10-Q 1 a10qdocument10012016.htm 10-Q Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended October 1, 2016.
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
intca01a03a01a04a13.jpg
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)
(408) 765-8080
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
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 þ
 
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 Exchange Act).    Yes  ¨    No  þ
Shares outstanding of the Registrant’s common stock:
Class
 
Outstanding as of October 1, 2016
Common stock, $0.001 par value
 
4,739 million




PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
(In Millions, Except Per Share Amounts)
 
Oct 1,
2016
 
Sep 26,
2015
 
Oct 1,
2016
 
Sep 26,
2015
Net revenue
 
$
15,778

 
$
14,465

 
$
43,013

 
$
40,441

Cost of sales
 
5,795

 
5,354

 
16,927

 
15,352

Gross margin
 
9,983

 
9,111

 
26,086

 
25,089

Research and development
 
3,069

 
2,927

 
9,460

 
9,009

Marketing, general and administrative
 
2,006

 
1,910

 
6,239

 
5,812

Restructuring and other charges
 
372

 
14

 
1,786

 
367

Amortization of acquisition-related intangibles
 
74

 
68

 
253

 
198

Operating expenses
 
5,521

 
4,919

 
17,738

 
15,386

Operating income
 
4,462

 
4,192

 
8,348

 
9,703

Gains (losses) on equity investments, net
 
(12
)
 
165

 
488

 
297

Interest and other, net
 
(132
)
 
(104
)
 
(340
)
 
(91
)
Income before taxes
 
4,318

 
4,253

 
8,496

 
9,909

Provision for taxes
 
940

 
1,144

 
1,742

 
2,102

Net income
 
$
3,378

 
$
3,109

 
$
6,754

 
$
7,807

Basic earnings per share of common stock
 
$
0.71

 
$
0.65

 
$
1.43

 
$
1.64

Diluted earnings per share of common stock
 
$
0.69

 
$
0.64

 
$
1.39

 
$
1.59

Cash dividends declared per share of common stock
 
$
0.52

 
$
0.48

 
$
1.04

 
$
0.96

Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
 
Basic
 
4,734

 
4,747

 
4,728

 
4,749

Diluted
 
4,877

 
4,876

 
4,872

 
4,900

See accompanying notes.

2



INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
(In Millions)
 
Oct 1,
2016
 
Sep 26,
2015
 
Oct 1,
2016
 
Sep 26,
2015
Net income
 
$
3,378

 
$
3,109

 
$
6,754

 
$
7,807

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Change in net unrealized holding gains (losses) on available-for-sale investments
 
412

 
(1,029
)
 
357

 
(943
)
Change in deferred tax asset valuation allowance
 
(2
)
 
(5
)
 
(5
)
 
(13
)
Change in net unrealized holding gains (losses) on derivatives
 
61

 
42

 
274

 
89

Change in net prior service (costs) credits
 
1

 
2

 
4

 
6

Change in actuarial valuation
 
10

 
11

 
(289
)
 
30

Change in net foreign currency translation adjustment
 
(2
)
 
(1
)
 
(1
)
 
(170
)
Other comprehensive income (loss)
 
480

 
(980
)
 
340

 
(1,001
)
Total comprehensive income
 
$
3,858

 
$
2,129

 
$
7,094

 
$
6,806

See accompanying notes.

3



INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(In Millions)
 
Oct 1,
2016
 
Dec 26,
2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
4,752

 
$
15,308

Short-term investments
 
3,270

 
2,682

Trading assets
 
9,747

 
7,323

Accounts receivable, net
 
4,952

 
4,787

Inventories
 
5,783

 
5,167

Assets held for sale
 
5,100

 
71

Other current assets
 
2,612

 
2,982

Total current assets
 
36,216

 
38,320

 
 
 
 
 
Property, plant and equipment, net of accumulated depreciation of $54,060 ($51,538 as of December 26, 2015)
 
34,707

 
31,858

Marketable equity securities
 
6,022

 
5,960

Other long-term investments
 
4,189

 
1,891

Goodwill
 
13,868

 
11,332

Identified intangible assets, net
 
9,524

 
3,933

Other long-term assets
 
7,691

 
8,165

Total assets
 
$
112,217

 
$
101,459

 
 
 
 
 
Liabilities, temporary equity, and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt
 
$
3,573

 
$
2,634

Accounts payable
 
3,181

 
2,063

Accrued compensation and benefits
 
3,110

 
3,138

Accrued advertising
 
820

 
960

Deferred income
 
1,724

 
2,188

Liabilities held for sale
 
1,881

 
56

Other accrued liabilities
 
5,804

 
4,607

Total current liabilities

20,093

 
15,646

 
 
 
 
 
Long-term debt
 
24,043

 
20,036

Long-term deferred tax liabilities
 
1,211

 
954

Other long-term liabilities
 
2,869

 
2,841

Contingencies (Note 22)
 

 

Temporary equity
 
886

 
897

Stockholders’ equity:
 
 
 
 
Preferred stock
 

 

Common stock and capital in excess of par value, 4,739 issued and outstanding (4,725 issued and outstanding as of December 26, 2015)
 
25,070

 
23,411

Accumulated other comprehensive income (loss)
 
400

 
60

Retained earnings
 
37,645

 
37,614

Total stockholders’ equity
 
63,115

 
61,085

Total liabilities, temporary equity, and stockholders’ equity
 
$
112,217

 
$
101,459

See accompanying notes.

4



INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
 
Nine Months Ended
(In Millions)
 
Oct 1,
2016
 
Sep 26,
2015
Cash and cash equivalents, beginning of period
 
$
15,308

 
$
2,561

Cash flows provided by (used for) operating activities:
 
 
 
 
Net income
 
6,754

 
7,807

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
4,684

 
5,885

Share-based compensation
 
1,136

 
1,009

Restructuring and other charges
 
1,786

 
367

Excess tax benefit from share-based payment arrangements
 
(111
)
 
(139
)
Amortization of intangibles
 
1,176

 
680

(Gains) losses on equity investments, net
 
(414
)
 
(245
)
Deferred taxes
 
(188
)
 
(1,093
)
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(100
)
 
332

Inventories
 
(118
)
 
(640
)
Accounts payable
 
188

 
(86
)
Accrued compensation and benefits
 
(1,874
)
 
(1,217
)
Income taxes payable and receivable
 
961

 
774

Other assets and liabilities
 
(222
)
 
156

Total adjustments
 
6,904

 
5,783

Net cash provided by operating activities
 
13,658

 
13,590

Cash flows provided by (used for) investing activities:
 
 
 
 
Additions to property, plant and equipment
 
(6,095
)
 
(4,998
)
Acquisitions, net of cash acquired
 
(15,151
)
 
(538
)
Purchases of available-for-sale investments
 
(7,962
)
 
(7,522
)
Sales of available-for-sale investments
 
3,793

 
1,040

Maturities of available-for-sale investments
 
4,928

 
2,153

Purchases of trading assets
 
(9,953
)
 
(7,943
)
Maturities and sales of trading assets
 
7,867

 
10,465

Investments in loans receivable and reverse repurchase agreements
 
(223
)
 
(2,550
)
Collection of loans receivable and reverse repurchase agreements
 
911

 
466

Investments in non-marketable equity investments
 
(893
)
 
(1,864
)
Other investing
 
405

 
380

Net cash used for investing activities
 
(22,373
)
 
(10,911
)
Cash flows provided by (used for) financing activities:
 
 
 
 
Increase (decrease) in short-term debt, net
 
426

 
(473
)
Excess tax benefit from share-based payment arrangements
 
111

 
139

Issuance of long-term debt, net of issuance costs
 
2,734

 
7,986

Proceeds from sales of common stock through employee equity incentive plans
 
1,024

 
696

Repurchase of common stock
 
(2,054
)
 
(2,476
)
Restricted stock unit withholdings
 
(434
)
 
(416
)
Payment of dividends to stockholders
 
(3,692
)
 
(3,423
)
Collateral associated with repurchase of common stock
 

 
325

Decrease in liability due to return of collateral associated with repurchase of common stock
 

 
(325
)
Other financing
 
44

 
(209
)
Net cash provided by (used for) financing activities
 
(1,841
)
 
1,824

Effect of exchange rate fluctuations on cash and cash equivalents
 

 
1

Net increase (decrease) in cash and cash equivalents
 
(10,556
)
 
4,504

Cash and cash equivalents, end of period
 
$
4,752

 
$
7,065

 
 
 
 
 
Supplemental disclosures of noncash investing activities and cash flow information:
 
 
 
 
Acquisition of property, plant, and equipment included in accounts payable and accrued liabilities
 
$
1,505

 
$
460

Cash paid during the period for:
 
 
 
 
Interest, net of capitalized interest and interest rate swap payments/receipts
 
$
472

 
$
60

Income taxes, net of refunds
 
$
843

 
$
2,301

See accompanying notes.

5



INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited
Note 1: Basis of Presentation
We prepared our interim consolidated condensed financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles, consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended December 26, 2015. We have reclassified certain prior period amounts to conform to current period presentation.
We have a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal year 2015 was a 52-week year. Fiscal year 2016 is a 53-week fiscal year, and the first quarter of 2016 was a 14-week quarter.
In the first quarter of 2016, we completed the acquisition of Altera Corporation (Altera). For further information, see "Note 8: Acquisitions and Divestitures."
We have made estimates and judgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. The actual results that we experience may differ materially from our estimates. The interim financial information is unaudited, but reflects all normal adjustments that are, in our opinion, necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 26, 2015.
Note 2: Change in Accounting Estimate
During our 2015 annual assessment of the useful lives of our property, plant, and equipment, we determined that the useful lives of machinery and equipment in our wafer fabrication facilities should be increased from 4 to 5 years. This change in estimate was applied prospectively, effective at the beginning of the first quarter of 2016. During the three months ended October 1, 2016, this change increased our operating income by approximately $425 million, our net income by approximately $300 million, and our diluted earnings per share by approximately $0.06. During the nine months ended October 1, 2016, this change increased our operating income by approximately $925 million, our net income by approximately $650 million, and our diluted earnings per share by approximately $0.13.
Note 3: Recent Accounting Standards
Accounting Standards Adopted
Deferred Tax Classification. In the first quarter of 2016, we elected to early adopt an amended standard requiring that we classify all deferred tax assets and liabilities as non-current on the consolidated condensed balance sheet instead of separating deferred taxes into current and non-current. The amended standard was adopted on a retrospective basis. As a result of the adoption, we made the following adjustments to the consolidated condensed 2015 balance sheet: a $2.0 billion decrease to current deferred tax assets, a $430 million increase to non-current deferred tax assets, a $21 million decrease to current deferred tax liabilities, and a decrease of $1.6 billion to non-current deferred tax liabilities.
Business Combinations. In the first quarter of 2016, we adopted an amended standard requiring that we recognize the effect on earnings of any adjustments identified during the measurement period after an acquisition in the same period the adjustment is identified, as opposed to the prior standard which required material adjustments be retrospectively adjusted. The standard did not have a significant impact on our consolidated condensed financial statements.

6

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Accounting Standards Not Yet Adopted
Revenue Recognition. In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB agreed to delay the effective date by one year; accordingly, the new standard is effective for us beginning in the first quarter of 2018 and we expect to adopt it at that time. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method nor have we determined the impact of the new standard on our consolidated condensed financial statements.
Financial Instruments - Classification and Measurement. In January 2016, the FASB issued changes to the accounting for financial instruments that primarily affect equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements. This standard is effective for us beginning in the first quarter of 2018; certain provisions allow for early adoption and we are evaluating whether we will do so. The new standard should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with certain exceptions. We have not yet determined the impact of the new standard on our consolidated condensed financial statements.

Financial Instruments - Credit Losses. In June 2016, the FASB issued a new standard requiring measurement and recognition of expected credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. This standard is effective for us in the first quarter of 2020; early adoption is permitted beginning in the first quarter of 2019 and we are evaluating whether we will early adopt. It is required to be applied on a modified-retrospective approach with certain elements being adopted prospectively. We have not yet determined the impact of the new standard on our consolidated condensed financial statements.
Leases. In February 2016, the FASB issued a new lease accounting standard requiring that we recognize lease assets and liabilities on the balance sheet. This standard is effective for us beginning in the first quarter of 2019; early adoption is permitted and we are evaluating whether we will do so. The new standard must be adopted using a modified retrospective transition which includes certain practical expedients. We have not yet determined the impact of the new standard on our consolidated condensed financial statements.
Share-Based Compensation. In March 2016, the FASB issued an accounting standard update aimed at simplifying the accounting for share-based payment transactions. Included in the update are modifications to the accounting for income taxes upon vesting or settlement of awards, employer tax withholding on share-based compensation, forfeitures, and financial statement presentation of excess tax benefits. This standard is effective for us beginning in the first quarter of 2017 and we will adopt it at that time. We have not yet determined the impact of the new standard on our consolidated condensed financial statements.
Income Taxes - Intra-Entity Asset Transfers. In October 2016, the FASB issued an accounting standard update aimed at recognizing the income tax consequences of intra-entity transfers of assets other than inventory when they occur. This removes the exception to postpone recognition until the asset has been sold to an outside party. This standard is effective for us beginning in the first quarter of 2018, and early adoption is permitted. It is required to be applied on a modified retrospective basis through a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We have not yet determined the impact of the new standard on our consolidated condensed financial statements.




7

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Note 4: Fair Value
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability. Our financial assets are measured and recorded at fair value, except for cost method investments, cost method loans receivable, equity method investments, grants receivable, and reverse repurchase agreements with original maturities greater than approximately three months. Substantially all of our liabilities are not measured and recorded at fair value.
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.

8

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Assets and liabilities measured and recorded at fair value on a recurring basis at the end of each period were as follows: 
 
 
October 1, 2016
 
December 26, 2015
 
 
Fair Value Measured and Recorded at Reporting Date Using
 
 
 
Fair Value Measured and Recorded at Reporting Date Using
 
 
(In Millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
 
$

 
$
113

 
$

 
$
113

 
$

 
$
1,829

 
$

 
$
1,829

Financial institution instruments
 
1,910

 
785

 

 
2,695

 
8,238

 
1,277

 

 
9,515

Government debt
 

 
50

 

 
50

 

 
130

 

 
130

Reverse repurchase agreements
 

 
768

 

 
768

 

 
2,368

 

 
2,368

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
 
492

 
823

 
14

 
1,329

 
336

 
764

 
20

 
1,120

Financial institution instruments
 
195

 
1,405

 

 
1,600

 
145

 
927

 

 
1,072

Government debt
 
93

 
248

 

 
341

 
65

 
425

 

 
490

Trading assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 

 
153

 
7

 
160

 

 
275

 
94

 
369

Corporate debt
 
2,273

 
920

 

 
3,193

 
1,744

 
564

 

 
2,308

Financial institution instruments
 
904

 
675

 

 
1,579

 
930

 
701

 

 
1,631

Government debt
 
2,399

 
2,416

 

 
4,815

 
1,107

 
1,908

 

 
3,015

Other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 

 
313

 

 
313

 
32

 
412

 
1

 
445

Loans receivable
 

 
292

 

 
292

 

 
137

 

 
137

Marketable equity securities
 
6,022

 

 

 
6,022

 
5,891

 
69

 

 
5,960

Other long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 

 

 

 

 

 

 
4

 
4

Corporate debt
 
1,063

 
842

 

 
1,905

 
407

 
801

 

 
1,208

Financial institution instruments
 
697

 
924

 

 
1,621

 
171

 
381

 

 
552

Government debt
 
468

 
195

 

 
663

 
79

 
48

 

 
127

Other long-term assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 

 
178

 
67

 
245

 

 
30

 
10

 
40

Loans receivable
 

 
311

 

 
311

 

 
342

 

 
342

Total assets measured and recorded at fair value
 
16,516

 
11,411

 
88

 
28,015

 
19,145

 
13,388

 
129

 
32,662

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 

 
368

 

 
368

 
2

 
210

 

 
212

Other long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
 

 
21

 

 
21

 

 
33

 

 
33

Total liabilities measured and recorded at fair value
 
$

 
$
389

 
$

 
$
389

 
$
2

 
$
243

 
$

 
$
245

Government debt includes instruments such as non-U.S. government bonds and U.S. agency securities. Financial institution instruments include instruments issued or managed by financial institutions in various forms such as commercial paper, fixed and floating rate bonds, money market fund deposits, and time deposits.

9

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


During the first nine months of 2016, we transferred approximately $508 million of assets from Level 1 to Level 2 of the fair value hierarchy and approximately $401 million of assets from Level 2 to Level 1 ($821 million from Level 1 to Level 2 and $148 million from Level 2 to Level 1 during the first nine months of 2015). These transfers were based on changes in market activity for the underlying instruments. Our policy is to reflect transfers between the fair value hierarchy levels at the beginning of the period.
Investments in Debt Instruments
Debt instruments reflected in the preceding table include investments such as asset-backed securities, corporate debt, financial institution instruments, government debt, and reverse repurchase agreements classified as cash equivalents. We classify our debt instruments as Level 2 when we use observable market prices for identical instruments that are traded in less active markets. When observable market prices for identical instruments are not available, we price the debt instruments using our own models, such as a discounted cash flow model, or non-binding market consensus prices based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar instruments; and the internal assumptions of pricing providers or brokers that use observable market inputs and unobservable market inputs that we consider to be not significant. When we use non-binding market consensus prices, we corroborate them with quoted market prices for similar instruments or compare them to output from internally-developed pricing models such as a discounted cash flow model. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. All significant inputs are derived from or corroborated with observable market data.
The fair values of debt instruments classified as Level 3 are generally derived from discounted cash flow models, performed either by us or our pricing providers, using inputs that we are unable to corroborate with observable market data. We monitor and review the inputs and results of these valuation models to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
Fair Value Option for Loans Receivable
We elected the fair value option for loans receivable when the interest rate or currency exchange rate risk was hedged at inception with a related derivative instrument. As of October 1, 2016 and December 26, 2015, the fair value of our loans receivable for which we elected the fair value option did not significantly differ from the contractual principal balance based on the contractual currency. Loans receivable are classified within other current assets and other long-term assets. Fair value is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Gains and losses from changes in fair value on the loans receivable and related derivative instruments, as well as interest income, are recorded in interest and other, net. During all periods presented, changes in the fair value of our loans receivable were largely offset by gains or losses on the related derivative instruments, resulting in an insignificant net impact on our consolidated condensed statements of income. Gains and losses attributable to changes in credit risk are determined using observable credit default spreads for the issuer or comparable companies; these gains and losses were insignificant during all periods presented. We did not elect the fair value option for loans receivable when the interest rate or currency exchange rate risk was not hedged at inception with a related derivative instrument. Loans receivable not measured and recorded at fair value are included in the following "Financial Instruments Not Recorded at Fair Value on a Recurring Basis" section.
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
Our non-marketable equity investments, marketable equity method investments, and non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment is recognized.
Some of our non-marketable equity investments have been measured and recorded at fair value due to events or circumstances that significantly impacted the fair value of those investments, resulting in other-than-temporary impairments. We classified these investments as Level 3 because the valuations used unobservable inputs that were significant to the fair value measurements and required management judgment due to the absence of quoted market prices. Impairments recognized on non-marketable equity investments held as of October 1, 2016 were $48 million during the third quarter of 2016 and $132 million during the first nine months of 2016 ($27 million during the third quarter of 2015 and $100 million during the first nine months of 2015 on non-marketable equity investments held as of September 26, 2015).

10

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On a quarterly basis, we measure the fair value of our grants receivable, cost method loans receivable, non-marketable cost method investments, reverse repurchase agreements with original maturities greater than approximately three months, and indebtedness carried at amortized cost net of applicable hedge adjustments; however, the assets are recorded at fair value only when an impairment is recognized. The carrying amounts and fair values of financial instruments not recorded at fair value on a recurring basis at the end of each period were as follows:
 
 
October 1, 2016
(In Millions)
 
Carrying
Amount
 
Fair Value Measured Using
 
Fair Value
Level 1
 
Level 2
 
Level 3
 
Grants receivable
 
$
557

 
$

 
$
559

 
$

 
$
559

Loans receivable
 
$
265

 
$

 
$
265

 
$

 
$
265

Non-marketable cost method investments
 
$
3,157

 
$

 
$

 
$
4,014

 
$
4,014

Reverse repurchase agreements
 
$
250

 
$

 
$
250

 
$

 
$
250

Short-term debt
 
$
3,557

 
$
2,003

 
$
2,195

 
$

 
$
4,198

Long-term debt
 
$
24,043

 
$
15,880

 
$
10,543

 
$

 
$
26,423

 
 
December 26, 2015
(In Millions)
 
Carrying
Amount
 
Fair Value Measured Using
 
Fair Value
Level 1
 
Level 2
 
Level 3
 
Grants receivable
 
$
593

 
$

 
$
600

 
$

 
$
600

Loans receivable
 
$
315

 
$

 
$
315

 
$

 
$
315

Non-marketable cost method investments
 
$
2,933

 
$

 
$

 
$
3,904

 
$
3,904

Reverse repurchase agreements
 
$
1,000

 
$

 
$
1,000

 
$

 
$
1,000

Short-term debt
 
$
2,593

 
$
1,513

 
$
1,563

 
$

 
$
3,076

Long-term debt
 
$
20,036

 
$
14,058

 
$
6,835

 
$

 
$
20,893

NVIDIA Corporation cross-license agreement liability
 
$
199

 
$

 
$
200

 
$

 
$
200

The fair value of our grants receivable is determined using a discounted cash flow model, which discounts future cash flows using an appropriate yield curve. As of October 1, 2016 and December 26, 2015, the carrying amount of our grants receivable was classified within other current assets and other long-term assets, as applicable.
The carrying amount and fair value of loans receivable exclude loans measured and recorded at fair value on a recurring basis. The fair value of our loans receivable and reverse repurchase agreements, including those held at fair value, is determined using a discounted cash flow model. All significant inputs in the models are derived from or corroborated with observable market data, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. The credit quality of these assets remains high, with credit ratings of A/A2 or better for substantially all of our loans receivable and reverse repurchase agreements as of October 1, 2016.

11

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


As of October 1, 2016 and December 26, 2015, the unrealized loss position of our non-marketable cost method investments was insignificant. Our non-marketable cost method investments are valued using a qualitative and quantitative analysis of events or circumstances that impact the fair value of the investment. Qualitative analysis of our investments involves understanding our investee’s revenue and earnings trends relative to pre-defined milestones and overall business prospects; the technological feasibility of our investee’s products and technologies; the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes; and the management and governance structure of the investee. Quantitative assessments of the fair value of our investments are developed using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable companies, such as revenue, earnings, comparable performance multiples, recent financing rounds, the terms of the investees’ issued interests, and the level of marketability of the investments. The selection of comparable companies requires management judgment and is based on a number of factors, including comparable companies’ sizes, growth rates, industries, and development stages. The income approach includes the use of a discounted cash flow model, which requires significant estimates regarding investees’ revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenue and costs are developed using available market, historical, and forecast data. We measure the fair value of our non-marketable cost method investments as close to the end of the period as feasible.
The carrying amount and fair value of short-term debt exclude drafts payable. Our short-term debt recognized at amortized cost includes our 2009 junior subordinated convertible debentures due 2039 (2009 debentures), our 2011 senior notes due 2016, our acquired Altera senior notes due 2017, and any commercial paper outstanding. During the third quarter of 2016, the 2009 debentures were classified as short-term debt on the consolidated condensed balance sheets and convertible at the option of the holder during the fourth quarter of 2016. For further information, see "Note 14: Borrowings" and the "Borrowings" note in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 26, 2015. Our long-term debt is composed of our senior notes and our convertible debentures. The fair value of our senior notes is classified as Level 1 when we use quoted prices in active markets and Level 2 when the quoted prices are from less active markets or when other observable inputs are used to determine fair value. The fair value of our 2009 and 2005 convertible debentures is determined using discounted cash flow models with observable market inputs, and takes into consideration variables such as interest rate changes, comparable instruments, subordination discount, and credit-rating changes; it is, therefore, classified as Level 2.

12

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Note 5: Cash and Investments
Cash and investments at the end of each period were as follows:
(In Millions)
 
Oct 1,
2016
 
Dec 26,
2015
Available-for-sale investments
 
$
16,339

 
$
22,007

Cash
 
1,126

 
1,466

Equity method investments
 
1,508

 
1,590

Loans receivable
 
868

 
794

Non-marketable cost method investments
 
3,157

 
2,933

Reverse repurchase agreements
 
1,018

 
3,368

Trading assets
 
9,747

 
7,323

Total cash and investments
 
$
33,763

 
$
39,481

Available-for-Sale Investments
Available-for-sale investments at the end of each period were as follows:
 
 
October 1, 2016
 
December 26, 2015
(In Millions)
 
Adjusted Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Adjusted Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Asset-backed securities
 
$

 
$

 
$

 
$

 
$
5

 
$

 
$
(1
)
 
$
4

Corporate debt
 
3,347

 
8

 
(8
)
 
3,347

 
4,164

 
3

 
(10
)
 
4,157

Financial institution instruments
 
5,910

 
7

 
(1
)
 
5,916

 
11,140

 
1

 
(2
)
 
11,139

Government debt
 
1,051

 
3

 

 
1,054

 
748

 

 
(1
)
 
747

Marketable equity securities
 
2,793

 
3,230

 
(1
)
 
6,022

 
3,254

 
2,706

 

 
5,960

Total available-for-sale investments
 
$
13,101

 
$
3,248

 
$
(10
)
 
$
16,339

 
$
19,311

 
$
2,710

 
$
(14
)
 
$
22,007

Government debt includes instruments such as non-U.S. government bonds and U.S. agency securities. Financial institution instruments include instruments issued or managed by financial institutions in various forms such as commercial paper, fixed and floating rate bonds, money market fund deposits, and time deposits. Most time deposits were issued by institutions outside the U.S. as of October 1, 2016 and December 26, 2015.
For information on the unrealized holding gains (losses) on available-for-sale investments reclassified out of accumulated other comprehensive income (loss) into the consolidated condensed statements of income, see "Note 21: Other Comprehensive Income (Loss)."
During the third quarter of 2016, we sold available-for-sale investments for proceeds of $195 million, $87 million of which related to sales of cash and cash equivalents ($1.1 billion in the third quarter of 2015, $134 million of which was related to sales of cash and cash equivalents). During the first nine months of 2016, we sold available-for-sale investments for proceeds of $4.0 billion, of which $216 million related to sales of cash and cash equivalents ($1.2 billion in the first nine months of 2015, $134 million of which was related to sales of cash and cash equivalents). The gross realized gains on sales of available-for-sale investments were $41 million in the third quarter of 2016 and $538 million in the first nine months of 2016 ($12 million in the third quarter of 2015 and $97 million in the first nine months of 2015).

13

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


The amortized cost and fair value of available-for-sale debt investments, by contractual maturity, as of October 1, 2016, were as follows:
(In Millions)
 
Cost
 
Fair Value
Due in 1 year or less
 
$
4,220

 
$
4,217

Due in 1–2 years
 
2,090

 
2,095

Due in 2–5 years
 
2,088

 
2,095

Instruments not due at a single maturity date
 
1,910

 
1,910

Total
 
$
10,308

 
$
10,317

Equity Method Investments
IM Flash Technologies, LLC
Since the inception of IM Flash Technologies, LLC (IMFT) in 2006, Micron Technology, Inc. (Micron) and Intel have jointly developed NAND flash memory and, most recently, 3D XPoint™ technology products. Intel also purchases jointly developed products directly from Micron under certain supply agreements.
The IMFT operating agreement, most recently amended in January 2016, continues through 2024 unless earlier terminated under certain terms and conditions and provides for certain buy-sell rights of the joint venture. Intel has the right to cause Micron to buy our interest in IMFT. If we exercise this right, Micron would set the closing date of the transaction within two years following such election and could elect to receive financing from us for one to two years. Subsequent to our put right, and commencing in January 2019, Micron has the right to call our interest in IMFT with the closing date to be effective within one year.
As of October 1, 2016, we own a 49% interest in IMFT. The carrying value of our investment was $886 million as of October 1, 2016 ($872 million as of December 26, 2015) and is classified within other long-term assets.
IMFT is a variable interest entity and all costs of IMFT are passed on to Micron and Intel through sale of products or services in proportional share of ownership. Intel's portion of IMFT costs, primarily related to product purchases and production-related services, was approximately $115 million in the third quarter of 2016 and approximately $315 million in the first nine months of 2016 (approximately $115 million in the third quarter of 2015 and approximately $315 million in the first nine months of 2015). The amount due to IMFT for product purchases and services provided was approximately $90 million as of October 1, 2016 (approximately $20 million as of December 26, 2015).
IMFT depends on Micron and Intel for any additional cash needs. Our known maximum exposure to loss approximated the carrying value of our investment balance in IMFT, which was $886 million as of October 1, 2016. Except for the amount due to IMFT for product purchases and production-related services, we did not have any additional liabilities recognized on our consolidated condensed balance sheets in connection with our interests in this joint venture as of October 1, 2016. Our potential future losses could be higher than the carrying amount of our investment, as Intel and Micron are liable for other future operating costs or obligations of IMFT. Future cash calls could also increase our investment balance and the related exposure to loss. In addition, because we are currently committed to purchasing 49% of IMFT’s production output and production-related services, we may be required to purchase products at a cost in excess of realizable value.
We have determined that we do not have the characteristics of a consolidating investor in the variable interest entity and, therefore, we account for our interest in IMFT using the equity method of accounting.
Cloudera, Inc.
During 2014, we invested in Cloudera, Inc. (Cloudera). Our fully diluted ownership interest in Cloudera is 16% as of October 1, 2016. Our investment is accounted for under the equity and cost methods of accounting based on the rights associated with different instruments we own, and is classified within other long-term assets. The carrying value of our equity method investment was $233 million and of our cost method investment was $454 million as of October 1, 2016 ($256 million for our equity method investment and $454 million for our cost method investment as of December 26, 2015).

14

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Intel-GE Care Innovations, LLC
During the first quarter of 2016, we gained control of Care Innovations LLC (Care Innovations), formerly our joint venture with General Electric Company. Care Innovations has been included in our consolidated condensed financial statements beginning in the first quarter of 2016.
Non-marketable Cost Method Investments
Investment in Beijing UniSpreadtrum Technology Ltd.
During 2014, we entered into a series of agreements with Tsinghua Unigroup Ltd. (Tsinghua Unigroup), an operating subsidiary of Tsinghua Holdings Co. Ltd., to, among other things, jointly develop Intel® architecture- and communications-based solutions for phones. We agreed to invest up to 9.0 billion Chinese yuan (approximately $1.5 billion as of the date of the agreement) for a minority stake of approximately 20% of Beijing UniSpreadtrum Technology Ltd., a holding company under Tsinghua Unigroup. During 2015, we invested $966 million to complete the first phase of the equity investment. We have determined we do not have significant influence over the company and, therefore, we account for our interest using the cost method of accounting. Subject to regulatory approvals and other closing conditions, the second phase of the investment will require additional funding of approximately $500 million.
Trading Assets
As of October 1, 2016 and December 26, 2015, substantially all of our trading assets were marketable debt instruments. There were $72 million net gains related to trading assets still held at the reporting date in the third quarter of 2016 and $245 million net gains in the first nine months of 2016 (net losses of $88 million in the third quarter of 2015 and net losses of $151 million in the first nine months of 2015). Net losses on the related derivatives were $54 million in the third quarter of 2016 and $224 million net losses in the first nine months of 2016 (net gains of $72 million in the third quarter of 2015 and net gains of $138 million in the first nine months of 2015).
Note 6: Inventories
We compute inventory cost on a first-in, first-out basis. Costs incurred to manufacture our products are included in the valuation of inventory beginning in the quarter in which a product meets the technical criteria to qualify for sale to customers. Prior to qualification for sale, costs that do not meet the criteria for research and development (R&D) are included in cost of sales in the period incurred. Inventories at the end of each period were as follows:
(In Millions)
 
Oct 1,
2016
 
Dec 26,
2015
Raw materials
 
$
688

 
$
532

Work in process
 
3,443

 
2,893

Finished goods
 
1,652

 
1,742

Total inventories
 
$
5,783

 
$
5,167


15

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Note 7: Derivative Financial Instruments
Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk, and, to a lesser extent, equity market risk, commodity price risk, and credit risk. When possible, we enter into master netting arrangements with counterparties to mitigate credit risk in derivative transactions. A master netting arrangement may allow counterparties to net settle amounts owed to each other as a result of multiple, separate derivative transactions. Generally, our master netting agreements allow for net settlement in case of certain triggering events such as bankruptcy or default of one of the counterparties to the transaction. We may also elect to exchange cash collateral with certain of our counterparties on a regular basis. For presentation on our consolidated condensed balance sheets, we do not offset fair value amounts recognized for derivative instruments under master netting arrangements. 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.
Currency Exchange Rate Risk
We are exposed to currency exchange rate risk, and generally hedge our exposures with currency forward contracts, currency interest rate swaps, or currency options. Substantially all of our revenue is transacted in U.S. dollars. However, a significant portion of our operating expenditures and capital purchases is incurred in or exposed to other currencies, primarily the euro, the Japanese yen, the Israeli shekel, and the Chinese yuan. We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in the fair value and the volatility of the functional currency equivalent of future cash flows caused by changes in exchange rates. Our non-U.S.-dollar-denominated investments in debt instruments, loans receivable and indebtedness are generally hedged with offsetting currency forward contracts or currency interest rate swaps. We may also hedge currency risk arising from funding foreign currency denominated forecasted investments. These programs reduce, but do not eliminate, the impact of currency exchange movements.
Our currency risk management programs include:
Currency derivatives with cash flow hedge accounting designation that utilize currency forward contracts and currency options to hedge exposures to the variability in the U.S.-dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. The substantial majority of these instruments mature within 12 months. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction. We utilize currency interest rate swaps to hedge exposures to the variability in the U.S.-dollar equivalent of coupon and principal payments associated with our non-U.S.-dollar-denominated indebtedness.
Currency derivatives without hedge accounting designation that utilize currency forward contracts or currency interest rate swaps to economically hedge the functional currency equivalent cash flows of recognized monetary assets and liabilities, non-U.S.-dollar-denominated debt instruments classified as trading assets, and non-U.S.-dollar-denominated loans receivable recognized at fair value. The majority of these instruments mature within 12 months. Changes in the functional currency equivalent cash flows of the underlying assets and liabilities are approximately offset by the changes in the fair value of the related derivatives. We record net gains or losses in the line item on the consolidated condensed statements of income most closely associated with the related exposures, primarily in interest and other, net, except for equity-related gains or losses, which we primarily record in gains (losses) on equity investments, net.
Interest Rate Risk
Our primary objective for holding investments in debt instruments is to preserve principal while maximizing yields. We generally swap the returns on our investments in fixed-rate debt instruments with remaining maturities longer than six months into U.S. dollar three-month LIBOR-based returns, unless management specifically approves otherwise. We may elect to swap fixed coupon payments on our debt issuances for floating rate coupon payments. These swaps are settled at various interest payment times involving cash payments at each interest and principal payment date, with the majority of the contracts having quarterly payments. We also utilize interest rate or currency interest rate swaps to modify cash flows related to our existing indebtedness. We may enter into treasury rate lock agreements to lock in a fixed rate for future debt issuances.

16

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Our interest rate risk management programs include:
Interest rate derivatives with cash flow hedge accounting designation that utilize interest rate swap agreements to modify the interest characteristics of debt instruments or treasury rate lock agreements to lock in a fixed rate for future debt issuances. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction.
Interest rate derivatives with fair value hedge accounting designation that utilize interest rate swap agreements to hedge against changes in fair value on certain fixed rate debt due to fluctuations in the benchmark interest rate. For these derivatives, we recognize gains and losses in interest and other, net, along with the offsetting gains and losses attributable to the changes in the benchmark interest rate on the underlying hedged items.
Interest rate derivatives without hedge accounting designation that utilize interest rate swaps and currency interest rate swaps in economic hedging transactions, including hedges of non-U.S.-dollar-denominated debt instruments classified as trading assets and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. Floating interest rates on the swaps generally reset on a quarterly basis. Changes in the fair value of the debt instruments classified as trading assets and loans receivable recognized at fair value are generally offset by changes in the fair value of the related derivatives, both of which are recorded in interest and other, net.
Equity Market Risk
Our investments include marketable equity securities and equity derivative instruments. We typically do not attempt to reduce or eliminate our equity market exposure through hedging activities at the inception of our investments. Before we enter into hedge arrangements, we evaluate legal, market, and economic factors, as well as the expected timing of disposal to determine whether hedging is appropriate. Our equity market risk management program may include equity derivatives with or without hedge accounting designation that utilize warrants, equity options, or other equity derivatives. We recognize changes in the fair value of such derivatives in gains (losses) on equity investments, net. We also utilize total return swaps to offset changes in liabilities related to the equity market risks of certain deferred compensation arrangements. Gains and losses from changes in fair value of these total return swaps are generally offset by the losses and gains on the related liabilities, both of which are recorded in cost of sales and operating expenses.
Volume of Derivative Activity
Total gross notional amounts for outstanding derivatives (recorded at fair value) at the end of each period were as follows: 
(In Millions)
 
Oct 1,
2016
 
Dec 26,
2015
 
Sep 26,
2015
Currency forwards
 
$
10,639

 
$
11,212

 
$
12,395

Currency interest rate swaps
 
7,194

 
5,509

 
4,966

Embedded debt derivatives
 
3,600

 
3,600

 
3,600

Interest rate swaps
 
6,446

 
5,212

 
1,740

Total return swaps
 
1,276

 
1,061

 
1,020

Other
 
79

 
61

 
64

Total
 
$
29,234

 
$
26,655

 
$
23,785

The gross notional amounts for currency forwards and currency interest rate swaps (presented by currency) at the end of each period were as follows:
(In Millions)
 
Oct 1,
2016
 
Dec 26,
2015
 
Sep 26,
2015
Chinese yuan
 
$
1,600

 
$
2,231

 
$
2,650

Euro
 
6,199

 
6,084

 
6,546

Israeli shekel
 
1,985

 
1,674

 
1,938

Japanese yen
 
2,890

 
2,663

 
2,733

Other
 
5,159

 
4,069

 
3,494

Total
 
$
17,833

 
$
16,721

 
$
17,361


17

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets
The fair value of our derivative instruments at the end of each period were as follows:
 
 
October 1, 2016
 
December 26, 2015
(In Millions)
 
Other
Current
Assets
 
Other
Long-Term
Assets
 
Other
Accrued
Liabilities
 
Other
Long-Term
Liabilities
 
Other
Current
Assets
 
Other
Long-Term
Assets
 
Other
Accrued
Liabilities
 
Other
Long-Term
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forwards
 
$
155

 
$
2

 
$
15

 
$
1

 
$
20

 
$
3

 
$
83

 
$
2

Interest rate swaps
 

 
175

 

 

 

 
1

 

 
14

Currency interest rate swaps
 

 
48

 

 

 

 
7

 

 

Total derivatives designated as hedging instruments
 
155

 
225

 
15

 
1

 
20

 
11

 
83

 
16

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forwards
 
41

 
1

 
25

 
1

 
20

 

 
63

 

Currency interest rate swaps
 
112

 
8

 
309

 

 
370

 
18

 
52

 

Embedded debt derivatives
 

 

 

 
19

 

 

 

 
17

Interest rate swaps
 
3

 

 
19

 

 
2

 

 
12

 

Total return swaps
 

 

 

 

 
32

 

 
2

 

Other
 
2

 
11

 

 

 
1

 
11

 

 

Total derivatives not designated as hedging instruments
 
158

 
20

 
353

 
20

 
425

 
29

 
129

 
17

Total derivatives
 
$
313

 
$
245

 
$
368

 
$
21

 
$
445

 
$
40

 
$
212

 
$
33



18

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Amounts Offset in the Consolidated Condensed Balance Sheets
The gross amounts of our derivative instruments and reverse repurchase agreements subject to master netting arrangements with various counterparties, and cash and non-cash collateral posted under such agreements at the end of each period were as follows:
 
 
October 1, 2016
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
(In Millions)
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts Presented in the Balance Sheet
 
Financial Instruments
 
Cash and Non-Cash Collateral Received or Pledged
 
Net Amount
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets subject to master netting arrangements
 
$
552

 
$

 
$
552

 
$
(243
)
 
$
(210
)
 
$
99

Reverse repurchase agreements
 
1,018

 

 
1,018

 

 
(1,018
)
 

Total assets
 
1,570

 

 
1,570

 
(243
)
 
(1,228
)
 
99

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities subject to master netting arrangements
 
385

 

 
385

 
(243
)
 
(142
)
 

Total liabilities
 
$
385

 
$

 
$
385

 
$
(243
)
 
$
(142
)
 
$

 
 
December 26, 2015
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
(In Millions)
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts Presented in the Balance Sheet
 
Financial Instruments
 
Cash and Non-Cash Collateral Received or Pledged
 
Net Amount
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets subject to master netting arrangements
 
$
482

 
$

 
$
482

 
$
(201
)
 
$
(188
)
 
$
93

Reverse repurchase agreements
 
3,368

 

 
3,368

 

 
(3,368
)
 

Total assets
 
3,850

 

 
3,850

 
(201
)
 
(3,556
)
 
93

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities subject to master netting arrangements
 
242

 

 
242

 
(201
)
 
(27
)
 
14

Total liabilities
 
$
242

 
$

 
$
242

 
$
(201
)
 
$
(27
)
 
$
14

We obtain and secure available collateral from counterparties against obligations, including securities lending transactions and reverse repurchase agreements, when we deem it appropriate.


19

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Derivatives in Cash Flow Hedging Relationships
The before-tax gains (losses), attributed to the effective portion of cash flow hedges, recognized in other comprehensive income (loss) for each period were as follows:
 
 
Three Months Ended
 
Nine Months Ended
(In Millions)
 
Oct 1,
2016
 
Sep 26,
2015
 
Oct 1,
2016
 
Sep 26,
2015
Currency forwards
 
$
65

 
$
(68
)
 
$
356

 
$
(268
)
Currency interest rate swaps and other
 
27

 

 
18

 

Total
 
$
92

 
$
(68
)
 
$
374

 
$
(268
)
Gains and losses on derivative instruments in cash flow hedging relationships related to hedge ineffectiveness and amounts excluded from effectiveness testing were insignificant during all periods presented in the preceding table. Additionally, for all periods presented, there was an insignificant impact on results of operations from discontinued cash flow hedges, which arises when forecasted transactions are probable of not occurring.
For information on the unrealized holding gains (losses) on derivatives reclassified out of accumulated other comprehensive income into the consolidated condensed statements of income, see "Note 21: Other Comprehensive Income (Loss)."
Derivatives in Fair Value Hedging Relationships
The effects of derivative instruments designated as fair value hedges, recognized in interest and other, net for each period were as follows:
 
 
Three Months Ended
 
Nine Months Ended
(In Millions)
 
Oct 1,
2016
 
Sep 26,
2015
 
Oct 1,
2016
 
Sep 26,
2015
Interest rate swap
 
$
(34
)
 
$
3

 
$
188

 
$
3

Hedged item
 
34

 
(3
)
 
(188
)
 
(3
)
Total
 
$

 
$

 
$

 
$

There was no ineffectiveness during all periods presented in the preceding table.
Derivatives Not Designated as Hedging Instruments
The effects of derivative instruments not designated as hedging instruments on the consolidated condensed statements of income for each period were as follows:
 
 
 
 
Three Months Ended
 
Nine Months Ended
(In Millions)
 
Location of Gains (Losses)
Recognized in Income on Derivatives
 
Oct 1,
2016
 
Sep 26,
2015
 
Oct 1,
2016
 
Sep 26,
2015
Currency forwards
 
Interest and other, net
 
$
6

 
$
(19
)
 
$
2

 
$
(33
)
Currency interest rate swaps
 
Interest and other, net
 
(41
)
 
80

 
(211
)
 
283

Interest rate swaps
 
Interest and other, net
 
7

 
(3
)
 
(8
)
 
(8
)
Total return swaps
 
Various
 
78

 
(90
)
 
92

 
(48
)
Other
 
Various
 
(6
)
 
(3
)
 
(2
)
 
(17
)
Total
 
 
 
$
44

 
$
(35
)
 
$
(127
)
 
$
177


20

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Note 8: Acquisitions and Divestitures
Altera Corporation
On December 28, 2015, we completed the acquisition of Altera, a global semiconductor company that designs and sells programmable semiconductors and related products. We acquired all outstanding shares of Altera common stock and, subject to certain exceptions, each share of Altera common stock underlying vested stock option awards, restricted stock unit awards (RSUs) and performance-based restricted stock unit awards in exchange for cash. The acquired company operates as the Programmable Solutions Group (PSG) and continues to design and sell programmable logic devices (PLDs), which incorporate field-programmable gate arrays (FPGAs) and complex programmable logic devices (CPLDs), and highly integrated System-on-Chip (SoC) devices. This acquisition is expected to expand our reach within the compute continuum, as the combination of our leading-edge products and manufacturing process with Altera's leading FPGA technology is expected to enable new classes of platforms that meet customer needs in the data center and Internet of Things market segments. As we develop future platforms, the integration of PLDs into our platform solutions is expected to improve the overall performance and lower the cost of ownership for our customers. For further information, see "Note 23: Operating Segments Information."
Total consideration to acquire Altera was $14.5 billion (net of $2.0 billion of cash and cash equivalents acquired) and comprised the following:
(In Millions)
 
 
Cash, net of cash acquired
 
$
14,401

Share-based awards assumed
 
50

Total
 
$
14,451


The preliminary fair values of the assets acquired and liabilities assumed by major class in the acquisition of Altera were recognized as follows:
(In Millions)
 
 
Short-term investments
 
$
182

Receivables
 
368

Inventory
 
555

Other current assets
 
123

Property, plant & equipment
 
312

Goodwill
 
5,433

Identified intangible assets
 
7,566

Other long-term investments and assets
 
2,515

Deferred income
 
(336
)
Other liabilities
 
(283
)
Long-term debt
 
(1,535
)
Deferred tax liabilities
 
(449
)
Total
 
$
14,451

The allocation of purchase consideration to assets and liabilities is not yet finalized. The preliminary allocation of the purchase price was based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized are certain tax matters and goodwill.
The preliminary goodwill of $5.4 billion arising from the acquisition is attributed to the expected synergies and other benefits that will be generated by combining Intel and Altera. Substantially all of the goodwill recognized is not expected to be deductible for tax purposes. For further information on the assignment of preliminary goodwill for the acquisition, see “Note 9: Goodwill.”

21

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


The identified intangible assets assumed in the acquisition of Altera were recognized as follows based upon their fair values as of December 28, 2015:
 
 
Fair Value
(In Millions)
 
Weighted Average Estimated Useful Life
(In Years)
Developed technology
 
$
5,757

 
9
Customer relationships
 
1,121

 
12
Brands
 
87

 
6
Identified intangible assets subject to amortization
 
6,965

 
 
In-process research and development
 
601

 
 
Identified intangible assets not subject to amortization
 
601

 
 
Total identified intangible assets
 
$
7,566

 
 

Acquired developed technology represents the fair value of Altera products that have reached technological feasibility and are a part of Altera’s product offerings, as opposed to in-process research and development which represents the fair value of products that have not reached technological feasibility. Customer relationships represent the fair values of the underlying relationships and agreements with Altera’s customers. Brands represent the fair value of Altera's master brand and product brand names.
Other 2016 Acquisitions
During the first nine months of 2016, in addition to the Altera acquisition, we completed eight acquisitions qualifying as business combinations in exchange for aggregate consideration (net of cash acquired) of $811 million, most of which was cash. Substantially all of the consideration was allocated to goodwill and identifiable intangible assets. For information on goodwill by operating segment, see “Note 9: Goodwill” and for information on the classification of intangible assets, see "Note 10: Identified Intangible Assets." These acquisitions, both individually and in aggregate, were not significant to our operations.
Actual and Pro Forma Results of Acquirees
Net revenue and net income attributable to all acquisitions completed during the first nine months of 2016 have been included in our consolidated condensed statements of income from their respective acquisition dates to the period ending October 1, 2016. The Altera acquisition was significant to our consolidated condensed results of operations, and these results are reported as the Programmable Solutions Group in "Note 23: Operating Segments Information."
The unaudited pro forma financial results combine the historical results of Intel and Altera for 2016 and 2015 along with the historical results of other businesses acquired during 2016. The results include the effects of pro forma adjustments as if the businesses acquired in 2016 were acquired at the beginning of Intel's 2015 fiscal year. The pro forma results for the nine months ended September 26, 2015 include non-recurring adjustments of $387 million for the inventory valuation adjustment, $64 million for deferred income (net of the impact of cost of goods sold) and $94 million for other acquisition-related transaction costs, all of which reduce pro forma net income.
The pro forma financial results presented below do not include any anticipated synergies or other expected benefits of the acquisitions. This is presented for informational purposes only and is not indicative of future operations or results that would have been achieved had the acquisitions been completed as of the beginning of our 2015 fiscal year.
 
 
Three Months Ended
 
Nine Months Ended
(In Millions, Except Per Share Amounts)
 
Oct 1,
2016
 
Sep 26,
2015
 
Oct 1,
2016
 
Sep 26,
2015
Net revenue
 
$
15,778

 
$
14,865

 
$
43,112

 
$
41,592

Net income
 
$
3,370

 
$
3,016

 
$
7,225

 
$
6,996

Diluted earnings per share
 
$
0.69

 
$
0.62

 
$
1.48

 
$
1.43


22

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)


Planned Divestiture of Intel Security Group
On September 7, 2016, we announced a definitive agreement with TPG VII Manta Holdings, L.P. (TPG) to transfer certain assets and liabilities relating to Intel Security Group (ISecG) to a newly formed, jointly-owned, separate cybersecurity company. The new company will be called McAfee following transaction close, which is expected in the second quarter of 2017.
Under the terms of the agreement, Intel will transfer certain assets and liabilities relating to ISecG, a transaction valued at approximately $4.2 billion, for consideration of approximately $3.1 billion and a 49% ownership interest in McAfee. Intel will finance approximately $2.2 billion of the consideration until the debt can be refinanced and repaid by McAfee and TPG. TPG will own a 51% ownership interest in McAfee.
The carrying amounts of the major classes of ISecG assets and liabilities held for sale included the following:
(In Millions)
 
Oct 1,
2016
Accounts receivable
 
$
309

Goodwill
 
3,600

Identified intangible assets