marketable equity securities. All of these securities were classified as Level 1 because the valuations were based

on quoted prices for identical securities in active markets. Our assessment of an active market for our marketable equity securities generally takes into consideration the number of days that each individual equity security trades over a specified period.

 

 

Contractual Obligations

The following table summarizes our significant contractual obligations as of December 29, 2012:

 

                                                                     
     Payments Due by Period  

(In Millions)

  Total     Less Than
1 Year
    1–3 Years     3–5 Years     More
Than 5
Years
 

Operating lease obligations

  $ 909     $ 206     $ 315     $ 178     $ 210  

Capital purchase obligations

    4,618       4,554       64              

Other purchase obligations and commitments

    1,958       1,140       581       228       9  

Long-term debt obligations

    22,852       480       860       5,330       16,182  

Other long-term liabilities4, 5

    1,714       627       652       330       105  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 32,051     $ 7,007     $ 2,472     $ 6,066     $ 16,506  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

1 

Capital purchase obligations represent commitments for the construction or purchase of property, plant and equipment. They were not recorded as liabilities on our consolidated balance sheets as of December 29, 2012, as we had not yet received the related goods or taken title to the property.

 

2 

Other purchase obligations and commitments include payments due under various types of licenses and agreements to purchase goods or services, as well as payments due under non-contingent funding obligations. Funding obligations include, for example, agreements to fund various projects with other companies.

 

3 

Amounts represent principal and interest cash payments over the life of the debt obligations, including anticipated interest payments that are not recorded on our consolidated balance sheets. Any future settlement of convertible debt would impact our cash payments.

 

4 

We are unable to reliably estimate the timing of future payments related to uncertain tax positions; therefore, $177 million of long-term income taxes payable has been excluded from the preceding table. However, long-term income taxes payable, recorded on our consolidated balance sheets, included these uncertain tax positions, reduced by the associated federal deduction for state taxes and U.S. tax credits arising from non-U.S. income taxes.

 

5 

Amounts represent future cash payments to satisfy other long-term liabilities recorded on our consolidated balance sheets, including the short-term portion of these long-term liabilities. Expected required contributions to our U.S. and non-U.S. pension plans and other postretirement benefit plans of $63 million to be made during 2013 are also included; however, funding projections beyond 2013 are not practicable to estimate.

 

6 

Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities except for the short-term portions of long-term debt obligations and other long-term liabilities.

 

Contractual obligations for purchases of goods or services, included in other purchase obligations and commitments in the preceding table, include agreements that are enforceable and legally binding on Intel and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. For obligations with cancellation provisions, the amounts included in the preceding table were limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee.

We have entered into certain agreements for the purchase of raw materials that specify minimum prices and quantities based on a percentage of the total available market or based on a percentage of our future purchasing requirements. Due to the uncertainty of the future market and our future purchasing requirements, as well as the non-binding nature of these agreements, obligations under these agreements are not included in the preceding table. Our purchase orders for other products are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, some of our purchase orders represent authorizations to purchase rather than binding agreements.

 

 

39


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Contractual obligations that are contingent upon the achievement of certain milestones are not included in the preceding table. These obligations include milestone-based co-marketing agreements, contingent funding/payment obligations, and milestone-based equity investment funding. These arrangements are not considered contractual obligations until the milestone is met by the third party. During 2012, we entered into a series of agreements with ASML intended to accelerate the development of 450mm wafer technology and EUV lithography. Intel agreed to provide R&D funding totaling 829 million (approximately $1.1 billion as of December 29, 2012) over five years and committed to advance purchase orders for a specified number of tools from ASML. Our obligation is contingent upon ASML achieving certain milestones. As a result, we have not included this obligation in the preceding table.

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. The obligation to pay the relevant taxing authority is not included in the preceding table, as the amount is contingent upon continued employment. In addition, the amount of the obligation is unknown, as it is based in part on the market price of our common stock when the awards vest.

Contractual obligations with regard to our investment in IMFT are not included in the preceding table. We are currently committed to purchasing 49% of IMFT’s production output and production-related services. We also have several agreements with Micron related to the supply of NAND flash memory products, IP, and R&D funding related to non-volatile memory manufacturing. The obligation to purchase our proportion of IMFT’s inventory was approximately $28 million as of December 29, 2012. For further information, see “Note 10: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.

The expected timing of payments of the obligations in the table above is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.

Off-Balance-Sheet Arrangements

As of December 29, 2012, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

 

40


Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are directly and indirectly affected by changes in non-U.S. currency exchange rates, interest rates, and equity prices. All of the potential changes that follow are based on sensitivity analyses performed on our financial positions as of December 29, 2012 and December 31, 2011. Actual results may differ materially.

Currency Exchange Rates

In general, we economically hedge currency risks of non-U.S.-dollar-denominated investments in debt instruments and loans receivable with currency forward contracts or currency interest rate swaps. Gains and losses on these non-U.S.-currency investments would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in an insignificant net exposure to loss.

Substantially all of our revenue is transacted in U.S. dollars. However, a significant amount of our operating expenditures and capital purchases is 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 the functional currency equivalent of future cash flows caused by changes in exchange rates. We generally utilize currency forward contracts in these hedging programs. Our hedging programs reduce, but do not always eliminate, the impact of currency exchange rate movements. For further information, see “Risk Factors” in Part I, Item 1A of this Form 10-K. We considered the historical trends in currency exchange rates and determined that it was reasonably possible that a weighted average adverse change of 20% in currency exchange rates could be experienced in the near term. Such an adverse change, after taking into account balance sheet hedges only and offsetting recorded monetary asset and liability positions, would have resulted in an adverse impact on income before taxes of less than $80 million as of December 29, 2012 (less than $40 million as of December 31, 2011).

Interest Rates

We generally hedge interest rate risks of fixed-rate debt instruments with interest rate swaps. Gains and losses on these investments would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in an insignificant net exposure to interest rate loss.

We are exposed to interest rate risk related to our investment portfolio and indebtedness. Our indebtedness includes our debt issuances and the liability associated with a long-term patent cross-license agreement with NVIDIA. The primary objective of our investments in debt instruments is to preserve principal while maximizing yields, which generally track the U.S.-dollar three-month LIBOR. A hypothetical decrease in interest rates of 1.0% would have resulted in an increase in the fair value of our indebtedness of approximately $1.5 billion as of December 29, 2012 (an increase of approximately $900 million as of December 31, 2011). The significant increase from December 31, 2011 was primarily driven by the inclusion of $6.2 billion of senior unsecured notes issued in the fourth quarter of 2012. A hypothetical decrease in benchmark interest rates of up to 1.0%, after taking into account investment hedges, would have resulted in an increase in the fair value of our investment portfolio of approximately $10 million as of December 29, 2012 (an increase of approximately $20 million as of December 31, 2011). The fluctuations in fair value of our investment portfolio and indebtedness reflect only the direct impact of the change in interest rates. Other economic variables, such as equity market fluctuations and changes in relative credit risk, could result in a significantly higher decline in the fair value of our net investment position. For further information on how credit risk is factored into the valuation of our investment portfolio and debt issuances, see “Note 4: Fair Value” in Part II, Item 8 of this Form 10-K.

Equity Prices

Our investments include marketable equity securities and equity derivative instruments such as warrants and options. 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, we may enter into transactions to reduce or eliminate the equity market risks. Additionally, for our 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.

We hold derivative instruments that seek to offset changes in liabilities related to the equity market risks of certain deferred compensation arrangements. The gains and losses from changes in fair value of these derivatives are designed to offset the losses and gains on the related liabilities, resulting in an insignificant net exposure to loss.

 

 

41


Table of Contents

As of December 29, 2012, the fair value of our marketable equity investments and our equity derivative instruments, including hedging positions, was $4.4 billion ($585 million as of December 31, 2011). Our marketable equity investment in ASML was carried at a total fair market value of $4.0 billion, or 90% of our marketable equity portfolio, as of December 29, 2012. Our marketable equity method investments are excluded from our analysis, as the carrying value does not fluctuate based on market price changes unless an other-than-temporary impairment is deemed necessary. To determine reasonably possible decreases in the market value of our marketable equity investments, we have analyzed the expected market price sensitivity of our marketable equity investment portfolio. Assuming a loss of 35% in market prices, and after reflecting the impact of hedges and offsetting positions, the aggregate value of our marketable equity investments could decrease by approximately $1.6 billion, based on the value as of December 29, 2012 (a decrease in value of approximately $265 million, based on the value as of December 31, 2011 using an assumed loss of 45%).

Many of the same factors that could result in an adverse movement of equity market prices affect our non-marketable equity investments, although we cannot always quantify the impact directly. Financial markets are volatile, which could negatively affect the prospects of the companies we invest in, their ability to raise additional capital, and the likelihood of our ability to realize value in our investments through liquidity events such as initial public offerings, mergers, and private sales. These types of investments involve a great deal of risk, and there can be no assurance that any specific company will grow or become successful; consequently, we could lose all or part of our investment. Our non-marketable equity investments, excluding investments accounted for under the equity method, had a carrying amount of $1.2 billion as of December 29, 2012 ($1.1 billion as of December 31, 2011). As of December 29, 2012, the carrying amount of our non-marketable equity method investments was $1.0 billion ($1.6 billion as of December 31, 2011). The majority of the total non-marketable equity method investments balance as of December 29, 2012 was concentrated in our IMFT investment of $642 million ($1.3 billion in IMFT and IM Flash Singapore, LLP as of December 31, 2011).

 

 

42


Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Page  

Consolidated Statements of Income

    44   

Consolidated Statements of Comprehensive Income

    45   

Consolidated Balance Sheets

    46   

Consolidated Statements of Cash Flows

    47   

Consolidated Statements of Stockholders’ Equity

    48   

Notes to Consolidated Financial Statements

    49   

Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm

    95   

Supplemental Data: Financial Information by Quarter

    97   

 

43


Table of Contents

 

INTEL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

 

 

                                         

Three Years Ended December 29, 2012

(In Millions, Except Per Share Amounts)

  2012     2011     2010  

Net revenue

  $ 53,341     $ 53,999     $   43,623  

Cost of sales

    20,190       20,242       15,132  
   

 

 

   

 

 

   

 

 

 

Gross margin

    33,151       33,757       28,491  
   

 

 

   

 

 

   

 

 

 

Research and development

    10,148       8,350       6,576  

Marketing, general and administrative

    8,057       7,670       6,309  

Amortization of acquisition-related intangibles

    308       260       18  
   

 

 

   

 

 

   

 

 

 

Operating expenses

    18,513       16,280       12,903  
   

 

 

   

 

 

   

 

 

 

Operating income

    14,638       17,477       15,588  

Gains (losses) on equity investments, net

    141       112       348  

Interest and other, net

    94       192       109  
   

 

 

   

 

 

   

 

 

 

Income before taxes

    14,873       17,781       16,045  

Provision for taxes

    3,868       4,839       4,581  
   

 

 

   

 

 

   

 

 

 

Net income

  $ 11,005     $ 12,942     $ 11,464  
   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

  $ 2.20     $ 2.46     $ 2.06  
   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

  $ 2.13     $ 2.39     $ 2.01  
   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

     

Basic

    4,996       5,256       5,555  
   

 

 

   

 

 

   

 

 

 

Diluted

    5,160       5,411       5,696  
   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

44


Table of Contents

 

INTEL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

                                         

Three Years Ended December 29, 2012

(In Millions)

  2012     2011     2010  

Net income

  $ 11,005     $ 12,942     $ 11,464  
   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

     

Change in net unrealized holding gain (loss) on available-for-sale investments

    470       (170     140  

Change in net deferred tax asset valuation allowance

    (11     (99     57  

Change in net unrealized holding gain (loss) on derivatives

    85       (119     (13

Change in net prior service costs

          4       (39

Change in net actuarial losses

    (172     (588     (205

Change in net foreign currency translation adjustment

    10       (142      
   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    382       (1,114     (60
   

 

 

   

 

 

   

 

 

 

Total comprehensive income

  $ 11,387     $ 11,828     $ 11,404  
   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

45


Table of Contents

 

INTEL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

                           

December 29, 2012 and December 31, 2011

(In Millions, Except Par Value)

  2012     2011  

Assets

   

Current assets:

   

Cash and cash equivalents

  $ 8,478     $ 5,065  

Short-term investments

    3,999       5,181  

Trading assets

    5,685       4,591  

Accounts receivable, net of allowance for doubtful accounts of $38 ($36 in 2011)

    3,833       3,650  

Inventories

    4,734       4,096  

Deferred tax assets

    2,117       1,700  

Other current assets

    2,512       1,589  
   

 

 

   

 

 

 

Total current assets

    31,358       25,872  
   

 

 

   

 

 

 

Property, plant and equipment, net

    27,983       23,627  

Marketable equity securities

    4,424       562  

Other long-term investments

    493       889  

Goodwill

    9,710       9,254  

Identified intangible assets, net

    6,235       6,267  

Other long-term assets

    4,148       4,648  
   

 

 

   

 

 

 

Total assets

  $ 84,351     $ 71,119  
   

 

 

   

 

 

 

Liabilities and stockholders’ equity

   

Current liabilities:

   

Short-term debt

  $ 312     $ 247  

Accounts payable

    3,023       2,956  

Accrued compensation and benefits

    2,972       2,948  

Accrued advertising

    1,015       1,134  

Deferred income

    1,932       1,929  

Other accrued liabilities

    3,644       2,814  
   

 

 

   

 

 

 

Total current liabilities

    12,898       12,028  
   

 

 

   

 

 

 

Long-term debt

    13,136       7,084  

Long-term deferred tax liabilities

    3,412       2,617  

Other long-term liabilities

    3,702       3,479  

Commitments and contingencies (Notes 21 and 27)

   

Stockholders’ equity:

   

Preferred stock, $0.001 par value, 50 shares authorized; none issued

           

Common stock, $0.001 par value, 10,000 shares authorized; 4,944 issued and outstanding (5,000 issued and outstanding in 2011) and capital in excess of par value

    19,464       17,036  

Accumulated other comprehensive income (loss)

    (399     (781

Retained earnings

    32,138       29,656  
   

 

 

   

 

 

 

Total stockholders’ equity

    51,203       45,911  
   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 84,351     $ 71,119  
   

 

 

   

 

 

 

See accompanying notes.

 

46


Table of Contents

 

INTEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

                                         

Three Years Ended December 29, 2012

(In Millions)

  2012     2011     2010  

Cash and cash equivalents, beginning of year

  $ 5,065     $ 5,498     $ 3,987  
   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used for) operating activities:

     

Net income

    11,005       12,942       11,464  

Adjustments to reconcile net income to net cash provided by operating activities:

     

Depreciation

    6,357       5,141       4,398  

Share-based compensation

    1,102       1,053       917  

Excess tax benefit from share-based payment arrangements

    (142     (37     (65

Amortization of intangibles

    1,165       923       240  

(Gains) losses on equity investments, net

    (141     (112     (348

(Gains) losses on divestitures

          (164      

Deferred taxes

    (242     790       (46

Changes in assets and liabilities:

     

Accounts receivable

    (176     (678     (584

Inventories

    (626     (243     (806

Accounts payable

    67       596       407  

Accrued compensation and benefits

    192       (95     161  

Income taxes payable and receivable

    229       660       53  

Other assets and liabilities

    94       187       901  
   

 

 

   

 

 

   

 

 

 

Total adjustments

    7,879       8,021       5,228  
   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    18,884       20,963       16,692  
   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used for) investing activities:

     

Additions to property, plant and equipment

    (11,027     (10,764     (5,207

Acquisitions, net of cash acquired

    (638     (8,721     (218

Purchases of available-for-sale investments

    (8,694     (11,230     (17,675

Sales of available-for-sale investments

    2,282       9,076       506  

Maturities of available-for-sale investments

    5,369       11,029       12,627  

Purchases of trading assets

    (16,892     (11,314     (8,944

Maturities and sales of trading assets

    15,786       11,771       8,846  

Collection of loans receivable

    149       134        

Origination of loans receivable

    (216     (206     (498

Investments in non-marketable equity investments

    (475     (693     (393

Proceeds from the sale of IM Flash Singapore, LLP (IMFS) assets and certain IM Flash Technologies, LLC (IMFT) assets

    605              

Return of equity method investments

    137       263       199  

Purchases of licensed technology and patents

    (815     (66     (14

Proceeds from divestitures

          50        

Other investing

    369       370       232  
   

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

    (14,060     (10,301     (10,539
   

 

 

   

 

 

   

 

 

 

Cash flows provided by (used for) financing activities:

     

Increase (decrease) in short-term debt, net

    65       209       23  

Proceeds from government grants

    63       124       79  

Excess tax benefit from share-based payment arrangements

    142       37       65  

Issuance of long-term debt, net of issuance costs

    6,124       4,962        

Repayment of debt

    (125           (157

Proceeds from sales of shares through employee equity incentive plans

    2,111       2,045       587  

Repurchase of common stock

    (5,110     (14,340     (1,736

Payment of dividends to stockholders

    (4,350     (4,127     (3,503

Other financing

    (328     (10      
   

 

 

   

 

 

   

 

 

 

Net cash used for financing activities

    (1,408     (11,100     (4,642
   

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

    (3     5        
   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    3,413       (433     1,511  
   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

  $ 8,478     $ 5,065     $ 5,498  
   

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

     

Cash paid during the year for:

     

Interest, net of capitalized interest

  $ 71     $     $  

Income taxes, net of refunds

  $ 3,930     $ 3,338     $ 4,627  

See accompanying notes.

 

47


Table of Contents

 

INTEL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

                                                                     

  

  Common Stock and Capital
in Excess of Par Value
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Total  

Three Years Ended December 29, 2012

(In Millions, Except Per Share Amounts)

  Number of
Shares
    Amount        

Balance as of December 26, 2009

    5,523     $ 14,993     $ 393     $ 26,318     $ 41,704  

Components of comprehensive income, net of tax:

         

Net income

                      11,464       11,464  

Other comprehensive income (loss)

                (60           (60
           

 

 

 

Total comprehensive income

            11,404  
           

 

 

 

Proceeds from sales of shares through employee equity incentive plans, net excess tax benefit, and other

    68       644                   644  

Share-based compensation

          917                   917  

Repurchase of common stock

    (80     (376           (1,360     (1,736

Cash dividends declared ($0.63 per common share)

                      (3,503     (3,503
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 25, 2010

    5,511       16,178       333       32,919       49,430  

Components of comprehensive income, net of tax:

         

Net income

                      12,942       12,942  

Other comprehensive income (loss)

                (1,114           (1,114
           

 

 

 

Total comprehensive income

            11,828  
           

 

 

 

Proceeds from sales of shares through employee equity incentive plans, net tax deficiency, and other

    142       2,019                   2,019  

Assumption of equity awards in connection with acquisitions

          48                   48  

Share-based compensation

          1,053                   1,053  

Repurchase of common stock

    (653     (2,262           (12,078     (14,340

Cash dividends declared ($0.7824 per common share)

                      (4,127     (4,127
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

    5,000       17,036       (781     29,656       45,911  

Components of comprehensive income, net of tax:

         

Net income

                      11,005       11,005  

Other comprehensive income (loss)

                382             382  
           

 

 

 

Total comprehensive income

            11,387  
           

 

 

 

Proceeds from sales of shares through employee equity incentive plans, net excess tax benefit, and other

    148       2,257                   2,257  

Share-based compensation

          1,108                   1,108  

Repurchase of common stock

    (204     (937           (4,173     (5,110

Cash dividends declared ($0.87 per common share)

                      (4,350     (4,350
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 29, 2012

    4,944     $ 19,464     $ (399   $ 32,138     $ 51,203  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

48


Table of Contents

 

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1: Basis of Presentation

We have a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal years 2012 and 2010 were 52-week years. Fiscal year 2011 was a 53-week year. The next 53-week year will end on December 31, 2016. Our consolidated financial statements include the accounts of Intel Corporation and our subsidiaries. We have eliminated intercompany accounts and transactions. We use the equity method to account for equity investments in instances in which we own common stock or similar interests and have the ability to exercise significant influence, but not control, over the investee.

In the first quarter of 2011, we completed the acquisition of McAfee, Inc. For further information, see “Note 13: Acquisitions.” Certain of the operations acquired from McAfee have a functional currency other than the U.S. dollar. As a result, we have recorded translation adjustments through accumulated other comprehensive income (loss) beginning in 2011. Prior to the acquisition of McAfee, the U.S. dollar was the functional currency for our company and all of our subsidiaries; therefore, we did not record a translation adjustment through accumulated other comprehensive income (loss) for fiscal year 2010.

Note 2: Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. The accounting estimates that require our most significant, difficult, and subjective judgments include:

 

the valuation of non-marketable equity investments and the determination of other-than-temporary impairments;

 

the assessment of recoverability of long-lived assets (property, plant and equipment; goodwill; and identified intangibles);

 

the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions);

 

the valuation of inventory; and

 

the recognition and measurement of loss contingencies.

The actual results that we experience may differ materially from our estimates.

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 assets and liabilities are measured and recorded at fair value, except for equity method investments, cost method investments, cost method loans receivable, reverse repurchase agreements with original maturities greater than approximately three months, 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 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.

For further discussion of fair value, see “Note 4: Fair Value” and “Note 20: Retirement Benefit Plans.”

 

 

49


Table of Contents

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Trading Assets

Marketable debt instruments are generally designated as trading assets when the interest rate or foreign exchange rate risk is economically hedged at inception with a related derivative instrument, or when the marketable debt instrument is used to economically hedge foreign exchange rate risk from the remeasurement of intercompany loans. Investments designated as trading assets are reported at fair value. The gains or losses of these investments arising from changes in fair value due to interest rate and currency market fluctuations and credit market volatility, offset by losses or gains on the related derivative instruments and intercompany loans, are recorded in interest and other, net. We also designate certain floating-rate securitized financial instruments, primarily asset-backed securities, as trading assets.

Available-for-Sale Investments

We consider all liquid available-for-sale debt instruments with original maturities from the date of purchase of approximately three months or less to be cash and cash equivalents. Available-for-sale debt instruments with original maturities at the date of purchase greater than approximately three months and remaining maturities of less than one year are classified as short-term investments. Available-for-sale debt instruments with remaining maturities beyond one year are classified as other long-term investments.

Investments that we designate as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss), except as noted in the “Other-Than-Temporary Impairment” section that follows. We determine the cost of the investment sold based on an average cost basis at the individual security level. Our available-for-sale investments include:

 

Marketable debt instruments when the interest rate and foreign currency risks are not hedged at the inception of

   

the investment or when our criteria for designation as trading assets are not met. We generally hold these debt instruments to generate a return commensurate with the U.S.-dollar three-month LIBOR. We record the interest income and realized gains and losses on the sale of these instruments in interest and other, net.

 

Marketable equity securities when there are barriers to mitigating equity market risk through the sale or use of derivative instruments at the time of original classification, and when there is no plan to sell the investment at the time of original classification. We acquire these equity investments to promote business and strategic objectives. To the extent that these investments continue to have strategic value, we typically do not attempt to reduce or eliminate the equity market risks through hedging activities. We record the realized gains or losses on the sale or exchange of marketable equity securities in gains (losses) on equity investments, net.

Non-Marketable and Other Equity Investments

Our non-marketable equity and other equity investments are included in other long-term assets. We account for non-marketable equity and other equity investments for which we do not have control over the investee as:

 

Equity method investments when we have the ability to exercise significant influence, but not control, over the investee. Equity method investments include marketable and non-marketable investments. Our proportionate share of the income or loss is recognized on a one-quarter lag and is recorded in gains (losses) on equity investments, net.

 

Non-marketable cost method investments when the equity method does not apply. We record the realized gains or losses on the sale of non-marketable cost method investments in gains (losses) on equity investments, net.

 

 

50


Table of Contents

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Other-Than-Temporary Impairment

Our available-for-sale investments and non-marketable and other equity investments are subject to a periodic impairment review. Investments are considered impaired when the fair value is below the investment’s adjusted cost basis. Impairments affect earnings as follows:

 

Marketable debt instruments when the fair value is below amortized cost and we intend to sell the instrument, or when it is more likely than not that we will be required to sell the instrument before recovery of its amortized cost basis, or when we do not expect to recover the entire amortized cost basis of the instrument (that is, a credit loss exists). When we do not expect to recover the entire amortized cost basis of the instrument, we separate other-than-temporary impairments into amounts representing credit losses, which are recognized in interest and other, net, and amounts related to all other factors, which are recognized in other comprehensive income (loss).

 

Marketable equity securities based on the specific facts and circumstances present at the time of assessment, which include the consideration of general market conditions, the duration and extent to which the fair value is below cost, and our ability and intent to hold the investment for a sufficient period of time to allow for recovery of value in the foreseeable future. We also consider specific adverse conditions related to the financial health of, and the business outlook for, the investee, which may include industry and sector performance, changes in technology, operational and financing cash flow factors, and changes in the investee’s credit rating. We record other-than-temporary impairment charges on marketable equity securities and marketable equity method investments in gains (losses) on equity investments, net.

 

Non-marketable equity investments based on our assessment of the severity and duration of the impairment, and qualitative and quantitative analysis, including:

   

the investee’s revenue and earnings trends relative to pre-defined milestones and overall business prospects;

   

the technological feasibility of the investee’s products and technologies;

   

the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes;

   

factors related to the investee’s ability to remain in business, such as the investee’s liquidity and debt ratios, and the rate at which the investee is using its cash; and

   

the investee’s receipt of additional funding at a lower valuation.

We record other-than-temporary impairment charges for non-marketable cost method investments and equity method investments in gains (losses) on equity investments, net.

Derivative Financial Instruments

Our primary objective for holding derivative financial instruments is to manage currency exchange rate and interest rate risk, and, to a lesser extent, equity market risk and commodity price risk. Our derivative financial instruments are recorded at fair value and are included in other current assets, other long-term assets, other accrued liabilities, or other long-term liabilities.

Our accounting policies for derivative financial instruments are based on whether they meet the criteria for designation as a cash flow hedge. A designated hedge with exposure to variability in the functional currency equivalent of the future foreign currency cash flows of a forecasted transaction is referred to as a cash flow hedge. The criteria for designating a derivative as a cash flow hedge include the assessment of the instrument’s effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction, and the assessment of the probability that the underlying transaction will occur. For derivatives with cash flow hedge accounting designation, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) and reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated statements of income as the impact of the hedged transaction. Derivatives that we designate as cash flow hedges are classified in the consolidated statements of cash flows in the same section as the underlying item, primarily within cash flows from operating activities.

We recognize gains and losses from changes in fair value of derivatives that are not designated as hedges for accounting purposes in the line item on the consolidated statements of income most closely associated with the related exposures, primarily in interest and other, net and gains (losses) on equity investments, net. As part of our strategic investment program, we also acquire equity derivative instruments, such as equity conversion rights associated with debt instruments, that we do not designate as hedging instruments. We recognize the gains or losses from changes in fair value of these equity derivative instruments in gains (losses) on equity investments, net. Gains and losses from derivatives not designated as hedges are classified in the consolidated statements of cash flows within cash flows from operating activities.

 

 

51


Table of Contents

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Measurement of Effectiveness

 

Effectiveness for forwards is generally measured by comparing the cumulative change in the fair value of the hedge contract with the cumulative change in the fair value of the forecasted cash flows of the hedged item. For currency forward contracts used in cash flow hedging strategies related to capital purchases, forward points are excluded, and effectiveness is measured using spot rates to value both the hedge contract and the hedged item. For currency forward contracts used in cash flow hedging strategies related to operating expenditures, forward points are included and effectiveness is measured using forward rates to value both the hedge contract and the hedged item.

 

Effectiveness for options is generally measured by comparing the cumulative change in the intrinsic value of the hedge contract with the cumulative change in the intrinsic value of an option instrument representing the hedged risks in the hedged item. Time value is excluded and effectiveness is measured using spot rates to value both the hedge contract and the hedged item.

 

Effectiveness for interest rate swaps and commodity swaps is generally measured by comparing the cumulative change in fair value of the swap with the cumulative change in the fair value of the hedged item.

If a cash flow hedge is discontinued because it is no longer probable that the original hedged transaction will occur as previously anticipated, the cumulative unrealized gain or loss on the related derivative is reclassified from accumulated other comprehensive income (loss) into earnings. Subsequent gains or losses on the related derivative instrument are recognized in interest and other, net in each period until the instrument matures, is terminated, is re-designated as a qualified cash flow hedge, or is sold. Ineffective portions of cash flow hedges, as well as amounts excluded from the assessment of effectiveness, are recognized in earnings in interest and other, net. For further discussion of our derivative instruments and risk management programs, see “Note 7: Derivative Financial Instruments.”

Securities Lending

We may enter into securities lending agreements with financial institutions, generally to facilitate hedging and certain investment transactions. Selected securities may be loaned, secured by collateral in the form of cash or securities. The loaned securities continue to be carried as investment assets on our consolidated balance sheets. For lending agreements collateralized by cash and cash equivalents, collateral is recorded as an asset with a corresponding liability. For lending agreements collateralized by other securities, we do not record the collateral as an asset or a liability, unless the collateral is repledged.

Loans Receivable

We make loans to third parties that are classified within other current assets or other long-term assets. We may elect the fair value option for loans when the interest rate or foreign currency exchange rate risk is economically hedged at inception with a related derivative instrument. We record the gains or losses on these loans arising from changes in fair value due to interest rate, currency, and counterparty credit changes, largely offset by losses or gains on the related derivative instruments, in interest and other, net. Loans that are denominated in U.S. dollars and have a floating-rate coupon are carried at amortized cost. We measure interest income for all loans receivable using the interest method, which is based on the effective yield of the loans rather than the stated coupon rate. For further discussion of our loans receivable, see “Note 4: Fair Value.”

Inventories

We compute inventory cost on a first-in, first-out basis. Inventories at year-ends were as follows:

 

                           

(In Millions)

  2012     2011  

Raw materials

  $ 478     $ 644  

Work in process

    2,219       1,680  

Finished goods

    2,037       1,772  
   

 

 

   

 

 

 

Total inventories

  $ 4,734     $ 4,096  
   

 

 

   

 

 

 
 

 

52


Table of Contents

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Property, Plant and Equipment

Property, plant and equipment, net at year-ends was as follows:

 

                           

(In Millions)

  2012     2011  

Land and buildings

  $ 18,807     $ 17,883  

Machinery and equipment

    39,033       34,351  

Construction in progress

    8,206       5,839  
   

 

 

   

 

 

 

Total property, plant and equipment, gross

    66,046       58,073  

Less: accumulated depreciation

    (38,063     (34,446
   

 

 

   

 

 

 

Total property, plant and equipment, net

  $ 27,983     $ 23,627  
   

 

 

   

 

 

 

We compute depreciation for financial reporting purposes using the straight-line method. Substantially all of our depreciable property, plant and equipment assets are depreciated over the following estimated useful lives: machinery and equipment, 2 to 4 years; buildings, 4 to 25 years.

We capitalize a majority of interest on borrowings related to eligible capital expenditures. Capitalized interest is added to the cost of qualified assets and amortized over the estimated useful lives of the assets. We record capital-related government grants earned as a reduction to property, plant and equipment.

Goodwill

We record goodwill when the purchase price of an acquisition exceeds the fair value of the net tangible and intangible assets as of the date of acquisition, assigning the goodwill to our applicable reporting units based on the relative expected fair value provided by the acquisition. We perform a quarterly review of goodwill for indicators of impairment. During the fourth quarter of each year, we perform an impairment

assessment for each reporting unit, and we perform impairment tests using a fair value approach when necessary. The reporting unit’s carrying value used in an impairment test represents the assignment of various assets and liabilities, excluding certain corporate assets and liabilities, such as cash, investments, and debt. For further discussion of goodwill, see “Note 15: Goodwill.”

Identified Intangible Assets

Licensed technology and patents are generally amortized on a straight-line basis over the periods of benefit. We amortize all acquisition-related intangible assets that are subject to amortization over their estimated useful life based on economic benefit. Acquisition-related in-process research and development assets represent the fair value of incomplete research and development projects that had not reached technological feasibility as of the date of acquisition; initially, these are classified as “other intangible assets” that are not subject to amortization. Assets related to projects that have been completed are transferred from “other intangible assets” to “acquisition-related developed technology;” these are subject to amortization, while assets related to projects that have been abandoned are impaired and expensed to research and development. In the quarter following the period in which identified intangible assets become fully amortized, we remove the fully amortized balances from the gross asset and accumulated amortization amounts.

The estimated useful life ranges for identified intangible assets that are subject to amortization as of December 29, 2012 are as follows:

 

             

(In Years)

  Estimated
Useful Life
 

Acquisition-related developed technology

    3–13   

Acquisition-related customer relationships

    5–8   

Acquisition-related trade names

    5–7   

Licensed technology and patents

    5–17   
 

 

53


Table of Contents

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

We perform a quarterly review of finite-lived identified intangible assets to determine whether facts and circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If an asset’s useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. We perform an annual impairment assessment in the fourth quarter of each year for indefinite-lived intangible assets, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the carrying value of the assets may not be recoverable. If necessary, a quantitative impairment test is performed to compare the fair value of the indefinite-lived intangible asset with its carrying value. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets.

For further discussion of identified intangible assets, see “Note 16: Identified Intangible Assets.”

Product Warranty

The vast majority of our products are sold with a limited warranty on product quality and a limited indemnification for customers against intellectual property rights infringement claims related to our products. The accrual and the related expense for known product warranty issues were not significant during the periods presented. Due to product testing, the short time typically between product shipment and the detection and correction of product failures, and the historical rate of payments on indemnification claims, the accrual and related expense for estimated incurred but unidentified issues were not significant during the periods presented.

Revenue Recognition

We recognize net product revenue when the earnings process is complete, as evidenced by an agreement with the customer, delivery has occurred, and acceptance, if applicable, as well as fixed pricing and probable collectibility. We record pricing allowances, including discounts based on contractual arrangements with customers, when we recognize revenue as a reduction to both accounts receivable and net revenue. Because of frequent sales price reductions and rapid technology obsolescence in the industry, we defer product revenue and related costs of sales from component

sales made to distributors under agreements allowing price protection or right of return until the distributors sell the merchandise. The right of return granted generally consists of a stock rotation program in which distributors are able to exchange certain products based on the number of qualified purchases made by the distributor. Under the price protection program, we give distributors credits for the difference between the original price paid and the current price that we offer. We include shipping charges billed to customers in net revenue, and include the related shipping costs in cost of sales.

Revenue from license agreements with our McAfee business generally includes service and support agreements for which the related revenue is deferred and recognized ratably over the performance period. Revenue derived from online subscription products is deferred and recognized ratably over the performance period. Professional services revenue is recognized as services are performed or, if required, upon customer acceptance. For arrangements with multiple elements, including software licenses, maintenance, and/or services, revenue is allocated across the separately identified deliverables and may be recognized or deferred. When vendor-specific objective evidence (VSOE) does not exist for undelivered elements such as maintenance and support, the entire arrangement fee is recognized ratably over the performance period. Direct costs, such as costs related to revenue-sharing and royalty arrangements associated with license arrangements, as well as component costs associated with product revenue and sales commissions, are deferred and amortized over the same period that the related revenue is recognized.

We record deferred revenue offset by the related cost of sales on our consolidated balance sheets as deferred income.

Advertising

Cooperative advertising programs reimburse customers for marketing activities for certain of our products, subject to defined criteria. We accrue cooperative advertising obligations and record the costs at the same time that the related revenue is recognized. We record cooperative advertising costs as marketing, general and administrative expenses to the extent that an advertising benefit separate from the revenue transaction can be identified and the fair value of that advertising benefit received is determinable. We record any excess in cash paid over the fair value of the advertising benefit received as a reduction in revenue. Advertising costs, including direct marketing costs, recorded within marketing, general and administrative expenses were $2.0 billion in 2012 ($2.1 billion in 2011 and $1.8 billion in 2010).

 

 

54


Table of Contents

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Employee Equity Incentive Plans

We have employee equity incentive plans, which are described more fully in “Note 22: Employee Equity Incentive Plans.” We use the straight-line attribution method to recognize share-based compensation over the service period of the award. Upon exercise, cancellation, forfeiture, or expiration of stock options, or upon vesting or forfeiture of restricted stock units (RSUs), we eliminate deferred tax assets for options and restricted stock units with multiple vesting dates for each vesting period on a first-in, first-out basis as if each vesting period were a separate award.

Income Tax

We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that it is believed more likely than not to be realized.

We recognize tax benefits from uncertain tax positions only if that tax position is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position. We then measure the tax benefits recognized in the financial statements from such positions based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to unrecognized tax benefits within the provision for taxes. For more information about income taxes, see “Note 26: Income Taxes.”

Note 3: Accounting Changes

2012

In the first quarter of 2012, we adopted amended standards that increase the prominence of items reported in other comprehensive income. These amended standards eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, and they require that all changes in stockholders’ equity—except investments by, and distributions to, owners—be presented either in a single continuous statement of comprehensive income or in two separate but consecutive

statements. Our adoption of these amended standards impacted the presentation of other comprehensive income, as we have elected to present two separate but consecutive statements, but it did not have an impact on our financial position or results of operations.

In the fourth quarter of 2012, we adopted amended standards to simplify how we test indefinite-lived intangible assets for impairment; these amended standards improve consistency in impairment testing requirements among long-lived asset categories. The amended standards allow for an assessment of qualitative factors such that we can determine whether the fair value of an indefinite-lived intangible asset is more likely than not to be less than its carrying value. For assets in which this assessment concludes that the fair value is more likely than not to be more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. Our adoption of these amended standards did not have an impact on our consolidated financial statements.

2011

In the first quarter of 2011, we adopted new standards for revenue recognition with multiple deliverables. These new standards change the determination of whether the individual deliverables included in a multiple-element arrangement may be treated as separate units for accounting purposes. Additionally, these new standards modify the method by which revenue is allocated to the separately identified deliverables. The adoption of these new standards did not have a significant impact on our consolidated financial statements.

In the first quarter of 2011, we adopted new standards that remove certain tangible products and associated software from the scope of the software revenue recognition guidance. The adoption of these new standards did not have a significant impact on our consolidated financial statements.

In the fourth quarter of 2011, we adopted amended standards that simplify how entities test goodwill for impairment. These amended standards allow for an assessment of qualitative factors such that we can determine whether the fair value of a reporting unit in which goodwill resides is more likely than not to be less than its carrying value. For reporting units in which this assessment concludes that the fair value is more likely than not to be more than its carrying value, these amended standards eliminate the requirement to perform goodwill impairment testing. Our adoption of these amended standards did not have an impact on our consolidated financial statements.

 

 

55


Table of Contents

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 4: Fair Value

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 December 29, 2012 and December 31, 2011:

 

                                                                                                               
     December 29, 2012     December 31, 2011  
     Fair Value Measured and
Recorded at Reporting Date Using
    Total     Fair Value Measured and
Recorded at Reporting Date Using
    Total  

(In Millions)

  Level 1     Level 2     Level 3       Level 1     Level 2     Level 3    

Assets

               

Cash equivalents:

               

Bank deposits

  $     $ 822     $     $ 822     $     $ 795     $     $ 795  

Commercial paper

          2,711             2,711             2,408             2,408  

Government bonds

    400       66             466       150                   150  

Money market fund deposits

    1,086                   1,086       546                   546  

Reverse repurchase agreements

          2,800             2,800             500             500  

Short-term investments:

               

Bank deposits

          540             540             196             196  

Commercial paper

          1,474             1,474             1,409             1,409  

Corporate bonds

    75       292       21       388       120       428       28       576  

Government bonds

    1,307       290             1,597       2,690       310             3,000  

Trading assets:

               

Asset-backed securities

                68       68                   115       115  

Bank deposits

          247             247             135             135  

Commercial paper

          336             336             305             305  

Corporate bonds

    482       1,109             1,591       202       486             688  

Government bonds

    1,743       1,479             3,222       1,698       1,317             3,015  

Money market fund deposits

    18                   18       49                   49  

Municipal bonds

          203             203             284             284  

Other current assets:

               

Derivative assets

    12       208       1       221             159       7       166  

Loans receivable

          203             203             33             33  

Marketable equity securities

    4,424                   4,424       522       40             562  

Other long-term investments:

               

Asset-backed securities

                11       11                   36       36  

Bank deposits

          56             56             55             55  

Corporate bonds

    10       218       26       254             282       39       321  

Government bonds

    59       113             172       177       300             477  

Other long-term assets:

               

Derivative assets

          20       18       38             34       29       63  

Loans receivable

          577             577             715             715  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured and recorded at fair value

  $ 9,616     $ 13,764     $ 145     $ 23,525     $ 6,154     $ 10,191     $ 254     $ 16,599  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

               

Other accrued liabilities:

               

Derivative liabilities

  $ 1     $ 291     $     $ 292     $     $ 280     $ 8     $ 288  

Long-term debt

                                        131       131  

Other long-term liabilities:

               

Derivative liabilities

          20             20             27             27  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured and recorded at fair value

  $ 1     $ 311     $     $ 312     $     $ 307     $ 139     $ 446  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Government bonds include bonds issued or deemed to be guaranteed by government entities. Government bonds include instruments such as non-U.S. government bonds, U.S. Treasury securities, and U.S. agency securities. The underlying assets of substantially all of our reverse repurchase agreements presented in the preceding table are government bonds.

 

56


Table of Contents

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

During 2012, we transferred approximately $200 million of government bonds and corporate bonds from Level 1 to Level 2, primarily based on the reduced market activity for the underlying securities. 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.

Investments in Debt Instruments

Debt investments reflected in the preceding table include investments such as asset-backed securities, bank deposits, commercial paper, corporate bonds, government bonds, money market fund deposits, municipal bonds, and reverse repurchase agreements classified as cash equivalents. When we use observable market prices for identical securities that are traded in less-active markets, we classify our debt investments as Level 2. When observable market prices for identical securities are not available, we price our debt investments 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 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.

Debt investments 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 our fair value measurements using non-binding market consensus prices and non-binding broker quotes from a second source.

Fair Value Option for Loans Receivable

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 December 29, 2012, the fair value of our loans receivable for which we elected the fair value option did not significantly differ from the contractual principal balance based on the contractual currency. Loans receivable are classified within other current assets and other long-term assets. Fair value is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Gains and losses from changes in fair value on the loans receivable and related derivative instruments, as well as interest income, are recorded in interest and other, net. During all periods presented, changes in the fair value of our loans receivable were largely offset by changes in the related derivative instruments, resulting in an insignificant net impact on our consolidated statements of income. Gains and losses attributable to changes in credit risk are determined using observable credit default spreads for the issuer or comparable companies; these gains and losses were insignificant during all periods presented. We did not elect the fair value option for loans when the interest rate or foreign exchange rate risk was not hedged at inception with a related derivative instrument.

Assets Measured and Recorded at Fair Value on a Non-Recurring Basis

Our non-marketable equity investments (non-marketable equity method and cost method 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.

A portion of our non-marketable equity investments has been measured and recorded at fair value due to events or circumstances that significantly impacted the fair value of those investments, resulting in other-than-temporary impairment charges. We classified these investments 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. Impairment charges recognized on non-marketable equity investments held as of December 29, 2012 were $68 million during 2012 ($62 million during 2011 on non-marketable equity investments held as of December 31, 2011 and $121 million during 2010 on non-marketable equity investments held as of December 25, 2010). The fair value of the non-marketable equity investments impaired during 2012 was $73 million at the time of impairment ($69 million and $128 million for non-marketable equity investments impaired during 2011 and 2010, respectively).

 

 

57


Table of Contents

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

We measure the fair value of our non-marketable cost method investments, indebtedness carried at amortized cost, cost method loans receivable, and reverse repurchase agreements with original maturities greater than approximately three months quarterly; however, the assets are recorded at fair value only when an impairment charge is recognized. The carrying amounts and fair values of certain financial instruments not recorded at fair value on a recurring basis as of December 29, 2012 and December 31, 2011 were as follows:

 

                                                                     
     2012  
     Carrying
Amount
    Fair Value Measured Using     Fair Value  

(In Millions)

    Level 1     Level 2     Level 3    

Non-marketable cost method investments

  $ 1,202     $     $     $ 1,766     $ 1,766  

Loans receivable

  $ 199     $     $ 150     $ 48     $ 198  

Reverse repurchase agreements

  $ 50     $     $ 50     $     $ 50  

Long-term debt

  $ 13,136     $ 11,442     $ 2,926     $     $ 14,368  

Short-term debt

  $ 48     $     $ 48     $     $ 48  

NVIDIA Corporation cross-license agreement liability

  $ 875     $     $ 890     $     $ 890  

 

                                                                     
     2011  
     Carrying
Amount
    Fair Value Measured Using     Fair Value  

(In Millions)

    Level 1     Level 2     Level 3    

Non-marketable cost method investments

  $ 1,129     $     $     $ 1,861     $ 1,861  

Loans receivable

  $ 132     $     $ 132     $     $ 132  

Long-term debt

  $ 6,953     $ 5,287     $ 2,448     $     $ 7,735  

Short-term debt

  $ 200     $     $ 200     $     $ 200  

NVIDIA Corporation cross-license agreement liability

  $ 1,156     $     $ 1,174     $     $ 1,174  

 

As of December 29, 2012 and December 31, 2011, the unrealized loss position of our non-marketable cost method investments was insignificant.

Our non-marketable cost method investments are valued 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 relevant factors, including comparable companies’ sizes, growth rates, industries, and development stages. The income approach includes the use of a discounted cash flow model, which requires significant estimates for investees’ revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenues and costs are developed using available market, historical, and forecast data. The valuation of these non-marketable cost method investments also takes into account variables such as conditions reflected in the capital markets, recent financing activities by the investees, the investees’ capital structure, the terms of the investees’ issued interests, and the lack of marketability of the investments.

The carrying amount and fair value of loans receivable exclude loans measured and recorded at a fair value of $780 million as of December 29, 2012 ($748 million as of December 31, 2011). The carrying amount and fair value of long-term debt exclude long-term debt measured and recorded at a fair value of $131 million as of December 31, 2011. Short-term debt includes our commercial paper

outstanding as of December 31, 2011, and the carrying amount and fair value exclude drafts payable.

The fair value of our loans receivable and reverse repurchase agreements, including those held at fair value, is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. The credit quality of these assets remains high, with credit ratings of A/A2 or better for most of our loans receivable and all of our reverse repurchase agreements as of December 29, 2012. Our long-term debt recognized at amortized cost comprises our senior notes and our convertible debentures. The fair value of our senior notes is determined using active market prices, and it is therefore classified as Level 1. The fair value of our convertible long-term debt is determined using discounted cash flow models with observable market inputs, and it takes into consideration variables such as interest rate changes, comparable securities, subordination discount, and credit-rating changes.

The NVIDIA Corporation cross-license agreement liability in the preceding table was incurred as a result of entering into a long-term patent cross-license agreement with NVIDIA in January 2011. We agreed to make payments to NVIDIA over six years. As of December 29, 2012 and December 31, 2011, the carrying amount of the liability arising from the agreement was classified within other accrued liabilities and other long-term liabilities, as applicable. The fair value is determined using a discounted cash flow model, which discounts future cash flows using our incremental borrowing rates.

 

 

58


Table of Contents

INTEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 5: Trading Assets

As of December 29, 2012 and December 31, 2011, all of our trading assets were marketable debt instruments. Net gains related to trading assets still held at the reporting date were

$16 million in 2012 (net losses of $71 million and $50 million in 2011 and 2010, respectively). Net gains on the related derivatives and intercompany loans were $11 million in 2012 (net gains of $58 million and $43 million in 2011 and 2010, respectively).

 

 

Note 6: Available-for-Sale Investments and Cash Equivalents

Available-for-sale investments and cash equivalents as of December 29, 2012 and December 31, 2011 were as follows:

 

                                                                                                               
     2012     2011  

(In Millions)

  Adjusted
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value     Adjusted
Cost
    Gross
Unrealized
Gains